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Insurance Australia Group’s Profit Affected by Natural Claims

Insurance Australia Group’s Profit Affected by Natural Claims
Aug 21, 2015 By Simon Herrmann

General insurance provider Insurance Australia Group (ASX:IAG) announced a 41% fall in net profit after a challenging year with record claims.

Net profit after tax was $728m which compares to $1.2bn in FY14. Revenue from ordinary activities increased 18.4% to $15bn, a significant increase compared to last year’s $12.7bn. IAG announced a final fully-franked dividend of 16 cents. The payment date is the 7th October 2015 with a record date on 9th September 2015.

IAG’s Insurance profit came in at $1.1bnm down from $1.6bn mainly due to the tropical storm Marcia in Queensland and storms in NSW.

In an announcement to the ASX this morning, the company commented on the results: “Insurance Australia Group Limited has produced a sound operating performance in an environment of increasingly competitive conditions, including a notably softer commercial market. This outcome attests to the strength of the Group’s core franchises in Australia and New Zealand and the considerable improvement in their collective underlying performance in recent years.”

Gross written premium (GWP) grew at 17% compared to the previous corresponding period and totalled $11.4bn. The inclusion of the former Wesfarmers business contributed to the GWP growth but at the same time lowered he Group’s margin due to its first time inclusion. IAG expects to generate significant annualised benefits of around $239m pre-tax by the end of FY16. While the Group’s move to a new operating model in Australia has affected the current financial year, it is expected to positively contribute to sustainable growth over the upcoming years.

Outlook

The quota share agreement with Warren Buffet’s Berkshire Hathaway is expected to reduce earnings volatility going forward and boost underlying profitability. Nevertheless the company expects relatively flat GWP growth in FY16 after a strong FY15. The insurance margin guidance for FY16 is 14-16%, well above FY15’s margin of 10.7% which was a result of high natural peril claims.

The company sees growth opportunities in further expanding its footprint into Asia, especially China. While Australia and New Zealand provide a stable income base, the challenging environment puts pressure on the company’s profit guidance and insurance margin. While the quota share agreement with Berkshire Hathaway as well as the former Wesfarmers insurance business are expected to start to bear fruit in FY16, the company needs to shift its focus into Asia in order to be able to satisfy dividend hungry shareholders. Investor’s will be relieved that FY15 is over and are now shifting their focus to a stronger FY16.

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Simon Herrmann Author: Simon Herrmann Aug 21, 2015

Simon is a financial analyst at independent research firm Wise-owl who wants to change the world by disrupting the cliché approach to investment decision making with convergent thinking. Wise-owl’s goal is plain and simple: Find the best opportunities for our members by following a proven methodology and to create long-term value through high-quality advice, innovation, technology and education. We combine industry experience and the agile mentality of a start-up. Wise-owl is the future of stock market investing.

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