IAG profits from fewer natural disasters

IAG has posted strong full year results on lower claims.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published July 19, 2013 8:30 am AEST

Insurance Australia Group (IAG) (ASX: IAG) has upgraded its full-year guidance as a result of paying out fewer insurance claim than expected. IAG expects gross written premiums (GWP), a key indicator of company performance, to increase by 11.8% and the insurance margin to be between 16.8% and 17.2%. This compares with previous guidance of 9.5%-11.5% and 12.5%-14.5% respectively.

IAG CEO Mike Wilkins said the results were due to a reduction in natural peril claims from the expected $620 million to $470 million, greater than expected investment income, and the release of reserves held to cover premiums.

IAG is the biggest insurer of homes and cars in Australia, is a general insurer in New Zealand, and has exposure to Asia via partnerships with established insurance businesses in the region. The Australian and New Zealand general insurance business is the group's largest contributor, accounting for around 94% of GWP in the first fiscal half of 2013, but operates in an extremely competitive and crowded market.

In order to diversify earnings, the company has acquired minority stakes in insurance companies in Vietnam, Indonesia, India, China, Thailand and Malaysia and provides back-office functions as part of the agreement. IAG hopes to generate 10% of GWP from its Asian interests by 2016 and is on the way to achieve this with 6% accountable to Asia in first half 2013.

The company currently pays a dividend of just under 4% fully franked and Mr Wilkins maintained guidance for a payout of between 50% and 70% of net profit.

Foolish takeaway

With a strong dividend and a growing exposure to Asia, IAG may reward investors in the medium term if the recent scarcity of natural disasters continues. IAG isn't for the feint-hearted though; more risk-averse investors may be better suited purchasing one of IAG's insurance products instead.

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Motley Fool contributor Andrew Mudie does not own shares of any companies mentioned in this article.

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