Why the Insurance Australia Group (ASX:IAG) share price is charging higher

The Insurance Australia Group Ltd (ASX:IAG) share price is on the move on Tuesday following the release of its half year results…

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The Insurance Australia Group Ltd (ASX: IAG) share price has been a positive performer on Wednesday.

At the time of writing, the insurance giant’s shares are up 3.5% to $5.23.

How did Insurance Australia perform in the first half?

For the six months ended 31 December, the company reported a 3.8% increase in gross written premiums (GWP) to $6,188 million.

And thanks to lower levels of claims, Insurance Australia Group delivered a sizeable 33.1% increase in insurance profit to $667 million. Management estimates that it experienced a ~$100 million benefit from lower motor claim frequency, largely from lockdowns in Victoria.

The company’s cash earnings also grew strongly. The company reported a 21.6% increase in cash earnings over the prior corresponding period to $462 million.

However, on a statutory basis, the company recorded a loss after tax of $460 million. This was due largely to an adverse ruling in respect to business interruption claims, which led to Insurance Australia making a $1.15 billion pre-tax charge.

In light of this, the company’s board cut its interim dividend by 30% to a fully franked 7 cents per share.

How does this compare to expectations?

The market was expecting the company to report a sizeable loss because of the pre-announced business interruption claims provision, so that was largely already factored into the Insurance Australia share price.

However, one positive surprise was the company’s dividend. Morgans and Goldman Sachs, for example, were not expecting the company to declare an interim dividend.

Outlook

Looking ahead, the company has set itself a target of expanding both its cash return on equity (ROE) and reported margin over the coming years. It is targeting a cash ROE of 12% to 13% and a reported margin of 15% to 17%.

This compares to FY 2020’s cash ROE of 11.5% and reported margin of 15.1%. It hopes this will allow it to pay sustainable dividends to shareholders.

Its margin target is ahead of Goldman Sachs’ forecast of 14.6% in FY 2023. This could be another reason why the Insurance Australia share price is outperforming today.

Management commentary

Insurance Australia’s Managing Director and Chief Executive Officer, Nick Hawkins, was pleased with the half.

He commented: “We have seen a strong underlying performance across our businesses over the last six months and we will build on this performance as we sharpen our focus to deliver a stronger, more resilient IAG.”

The Chief Executive also spoke about the elephant in the room – the $1.15 billion pre-tax charge for business interruption claims.

He said: “Our business interruption policies were never intended to cover pandemics. However, following the Supreme Court of NSW Court of Appeal decision on the COVID-19 business interruption test case, we conducted a detailed review to determine our potential exposure, and took action to strengthen our balance sheet.”

Looking ahead, Mr Hawkins appears positive on the future.

He explained: “Over the past few months, we have put in place measures which I believe will further strengthen the business. We’ve restructured the business, splitting our Australia Division into Direct Insurance Australia and Intermediated Insurance Australia to better align our brands to our customers and to bring a stronger focus to our commercial and personal intermediated businesses.”

“We are acting decisively to address the issues facing our business. We are working with the broader insurance industry to get clarity on how our business interruption policies should be interpreted in the context of COVID-19, and we continue to make progress on our customer remediation program.”

“And today we have outlined our strategy which will allow us to deliver IAG’s full potential over the next three to five years. At IAG we have a great history, strong foundations and a clear purpose. I’m excited about IAG’s future and our opportunity to make the world a safer place for more than 30 million Australians and New Zealanders,” he concluded.

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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. 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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