MAKING NEWS

Sun, 25 May 2008
Insurance Australia Forecasts Narrower Margins
Insurance Australia Group Ltd. said storms and higher borrowing costs will harm profitability, weakening its case for QBE Insurance Group Ltd. to increase a A$8 billion ($7.5 billion) takeover offer.

Chairman James Strong today reiterated that QBE's bid is ``inadequate'' and said his Sydney-based company is taking steps to reverse three years of declining profit. Insurance Australia forecast an insurance margin of as little as 6 percent for this fiscal year, down from a February estimate of up to 11 percent.

``Shareholders will be putting more pressure on the directors to take another look at QBE's bid,'' said Steven Marsh, who helps manage the equivalent of $632 million, including QBE shares, at Trust Co. in Sydney. ``The Board really needs to consider whether QBE's management has a better track record.''

Insurance Australia, the nation's worst-performing insurance stock in 2007, fell 2.1 percent to A$4.29 at the close in Sydney while QBE rose 1.2 percent to A$24.84, giving it a market value three times bigger than its rival. The combined company would dominate the local market for insuring everything from cars and real estate to work-place injuries.

QBE, which gets more than 70 percent of earnings overseas, is Australia's largest property and casualty insurer. Insurance Australia is the nation's biggest auto and home insurer.

Insurance Australia said storms cost the company about A$135 million between January and early April, while higher borrowing costs may cut insurance profit by A$55 million.

Margins, Revenue Growth

The company's insurance margin -- underwriting profit and investment returns as a percentage of premium sales -- will be between 6 percent and 8 percent for fiscal 2008, less than a February forecast of 9 percent to 11 percent, it said in a statement today.

Insurance Australia also cut an estimate for growth in revenue from premiums to between 5.5 percent and 6.5 percent, from between 7 percent to 9 percent previously.

Insurance Australia Chief Executive Officer Michael Hawker last reported an increase in profit in February 2005. The company appointed Mike Wilkins, former head of rival Promina Group Ltd., chief operating officer on Oct. 26, the same day Hawker cut his forecast for insurance premium growth.

``This will have some impact on our next profit result,'' Hawker said in an interview. ``Margins were affected mainly by the widening of credit spreads and storms, neither of which we believe are systemic. We believe the insurance cycle has bottomed.''

Strong today said Insurance Australia will try to reverse the earnings slump by raising premium prices to reflect higher claims costs, adjusting investment its portfolio and reducing expenses.

May Deadline

QBE on April 22 said its proposal of 0.142 shares and 70 Australian cents for each unit of Insurance Australia's stock will remain open until May 5.

`There was some expectation that the company would clear the decks after QBE made its bid,' said Richard Wallace, who helps manage $138 million at Wallace Funds Management in Sydney. `Insurance is a cyclical business, and IAG is probably one of the more transparent insurance companies in terms of informing the market where it's at.'

SOURCE: Stuart Kelly, Bloomberg

Click here for more news from PI Insurance Online.

Here are some PI Insurance Online articles that may be of interest ...

BOOKMARK THIS WEBSITE
To add PI Insurance Online to your favourites, simply click here.

PI Insurance Online Link Exchange
To view our links page or to exchange links with this website, please visit our PI Insurance Online links page.

|  home  |  news  | links  |