IAG profit surges

Good weather and higher premiums drive 274% profit increase.

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This morning Insurance Australia Group (ASX: IAG) announced, for the year ended 30 June 2013, a profit of $776 million, compared to $207 million in 2012. IAG has ticked all boxes this year by doubling its dividend, increasing operating cash flow and insurance margins.

Benign weather conditions, fewer claims and higher premiums will enable the group to pay out a dividend of 36 cents for the full year, up from 17 cents a year earlier. Trading at $5.85 per share will take the full dividend to around 6% and represents 64.7% of cash earnings, not far away from the top end of their pledge of 50%-70% of profits.

Profit margins grew to 17.2% in the past 12 months but the groups budgeted $620 million natural disaster fund got through the year paying out only $464 million, which also helped profits. Around 15.2% of revenues stem from New Zealand and the increase in the Kiwi dollar helped earnings.

Outlook

Contrary to Suncorp (ASX: SUN), IAG believes no increases in premiums will be needed in the year ahead but expects to report a growth rate of between 5% and 7% in gross written premiums for the next 12 months. After dragging its tail between its legs since retreating back from the UK last year, the group hopes its expansion into Asia will be more successful. It expects its Asian business to contribute 10% of revenues by 2016.

In a news release, CEO Mike Wilkins said “Maintaining a clear focus on our strategic priorities, to accelerate growth in Australia and New Zealand and build our Asian footprint, has underpinned the Group’s ability to deliver this strong result”.

IAG

Source: Google Finance

Benign weather conditions are important for the group going forward. The company has raised its natural disasters budget to $640 million in the next 12 months.

Foolish takeaway

Despite trading on low multiples and paying a strong dividend, IAG is not for the faint-hearted. Its failure in the UK, the inherent risk that carries with insurance companies and regulatory conditions can make it difficult to forecast the future price of the stock. However compared to its Australian peers, QBE (ASX: QBE) and Suncorp, it pays the best dividend and has very strong underlying insurance margins.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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