Insurance Australia Group Limited Financial Analysis - Case Study Example

Reading Header: INSURANCE GROUP LIMITED QBE & IAG/INSURANCE AUSTRALIA GROUP LIMITED FINANCIAL REPORTS FOR YEARS 2007-2009 Your institution: Your name: Course name: Course instructor: March 15, 2010 Insurance Group Limited/ QBE This is Australian world largest insurer in general policies and reinsurance group and is also one of the top 25 re-insurers and insurers internationally. Its history dates back to more than 120 years when it was began in Australia and since then it has undergone growth to include operations in over 45 nations of the world with the help of over 13,000 workforce. In 2008, the America’s division produced above 3.8 billion in gross written premium with surplus strength of above $1.7 billion in 2008 in support of the stable, diversified portfolios in more than 40 locations covering 22 states including 4 American Latin countries. This division underwrites diversified mix of casualty, property, including health businesses on direct, reinsurance, surplus or excess basis. The vision of this multinational organization is to be recognized as a corporation that excels in continued delivery of new and proven services and products of indisputable quality. It is also striving for customer retention and satisfaction, employee integrity and motivation. 2007 Financial reports The highlights for the performance in year 2007 indicate that record operating profit after tax for the half year was up to $921 million which was higher by 56% since 2006 reported $591 billion. The insurance profit on the other hand was up by 41% to $1,053million as compared to that of 2006 reported at $748 million with an insurance profit margin of 22.2% compared to that of 2006 at 18.7%. These results reflect a continual low frequency and severity of claims, increased investments yields and inclusion of recent US acquisitions for part of the half year. The diluted earnings per share, including hybrid securities, were up by 52% to $104.9 per share up from $69.1 per share in 2006. The shareholders funds increased by 23% to $7,721 million since 31st December 2006. The return on average shareholder’s fund is 28.1% while records for 2006 were 22.2% which indicate an upward trend. The cash flow on the other hand from operations was $785 million while that of 2006 was $322 million which also indicate upward trend increase due to a generally benign claims environment and growth. The gross written premium is up by 15% to $6,520million from $5,656 million in 2006 and this was due to acquisitions and continued high customer retention. The growth on the hand was adversely affected by an increased competition, overall weighted average reduction in premium rates of around 3% and depreciation of the US dollar. The gross earned premium was up 17% to $5,751milion which was an increase from $4,932 in 2006 while the net earnings premium was up 19%to $4,749milion while that of 2006 was $3,998million. The reinsurance costs as a percentage of gross earned premiums were reduced to 17% while that of 2006 was 19% and this was due to increased use of equator re and us acquisitions. The maximum event retention on largest realistic disaster scenario reduced to 3.3% of the projected 2007 net earned premium while that of 2006 was only 4%. The combined operating ratio improved to 86.2% which an up from 2006 which had recorded 87.9% while the underwriting profit is up 35% to $653milion due to premium growth and strong performance of the company’s diversified portfolios. The claims ratio other hand, was 55.7% while in 2006 it was 58.3%. The overall average reduction in premium rates has been offset by a continued low frequency of claims. Favorable runoff of prior accident year outstanding claims reinvested in the risk margins for 2007 while the insurance liabilities include significant allowances for the large risk claims and catastrophe losses in the second half. 2008 Financial reports In 2008, the quality insurance profit was up 65 to $1,116million as compared to 2007 profit of 41,053million despite the substantial appreciation of the Australian dollar, increased frequency of large individual risks and catastrophe claims and market conditions. The insurance profit margin of 21.8% was recorded in same year while that of 2007 22.2% which indicate slight reduction at high end of market performance. The profit after tax before net realized and unrealized equity gains and losses was up 7% to $920million compared to that of 2007 at $860million. The cash flow from operations was on target at $839million, up 7%, 2007 recorded $921 million. Compared with that same period last year, reported profit adversely affected by 4196 million due to substantially weaker equity markets which were down by $122million and the strong Australian dollar was also down $74million applying constant exchange rates. The interim dividend of 61.0 cents per share while that of 2007 was 57.0 cents hence representing a payout of $542million, which was up 10% as compared with 2007 interim dividends. The return on average shareholder’ funds were 19.9% while that of 2007 was 28.1% which adverse drastic drift. The net earned premium was up 8% to $5,108 million and using constant exchange rates was up 18% while the reinsurance costs as a percentage of gross earned premiums was reduced to 14% with that of 2007 being 17% after additional protection purchased in the period and greater use of our captive Equator Re. as previously announced, $200 million of aggregate reinsurance protection was purchased to cover a frequency of large individual risk and catastrophe claims exceeding 8.5% of the net earned premium. The gross written premium on the other hand was up by 1% to $6,603 million and gross earned premium up 4% to $5,958 million and using constant exchange rates gross written premium and gross earned premium was up 115 and 135 respectively and this growth was mainly from Australia and the acquisitions in the USA. Premium growth was adversely affected by increased competition and below budgeted growth for new business due to inadequate pricing and particularly in Europe and the US; offset slightly by overall higher customer retention and better that expected premium rate reductions on renewals of 2%. The eight acquisitions in the period to date include the US based North Pointe, underwriting agencies in the US and Australia and the recently announced PMI Mortgage insurance. The company expects the first full year to generate in excess of $550 million additional net written premium and $160 million incremental profit after tax. The combined operating ratio at near record level of 85.8% which a drop since 2007 was 86.2%, while underwriting profit was up 11% to $727million due to net earned premium growth and strong performance of most of the company’s diverse portfolios. The claims on the other hand was 54.7% while for 2007 was 55.7% and this reflects a continued low attritional claims ratio notwithstanding overall average reduction in premium rates and higher frequency and severity of large individual risk and catastrophe claims. The insurance liabilities include significant allowances for large individuals risk and catastrophe claims in the second half. The risk margins retained in outstanding claims to provide a probability of adequacy of 95.1% and that of 2007 was 95.8%. This probability of adequacy has been assisted increased diversity resulting in a slightly lower coefficient of variation.    2009 financial report `The shareholder’s funds were $10,232 million compared with $11,159million at 31st December 2008. The movement mainly reflects the adverse effect of the appreciation of the Australian dollar against the US dollar causing a reduction in the value of company’s overseas shareholder’s funds when translated to Australian dollar, offset by the profit for the period net of the payment of the final 208 dividend in March 2009. The corporation’s policy of not hedging its investments in overseas shareholders funds means that shareholders funds now move in line with the changes in the assets and liabilities in other currencies which ensure greater stability in capital adequacy levels for the consolidated entity. The number of shares to the Australian securities exchange increased slightly from 987million at 31 December to 1,003million. Operations review Gross earned premium was $7,118 million, up 19% from the same period last year. Premium growth was assisted by the weaker cumulative average Australian dollar. Using constant rates of exchange, gross earned premium growth was 6%. Premium growth was also assisted by the acquisitions made in 2008, most significantly QME LMI in Australia and ZC Sterling in the USA, and an overall average 4% increase in premium rates. Net earned premium increased 21% to $6,186 million, assisted by a reduction in the cost of our reinsurance protections. The ratio of claims, commissions and expenses to net earned premium/ combined operating ratio were 89.35 compared with 85.8% for the same period in 2008. the net claims ratio was 60.8% compared with 54.7% for the same period last year with the movement reflecting an increase in the frequency and severity of trade credit and other credit-related insurance claims and smaller releases of prior year claims provisions. The strength of the company’s provision for outstanding claims has been increased with the probability of adequacy at 89.05 compared with 86.1% at 31 December 2008. The combined commission and expense ratio reduced from 31.1% benefiting mainly from the contributions of the company’s agency operations acquired in 2007 and 2008. Key financial ratios for year ended 30th June 2009 2008 2007 Gross written premium $M 8,057 6,603 6,197 Gross earned premium $M 7,118 5,958 5,546 Net earned premium $M 6,186 5,108 4,899 Claims ratio % 60.8 54.7 49.8 Commission ratio % 17.0 17.2 17.9 Expense ratio % 11.5 13.9 14.2 Combined operating ratio % 89.3 85.8 83.3 Insurance profit to net earned premium % 17.5 21.8 22.6 IAG/Insurance Australia Group Limited This is an international insurance group engaging in general business and has got operations in New Zealand, Australia, U. K. and Asia. This corporation underwrites more than $7.8 billion premium annually and it employs more than 13,500 employees. Financial results for years 2007, 2008 and 2009 The group made net profit of $329 million in the first half of 2009 which was up significantly from the previous corresponding period of $4million. This increase from $227 million to $488 million in the first half the previous year has represented an improvement in insurance margin up from 6.2% to 13.4%. This has also confirmed the outlined new corporate strategy to be bearing results with businesses in New Zealand and Australia improving substantially through the introduction of better pricing and underwriting disciplines and also the enhanced claims management and cost reduction. This result were however buoyed by anticipated natural perils which resulted in reduction of claim costs that were associated with major fires and storms while easing volatility in credit market were favorable happenings. The reported revenue premium revenue, which is indicated in form of gross written premium, experienced a decline of 1.5% as compared with the previous year’s first half because of sale businesses in the previous years which were underperforming. And also foreign exchange effects in Australian dollar were strengthened and when these factors are excluded, the underlying revenue premium would be up by 5.1%. References Ahsan, Syed M., (1998)“Public General Insurance for Developing Countries; The Lessons from the Japanese Experiment,” The Rural Challenge, pp. 181-186, Edited by Margot A. Bellamy and Bruce L. Greenshields, Aldeshot, Hamps.: Gower Publishing Co., Australia, Industries Assistance Commission, Rural Income Fluctuations, Canberra; Australian Government Publishing Service (1997). Dankerkar, V.M., (Sept. 2007), General Insurance for Developing Countries, Teaching and Research Forum No: 10, New York: The Agricultural Insurance Development Council, Inc. Ehrlich, Isaac, and Becker, Gary S., (2006), “Market Insurance, Self-Insurance, and Self- Protection,; Journal of Political Economy 80 (July/August): 623-648 Jodha, N.S., (2008), ‘Effectiveness of Insurers’ Adjustments to Risk,’ Economic and Political Weekly, June 24 2008, pp. 230-232. Marshall, John M., ‘Moral Hazard.’ The American Economic Review 66 (December 2004): 880-891 Masson, Robert T., (2003), “The Creation of Risk Aversion by Imperfect Capital Markets,” The American Economic Review 62 (March 2003): 77-86. Read More