Insurance Australia Group

Insurance Australia Group (IAG) has announced that its insurance margin for the financial year ending 30 June 2013 will fall between 16.8% and 17.2%, well above previous guidance of 12.5-14.5%, which itself was a significant improvement from the previous year’s results.

Fewer natural disasters meant claims were $150m less than expected, reserve releases were 2.5% of net earned premium compared to earlier estimates of 1-2% due to ‘favourable experience in long tail classes in a low inflation environment’ and the more positive global economic outlook produced a $20m gain as higher prices for riskier fixed income securities tightened credit spreads. Net earned premium is expected to reach $8.3bn and gross written premium should increase 11.8%, slightly ahead of earlier guidance of 9.5-11.5% due to favourable currency movements.

Having largely ditched the lousy UK operations, chief executive Mike Wilkins’ cost cutting efforts are bearing fruit as the insurance industry enjoys strong premium increases following a string of natural disasters in Australia and New Zealand. It would be a tough call to sell the business if the share price breaches six dollars while it’s performing so well, but we’re cognisant that insurance companies are highly cyclical businesses. We’ll provide a more in-depth review after the company announces its full year results on 22 August. The share price has increased 4% since 11 Apr 13 (Hold – $5.64) and we’re sticking with HOLD.