Insurance Australia Group: FY22 guidance re-affirmed, although elevated 1Q22 hazards
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 25 October 2021, 7:30 AM
- Sectors Covered:
- Insurance, Diversified Financials
- Insurance Australia Group (ASX:IAG) has provided a FY22 trading update as part of its AGM.
- IAG said the first quarter had “started well” and management re-affirmed FY22 key guidance metrics. IAG did, however, note 1Q22 hazards had been “elevated.”
- We make nominal IAG earnings changes of <1% on slightly reduced FY22 GWP forecasts. Our price target is largely unchanged at (login to view).
- IAG clearly had a difficult FY21. However, from here we believe insurance price increases and management’s strategy to improve underwriting and lower costs, should drive improved profitability.
- With the IAG share price at its lowest level for almost 7 years and the stock trading on an undemanding ~19x FY22F PE, we see relative value in the name and maintain our ADD recommendation.
Event
Insurance Australia Group (ASX:IAG) has provided a FY22 trading update as part of its AGM.
The key points were;
- IAG said the first quarter had “started well” and FY22 key guidance metrics were re-affirmed;
- IAG recorded mid single-digit gross premium growth in 1Q22, but FY22 guidance remains for ‘low single-digit growth’ (noting some expected portfolio shedding in Intermediated Insurance Australia);
- FY22 insurance margin guidance remains at 13.5%-15.5%, with IAG noting lower motor vehicle claims frequency linked to CV-19 lockdowns had been somewhat offset by inflationary pressures and some reserving conservatism;
- and while perils costs were called out as elevated in 1Q22, mainly due to storm activity in New Zealand and the earthquakes in Victoria, IAG’s natural perils allowance of $765m for FY22 remains unchanged.
Key thoughts
A broadly positive update with key FY22 guidance metrics re-affirmed. We had been a tad concerned on natural hazard claims given the recent volatile weather on the East Coast of Australia, and while it appears an active 1Q22 (reducing some buffers for the rest of the year), IAG’s FY22 perils allowance remains unchanged at this stage.
If things go IAG’s way over the next few months there are two clear catalysts for the stock, in our view; 1) a solid 1H22 result in-line with guidance; and 2) a favourable Federal Court decision on Business Interruption (BI) claims (noting the recent second BI test case largely went the way of insurers). This could see potential provision releases over time.
Forecast and valuation update
Nominal IAG earnings changes of <1% on slightly reduced FY22 GWP forecasts. Our price target is largely unchanged at (login to view).
Investment view
IAG clearly had a difficult FY21. However, from here we believe insurance price increases and management’s strategy to improve underwriting and lower costs, should drive improved profitability.
With the IAG share price at its lowest level for almost 7 years and the stock trading on an undemanding ~19x FY22F PE, we see relative value in the name and maintain our ADD recommendation.
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resilient result given the extent of lockdowns in the period (~70% of stores
impacted) and the strength of the pcp (cycling 27% growth). Composition
comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%.
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