Fewer natural disasters lift IAG's profits
The insurer said on Wednesday that profit margins would be higher than previously thought, at between 16.8 and 17.2 per cent, compared with previous guidance of 12.5 to 14.5 per cent.
Claims from natural disasters over the past six months were also better than expected, at $470 million, rather than its previous assumption of $620 million.
Weather conditions have been unusually kind to insurers for much of this year, with few major sources of claims aside from ex-tropical cyclone Oswald and bushfires in NSW and Tasmania.
As well, revenue from premiums had grown more than expected, thanks mainly to the rise in the New Zealand dollar.
IAG makes about a fifth of its revenue in New Zealand, so an increase in the Kiwi dollar translates to higher total group earnings.
"Compared to our previously held assumptions, these factors have caused the group's insurance margin to exceed our earlier guidance. Meanwhile, the underlying performance of the group has remained strong over the course of the financial year," managing director Mike Wilkins said.
IAG said it intended to pay shareholders a dividend of 50 to 70 per cent of earnings, in line with its policy. Its shares rose 1.7 per cent to $5.94, and have risen 27 per cent this year.
Brokers upgraded their forecasts in response to the news. Nomura analyst Toby Langley said the final dividend would be the main "talking point" when IAG handed down its full-year results next month. Mr Langley said the board could pay a second-half dividend of 22¢ a share, taking the full-year dividend to 33¢, a year-on-year increase of 94 per cent.
The rise comes after the two major domestic insurers - IAG and Suncorp - enjoyed bumper profit growth when they last reported their results in in February.
At the time IAG said home and car premiums could rise 5 to 10 per cent over the next 12 to 18 months, as it passed on the growing cost of meeting claims to customers.
Some analysts question whether big insurance companies - which are facing growing competition from "challenger" brands, including those owned by supermarkets - will be able to continue propping up profits with higher premiums.
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IAG's profits were boosted mainly by lower-than-expected natural disaster claims (about $470 million over six months versus an earlier $620 million assumption) and favourable currency movements, particularly a stronger New Zealand dollar that lifted premium revenue. The group also reported stronger underlying performance, which together pushed profit margins higher.
IAG raised its insurance margin guidance to between 16.8% and 17.2%, up from prior guidance of 12.5% to 14.5%. For investors, a higher margin generally signals improved profitability from underwriting operations and can support stronger earnings and dividend outcomes.
Weather has been unusually kind for insurers for much of the year, with few major claim sources aside from ex-tropical cyclone Oswald and bushfires in NSW and Tasmania. As a result, IAG's natural disaster claims for the past six months were around $470 million—well below the $620 million it previously assumed.
IAG said it intends to pay shareholders 50% to 70% of earnings, in line with its policy, and brokers have upgraded forecasts. Nomura's analyst suggested the board could pay a second-half dividend of 22¢ a share, taking the full-year dividend to about 33¢ (a 94% year-on-year increase). The final dividend is expected to be a key talking point when full-year results are announced.
IAG earns roughly one-fifth of its revenue in New Zealand, so a stronger New Zealand dollar increased premium revenue when converted to group currency. That favourable currency movement contributed to higher total group earnings.
Shares rose 1.7% to $5.94 on the news, and IAG's stock has gained about 27% year-to-date. Brokers also upgraded their forecasts in response to the improved profit outlook.
IAG previously indicated home and car premiums could rise 5% to 10% over the next 12 to 18 months as the company passes on the growing cost of meeting claims to customers. That step is intended to help insurers manage claim cost pressures.
Some analysts question whether large insurers can keep propping up profits with higher premiums because they're facing growing competition from 'challenger' brands, including insurers owned by supermarkets. Increased competition could limit pricing power and margin sustainability over time.
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