Insurance Australia Group Ltd (ASX: IAG) shares surged 3% on Thursday after the company confirmed that it was tracking well towards hitting its full-year guidance. IAG confirmed that it anticipates:
- Gross Written Premium (GWP) growth in the range of 17–20%, and
- A reported insurance margin in the range of 13.5–15.5%.
Quality of Results
The company noted that the majority of GWP growth would be due to the acquisition of the insurance underwriting business acquired from Wesfarmers Ltd (ASX: WES) on June 30 this year.
IAG CEO Mike Wilkins noted that the company is "pleased with the quality of the former Wesfarmers business and its integration is proceeding to plan." Importantly, IAG is on track to deliver pre-tax synergies of around $230 million a year within two years. Cost savings through synergies was one of the big talking points during the process of the $1.85 billion purchase, as it made up a significant part of the business case.
Decent Returns
Yesterday's jump takes IAG's share price within striking distance of its one-year high of $6.61 and takes the rise to 9.3% in just 10 trading days.
IAG shares have returned nearly 14% this year, comprising 8% in capital growth and 6% in dividends. Yesterday's announcement means that IAG should have no problems paying out between 39 and 45 cents per share in dividends over the next 12 months.
Risks
The biggest risk to IAG, like many insurers, is a major natural disaster that results in higher claims than expected. Another risk is that of a poorly executed or planned acquisition. Many analysts questioned the Wesfarmers purchase as it relied heavily on synergies between the businesses. Unfortunately, IAG has a poor acquisition history, having recently exited its UK position to focus on Australia, New Zealand and Asia (only 3% of premiums). I would prefer to see the company consolidate its position and learn from the mistakes made by QBE Insurance Limited (ASX: QBE).
Online Competition
There is a growing trend of internet-based insurers moving into the Australian market. Car insurance has been a big growth area for other brands and I wonder whether these cheaper competitors will eat into profits over time.
