IAG: Result 2014
Recommendation
Insurance Australia Group's (IAG) performance has been remarkable since the string of natural catastrophes in 2011. Chief executive Mike Wilkins has cut costs and disposed of the problematic UK businesses, revealing a first class insurance business enjoying a period of minimal claims and strong premium pricing that reflects its market position as one third of an oligopoly to rival that of the big four banks. The share price has responded in kind, increasing 132% since its low of $2.79 in November 2011.
Year to 30 Jun | 2014 | 2013 | /– (%) |
---|---|---|---|
Revenue ($m) | 9,779 | 9,498 | 3.0 |
Insur. profit ($bn) | 1,579 | 1,428 | 10.6 |
U'lying insur. margin (%) | 14.2 | 12.5 | n/a |
Net profit ($m) | 1,233 | 776* | 59 |
EPS ($) | 54 | 50 | 8.0 |
PER | 11.9 | 12.9 | n/a |
DPS ($) | 0.39 | 0.36 | 8.3 |
Div. Yld (%) | 6.0 | 5.6 | n/a |
Franking (%) | 100 | 100 | n/a |
Final div. | $0.26, fully franked, ex date 8 Sep | ||
*Includes losses from UK business |
IAG doesn't look expensive trading on a price-to-earnings ratio of 12 and a 6% fully franked dividend yield, but therein lies the trap. The time to buy insurance companies is during periods like 2011 when claims explode following a series of expensive natural catastrophes and the price-to-earnings ratio is high becuase earnings have collapsed. It's usually the same time that investors make any excuse not to buy insurance companies, such as blaming global warming as the reason for the increase in natural catastrophes while overlooking the fact that such periods lead to more people spending a lot more to protect their belongings.
IAG's results show we're currently at or near a peak in the insurance cycle. Premium growth is slowing following three years of strong growth and margins are at or near record levels as the benign claims environment produces reserve releases. We wouldn't underestimate Wilkins' ability to create plenty of value from the recent acquisition of Wesfarmers' insurance business, which has made IAG top dog in commercial insurance, but we're prepared to wait patiently for the next great buying opportunity when Mother Nature strikes.
IAG is a far better business than it was prior to Wilkins' arrival, but with the share price approaching $6.50 we're taking advantage of Mr Market's ebullience even if it means leaving some value on the table (this was a key lesson from our experience with QBE Insurance). The insurance industry is notoriously cyclical, so with the share price increasing 5% since IAG confirms profit guidance from 24 Jul 14 (Hold – $6.14) we're downgrading to SELL.