Today's full year profit result from Insurance Australia Group Ltd (AX: IAG) has sent the share price down 4.8% to $5.57 – that's the exact price Warren Buffett's Berkshire Hathaway paid to purchase 3.7% of the company in June.
Unlike what often occurs when Buffett buys into a company, in the case of IAG the stock hasn't experienced a re-rating – this could lead some investors to wonder whether Buffett has in fact got it wrong on IAG?
Here are the key points from the full year result:
- Insurance profit fell to $1.1 billion from $1.6 billion in the prior year
- Underlying insurance margin slipped to 13.1% from 14.2%
- Gross written premium (GWP) grew 17% to $11.4 billion
- Net profit after tax was down to $728 million from $1.2 billion
- The full year dividend payment was reduced to 29 cents per share (cps) from 39 cps. A final dividend of 16 cps has been declared
At the divisional level:
- Personal Insurance saw a 5.2% increase in GWP but was affected by an increase in net natural peril claims costs that squeezed the insurance margin
- Commercial Insurance reported a 40.7% jump in GWP on the back of the addition of a business acquisition from Wesfarmers Ltd (ASX: WES). On a like-for-like basis however, GWP was "modestly negative"
- New Zealand retained its market-leading position and performed well with growth in GWP of 22.8% achieved. This divisional growth also benefitted from the acquired Wesfarmers' business.
- Asia remains a small division for IAG with the earnings contribution only $21 million, up from $14 million in the prior year
Buy, Hold or Sell?
Management provided an upbeat assessment of its outlook for FY 2016 stating that it expects to report an insurance margin between 14% and 16% which includes a 2% favourable effect from the previously announced quota share arrangement with Berkshire Hathaway.
While some shareholders will be disappointed with the reduction in dividends, arguably the difficult recent past period (which included earthquakes in New Zealand and floods in Australia) is now behind IAG and a more positive future is before it.
