Shares of general insurance business Insurance Australia Group Ltd (ASX: IAG) have come under heavy selling pressure over the last week following the release of its interim earnings report.
The insurer reported a net profit of $579 million for the period, which represented a 9.8% decline on the prior year. This was the result of heightened competition for customers and a 26% increase in natural disaster claims to $421 million. As it stands, the group's peril allowance for the full year is $700 million, with a separate insurance cover for retained perils amounting to $150 million. The total damage caused by the recent tropical cyclone Marcia is yet to be announced.
Insurance Australia Group's profit was also impacted by a 41% reduction in investment income. This is concerning given the strength of global equity markets during the reporting period.
Of course, there were positives to be taken from the report, but those barely came as a surprise. Gross Written Premiums rose 17.1% to $5.6 billion, although this came largely as a result of its recent acquisition of Wesfarmers Ltd's (ASX: WES) insurance underwriting arm late in 2013.
Should you sell?
Over the last week, the stock has fallen more than 7% from a high of $6.43 to just $5.94 today. Although it was a disappointing result from the insurer, there are still reasons to suggest it can perform for investors in the long term. For instance, it is doing a reasonable job of maintaining its margins, while the synergies from its Wesfarmers acquisition should soon become more recognisable.
For now, it seems as though holding onto your shares might be the best option. While investors will need to remain patient, at least they'll get to enjoy its solid dividend yield, currently amounting to 6.6% fully franked (or 9.4% when grossed up for franking credits).
