IAG (ASX:IAG) share price on watch after 170% jump in cash earnings

IAG has reported strong cash earnings growth…

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The Insurance Australia Group Ltd (ASX: IAG) share price will be one to watch closely on Wednesday.

This follows the release of the insurance giant's full year results this morning.

IAG share price on watch after almost tripling its cash earnings

  • Gross written premium (GWP) increased 3.8% to $12,135 million
  • Insurance profit up 35.9% to $1,007 million
  • Underlying insurance margin down 130 basis points to 14.7%
  • Reported insurance margin up 340 basis points to 13.5%
  • Net loss after tax of $427 million
  • Cash earnings up 170% to $747 million
  • Full year dividend doubled to 20 cents per share

What happened for IAG in FY 2021?

The good news for the IAG share price on Wednesday is that the insurer returned to form in FY 2021.

IAG revealed GWP growth of 3.8% for the year, which was mainly rate driven, but also supported by promising new business growth and stronger customer retention.

Another positive during the year was its reported insurance profit of $1,007 million, which is an increase of 35.9% over FY 2020. This was due mainly to lower natural perils costs, positive credit spreads, and a first half COVID-19 benefit largely from lower motor claims in Australia. This translated to an improved reported insurance margin.

As per its announcement in July, IAG reported a net loss of $427 million for the year. This was due to significant one-off corporate expenses mainly relating to business interruption, customer refunds, and payroll remediation. Management notes that these are historical issues that have been identified, provisioned for, and are being fixed. The company is also making investments to continue to lift its risk management and operational capabilities.

Finally, its cash earnings, which exclude one-off items, increased 170% to $747 million. This allowed the company to announce a final dividend of 13 cents per share, which takes its payout ratio to 66% based on full year cash earnings.

What did management say?

IAG's Managing Director and CEO, Nick Hawkins, was pleased with the company's performance in FY 2021.

He said: "We are pleased with the underlying financial results we are delivering today. Our FY21 business performance is sound and reflects the strength of our core insurance business and its marketleading brands. The underlying margin of 14.7% (FY20: 16.0%) is within expectations and we've reinstated guidance for FY22, reflecting the confidence we have in our business and economic outlook."

"I'm confident that the strong leadership team I've established, the new organisational structure we have in place and the strategy we're executing will deliver business and customer growth. IAG is a company guided by a clear purpose 'to make your world a safer place' that makes a real difference to our customers and communities. I'm focused on IAG's long-term future, and together with my leadership team and our people, we will build a stronger, more resilient company," he added.

What's next for IAG?

Positively for shareholders and the IAG share price, the company is forecasting low single-digit GWP growth and a reported insurance margin of between 13.5% to 15.5% in FY 2022.

Management notes that its FY 2022 guidance aligns to its aspirational goal to achieve a 15% to 17% insurance margin over the medium term.

This goal encompasses organic direct customer growth that at least matches the market in Direct Insurance Australia and New Zealand, an insurance profit of at least $250 million over the next three to five years for Intermediated Insurance Australia, and delivering further simplification and efficiencies in the cost structure of the company.

"We are optimistic about the outlook for IAG and are reintroducing guidance for FY22. The strength of our core business and its sound underlying performance in FY21, our new operating model with clear, embedded executive responsibilities, as well as greater certainty in the economic outlook, mean that we are confident that IAG's underlying performance will continue to improve," Mr Hawkins concluded.

IAG share price performance

The IAG share price is currently up 12% year to date. This means it is outperforming the ASX 200 by a slender margin.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Insurance Australia Group Limited. 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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