Profit, Dividends To Surge For IAG Shareholders – At Last

Shareholders in Insurance Australia Group can expect a sharply higher final dividend payment in August after the company revealed yesterday that it is looking at a cracker of a full year result.

And the same thinking should be applied to other insurers, such as Suncorp (AAMI, GIO and other brands) and the insurance business at Wesfarmers.

Better weather conditions and absence of major disasters has meant fewer claims at a time when insurers premiums have risen to reflect previous claim costs. That has resulted in a surge in cash flow and underwriting surpluses for the groups.

IAG lifted its profit guidance for 2012-13 because of a higher insurance margin (that’s essentially the gross profit in its insurance business) than it had been forecasting.

The reason – an absence of nasty disasters, apart from floods and storms and a cyclone in the first quarter, which in turn means more money can be released from reserves set aside to meet extra claims.

And, the company’s cash reserves have been earning more money in the year as well, meaning all up it could have hundreds of millions of dollars more to distribute to shareholders.

IAG told the ASX yesterday that it expects to report an insurance margin of between 16.8% and 17.2% for the year to June, well above previous guidance of 12.5% to 14.5% when it revealed its 2012-13 interim results in February.

The surge in the profitability of the group can be seen by comparing the forecast insurance margin of 11% to 13% when the 2011-12 results were released in August of last year. The company had an actual insurance margin of 10.6% in the 2011-12 year, so the rise in the year to June will be close to 70%.

Net earned premium for the year was expected to come in at about $8.3 billion, around a billion dollars more than the $7.238 billion announced for the 2011-12 financial year.

That’s down to the higher premiums set after the spate of natural disasters and other problems for insurers in the preceding two years. Gross written premiums in 2011-12 were up 11.7% against the 11.8% result for 2012-13.

Now that the weather has calmed down (especially in Queensland) and there’s been no significant natural disasters (such as the two NZ quakes in 2010 and 2011 and the Japanese quake and tsunami), insurers finances are in far better shape. And that in turn has meant fewer claims on IAG.

In fact London reports suggest that re-insurance premium costs for Australia will be down by up to 10% in the rest of 2013 into 2014, and perhaps more because of this improved claims experience.

IAG YTD – Fewer natural disasters to help IAG

IAG chief executive officer Mike Wilkins said yesterday the group was "favourably impacted by natural peril, reserve release and credit spread outcomes. Compared to our previously held assumptions, these factors have caused the group’s insurance margin to exceed our earlier guidance."

IAG also said it expected to book a net natural disaster claim expense of around $470 million, compared to a guidance assumption of $620 million and the so-called credit spread impact would be $110 million, ahead of a guidance assumption of $90 million.

This would see a significant amount of funds released from the company’s reserves because of the lower levels of claims which will bolster earnings and increase the amount of money available to pay out to shareholders.

"Reserve releases in the region of 2.5% of NEP, compared to guidance of 1-2% of NEP, derived from continued favourable experience in long tail classes in a low inflation environment< the company said. That 2.5% will be equal to around $205 million, compared with the forecast for up to half that figure," IAG said.

(Cash earnings is defined as net profit after tax attributable to IAG shareholders, adjusted for amortisation and unusual items. In FY13 unusual items include the loss associated with the discontinued UK operations (which will reduce the amount available for distribution).

IAG earned a net after tax profit of $583 million in the 2011-12 year and paid a dividend of 17c a share including a 12c a share final. That could easily rise past 20c a share, all up. The company earned $461 million after tax in the first half of the 2013 year and paid an interim dividend of 11c a share, up from 5c paid previously.

This year’s final could easily increase by a similar amount, taking the potential payout to 30c a share.

The Group will announce full details of its 2012-13 results on August 22, 2013, including the outlook for the 2013-14 financial year.

IAG shares rose 1.7% or 10c to $5.94.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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