Insurance Australia Group Limited (ASX:IAG) released financial result for the six months ended December 2015, with improved margins despite challenging conditions.
Improved Underlying Margin
The company released insurance profit of $610 million, against a $693 million reported in the previous comparable period. Statutory insurance margin improved to 14.9% from 13.4% acheived in 1H15. The progress was attributed to lower ‘net natural peril claim costs’ of $22 million, which was partially offset by an adverse credit spread impact of $15 million and a 0.3% decrease in ‘prior period reserve releases’.
The underlying insurance margin, which is a crucial measure of an insurer’s business performance, improved 0.9% to 14.2%. However, statutory Net Profit after Tax declined from $579 million to $466 million.
IAG’s Managing Director and Chief Executive Officer Peter Harmer was pleased with the company’s operating performance: “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. In our commercial businesses we are prudently maintaining our underwriting discipline in the most competitive conditions in almost four decades.”
Strong Operational Performance
The Australian Consumer Division which denotes 51% of Group GWP, enhanced its underlying margin by 1.5% as the segment reported reserve releases at 8.3% of Net Earned Premium (NEP), which was considerably above long term expectations.
The company’s New Zealand segment also reported a robust performance with an underlying margin improvement of 2.5% as IAG maintained its market-leading position coupled with modest premium growth in direct personal lines.
However Australian Business Division saw a 6.3% contraction GWP with the continuation of tough commercial market conditions which pushed the average rates lower.
IAG’s consumer businesses in Australia and New Zealand, which represent more than 60% of the Group’s Gross Written Premium (GWP), are performing well. Conversely, the positive contribution by consumer business was counterbalanced by challenges in market conditions within the commercial businesses. The overall GWP reduced from $5.6 billion to $5.5 billion reflecting lower ‘average rates’ and marginal loss of compulsory third party (CTP) volumes, as the company maintained its strict underwriting disciplines.
Arrangement with Berkshire Hathaway
The current financial result includes the earnings impact of the 20% quota share arrangement with Berkshire Hathaway, which mitigates IAG’s exposure to the Canterbury earthquakes and asbestos related liabilities. While the transaction had a neutral impact on the reported insurance profit, it had a favourable effect of 250 basis points on the company’s underlying margin. Overall, this arrangement has been rewarding for IAG, as it resulted in lower earnings volatility and a reduction in regulatory capital requirements.
10 Cents Rise in Dividend
IAG’s board has announced that the company will distribute an interim fully franked dividend of 13 cents per ordinary share on 30 March 2016, unchanged from the previous interim period.
The company strengthened its capital position as its Prescribed Capital Amount multiple and Common Equity Tier 1 ratio were both above their targeted ranges. Recognizing its strong capital position, IAG announced a fully franked special dividend of 10 cents per share, also payable on 30 March 2016.
While IAG expects GWP growth to be relatively flat, the Group’s reported margin guidance remains unchanged at 14-16% for FY16. The margins are now expected to be at the lower end of this range as the group as the group expects net losses from natural disasters to remain within the allowance of $600 million.
IAG eased slightly upon opening as investors digest the mixed results.
Author: Imran Valibhoy
Feb 17, 2016
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.