The Insurance Australia Group Ltd (ASX: IAG) share price is likely to remain steady today, with dividend payments maintained despite a lower-than-expected insurance profit due to higher claims expenses. Here's what you need to know:
- Gross written premium (GWP) rose 4.7% to $5,802 million
- Insurance profit fell 6.4% to $571 million
- Dividends maintained at 13 cents per share
- Outlook upgraded to low-single digit growth in GWP for the full year
- Outlook for continued strong competition and potential excess capacity in some insurance markets
So What?
A better-than-expected half for IAG – although the Kaikoura earthquake resulted in higher-than-expected claims expenses that hurt the company's insurance margins, GWP also rose as IAG raised prices on its policies. IAG also experienced better-than-expected retention rates on some of its commercial policies – it wasn't entirely clear whether this was just luck or if it reflected the improving quality of IAG's service. Management did note that they are attempting to maintain retention rates at these levels going forwards, and for a company as big as IAG, a strong focus on service is necessary to attract repeat business.
Management noted that challengers and disrupters would continue to compete fiercely for market share with major insurers like IAG. Yet the majors are expected to be able to contain further market share losses by optimising their policies and cutting costs. IAG is currently working to improve the consumer experience, both by further personalising policies and improving customer service via developments such as web chat.
IAG does have some growth opportunities in south-east Asian markets, and its performance during the half was adequate to excellent, with India growing 29% and IAG investing a further $800 million in this region. However, they are too small to make much of a contribution yet.
Now What?
What every IAG investor wants to know – "How are my dividends looking?"
They're looking good, although the insurance market remains competitive and, as a major player, IAG doesn't have a strong visible path for growing this dividend much in the future. That said, with $13 billion in investments ($1.30 per share in net tangible assets) the company does stand to benefit from higher interest rates.
Depending on the impacts of claims and the tax rate (which is soon expected to revert to the mid 20% range from current levels of 17%), IAG doesn't appear too expensive – analysts are forecasting an average of 36 cents per share in earnings for 2017 (according to Thomson Reuters), pricing the company at about 17 times earnings. A 4.4% fully franked dividend is pretty good too, but to my mind IAG is approximately fairly valued and I don't see much of an opportunity in it today. I'd consider it a 'Hold'.
