Why natural disasters can be good for insurers

Insurance Australia Group (ASX:  IAG) has today announced a full year net profit after tax of $207m, 17% lower than last year, after writing off all the remaining goodwill and intangibles assets associated with its UK businesses ($297m). The company has declared a final dividend of 12 cents per share, taking the total for the year to 17 cents, fully franked.

Gross written premium (GWP) increased by 12% to $9 billion, while the company declared an insurance profit of $832m, a 26% rise over 2011.

All divisions appear to be performing well, with the company’s Australian division a stand out, growing premiums by 10.5% and sporting an underlying insurance margin of 15.2%. New Zealand also performed well, growing premiums by 27%.

Whether the company is stealing market share from competitors Suncorp Group (ASX: SUN), QBE Insurance (ASX: QBE) and AMP Limited (ASX: AMP), remains to be seen, but it appears all four are growing the total value of written premiums. The most likely reason is an increase in premiums. Its also possible that consumers are learning the lessons from the recent spate of natural disasters, such as the floods and cyclones in Queensland, and the earthquakes in New Zealand and more consumers are electing to insure their assets, or increase their insurance cover.

IAG has initiated a strategic review of its UK business, with the outcome expected before the end of 2012. The company is looking at all options including continuing with the current model, refining the business to focus on niche areas, or exploring a potential sale of all or part of the business. The company says that it expects a small profit from the UK division next year.

Looking out to the next financial year, IAG sees gross written premiums increasing between 9 and 11%, and a higher insurance margin of 11 to 13%. Australia and New Zealand are expected to drive strong growth, while Asia is expected to produce a modest profit.

The Foolish bottom line

IAG’s focus on its core business in Australia and New Zealand appears to be paying dividends. Its softly, softly approach to expansion in Asia appears to be working, and certainly less risky than its past UK expansion.

Perhaps an issue to watch is that the company’s combined operating ratio has increased to 102.2%, which shows the company is paying out more in claims and expenses than it is writing in premiums. Compare that to QBE’s ratio of 92.9%, and it suggests that IAG is writing higher risk insurance than QBE. That could come back to bite IAG.

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Motley Fool writer/analyst Mike King owns shares in QBE. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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