Insurance Australia Group

IAG’s share price has jumped 15% after announcing its interim result. Gross written premium—the insurance industry’s key revenue measure—increased 9.7% to $4.3bn, due to a combination of premium increases, higher volumes and small acquisitions. In stark contrast, the underlying insurance profit fell 42% to $271m. Reinsurance costs increased 56% to $356m following the insurance industry’s record year of natural disaster induced payouts, floods in Thailand and the Christmas day storms in Melbourne caused a threefold increase in natural peril claims to $396m and wider credit spreads reduced profits by $80m.

The interim dividend was also cut to five cents (fully franked, ex date unknown), from nine cents. A sensible move given IAG must satisfy minimum regulatory capital standards while simultaneously acquiring new businesses.

So why has the share price increased? First, the company increased guidance for annual gross written premium growth from 6% to 9%, to between 8% and 10%. Second, it reiterated expectations of producing an insurance margin at the lower end of previous guidance of between 10% and 12% (that assumes no major natural disasters before 30 June). Third, the UK business almost broke even.

Provided 2012 doesn’t produce another year of major catastrophes, the company’s progress­ under chief executive Mike Wilkins—of which there is plenty—should emerge as profits increase. The share price has increased 13% since the update on 24 Jan 12 (Long Term Buy – $2.95) and we’re sticking with LONG TERM BUY.

Note: The model Income portfolio owns shares in Insurance Australia Group.