IAG: Interim result 2016
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Insurance Australia Group (IAG) has posted a lousy interim result following what management described as 'the most competitive conditions in almost four decades'. Net profit fell 20% to $466m and gross written premium (GWP) – an insurer's measure of revenue – was down slightly to $5.5bn.
The Australian Consumer division, IAG's largest, achieved 2% growth in GWP and improved profitability, with an underlying insurance margin on 15.5% (up from 14% in 2015), with fewer natural peril claims than expected.
'We are pleased with the performance of our consumer businesses where we have been able to broadly maintain market share with limited movement on price – demonstrating the strength and resilience of our franchises' said chief executive Peter Harmer.
Unfortunately, this positive result was offset by a marked decline in the Business division, where GWP fell 6.3% and the underlying margin unchanged at a lacklustre 10.7% 'with synergies from the Wesfarmers integration partially offsetting pressures from the market environment'.
IAG's New Zealand business continued to deliver strong profitability, with an underlying margin of 18.4% (up from 15.9%). Unfortunately, premium growth in personal lines was more than offset by a decline in commercial business, so GWP fell 4%.
IAG's $15bn investment portfolio took a battering too, with investment income falling 59% to $174m due to a declining sharemarket during the period and lower yields on the company's fixed-interest investments. Until interest rates start to rise, low investment returns are likely to be the norm.
Management expects GWP to be flat in 2016 with the insurance margin 'at the lower end' of 14–16%. Though this factors in a two percentage point benefit from the recent deal with Berkshire Hathaway, it is still an improvement on the 10.7% achieved last year, which was depressed due to a $350m blow out in natural disaster costs.
Despite growing competition, overall return on equity came in at a still respectable 14.7% and we continue to recommend you HOLD.
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