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Insurance Australia Group FY20 results unpacked

We examine the highlights from Insurance Australia Group’s full-year results release.

IAG Source: Bloomberg

IAG’s profits lag, CEO looks to a brighter future

The Insurance Australia Group (IAG) share price opened lower on Friday, after the insurance giant released its full-year (FY20) results to the market.

Overall, while the Group's reported gross written premiums were in-line with guidance, its margins weakened, with reported insurance margins coming in below guidance. Moreover, IAG revealed that it wold not be paying a final dividend, though reiterated its commitment to a 60-80% payout of cash earnings.

The IAG share price closed Thursday’s session at $5.070 per share, down approximately 33% year-to-date.

Looking forward, IAG’s Managing Director and Chief Executive Officer Peter Harmer said:

'We face a future with the confidence that we have a resilient business and we are well-equipped to rise to the challenges presented by the current environment, as well as the opportunities we see in a post-COVID-19 world.'

Full-year results examined

On the top-line, IAG reported minor growth in its Gross Written Premiums, which came in at $12,135 million, representing a year-over-year increase of 1.1%. This result, noted management, was weighed down by the impact of the coronavirus pandemic in the second half of fiscal 2020.

By comparison, the Group's earnings contracted, with insurance profits, reported insurance margins and net profits after tax all falling.

Investors may be particularly disappointed with IAG reporting an underlying insurance margin of 16.0%, and a reported insurance margin of 10.1% -- down 680 basis points and below the Group's prior guidance of 12.5-14.5%. Management attributed this result to 'higher than expected level of natural peril events [with natural peril claims costs coming in at $904 million], a strengthening of our reserves mainly in the liability, professional risks and workers' compensation areas, and credit spread effects.’

IAG share price: earnings and dividends

Elsewhere, IAG’s full-year net profits after tax (NPAT) came in at $435 million, down 59.6%. These profits were largely driven by the sale of the Group's 26% interest in the Indian-based SBI General, for which IAG derived a net profit after tax of $326 million.

In step with that, IAG said it would not be paying a final dividend, with full-year (FY20) dividends equal to 10 cents per share – down from 32 cents per share in FY19. Indeed, the insurance giant’s negative cash earnings during the second-half of 2020 meant that IAG’s dividend payout ratio actually came in at 83% of group earnings – modestly ahead of its upper dividend payout range.

Looking forward, management warned that due to the reduction in its franking balance, 'IAG expects a reduced level of franking will apply to any ordinary dividends that it may declare and pay during calendar 2021, while zero franking will apply to relevant distributions on the Capital Notes in the six-month period to 31 December 2020.’

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