Why I think this insurer is poised to outperform in 2018 after posting a 90%+ surge in profits

Shares in AUB Group Ltd (ASX:AUB) have surged higher this morning on the back of a pleasing result with all divisions posting strong organic growth. But is this enough to keep the stock moving higher?

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The share price of AUB Group Ltd (ASX: AUB) surged 7.8% to $13 this morning after the insurance broker posted a strong first half result and issued an upbeat outlook.

Management reported a 91.5% uplift in statutory net profit to $23.8 million as revenue increased 6.6% to $129.8 million for the six months to end December 2017.

The bottom line was inflated by profits from the sale of assets and non-cash accounting adjustments on acquisitions. If those were stripped out, underlying net profit would be up 15.1% to $16.7 million.

That's still a pretty decent result and it's noteworthy that the uplift is driven by organic growth across all its operating divisions as AUB benefited from a rising insurance premiums environment that has also lifted the fortunes of others in the sector like Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN).

Investors also cheered the 8% increase in its fully franked interim dividend to 13.5 cents a share and management's confidence that the company will deliver full year earnings at the top end of its 5% to 10% adjusted FY18 net profit growth.

The downside to the outlook is that it implies a slowdown in growth for the current half with AUB facing a number of headwinds.

This includes an increase in technology investment to improve reliability, security and access speed to its platform. AUB will outsource its IT infrastructure services and the initial costs will weigh on the second half, although management is predicting $1 million in annual cost savings from FY19 onwards.

The streamlining of the New South Wales workers compensation scheme is another negative on the company's Risk Services business, although management is confident that its geographical and income diversification strategy will offset this headwind.

"The 1H18 results are ahead of our expectations driven by strong organic growth. Our performance expectations for 2H18 are tempered by our caution regarding the short-term impact of the NSW workers compensation changes… and one off corporate costs relating to technology outsourcing," said AUB.

"Notwithstanding, we are confident that performance will be at the top end of our current guidance range."

I believe a near 10% increase in underlying net profit and its estimated yield of around 5% (including franking credits) will put the stock in investors' good books, although it may not be enough make this a top performing stock on the All Ordinaries (Index:^AORD) (ASX:XAO) index in 2018.

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Motley Fool contributor Brendon Lau owns shares of Insurance Australia Group Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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