IAG profit up but home, car cover to rise
After recording a strong bounce in profits during the latest half, IAG said on Thursday that the cost of meeting claims continued to rise faster than inflation.
The costs from recent flooding and bushfires were within its allowances, but chief executive Mike Wilkins said "underlying longer-term cost trends" were likely to result in higher prices. "On a blended basis we could see prices moving in the 5-to-10-per cent range," Mr Wilkins said. The price pressure was not due to any individual event, but was being caused by continuing rises in costs such as salaries.
His comments came after IAG handed down earnings of $461 million in the six months to December, more than triple the result in the prior corresponding period.
The result was helped by strong growth in earnings from its core Australian and New Zealand operations, which helped expand group profit margins from 7.7 per cent to 19.9 per cent. Its Asian businesses, which include investments in Thailand, Malaysia, China and Vietnam, contributed almost 6 per cent of gross revenue from premiums.
IAG, the group behind the NRMA, RACV and CGU brands, is the nation's biggest insurer of cars and homes.
Australian consumers are generally regarded as less likely to shop around for insurance than customers in some other countries, and analysts expect IAG will be able to pass on most of its price rises.
But an analyst at Nomura, Toby Langley, said that if wage growth were to slow it could result in increased "consumer activism" with individuals becoming more discerning about their insurance policies.
Investors welcomed the latest bounce in profits, lifting IAG shares by 15¢, or 2.8 per cent to $5.57.
Mr Langley said the strong reaction to IAG's profit result might have been influenced by the strength of its earnings from premium increases.
"The market seems to have underestimated the benefit of price rises that IAG has managed to put through its business in recent periods," Mr Langley said.
The bounce in earnings helped increase the group's capital ratio above its own benchmarks, but Mr Wilkins said that any talk of capital management, such as a special dividend, was "premature".
Frequently Asked Questions about this Article…
Insurance Australia Group (IAG) expects home and car insurance premiums to rise by as much as 10% over the next 12 to 18 months. IAG’s CEO Mike Wilkins noted that on a blended basis prices could move in the 5–10% range as the group passes on higher costs of meeting claims.
IAG says the cost of meeting claims is rising faster than inflation and that longer‑term cost trends — such as higher salaries and other expense increases — are driving upward pressure on prices. The company is passing these costs on to customers through premium increases.
No. IAG stated that costs from recent flooding and bushfires were within its allowances. The insurer says the price pressure is not due to any single event but rather ongoing rises in claim‑related costs.
IAG reported earnings of $461 million for the six months to December, more than triple the prior corresponding period. The gain was helped by strong earnings growth from its core Australian and New Zealand operations, which expanded group profit margins from 7.7% to 19.9%.
IAG’s Asian businesses — including investments in Thailand, Malaysia, China and Vietnam — contributed almost 6% of the group’s gross revenue from premiums, according to the company.
Investors welcomed the profit bounce, lifting IAG shares by 2.8% to $5.57. Nomura analyst Toby Langley said the market may have underestimated the benefit of recent price rises IAG has managed to put through its business, which helped the strong share reaction.
Although the earnings boost helped lift IAG’s capital ratio above its own benchmarks, CEO Mike Wilkins said talk of capital management measures, such as a special dividend, was "premature."
Investors should monitor ongoing claims cost trends and wage growth (which could affect consumer behaviour), how IAG implements premium increases, changes in profit margins and capital ratios, and the contribution from its Asian operations — all factors highlighted by the company as relevant to future performance.
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