IAG UK hit by reserve hikes and winter weather

Insurance Australia Group (IAG) said that its UK unit will suffer a greater-than-expected insurance loss of A$121 for the six months to December 31 2010.

IAG UK, which includes motor insurer Equity Red Star, had to boost reserves by a further A$18m in the six-month period for bodily injury claims inflation in relation to the 2010 calendar underwriting year. The unit also had to book a A$40m liability adequacy test expense.

IAG took out adverse development reinsurance cover in June 2010 to protect against further bodily injury reserve deterioration. However, this only covered underwriting years ended on or before 31 December 2009.

“We have made progress during the period in remediating our operation in the UK, but I’m disappointed to report that bodily injury claim inflation has continued to affect the local industry, and has exceeded our previously held expectations,” IAG chief executive Mike Wilkins said in a statement.

IAG took a net charge of A$367m in the year to 30 June 2010 to strengthen UK reserves because of rising bodily injury claims.

In addition to the reserve strengthening, IAG’s UK business was also hit by A$11m of natural disaster claims costs in the six months to December 31 2010 because of the harsh UK winter weather.

As a result of the worse-than-expected UK result, as well as estimated A$500m of natural catastrophe claims from natural perils for the year, IAG now expects to achieve a full-year insurance margin of between 9% and 11%, compared with previous forecasts of between 10.5% and 12.5%.

Since the beginning of 2011, IAG has incurred natural peril claims costs of A$300m from events including the severe flooding and Cyclone Yasi.