FY20 report: IAG (ASX:IAG) reveals 60% profit drop

Insurance giant Insurance Australia Group Ltd (ASX: IAG) has announced its FY20 report this morning which showed a big decline in profit. The IAG share price is down around 1%.

IAG operates several insurance divisions including NRMA, SGIO, SGIC and CGU Insurance.

IAG’s FY20 profit result

IAG announced that its gross written premiums (GWP), the amount of insurance it wrote, increased 1.1% to $12.1 billion. However, the insurance profit dropped 39.5% to $741 million. The reported insurance margin declined by 680 basis points (6.80%) to 10.1% due to higher than expected natural peril events, a strengthening of reserves, professional risks and workers’ compensation areas and credit spread effects.

COVID-19 impacts on the underwriting profit largely offset each other this year. There were lower motor claims in April and May, though landlord insurance and travel insurance somewhat offset this. The company provisioned around $100 million for COVID-19 claim cost impacts.

However, IAG said that the underlying insurance margin only declined by 60 basis points (0.60%) to 16% because of a softer second half owing to higher reinsurance costs, lower interest rates impacting investment income and a poorer performance from the commercial long tail classes in Australia.

Net profit after tax (NPAT) dropped 59.6% to $435 million. During the year the company exited its Indian investment, realising a post-tax profit of $326 million. However, this was partially offset by a customer refund provision of $141 million for the full year, up from $82 million that was recognised in the half year result.

Dividend

The IAG board decided not to declare a final dividend after its 10 cent per share interim dividend because it actually saw a negative cash profit in the second half of FY20. The half-year dividend alone represented 82.8% of cash earnings. The long term aim is for a payout ratio of 60% to 80% of cash earnings.

Summary

Insurance businesses seem to have a pretty rough time. Economically painful storms seem to be a regular occurrence and each recession also seems to cause a big hit to the company. It’s not as though IAG can dramatically increase prices at the moment to make up for the difficult insurance conditions. I hope IAG has a benign FY21, but I couldn’t see myself investing in its shares due to the regular difficult conditions. I’d rather buy one of these ASX dividend shares instead like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).

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At the time of publishing, Jaz owns shares of WHSP.

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