Profit crash: Insurance Australia Group Ltd disappoints investors

Should you buy Insurance Australia Group Ltd (ASX:IAG) after today's lacklustre results?

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Major Australian and New Zealand insurer Insurance Australia Group Ltd (ASX: IAG) reported its results to the market this morning.

They were fairly lacklustre, reflecting the impact of the Berkshire Hathaway investment as well as mediocre business conditions. Here's what you need to know:

  • Revenue rose 3.7% to $8,235m
  • Net Profit After Tax attributable to shareholders fell 19.5% to $466m
  • Insurance margins rose to 14.9% up from 13.4% previously
  • Dividends of 17 cents per share (16 cps in the prior period) plus a special dividend of 10 cents per share, as well as an increase in payout ratio from 60%-80% of cash earnings (50%-70% previously)
  • Investment income fell heavily as a result of market turmoil over the past six months
  • Combination of challenging market conditions and operating discipline reduced Gross Written Premium by 1.1%
  • Cash of $1.5bn and debt of $1.7bn
  • Assets of $30bn compared to liabilities of $23bn

So What?

The report was largely as indicated by IAG, although profits fell heavily due to a vastly increased reinsurance expense, which was mostly due to IAG's arrangement with Berkshire Hathaway.

There was no change in the company's holdings in part-owned associate ventures throughout south-east Asia, and these businesses contribute barely anything ($15m) to IAG's earnings.

Personal insurance in the ANZ region continues to be a growth avenue for IAG, although commercial insurance struggled to perform. Compulsory Third Party (CTP) insurance has become an item of concern through increased claims frequency, particularly in New South Wales.

Although IAG touts its Asia segment as a major growth avenue for the company, so far progress has been slow, with the region only generating $246m of revenue. As market penetration improves, shareholders could expect this to grow, however it could be many years before IAG draws significant earnings from this region.

Now What?

A fairly uninspiring report, IAG's business performance was mixed, with improvements in some areas offset by declines in others. The general outlook for insurance in Australia and New Zealand is average over the next few years, according to accounting firm Ernst & Young. As a result I do not expect IAG to become a major outperformer, although there appears to be room to incrementally improve its earnings.

Additionally, the company has undergone a bit of a management reshuffle in the past few months, which adds an element of uncertainty for shareholders. Taking into account all of these things, I do not believe IAG shares are a buy today.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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