Insurance Australia Group: Hopefully, the worst is behind it

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
26 July 2021, 8:30 AM
Sectors Covered:
Insurance, Diversified Financials

  • Insurance Group Australia (ASX:IAG) has provided an outline of its preliminary FY21 results and FY22 guidance.
  • IAG has disclosed that further one-off factors will impact its FY21 result, eg, longtail reserve top ups and additional charges stemming from the customer refund issue. IAG will report a disappointing FY21 Net loss of A$427m.
  • On a more positive note, IAG has given guidance for FY22, which points to an expected reported insurance margin (RIM) in the 13.5% to 15.5% range. This range indicates a likely improvement on the 2H21 underlying insurance margin result (just below 14%, ex restructuring costs), and is also “better quality” given it provides for an additional ~A$100m in natural hazard claims (A$765m in total).
  • In our view, it feels IAG management have gone hard to draw a line in the sand on key current issues at the FY21 result, and IAG’s earnings trajectory should improve from here off cyclically low levels. We therefore see value in IAG, and maintain our ADD call, although we acknowledge near term catalysts are difficult to find. We lower our IAG FY21F/FY22F EPS by 8%/2%, with our PT reduced to (login to view).

Event: Update on FY21 results

Insurance Group Australia (ASX:IAG) has provided an update on its preliminary FY21 results and FY22 guidance. For FY21, IAG expects to report a large net loss of -A$427m.

This compares to previous market expectations (-A$161m, Bloomberg) reflecting further 2H21 oneoff items including a A$66m provision for adverse prior year claims development (in long-tail insurance classes), and a further A$163m pre-tax charge relating to the existing customer refund issue.

On its 2H21 underlying insurance margin (UIM) result, IAG noted it delivered a 13.5% UIM versus ~14% in 1H21 (excluding COVID benefits), although the 2H21 performance would have been more in-line with 1H21, ex some one-off restructuring charges. For FY22, IAG has guided to a combination of low-single-digit premium growth and a 13.5%-15.5% reported insurance margin (RIM).

Analysis

There is no doubt the FY21 result is an ugly one affected by a range of factors including the large 1H21 COVID-19 business interruption (BI) claims provision. However, importantly FY22 RIM guidance (13.5%-15.5%) does point to a likely improvement in the group UIM in FY22, which IAG said would be driven by price increases and cost benefits from its organisational restructure.

IAG also called out UIM guidance as being “better quality” than FY21 outcomes given it allows for an additional +A$100m in natural hazard costs (A$765m in total). 

Whilst FY22 UIM guidance does not factor in impacts of current COVID-19 lockdowns, management did say IAG’s existing BI provision will be adequate to cover any further BI claims from the new lockdowns (with lAG also to see some benefits of lower motor claims frequency during such periods).

Overall, our view is there are reasons to be optimistic FY21 marks the low point for IAG’s insurance results, with the earnings trajectory to improve from here (off cyclically low levels). This arguably means the current share price represents an attractive entry point, however, we acknowledge the stock lacks clear catalysts and also has some lingering risks, for example, provisioning in long-tail insurance classes given rising inflation.

Forecast and valuation update

We downgrade IAG FY21F/FY22F cash EPS by ~8% and ~2% respectively. Downgrades in FY21 reflect the details provided in the preliminary results, while in FY22 we have marginally reduced our RIM forecasts. Our PT falls slightly to (login to view).

Investment view

IAG has had a difficult FY21, mainly tied to concerns around BI claims. However, we think substantial recent provisions raised in this area have taken this issue off the table and IAG’s insurance margin should improve from here on price increases and management’s new strategy.

With the IAG share price at its lowest level for almost 7 years and the stock trading on an undemanding ~16x FY22F PE, we maintain our ADD recommendation.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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