This morning, Insurance Australia Group Ltd (ASX: IAG) reported growth in its gross written premiums (GWP) and net profit for its full year 2016-17 financial results.
Its GWP rose 3.5% to $11.8 billion, net profit rose 48% to $929m, but its underlying insurance margin fell to 11.9% from 14% on the prior corresponding period (pcp).
The insurance margin fell due to higher claims costs in its Australian and New Zealand motor businesses, elevated large losses in its commercial classes of insurance and its natural peril claims costs of $822m which exceeded its allowance for the year by $140m.
Big tail winds for IAG in the past year, however, have been strong equity markets, which also helped boost IAG's net profit due to an increase in its investment income on shareholders' funds, and the improvement in the prior period reserve releases.
Prior period reserve releases relate to expected claims and inflation for its Australian 'long-tail' insurance classes being much lower than expected. The amount of the releases came to $457m which is the equivalent to 5.4% of the company's net earned premium and is certainly not something shareholders should become accustomed to. The same figure for the 2017-18 financial year is expected to be at least 2%.
The company's cash return on equity also improved from 13% on the pcp to 15.2%, and its combined ratio fell to 88% from 91.3%.
IAG's share price is down over 7% morning, probably on disappointment with its fall in underlying insurance margin, but this merely provides an opportunity for yield-seeking investors to now grab the almost 5.3% fully franked forward yield that's on offer.
IAG will pay it shareholders a fully franked dividend of 20 cents per share in early October which brings the total dividend for the year to 33 cents.
