Insurance Australia Group has upgraded its full-year profit margin expectations to its highest levels since the company listed on the Australian Securities Exchange in 2000, as benign weather and a lack of claims boost the insurance giant’s bottom line.
IAG, the owner of brands such as NRMA and CGU, expects to table an insurance margin of 18-18.3 per cent - a substantial rise from the previously flagged 14.5-16.5 per cent range. It is the fifth consecutive time that IAG has upgraded its full-year insurance margin guidance.
''This reflects the relatively benign natural peril activity in the second half of the financial year, notably in Australia, and a more favourable financial impact from narrower credit spreads than previously anticipated. The underlying performance of the group has remained strong,” IAG boss Mike Wilkins said.
IAG’s natural disasters claim expense hit around $555 million for the year, compared with a full-year allowance of $640 million. The company, which made a $1.85 billion takeover bid for rival Wesfarmers’ insurance underwriting arm last year, also benefited from a favourable credit spread impact of around $100 million.
IAG will also post reserve releases of just below 3 per cent of net earned premium, compared with a previous expectation of around 3 per cent.
''This is a very strong result, but mainly driven by one-offs such as benign weather and credit spread contraction,” Commonwealth Bank of Australia insurance analyst Ross Curran told clients.
Tom Millner, chief executive of IAG shareholder BKI Investment Company, said the upgrade would give investors confidence that the insurer remained on track for steady growth.
''Since they’ve improved their stance in the UK [where IAG exited the market last year], they’ve become more domestic-focused, and it’s paying off,” he said.
The insurance behemoth also told investors it would likely post revenue or gross written premium growth of around 3 per cent for fiscal 2014, at the bottom end of its 3-5 per cent growth guidance.
“[This] reflects an ongoing relative absence of input cost pressures and associated need for premium rate increases,'' IAG said.
IAG said in May it was overhauling its operating model in Australia as it prepared to absorb the Wesfarmers' insurance acquisition. The changes, which took effect from July 1, will see IAG book a $100 million restructuring cost bill, of which $50 million will be recognised in the last financial year’s accounts.
IAG expects to post $90 million in annualised pre-tax benefits within two years as the new model takes hold. The changes are likely to lead to job losses as IAG streamlines its operations into three divisions: personal insurance, commercial insurance, and enterprise operations.
It expects to realise an annualised pre-tax benefit of about $230 million, and about $220 million in one-off costs over the next two years.
Major IAG shareholder Tyndall Investment Management said the market had expected most of the upgrade. ''However, the magnitude of the improvement is probably higher than many would have expected, and this release would suggest underlying margins have actually improved further once we strip out these one-offs,'' portfolio manager Jason Kim said.
Goldman Sachs insurance analyst Ryan Fisher told investors the implementation costs of the new operating model were ''a bit higher than we forecast'', but the expected benefits were consistent with the broker’s expectation of a stronger-for-longer group insurance margin.