It's back to the basics for IAG

After a torrid last four years, there are - at last - signs that Insurance Australia Group is getting its act together and behaving like an insurer should do.
 
That has meant jettisoning its one-time ambitious plans of expansion overseas (albeit that India remains a long-term hope for the company's relatively new management team), sorting out its domestic operations into a coherent and solid offering and putting its New Zealand business on to more of an even keel.
 
For IAG shareholders, it's been a rough ride since late 2006-early 2007 with the ill-timed strategy of pumping up business in the UK going awry - a direction which was then blown well and truly off course by devastating weather-related events that knocked a huge hole in its core Australian operations.
 
Throw in the impact of the global financial crisis which hit its investment earnings and caused a blow-out in credit spreads and you have what you might describe as a perfect storm when it comes to bottom-line profits - or lack of them.
 
Fortunately, for its army of small shareholders, the group - now run by former Promina chief executive Mike Wilkins, an insurance man to his bootstraps - has begun to re-establish itself by focusing on the basics.
 
Wilkins is 18 months into a re-structuring of its operations that has sought to re-establish trust in its main brands at the same time as benefiting from a restoration of more "normal'' conditions in financial markets.
 
And like its rivals who realise that competition for volume can only go so far, IAG has also managed to obtain price increases that have boosted its top line revenue which are now dropping down to the bottom line thanks to tighter control of costs.
 
Change of fortunes
 
There has also been quite a bit of luck involved. After the huge storms, floods and bushfires of recent years, the insurers have lately enjoyed a relatively calm period weather-wise and this has seen their claims and associated pay-outs (primarily those of catastrophic nature) drop sharply over the past year.
 
Reserve releases are down, albeit only slightly, whilst in the half year just gone there was a $40 million boost from natural peril claim costs which had been slated to hit $166 million but actually came in at $121 million. A year ago these had soared to $176 million.
 
All of those factors are evident in the result of IAG's main Australian business which includes NRMA Insurance. That business saw growth in gross written premium (revenue) of 7.8 per cent in its first half to December 31 2009 and a corresponding insurance margin up of 16.9 per cent - a very tidy increase in its pre-tax profits.
 
Added together with a long-awaited improvement in its commercial insurance division, CGU where it has been harder to make premium increases stick, the group's insurance profit was up a healthy $261 million to $488 million.
 
All told, the group's net profit after costs and tax rose to $329 million from the very sickly $4 million in the corresponding period a year ago.
 
Such a recovery was always on the cards given the most recent loss recorded which was caused by massive write-downs and the operational difficulties which had beset IAG at the time.
 
Wilkins delivers
 
But, nonetheless, there had to be improvements and Wilkins is now starting to deliver on them - not least in the fact that there is a very welcome rise in the interim dividend from 4 cents a share last time to 8.5 cents a share now.
 
There is, though, a long way still to go before IAG realises its full potential, particularly if it is to avoid the false dawns of the early years after its stock market listing.
 
There is also a huge amount of competition to deal with and the ever-present awareness that QBE, despite its retreat from trying an opportunistic takeover bid some time back, may still have another go.
 
Despite the industry's rather dour image, life - in present times at least - can't be described as dull given what IAG, and for that matter its major rival, Suncorp, have been through over the last two years or so.
 
djohn@smh.com.au