CGU Insurance Company Limited
Discuss about the Ha1022 Principles of Financial Markets Group for Insurance Industry.
The insurance industry in Australia is large and profitable. It has greatly contributed towards expanding the economy of Australia (Boehm & Moore, 2014, p.34). As technology advances and customer expectations rise, the insurers have focused on making more sales, increasing profitability, coping with the present challenges and outdoing their competitors in the dynamic industry. This is difficult to achieve as not all the challenges experienced can be controlled by the insurance industry; but the way the insurers prepare themselves and adapt to the changing business environment enables them to stand out in the market. Despite the challenges faced, the insurance industry in Australia has a bright future as it is anticipated to grow due to increased insurance sales and customer expectations.
Two insurance companies in the insurance industry of Australia have been chosen. These companies are the CGU and the NRMA insurance companies.
CGU Insurance Company Limited is an Australian insurance company and is among the Insurance Australia Group Limited (IAG) companies. CGU Insurance Company was formed by a merger between Commercial Union plc and NZI’s company (General Accident plc). This merger united two highly rated insurers with more than 160 years of insurance industry experience in Australia. The acronyms of these two insurers together formed CGU which is now not an acronym. The vision statement of CGU is to deliver great experience for the customers and partners, be the best in the industry of work, be the most trusted insurer and deliver sustained high performance in Australia. The purpose and ambition of CGU is to protect tomorrow so as to enjoy today and be the most admired insurer in the market.
GIO General Insurance Company Limited is a general insurance provider in Australia. The company is owned by the Suncorp Group and offers insurance products which include car, boat, home contents, travel, CTP, public liability, caravan, business and workers compensation in the Australian Capital Territory and the state of New South Wales. GIO General was founded in 1927 as the Government Insurance Office in New South Wales. Its major purpose was to provide workers compensation insurance and thus adopted its name, GIO. The company was listed on the Australian Stock Exchange in 1992 August. In January1999, the company was acquired by AMP Limited. In 2001, Suncorp Group acquired GIO by acquiring AMP’s general insurance interests. GIO has maintained its strong commitment throughout its 80-year history to the local community and also currently supports organizations which include Young care, New South Wales Rugby Group and Sports NSW. The purpose and strategy of GIO is to make the World a safer place and optimize the core insurance business while creating future growth options.
GIO General Insurance Company Limited
Australia is among the richest nations world-wide and has undergone economic expansion for the past two decades (Cummins, 2010, p.7). Australia is ranked number five among the nations with economic freedom with a score of 80.9 according to 2018 index. In Asia-Pacific region, Australia is ranked number four of forty three countries in the region and its overall score exceeds the expected regional and world averages. Australia has attracted investment both from the locals and international investors since industries are open to foreign competition and skilled labour is readily available. The current population of Australia is 24.3 million. This is a slight rise compared to the previous results. With this population number unemployment rate stands at 5.7% and the per capita income is currently at $48,899. The current GDP is $1.2trillion reflecting a 2.5% increase compared to the previous results. The inflation rate is low at the rate of 1.3%. The Australian economy is currently undergoing the recession business cycle. This means that the economy is growing and is anticipated to do the same in future. In terms of service delivery, advanced technology and provision of quality products, Australia has remained to be internationally competitive.
Interest Rates in Australia have been high for the past years but currently the Reserve Bank of Australia has maintained the interest rate at a low rate of 1.5% (Cummins & Weiss, 2012, p.764). With this rate of interest, the Australian economy has been forecasted by the policy makers to grow by 3% and above in 2018 and 2019 due to positive supportive business environment and increased exports. The low rate of interest makes capital available to business organizations and investors at relatively low costs in terms of loans and other available means. This means that various industries will experience a positive growth as they expand due to the availed capital at low cost. This expansion and creation of other new businesses using the readily available capital helps reduce unemployment and generally this will automatically lead to improvement in terms of economic performance.
Considering the insurance industry in Australia, it goes without say that the insurance company has grown and is expected to expand due to the low rate of interest put in place. This is due to the fact that insurance companies can acquire capital at the low interest rates for expansion or other investment means. This will generally improve the economy as a whole.
Top down analysis
The current inflation rate in Australia is low (Donni & Fecher, 2017, p.523). The rate currently stands at 1.3%. Consumer prices rose by 1.9% by 2018, March. Reserve Bank of Australia trimmed mean CPI rose to 1.9% as compared to a 1.8% in the prior quarter. This increment was slightly below the expected increment of 2%. Putting Quarter-on-quarter into consideration, the index rose by 0.5% compared to a 0.4% rise in the previous three months. This increment was in line with estimates. Reserve Bank of Australia weighted mean CPI rose to 2.1% in the three months to March. This increment was slightly above the expected increment of 2%. Considering quarterly basis, the consumer prices rose to 0.4% after a 0.6% gain previously. The markets had estimated a 0.5 percent. The most noted significant rise in prices on quarterly basis were secondary school education (3.3%), household fuels and gas (6.0%), vegetables (3.7%), pharmaceutical products (5.6%) and medical services (1.5%). The rises were partially compensated by international holiday travels and accommodation fall (-2.4%), visual, audio and computing services (-6.1%) and furniture (-2.8%). With the current low rate of inflation, it means that consumers are greatly taken care of when it comes to prices and satisfaction and therefore it is clear that the insurance industry is doing great and is expected to do better in future. This will in general improve the economy of Australia.
The company tax rate in Australia rose from 40% in 1960 to 49% in 1980s (Dungey, Pagan, 2013, p.321). It then reduced to 30% in 2001 and is currently at this rate but for the small companies with turnover of $2 million the tax rate is 28.5 per cent. Decrease in tax rates has encouraged foreign investment and has seen the existing businesses comfortably operate in a tax friendly business environment. Foreign investment in Australia is dominated by 13 countries. Some of these countries have a higher while others have lower company tax rates. Majority of these countries (actually nine of them) have lower company tax rates compared to Australia, but they have chosen to invest in Australia due to their significance in the world economy. Therefore, it is not really true to say that foreign investments in Australia are attracted by the low company tax rate.
The decrease in the company tax rate has led to expansion of the insurance industry in Australia and new investments in the same industry have also emerged. This has led to rise in profitability of the insurance industry and thus improvement in the economy performance as a whole.
Bottom up analysis
Under the bottom up analysis, the companies have been assessed based on their current financial statements. Various important accounting ratios have been calculated and explained accordingly.
Considering the CGU Insurance Company limited, the company has been improving generally and thus its increase in profitability. The debt-to-equity ratio is a financial ratio used to show the proportion of equity and debt that is used to finance the company assets (Jajaee & Ahmad, 2012, p.221). It is also known as the financial leverage. The debt-to-equity ratio is calculated by dividing the total liabilities by the shareholders’ equity. The CGU’s debt-to-equity ratio currently is 3.36. This shows that CGU is a large company since its debt-to-equity exceeds 2. It also shows that CGU may in one way or another face challenges in financing its liabilities. This debt-to equity ratio is slightly higher compared to that of the previous quarter.
The GIO Insurance Company Limited has also been doing great and its profitability is anticipated to rise. The debt-to-equity ratio of GIO Insurance Company Limited currents is 2.78. The ratio has been obtained by dividing the total liabilities by the shareholders’ equity. This shows that GIO is also a big company since the ratio exceeds 2. The value of the ratio is higher compared to that of the previous quarter. It is also likely to face challenges in financing its liabilities.
The current ratio refers to a liquidity ratio which shows the ability of the company to meet its current (short-term) obligations (Keneley, 2001, p.145). It is also known as the cash asset ratio, liquidity ratio and cash ratio. The current ratio is obtained by dividing the current assets by the current liabilities. The CGU current ratio currently stands at 1.5. This value indicates that CGU Company Limited is able to meet its current/short-term obligations fully since the value exceeds 1. The value is slightly higher compared to that of the previous quarter, a clear indication that CGU has improved in terms of performance.
The GIO Insurance Company Limited current ratio currently is 2.14.This value is higher compared to that of the previous quarter. It has also been obtained by dividing the current assets by the current liabilities. This value shows that GIO is better positioned. This is because it is able to fully meet its current/short-term obligations fully since the current ratio value 2.14 is much higher than 1.
The Return on Equity (ROE) refers to the amount of net income that is returned as the shareholders’ equity percentage (Maddock & McLean, 2015). The return on assets shows an estimate of the company’s profitability by showing the profit realized with the money invested in the company by the shareholders. It is also referred to as the return on net worth (RONW) and is calculated by dividing the net income by the shareholder’s equity. Return on equity is expressed as a percentage. The CGU current return on equity is 5.067%. This value is higher compared to the value of the previous quarter. This shows that the money invested by the shareholders gained profit and thus the profit of the company rose in general.
The GIO Insurance Company Limited return on assets currently is 4.2%. This value is slightly higher compared to that of the previous quarter. The value was calculated by dividing the net income by the shareholder’s equity. This is an indication that the money invested by the shareholders gained profit and thus the profit of the company generally increased indicating an improvement in the company in terms of performance.
The Net Profit Margin shows the efficiency of a company considering its cost control (Weber, 2014, p.355). A higher net profit margin shows that a company is efficient at making profit using its revenue. The CGU net profit margin currently is 4.97%. This value is slightly higher as compared to that of the previous quarter. This value indicates that CGU is actually generating more profit using the revenue at hand.
The GIO net profit margin is currently 5.3%. This value is higher compared to that of the previous quarter. This is an indication that GIO is actually making profit from its revenue.
The dividend payout ratio refers to the amount of money that is paid out to the shareholders relative to the net income (Wooden, Freidin & Watson, 2012, p.339). Dividend payout ratio is calculated by dividing the dividends by the net income. The amount of money that is not paid out as dividends by the company is referred to as retained profits and is kept by the company for growth. The CGU dividend payout ratio currently is 26.3%. This value is slightly higher compared to the previous quarter indicating that the company has increased the proportion of its profit it pays to the shareholders. It also shows that the company retains most of its earnings for growth and also investors will be safe to invest in the company.
The GIO dividend payout ratio currently is 24.7%. This value is slightly higher compared to the previous quarter indicating that the company has increased the proportion of its profit it pays to the shareholders. It also shows that the company retains most of its earnings for growth but the investors will be safe to invest in the company.
In conclusion, Australia is among the richest nations in Asia-Pacific. From the current business environment in Australia, considering the current interest rates, inflation rates and the prevailing tax rates, it is clear that the Australian economy is growing and is anticipated to do much better in future. The industry chosen (Australian Insurance Industry) and the companies (CGU and GIO Insurance Companies Limited) are currently doing better in the Australian industry and are expected to improve in terms of performance in future.
It is recommended that the Australian economy keeps the interest rates, tax rates and the inflation rates low so as to increase profitability in its various industries by creating a friendly business environment for operation and attraction of new investors into the economy. Companies in the Insurance industry should improve their service to customers. This will help attract more customers to their businesses and thus increase their profitability.
References
Boehm, E. and Moore, G.H., 2014. New Economic Indicators for Australia, 1949?84. Australian Economic Review, 17(4), pp.34-56.
Cummins, J.D., 2010. Allocation of capital in the insurance industry. Risk Management and Insurance Review, 3(1), pp.7-27.
Cummins, J.D. and Weiss, M.A., 2012. Analyzing firm performance in the insurance industry using frontier efficiency and productivity methods. In Handbook of insurance (pp. 767- 829). Springer, Dordrecht.
Donni, O. and Fecher, F., 2017. Efficiency and Productivity of the Insurance Industry in the OECD Countries. The Geneva Papers on Risk and Insurance-Issues and Practice, 22(4), pp.523-525
Dungey, M. and Pagan, A., 2013. A structural VAR model of the Australian economy. Economic record, 76(235), pp.321-342.
Jajaee, S.M. and Ahmad, F.B.S., 2012. Evaluating the relationship between service quality and customer satisfaction in the Australian car insurance industry. In International Conference on Economics, Business Innovation (Vol. 38, pp. 219-223).
Keneley, M., 2001. The evolution of the Australian life insurance industry. Accounting, business & financial history, 11(2), pp.145-170.
Maddock, R. and McLean, I.W. eds., 2015. The Australian economy in the long run. CUP Archive.
Weber, E.J., 2014. The role of money during the recession in Australia, Applied Financial Economics, 4(5), pp.355-361.
Wooden, M., Freidin, S. and Watson, N., 2012. The household, income and labour dynamics in Australia (HILDA) survey: wave 1. Australian Economic Review, 35(3), pp.339-348.
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