Insurance Australia Group Lowers Outlook

April 28, 2008

Insurance Australia Group Limited (IAG) announced lower earnings projections for its insurance activities for the full year ending 30 June 2008 of between 6 and 8 percent, “mainly due to the impact of high storm costs and widening credit spreads in the second half.”

IAG explained that the “guidance provided at the interim results in February 2008 was for a full year insurance margin at the low end of 9 to11 percent. This was subject to no catastrophes or large losses outside the Group’s allowances, or any material movements in currency or investment markets in the second half of the year.

“However, so far in this half year these two factors have had a negative impact of 1.6 percent on the FY08 insurance margin. The lower insurance margin guidance also reflects some further deterioration of the claims experience in the UK due to market conditions.”

The Group also lowered its guidance on for the growth of gross written premiums for the full year from the low end of 7 – 9 percent to 5.5 – 6.5 percent. “This largely reflects reduced premium revenue from Australian Commercial Lines (CGU) as the business has not been able to maintain forecast volumes while adhering to its underwriting discipline, “IAG explained. GWP growth in all other businesses is still on track to meet earlier guidance.

CEO Michael Hawker said, that, while the Group continues to be adversely impacted by external factors, this masks the improving underlying trend. He stated: “Although our FY08 insurance margin is now lower than forecast, the performance of the underlying business is improving half on half and we expect this trend will continue into FY09 as we are already benefiting from improved operating efficiencies and reduced costs as well as ongoing underwriting and pricing disciplines.

“As a result, our performance in FY08 does not reflect our long-term prospects and underlying profitability. It reflects the current weakness in insurance cycles in our core markets, higher than normal frequency of severe weather events and the mark-to-market impact of volatile investment markets. We continue to be of the view that the Group is well positioned to improve its performance once more normal operating conditions prevail.”

The announcement subsequently gave a detailed breakdown of the storm losses, the credit spread difficulties and the particular problems IAG has been having in the UK motor (automobile) insurance market. They are available on the Group’s web site at – http://www.iag.com.au.

In addition the announcement noted IAG Chairman, James Strong’s statement on the proposal by rival insurer QBE to merge with IAG (See IJ web site – https://www.insurancejournal.com/news/international/2008/04/16/89165.htm). “Notwithstanding today’s announcement, the Board continues to be of the view that QBE’s proposal is inadequate because of the inherent and long-term value in IAG -its brands, market penetration and unique scale,” Strong stated. “The Board and management are addressing the short term challenges facing the company such that it will be well positioned to benefit from the anticipated improvement in the insurance cycle.”

Source: Insurance Australia Group

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