IAG share price sinks 6% despite huge dividend boost and buyback

This insurance giant had a strong first-half thanks to premium increases. But was it not strong enough?

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The Insurance Australia Group Ltd (ASX: IAG) share price is on the slide on Friday morning.

At the time of writing, the insurance giant's shares are down 6% to $5.96.

This follows the release of the company's half-year results.

IAG share price falls on half-year results

  • Gross written premium (GWP) up 12.5% to $7,947 million
  • Insurance profit up 75.4% to $614 million
  • Net profit after tax down 13% to $407 million
  • Interim dividend up 67% to 10 cents per share
  • $200 million on-market share buyback
  • Guidance reaffirmed for FY 2024

What happened during the half?

For the six months ended 31 December, IAG reported a solid 12.5% increase in GWP to $7,947 million. This reflects premium increases across Direct Insurance Australia, Intermediated Insurance Australia, and the New Zealand business in response to inflation pressures, higher perils, and reinsurance costs.

This offset lower volumes driven by the Intermediated Insurance Australia business focusing on improved underwriting and pricing.

IAG's reported insurance profit came in at $614 million for the half, which is an increase of 75.4% year on year. This equates to a reported insurance margin of 13.7%, up significantly from 8.5% a year earlier.

And while the company's net profit after tax was down 13% to $407 million, this was due to the prior corresponding period benefitting from a $360 million pre-tax business interruption (BI) claim provision release.

As a result, the IAG board was able to overlook the profit decline and increase its interim dividend by 67% to 10 cents per share.

But the returns won't stop there. Thanks to its strong capital position, the company has announced an on-market share buyback of up to $200 million.

How does this compare to expectations?

While this is certainly a strong result on paper, it appears to have fallen a touch short of expectations. This explains why the IAG share price is falling today.

Commenting on the result, Goldman Sachs highlights that IAG slightly missed on a few key metrics. It said:

Overall result summary: 1) Insurance profits: 1H24 result was $614m vs. GSe of $628m. 2) Cash earnings for 1H24 was $415m vs. GSe of $442m. 3) Underlying margin in line: IAG's definition of 1H24 underlying margin was 13.7% (however 15.1% ex reinsurance reinstatement) vs. GSe of 15.1%. 4) Reported margin: 1H24 reported margin was 13.7% vs. GSe of 13.9%.

Management commentary

IAG's CEO, Nick Hawkins, was very pleased with the half. He said:

Today's results show the progress we've made against our strategic priorities. We've added new direct insurance customers and our IIA business is on track to deliver its FY24 insurance profit target of at least $250m, after a solid first half performance.

Hawkins also revealed that IAG is on course to deliver on its guidance for FY 2024. He adds:

We're on track to deliver the FY24 guidance we outlined at the beginning of the financial year. Our strategy is clear, and our leadership team is focused on delivering against our goals.

This will mean GWP growth of "low double digits" and a reported insurance margin of 13.5% to 15.5%.

The IAG share price remains up 26% over the last 12 months.

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 positions in and has recommended Goldman Sachs Group. 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 Scott Phillips.

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