Shareholders in Insurance Australia Group (IAG) were left a little stunned yesterday – the expected weak half year result, a disappointing full year outlook – and yet a special dividend, courtesy of the deal last year with Warren Buffett.
And there’s also the prospect of higher dividends in coming years, as directors boosted the payout ratio by 10 percentage points.
The shares traded 1.3% lower to $5.18 at the close yesterday as investors struggled to make up their minds on the news – was it good, poor or mixed. From the market reaction, it was more the latter.
IAG, said its first-half insurance profit fell 12% to $610 million in the six months to June, from the $693 million reported in the December 2014 half year.
And net profit after tax fell 19.5% to $466 million from $579 million in 2015, as poor investment market returns and volatile markets added to the pressures on the company’s earnings.
Investors though will pocket a 10 cents a share special dividend on top of the steady 13 cents a-share interim dividend.
But new CEO Peter Hamer did disappoint investors by providing a weak outlook statement, saying gross written premium (GWP) growth would be flat for the full year and the insurance margin would be at the lower end of the guidance for the full year of between 14% to 16% range.
But he pleased investors by lifting the percentage of full year cash earnings it will hand over in the form of dividends to 60% to 80%, from 50% to 70%.
The 10-year quota share deal with IAG did with Berkshire Hathaway in 2015 (it started last July 1) means it had additional capital to hand back.
Berkshire bought half a billion dollars worth of IAG shares in exchange for taking 20% of its annual revenues in exchange for paying 20% of its claims ($1 billion in the December half year for Berkshire).
Berkshire is effectively reinsuring IAG’s long tail insurance claims in the areas of asbestos and other long lasting property and casualty claims (the damage and personal claims from the Christchurch earthquake is another area).
Berkshire also pays IAG a so-called exchange commission, which added 250 basis points (2.50%) to the underlying insurance margin. That saw the company’s insurance margin improve from 13.3% to 14.2%, benefiting IAG by about $200 million on an annual basis.
“We now require less capital to run our company, so you can see some capital creation as we’re only on risk now for 80 per cent of the business we’re writing. In terms of our actual net profit, it has a minimal impact,” the company’s chief financial officer, Nick Hawkins said yesterday.
"IAG’s personal insurance businesses in Australia and New Zealand, which contributed more than 60% of the group’s gross written premium, performed strongly during the period, but its commercial insurance companies continued to face “challenging market conditions,” as competition remained stiff and premiums fell.
IAG said its net profits were hit by “significantly lower contribution” from investment income on shareholders’ funds, following volatility and losses in equity markets in the period.
"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,” Mr Harmer said.
"In our commercial businesses we are prudently maintaining our underwriting discipline in the most competitive conditions in almost four decades."
The company’s interim profit announcement comes a day after the insurer appointed Virgin Australia chairwoman Elizabeth Bryan to replace the retiring chairman Brian Schwartz. Ms Bryan, who became IAG’s deputy chair last June, steps into her new role on March 31.
IAG profits fall as reinsurance expenses rise.
