Investors in insuring-giant Insurance Australia Group Limited (ASX: IAG) have woken to yet another day of gains as it delivered its remarkable FY14 report to the market this morning. Despite much pessimism surrounding it in earlier analyst forecasts, Insurance Australia has managed to grow earnings strongly for the fourth consecutive year. Here are some highlights from today’s report:
- Net profit after tax increased a massive 59% to $1,233 million
- Earnings per share rose to 53 cents, a 49% increase from FY13
- Insurance margins, representing the profitability of its premiums, rose to 18.3% from 17.2% in FY13
- A final fully franked dividend of 26 cents per share was announced, pushing the yearly dividend to 39 cents, an 8.3% increase from the last reporting season
What this means for shareholders?
In a market where most of its competitors have been experiencing difficulties due to lagging divisional results, Insurance Australia has remained strong, indicating its resilience to difficulties and quality business model. Its volatile area of business doesn’t make it any easier to grow, but Insurance Australia has been able to weave its way through the tough times.
Ultimately, investors should be very happy with these results. Insurance Australia has managed to turn relatively flat revenue growth rates into stellar earnings growth. If we compare this to the 18% fall in net profit after tax by its major competitor QBE Insurance Group Ltd (ASX: QBE), its easy to see why investors should see better opportunity in Insurance Australia.
A company’s ability to sustain these results into the future is dependent on the medium to long-term strategies it has put in place to ensure that earnings will flourish.
Insurance Australia’s CEO, Michael Wilkins, inferred today that it is aiming to achieve just that and it is well placed to achieve strong returns over the long term.
Much of the profit increase can be also attributed to cost-cutting endeavours which have pushed margins higher. This is reflected through its largest business, Australia Direct, which managed to improve insurance margins to 16.4% as efficiency improvements throughout its supply chains and general operations materialised into lower claims costs, despite flat gross written premiums.
Furthermore, these cost-cutting endeavours are highlighted as a key business priority as it moves into FY15. In its investor presentation, Insurance Australia outlined that it is on track in the implementation of its new operating model, aiming to improve efficiencies throughout its business functions.
Finally, Insurance Australia’s most exciting growth prospect has been its recent $1.845 billion acquisition of Wesfarmers’ underlying insurance wing which was completed on 30 June 2014. The report outlined that approximately $230 million worth of synergies will be reaped by the acquisition until the end of FY16, in addition to significant gross premium increases in the future.
I think Insurance Australia has been ticking all of the right boxes and is well prepared for another year of strong growth. I would consider an entry point soon, before shares fly any higher.
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Motley Fool contributor Aryan Norozi owns shares in Insurance Australia Group Ltd.