Taking a big-picture view of a company's financials over the past 10 years is a great way to be honest with yourself about an investment.
As the disclaimer goes: 'Past performance is no indication of future performance', but looking at a company's results and examining how they've performed offers useful insights into the nature of the business.
Does it possess a business model or competitive advantages that it can spin into greater profits year after year? Virtually every company on the ASX has taken an earnings hit during the past 10 years, but if the general trend is for earnings to rise and number of shares on issue to remain the same, you've likely done quite well.
Unfortunately, Insurance Australia Group Ltd (ASX: IAG) was not one of the past decade's outstanding performers:
Down 7% in the past ten years, ouch! Fortunately earnings and dividends have increased over that time; 2014's Earnings Per Share (EPS) were roughly 20% higher than they were in 2005, while dividends were up 50% over the same period:
Part of the problem was the GFC and the subsequent rebound, while another is the increasingly competitive nature of Australian insurance. Some analysts view insurance as a semi-commodity type product – meaning it is hard to achieve prices above the market rate – and I am inclined to agree with this view.
The lumpy nature of insurance earnings has also played a part, with natural disasters and years of high claims being by their very nature hard to predict. All these things are part and parcel of owning an insurance business but as readers can see, IAG has not been a great investment over the past 10 years.
Fortunately, in recent times the insurer has staged quite a turnaround, with rapid increases in Gross Earned Premium and Statutory Net Profit After Tax (NPAT):
Gross Earned Premium has increased roughly 50% from 2005-2014, while NPAT is up nearly 70% over the same period. Shares on issue in 2015 numbered ~2,329 million, an increase of 29% from 1,794m in 2007 (the earliest figures I could find).
Insurance Australia Group has also improved its return on equity (ROE) to pre-GFC levels, returning 21% and 17% in 2014 and 2013, respectively. Based on its half-year results and natural disasters notwithstanding, the company looks likely to deliver another strong performance this year, before earnings flatten again in 2016.
On one hand, IAG appears cheap today as investors can buy 70% more profits for 7% less cost compared to a decade ago. Even so, from this data it's difficult to spot any evidence of a compelling business model and there are plenty of better options for investors looking to smash the market over the long term.
