The 2014-15 financial year is turning out to be a year of consolidation and some strain for Insurance Australia Group (IAG) as it swallows the $1.8 billion plus insurance operations of Wesfarmers (WES) and has to deal with intensifying pressure for customers and premiums.
That rising competition, modest stockmarket performance and a lack of any growth in premiums (thanks to the mostly mild weather in the six months to December, with the exception of the huge Brisbane hail storm in early December) and the costs of merging the Wesfarmers business saw IAG’s net profits fall 10% to $579 million in the half year.
In fact the real benefits from the Wesfarmers acquisition now look like they won’t fully appear until the 2016-17 year – a little behind schedule.
And the stockmarket gave the thumbs down to the result yesterday and the sense of a consolidating year, not one of growth. IAG shares fell more than 8% to $5.865.
IAG 1Y – Insurance Australia sees H1 profit fall
IAG yesterday reported an insurance profit of $693 million for the period, down from $758 million in 2014. The company, which owns brands such as NRMA and CGU, will pay an interim dividend of 13c per share – the same payout as 2014.
And that steady dividend gives us confirmation the huge insurer is playing it safe as it goes through the merger of the Wesfarmers businesses and asses the weaker local outlook and rising competition.
IAG’s gross written premium or revenue grew 17% to $5.6 billion, largely due to the addition of Wesfarmers’ insurance unit which the listed insurer bought for $1.85 billion in 2013.
“Our underlying performance has remained strong and we have made significant progress in moving to our new operating model in Australia, and integrating the former Wesfarmers business.This ensures we can efficiently respond to the changing business environment, while also maintaining our strong underwriting discipline,” IAG chief executive Mike Wilkins said in a statement yesterday.
IAG’s insurance margin, a key indicator of insurers’ profitability, dipped to 13.3% from 13.7%. That was blamed on the costs of the early stages of the Wesfarmers merger.
For the full year, IAG expects to post a reported insurance margin of 13.5% to 15.5 % for the year to June, and for revenue growth to be at the lower end of its 17% to 20% guidance range.
"We remain optimistic about the longer term performance of our business, as we realise the full benefit of the major initiatives we have underway, and we progressively realise the potential attached to our Asian business," Mr Wilkins said.
Interestingly IAG’s result was not helped by the weak performance of the stockmarket in the six months to December.
"Investment income on shareholders’ funds was a profit of $142 million, a decrease of over 40% on the profit of $242 million in the corresponding prior half year. This was driven by a more modest return from equity markets in the six months to 31 December 2014, with the broader Australian index (S&P ASX200 Accumulation) delivering a positive result of 2.5%,” the company explained yesterday.
Could that mean that if the solid performance seen so far this month is maintained for the rest of this half, that weak first half performance could be offset, bolstering the overall result and improving returns?
