IAG: Result 2015
Recommendation
A string of natural disasters in New Zealand and on Australia's east coast earlier this year has caused Insurance Australia Group's net profit to fall 41% to $728m. IAG, which owns brands such as NRMA and CGU, paid out more than $1bn in claims for storm damage.
Gross written premium (GWP) – an insurer's measure of revenue – increased 17%, though this was entirely thanks to IAG's $1.85bn purchase of Wesfarmers' insurance business in late 2014 (see IAG buys Wesfarmers' insurance arm). The Wesfarmers' business included the WFI and Lumley insurance brands, and around $1.6bn in premiums.
The company's insurance profit fell 30% to $1.1bn after storm related costs blew $348m above budget. The underlying insurance margin fell to 13.1% from 14.2% a year ago, due to aggressive price cutting in the commercial insurance market and the lower margin Wesfarmers' acquisition. The company is working to cut costs from the Wesfarmers' insurance business and has so far made $80m of savings.
Year to June | 2015 | 2014 | /(–) (%) |
---|---|---|---|
GWP ($m) | 11,440 | 9,779 | 17 |
Insurance profit ($m) | 1,103 | 1,579 | (30) |
Net Profit ($m) | 728 | 1,233 | (41) |
EPS (cents) | 31.2 | 56.0 | (44) |
DPS (cents) | 29.0 | 39.0 | (25) |
IAG's Asian operations achieved far more respectable underlying GWP growth of 10%, mainly due to strong growth in India and Thailand.
Chief executive Mike Wilkins said the company's Asian business would be a significant driver of profitability in coming years. 'China in particular is a key focus for us as we pursue opportunities which have more of a national presence, enabling us to capitalise on a market that remains under-penetrated and with significant growth potential,' Wilkins said. The fact that the company wrote off $60m from its Chinese business this year, however, suggests IAG is off to a rocky start.
Management expects GWP to be 'relatively flat' in 2016, with an improved insurance margin of 14–16% due to its quota share arrangement with Berkshire Hathaway. Over the next 10 years, Berkshire will receive 20% of IAG's gross written premium and pay 20% of claims, which the company expects will improve margins by at least two percentage points, all things being equal.
IAG's share price has fallen 5% since IAG: Interim result 2015 from 4 Mar 15 (Hold – $5.79). Insurance is a highly cyclical business and we'd like to see more organic growth without the help of acquisitions before we consider an upgrade. HOLD.