As forecast by the company, Insurance Australia Group (IAG) has ridden the lack of any major weather-related claims to report a 59% rise in profits to $1.23 billion for the year to June.
The result was healthy, unlike the interim produced from rival QBE yesterday with lower earnings, lower dividend and a series of surprise capital boosting measures.
IAG has been telling the market since late in 2013 that it was looking at improving results, thanks to low levels of claims, low costs and a rising insurance margin (meaning higher profits on its insurance activities).
As a result, IAG, which owns insurance brands such as NRMA and CGU, reported an insurance margin of 18.3%, up from an already solid 17.2% for the 2012-13 year.
The group’s gross written premium or revenue rose 3% to $9.8 billion for the year, reflecting tightening premium growth, tougher competition for new business and the lack of any big events that might have forced up premium costs.
Investors will get a final dividend of 26c a share, and 39c for the year – that’s up 8.3% from 2012-13 and a cash payout ratio of 70%, at the top of the company’s target range of 60% to 70%.
IAG’s CEO Mike Wilkins said in yesterday’s earnings report that 2013-14 had "been a significant year for IAG”.
"We have delivered a strong financial result, maintained the strength of our capital position and completed the acquisition of the Wesfarmers insurance underwriting business.
"The improvement in our underlying performance has continued and demonstrates the value of pursuing a disciplined and consistent strategy over a number of years.
"In the coming year, IAG will have the benefits of the $1.85 billion purchase of Wesfarmers’ insurance underwriting arm late last year,” Mr Wilkins said.
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But there will be associated costs in managing the integration of the business into IAG’s operational matrix. Barring any disasters, this will be the biggest concern for IAG shareholders in the coming year.
Mr Wilkins said in yesterday’s statement that, "The integration of the Wesfarmers insurance underwriting business and the move to a new operating model in Australia, which was announced in May 2014, is expected to result in a combined annualised pre-tax synergy and benefit run rate of $230 million by the end of FY16.
"One-off pre-tax costs of approximately $220 million are expected to be recognised over the course of a roughly two-year period, including $50 million which has been identified in FY14," he said.
He said, "IAG’s guidance for FY15 comprises higher Gross Written Premium growth of 17-20%, largely as a result of consolidating the Wesfarmers business in Australia and New Zealand".
This also reflects the expected limited need for rate increases, owing to current minimal input cost pressures.
"The Group anticipates a reported insurance margin in the range of 13.5-15.5%," Mr Wilkins said.
Despite these moves, IAG shares have risen by just on 7% in the past 12 months, compared with the 9.2% rise in the ASX200 Index.
They edged up 0.5% yesterday to $6.29.
IAG Results Video
