REPORTING SEASON: IAG Limited (IAG)

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Figure 1: IAG Limited 12 month chart

 

Insurance Australia Group Ltd (IAG) ballooning natural peril costs weigh on IAG’s result

– Ballooning natural peril costs have weighed on IAG’s full year result. The total value of policies sold, also known as the Gross Written Premium (GWP) rose 17% to $11.4 billion compared with $9.8 billion a year ago. However, claim costs for the period rose beyond the $1 billion mark for the first time to $1.05 billion. This represents an increase of $495 million compared with 2014 and is substantially higher than the $700 million the insurer had allowed for. These factors conspired to see IAG’s full year Net Profit After Tax (NPAT) fall 41% to $728 million, which was well below expectations.

– A key measure of profitability for insurers is the Insurance Margin. IAG’s full year Insurance Margin fell dramatically from a record high of 18.3% in 2014 to 10.7% in 2015. IAG’s preferred measure, Underlying Margin, which removes the impact of one-off events, saw a contraction of the measure to 13.1%.

– IAG offered a positive outlook for FY16 with GWP growth expected to be flat in a competitive low growth environment. The group expects underlying profitability to remain strong thanks to the ongoing integration of the former Wesfarmers business. The reported Insurance Margin for FY16 remains unchanged at 14-16%. This will be helped by the quota share agreement with Berkeshire Hathaway, which came into effect on 1 July 2015. IAG expects the losses from natural perils for FY16 to be below $600 million.

– IAG declared a final fully franked dividend of 16 cents per share, bringing the total dividend for the year to 29 cents, down from 39 cents a year ago. The payment will be made 7 October 2015, with a record date of 9 September.

 

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Tom Piotrowski, Market Analyst,