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IAG profit dips, hit by bond market

Nicki Bourlioufas  |  22 Feb 2017Text size  Decrease  Increase  |  

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Insurance Australia Group (ASX: IAG) has posted a 4.3 per cent fall in net profit for the first half of fiscal 2017 to $446 million, with a fall in investment income denting profits.

Insurance profit fell 6.4 per cent to $571 million, down from $610 million a year earlier. But the result was stronger than expected, with gross written premiums coming in higher than forecast.

The nation's largest general insurer said gross written premium for the first half was $5.8 billion, a 4.7 per cent increase on the same period a year ago, helped by higher prices on insurance policies.

The company's underlying margin, IAG's preferred measure of business performance, was 12.6 per cent, down from 14.2 per cent.

Morningstar senior equities analyst David Ellis said the result was good overall, boosted by policy price increases and a lower-than-expected tax rate, offsetting a rise in claims costs.

"A key positive was the [policy price] increases in most consumer and business lines, which is a positive for the insurance market," Ellis said.

IAG said gross written premiums were expected to rise at low-single-digit levels for the full year, up from its prior guidance of relatively flat growth.

IAG's effective tax rate of 17 per cent was higher than the 11 per cent rate of a year earlier, but was lower than normal owing to approval by Singapore tax authorities of a lower applicable tax rate for reinsurance recoveries relating to the February 2011 Canterbury earthquake.

IAG managing director and chief executive officer Peter Harmer said the first-half result reflected a strong performance in IAG's consumer businesses, further signs that commercial pricing has passed the bottom of the cycle, and a focus on creating a more efficient business.

"This is a sound result for our core businesses in Australia and New Zealand, reinforced by the strength and integrity of our brands, our sharpened customer focus, and the quality and passion of our people," Harmer said.

"We are already seeing positive results, with our customers' measure of our performance across our different brands above industry average. Our customer feedback is put into action through our 'listen, learn and act' model, which enables us to implement improvements."

While the company talked up a rise in investment income from shareholders' funds, which rose to $105 million from $38 million a year earlier on stronger equity markets, investment income overall was down 33 per cent to $142 million, from $212 million a year earlier.

Investment income from policyholder funds dived to $37 million from $174 million a year earlier due to a rise in bond prices.

IAG will pay an interim fully franked dividend of 13 cents per ordinary share, flat from a year earlier, disappointing shareholders. IAG shares fell on the result, trading at $5.87, down 0.7 per cent shortly before the close of trade.

As at 18 February 2017, the 14 analysts surveyed by Thomson Reuters offering 12-month price targets for IAG had a median target of $5.91, with a high estimate of $6.60 and a low estimate of $5.75.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The writer owns shares in Medibank Private.

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