IAG launches $300m buy-back as profit drops 14%
Insurance Australia Group will launch a $300 million off-market share buy-back after annual profit dropped 14 per cent.
IAG revealed on Friday morning that full-year profit attributable to shareholders, for the period ended June 30, 2016, fell 14.1 per cent to $625 million.
IAG chief executive Peter Harmer said pricing pressures in the industry were the most competitive he had seen in his 30 year career. Photo: Daniel Munoz
However, revenue from ordinary activities rose 11.8 per cent to $16.77 billion as insurance profit rose 6.8 per cent to $1.18 billion.
“Insurance profits growing at nearly 7 per cent is a reflection of the true underlying health of the business,” IAG chief executive officer Peter Harmer said.
Underlying insurance margins grew to 14 per cent up from 13.1 per cent in the 2015 financial year.
This was despite gross written premium, a key measure of the amount of money the company makes from selling insurance, slipping 0.6 per cent to $11.34 billion. This was at the low end of the company’s guidance for a “relatively flat” result.
Mr Harmer said pricing pressures in the industry were the most competitive he had seen in his 30 year career.
Shares slip in early trade
The company released its latest financial results before the market opened on Friday, in early trade the stock slipped as much as 2.6 per cent but by the close was down just 0.5 per cent at $5.82. By comparison the benchmark S&P/ASX 200 index crept 0.3 per cent higher over the session The shares have lost 1.8 per cent over the past 12 months.
IAG’s annual net profit after tax was $702 million, down from $830 million in the 2015 financial year.
Mr Harmer labelled the overall set of results “pleasing” given difficult market conditions and told investors he “felt confident” about the outlook for the business heading into 2017.
Weaker profits came as the insurer as a combination of low interest rates and volatile markets delivered a $126 million hit to its investment portfolio, down 56 per per cent on the previous year.
Another factor weighing on the profit result was a higher tax bill. IAG chief financial officer Nick Hawkins said this reflected abnormally low liabilities in the previous year as a result of a high level of claims in the New Zealand business following the Christchurch earthquake being processed through Singapore.
Rising claim costs from the compulsory third party (CTP) scheme in NSW were also a drag, despite the company hiking rates in this business by 12 per cent over the past 18 months.
Mr Harmer said he was hopeful NSW would soon confirm plans to overhaul the scheme from July 2017 alleviating pressure to further raise prices.
The company said pressures on profitability were “particularly apparent” in commercial markets due to a combination of soft markets and pricing pressures, although it flagged it had seen a “growing ability” to lift its premium rates in Australia in the latter part of the year.
Costs from implementing a new reinsurance program and entering a quota share arrangement with Warren Buffet’s Berkshire Hathaway from July 1, 2015 also dampened the full year profit result. Both of these initiatives are expected to reduce the volatility of claims costs in future years.
In early June IAG warned shareholders that major storms across much of the east coast of Australia had resulted in more than 10,000 claims at an estimated cost of between $60 million to $80 million net pre-tax.
The anticipated $300 million buy-back will open on Friday September 9. Following a special dividend at the half year result it brings total shareholder returns for the year to around $550 million. The capital management program flows from the Berkshire Hathaway deal, which is due to lead to another $300 million of shareholder capital being released over the next two to three years.
A final dividend of 13¢ per share, fully franked, was also announced.
IAG is one of the biggest general insurers in Australia and New Zealand. It sells insurance products for motor vehicle, home and contents, compulsory third party, lifestyle, and business under a range of brands including NRMA, RACV, and CGU. The company also has operations in Malaysia, India, Indonesia, Malaysia, Thailand and Vietnam.
Gross written premium from Asia grew 7 per cent and the company said the region “remains a long term growth focus”.