Insurance Australia Group shares have dropped more than 7 per cent after the insurer said profit margins would narrow in the year ahead amid high claim costs.
IAG on Wednesday said net profit after tax rose 48.6 per cent to $929 million, helped by stronger investment income and reserve releases thanks to the very low inflation environment.
The profit result was only slightly below market expectations, but analysts said the company’s outlook for reported insurance profit margins between 12.5 per cent and 14.5 per cent for the year ahead left some investors underwhelmed.
By lunchtime, IAG’s shares had fallen 7.5 per cent to $6.26.
Shaw Stockbroking analyst David Spotswood said the slump in the share price was an example of company shares being priced for high expectations, and then falling sharply on cautious outlook statements.
Until Wednesday’s fall, IAG’s shares had jumped 30 per cent from their lows of last November, trading at a record high of just below $7 in June.
“I think it’s all about expectations. They are too high,” Mr Spotswood said.
IAG, which sells insurance under brands including NRMA, CGA and Swan Insurance, said that in the year to June its reported insurance margins widened from 14.3 to 14.9 per cent, helped by reserve releases.
This margin is expected to narrow in the year ahead, partly because of high claim costs from motor vehicles, and from higher commercial claims.
IAG’s profit growth in the year to June was helped by investment income, higher insurance prices, and reserve releases from earlier periods. Gross written premium (GWP) rose 3.9 per cent to $11.8 billion.
Reserve releases are undertaken when an insurance company’s final cost of claims is lower than it anticipated, which allows the business to release funds, boosting profit.
IAG will pay a fully-franked final dividend of 20c a share, taking its full-year dividend payout to 33c a share.
“Overall GWP growth reflects positive momentum in our commercial business and rate responses to claims inflation, particularly in our short tail motor insurance business in Australia and New Zealand,” chief executive Peter Harmer said.
Insurers have benefited from the very low rate of inflation, and IAG in June had flagged to the market that it would be releasing reserves this year, bolstering profit growth.
This story Administrator ready to work first appeared on Nanjing Night Net.