IAG: Interim Result 2013

Mike Wilkins has turned in his best report card since taking the helm of Insurance Australia Group in May 2008, and the company’s share price has increased a further 29% since we initially took some chips off the table on 26 Sep 12 (Take Part Profits – $4.40).

Gross written premium increased 14% to $4.6bn compared to a year earlier, though comparisons were flattered by acquisitions and excluding recent results from the UK division which has been sold. The reported insurance profit almost tripled to $815m though the underlying margin only increased from 11.7% to 12.1%. Net profit more than tripled to $461m and earnings per share tripled to 22 cents. A fully franked interim dividend of 11 cents was declared (ex date 28 February), up from five cents a year earlier.

Premium increases played a role in the result, but in stark contrast to 2011 natural disaster claims dropped to $133m ($180m below allowances) triggering a $90m release of reserves. Investment returns were also significantly higher, due to sharemarket gains and tighter credit spreads (investors reaching for yield have bid up the prices of riskier bonds).

Mike Wilkins has proven his worth, but large capital gains from here will require a continuation of low claims and a decent profit from the Asia division. That’s not something we’re prepared to bet on, and instead are prepared to wait for the next string of large claims to provide another attractive buying opportunity,

Though we’ve increased the prices in the recommendation guide to reflect Wilkins’ operating improvements, we’ve reduced the portfolio limit to 2% due to the share price increasing 22% since 20 Dec 12 (Take Part Profits – $4.64). TAKE PART PROFITS.