IAG (ASX:IAG) share price on watch amid earnings miss but guidance upgrade

IAG had a difficult half…

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Key points

  • IAG has released a poor set of numbers for the first half
  • Its cash earnings have fallen well short of consensus estimates
  • However, it has upgraded its gross written premium guidance for FY 2022

The Insurance Australia Group Ltd (ASX: IAG) share price will be on watch on this morning.

This follows the release of the insurance giant’s half year results.

IAG share price on watch after earnings tumble

  • Revenue down 4.4% to $9,233 million
  • Gross written premium (GWP) up 6.2% to $6,570
  • Insurance profit down 57.8% to $282 million
  • Cash earnings down 62% to $176 million
  • Reported insurance margin down 10.8 percentage points to 7.1%
  • Interim dividend down 14.3% to 6 cents per share

What happened during the half?

For the six months ended 31 December, IAG reported a 4.4% increase in revenue to $9,233 million but a 62% decline in cash earnings to $176 million. The latter falls well short of the consensus estimate of $285 million, which may not bode well for the IAG share price on Friday.

Management advised that this reflects the impact of a lower underlying insurance margin, higher net natural perils claims costs, a net strengthening of prior year reserves, and a lower gain from the narrowing of credit spreads.

This offset a 6.2% improvement in its GWP to $6,570 million, which was driven by a range of factors. These include higher premium rates and volume growth across personal short-tail classes in Direct Insurance Australia (DIA), significant premium rate increases in Intermediated Insurance Australia (IIA), and a combination of higher premium rates and good retention levels across all key portfolios.

In light of its softer performance, the IAG board has elected to cut its interim dividend to 6 cents per share. This represents the insurance company’s lowest interim dividend in a decade.

Outlook

One thing that could lend some support to the IAG share price today was management’s outlook for the full year.

Following stronger than expected GWP growth in the first half and ongoing supportive economic conditions, IAG has upgraded its GWP guidance from low to mid single-digit growth and reaffirmed its reported insurance margin guidance of 10% to 12%.

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

IAG’s CEO, Nick Hawkins, commented: “We have upgraded our FY22 gross written premium (GWP) guidance from low to mid single-digit growth reflecting the confidence we have in the business and future economic outlook. We’ve reaffirmed reported insurance margin guidance of 10-12% for FY22. We’re encouraged by our strong GWP growth of 6.2% and sound underlying performance, with our underlying insurance margin improving to 15.1% (FY21: 14.7%).”

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 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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