IAG is back in black, but despite strong FY22 profit, slashes dividends

Shareholders in Insurance Group Australia (ASX: IAG) had something to smile about this morning, after the general insurer posted a strong pivot back into profit, but due to higher natural perils costs, the reported insurance margin took a hit.

Despite a 2.9% drop in revenue ($18.3bn), the group delivered a net profit of $347m for the 12 months through June, versus a net loss of -$427m last year, which was underpinned by major one-off expenses like business interruption (BI).

Dividend cut

But despite posting a strong profit result, management took the unpopular decision to take a scalpel to the full year dividend.

As a result, on 22 September shareholders will receive a final 5 cent dividend, taking full year payout to 11 cents, down from the 20 cents in FY21.

But that didn’t stop the share price from rising 2.17% at the open.

The insurer reiterated the FY23 guidance it provided to the market back in July.

GWP growth is expected to be mid-to-high single digits, while the reported insurance margin is expected to be between 14% to 16%.

Underlying business in good shape

In an attempt to highlight the quality of the underlying business, management pointed the market to gains in gross written premiums (GWP), which increased 5.7% to $13.3bn in the year.

While growth largely reflected rate increases required to offset inflationary pressures in the supply chain and natural perils, management also noted that retention rates improved over the year.

However, in the next breath, management also conceded that due to higher natural perils costs (aka catastrophe costs), the reported insurance margin – a combination of the combined ratio and earnings from the investment of 'float' - of 7.4% did not meet expectations.

“We had strong GWP growth, and the performance of our business was steady despite the challenging external environment,” noted CEO Nick Hawkins.

“While the [GWP] growth predominantly reflected rate increases to offset inflationary pressures in the supply chain and natural perils, retention rates improved over the year.”

Result highlights

• Diluted eps up 13.33 cents, versus -17.82 cents last year

• Cash earnings (excl one-off items), down 71.5% from $747m a year earlier

• Higher natural perils costs of $1,119m versus the allowance of $765m

• $200m pre-tax release from the BI provision

• GWP growth in the Direct Insurance Australia, up 4.6%

• Net insurance profit down 41.8% from FY21 to $586m

• Underlying insurance margin down 10bps to 14.6%

Strategy

To deal with the increasing severity and frequency of extreme weather events - one of the critical challenges IAG faces as a business – the group has put in place its largest to date perils allowance, increasing it by 19% to $909m for FY23.

While it is early days, IAG reported progress towards its aim of delivering $400m of value through claims and supply chain effectiveness. 

IAG share price over 12 months.