Australian insurer IAG’s UK business made an insurance loss of A$181m (£115.3m) for the year to 30 June 2011 as a result of bodily injury claims inflation and the need to buy additional reinsurance.

This is the second year IAG UK, the bulk of which is Lloyd’s motor insurer Equity Red Star, has made a large loss. However, the 2011 loss is half that made in 2010. The company made a A$355m insurance loss in 2010, largely because of reserve strengthening for bodily injury claims.

IAG UK’s combined ratio came in at 135.6%, s 31-point improvement over 2010’s 166.6%.

IAG also took a A$150m goodwill impairment charge for its UK business in 2011 (FY 2010: A$87m) as a result of the unit’s lack of profitability.

Despite the loss, IAG group chief executive Mike Wilkins said that the business is showing signs of recovery. “Our UK business recorded a disappointing result. However, the second half saw an encouraging improvement as remedial actions take hold,” he said in a statement.

IAG UK’s insurance loss for the second half of the financial year was A$60m, half the A$121m loss it made in the first half. The second-half loss included a A$36m expense to buy additional adverse development reinsurance cover. The 2011 result also includes $11m of net winter weather claims.

However, the company also admitted that the UK division’s recovery was slower than anticipated during the year as a whole because claims trends continued to be above expectations and because of the adverse development cover charge.

Wilkins stressed that he expects IAG’s UK performance to turn around. “While the result of our UK business was disappointing, we remain confident that accelerated management actions – including substantially increasing rates and exiting poorly performing business –will move the business towards breakeven in the 2012 financial year.”

IAG UK’s gross written premium fell more than 23% to A$546m (FY 2010: A$712m), as unprofitable business was cut. This was slightly offset by higher rates.

The IAG group as a whole made an insurance profit of A$660m for the year ended 30 June 2011 (FY 2010: A$493m) and a profit after tax of A$250m (FY 2010: A$91m). This was despite the large number of natural disasters, including flooding in Australia and earthquakes in New Zealand and Japan, in the six months to 30 June.

Claims from natural disasters cost IAG A$610m in the year to 30 June - A$175m in excess of the company’s A$435m allowance.

IAG UK FY 2011 results in A$m (compared with FY 2010)

  • Gross written premiums: 546 (712)
  • Underwriting loss: 192 (361)
  • Investment income: 11 (6)
  • Insurance loss: 181 (355)
  • Total divisional loss: 179 (358)
  • Combined ratio: 135.6% (166.6%)