Profit crash: Insurance Australia Group Ltd disappoints investors

Should you buy Insurance Australia Group Ltd (ASX:IAG) after today's lacklustre results?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Major Australian and New Zealand insurer Insurance Australia Group Ltd (ASX: IAG) reported its results to the market this morning.

They were fairly lacklustre, reflecting the impact of the Berkshire Hathaway investment as well as mediocre business conditions. Here's what you need to know:

  • Revenue rose 3.7% to $8,235m
  • Net Profit After Tax attributable to shareholders fell 19.5% to $466m
  • Insurance margins rose to 14.9% up from 13.4% previously
  • Dividends of 17 cents per share (16 cps in the prior period) plus a special dividend of 10 cents per share, as well as an increase in payout ratio from 60%-80% of cash earnings (50%-70% previously)
  • Investment income fell heavily as a result of market turmoil over the past six months
  • Combination of challenging market conditions and operating discipline reduced Gross Written Premium by 1.1%
  • Cash of $1.5bn and debt of $1.7bn
  • Assets of $30bn compared to liabilities of $23bn

So What?

The report was largely as indicated by IAG, although profits fell heavily due to a vastly increased reinsurance expense, which was mostly due to IAG's arrangement with Berkshire Hathaway.

There was no change in the company's holdings in part-owned associate ventures throughout south-east Asia, and these businesses contribute barely anything ($15m) to IAG's earnings.

Personal insurance in the ANZ region continues to be a growth avenue for IAG, although commercial insurance struggled to perform. Compulsory Third Party (CTP) insurance has become an item of concern through increased claims frequency, particularly in New South Wales.

Although IAG touts its Asia segment as a major growth avenue for the company, so far progress has been slow, with the region only generating $246m of revenue. As market penetration improves, shareholders could expect this to grow, however it could be many years before IAG draws significant earnings from this region.

Now What?

A fairly uninspiring report, IAG's business performance was mixed, with improvements in some areas offset by declines in others. The general outlook for insurance in Australia and New Zealand is average over the next few years, according to accounting firm Ernst & Young. As a result I do not expect IAG to become a major outperformer, although there appears to be room to incrementally improve its earnings.

Additionally, the company has undergone a bit of a management reshuffle in the past few months, which adds an element of uncertainty for shareholders. Taking into account all of these things, I do not believe IAG shares are a buy today.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »