profit upgrade: iag shares soar february 3

http://www.businessday.com.au/business/profit-upgrade-iag-shares-soar-20100203-nbpe.html

Profit upgrade: IAG shares soar February 3, 2010 - 5:28PM

Insurance Australia Group is the latest company to join a rush of corporates to lift their profit forecasts as the economy rebounds from the global financial crisis.

Australia's top car and home insurer lifted its full-year insurance margin to between 11.5 and 13 per cent, up from a previous forecast of 9 to 11 per cent on lower claims, cost and favourable credit spreads.

IAG, which also has a presence in UK and parts of Asia, said its first-half insurance profit is expected to more than double to $488 million representing an improved insurance margin of 13.4 per cent.

Shares rose as much as 6.1 per cent in early trade this morning and closed 17 cents, or 4.5 per cent, higher at $3.96.

The stock has recovered to the level of about a year ago, but have some way to go to reach the $4.60 offer price in May 2008 by QBE Insurance Group.

Conservative forecasting

Tyndall Investment Management analyst Jason Kim said the magnitude of the upgraded guidance was better than he expected, even though Mr Wilkins has a history of conservative forecasting.

They took a lot of pain on their fixed interest portfolio when spreads widened so you expected that to reverse, said Mr Kim, who helps manage about $4.6 billion in equities. The weather was more favourable for insurers as we went from a La Nina to more neutral or more El Nino. So the outlook is quite good for these guys.

Mr Kim said there was a big improvement in the New Zealand operations, which had been going badly.

"Our performance has also been aided by narrowing credit spreads and natural peril claim costs ..., particularly in November and December which traditionally experience more weather events," chief executive Michael Wilkins said in a statement.

Mr Wilkins, who took charge of Sydney-based IAG in May 2008, set out to increase efficiency and reduce costs to reverse the net loss reported in 2007/08.

That included cutting staff and exiting unprofitable businesses in the UK, while improving the main operations in Australia and New Zealand, which include NRMA, SGIO and CGU.

IAGs profitability has been aided by the weather, as climate conditions move toward an El Nino pattern, which means less rain, storms, hail and flooding, resulting in fewer claims. Rising interest rates also mean that the general insurer gets a better return on its claims reserves, which are invested in cash and other fixed income securities.

IAG is due to release earnings on February 25.

Stronger economy

IAG joins Commonwealth Bank, Flight Centre, Computershare, takeover target AXA Asia Pacific and Aristocrat Leisure in lifting earnings forecast over the past few weeks largely on a stronger economy.

The Australian economy, which turned down but evaded recession last year, has outperformed its global peers mainly on strong demand from China for its resources and robust domestic consumption.

On Tuesday, the Reserve Bank was resoundingly upbeat on the domestic outlook saying the economy had proved stronger than expected with unemployment peaking much lower than feared.

IAG, which underwrites about $7.8 billion of premium a year said it expects underlying gross written premium growth of 5 per cent in the first half and 3-5 per cent for the full year, excluding divested business and forex movements.

But the reported gross written premium would fall 1.5 per cent in the first half and remain flat for the full year due to the strength of the Australian dollar, the company said.

It said natural peril claims were lower at $121 million compared to allowances of $166 million.