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Insurance Australia Group share price sinks 4% lower after cancelling final dividend

Dividend payment cancelled
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The Insurance Australia Group Ltd (ASX: IAG) share price is dropping lower on Friday after the release of an announcement.

At the time of writing the insurance giant’s shares are down 4% to $5.54.

What did IAG announce?

This morning IAG provided the market with an update on its expectations for FY 2020.

According to the release, the insurer expects to report gross written premium (GWP) growth of ~1.1%. This is consistent with its ‘low single digit’ guidance.

IAG also expects to report an insurance margin of approximately 10%, which has fallen short of its prior guidance of 12.5% to 14.5%. This is due largely to adverse natural perils, prior period reserving, and credit spread factors.

On an underlying basis, its insurance margin is expected to be 16%, compared to 16.6% in FY 2019. This was driven by a tough second half, which saw its margin fall to 15.1% because of higher reinsurance costs, lower investment returns, and a deterioration in the performance of some Australian commercial long tail portfolios.

This is ultimately expected to lead to a pre-tax loss on shareholders’ funds income of $181 million. While this is down sharply from a profit of $227 million in FY 2019, it is better than its previously indicated year-to-date loss of approximately $280 million at the end of April.

Dividend cancelled.

In light of its poor performance, there will be no final dividend in FY 2020.

The company explained: “While IAG recognises many shareholders will be disappointed with no final dividend, it believes it is important to adhere to its long-established dividend payout policy and to maintain a strong capital position in the current uncertain environment.”

IAG’s Managing Director and CEO Peter Harmer, commented: “We have experienced an immensely challenging second half to the 2020 financial year, characterised by severe natural peril activity, the disruption caused by the COVID-19 pandemic to our people, customers and suppliers, and the marked volatility in investment markets which has adversely impacted our results.”

“We have seen some softening in our underlying margin in the second half. This stems from the combination of lower investment returns from diminishing interest rates, an increased reinsurance expense as we bolstered our protection following heavy perils incidence early in the calendar year, and some deterioration in Australian commercial long tail loss ratio,” he added.

However, the chief executive appears cautiously optimistic on the year ahead.

He concluded: “We enter FY21 with a strong balance sheet and enhanced reinsurance protection, and are well equipped to negotiate the challenges and opportunities that a post-COVID environment will present.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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