Insurance Australia Group: FY22 guidance re-affirmed, although elevated 1Q22 hazards

About the author:

Richard Coles
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;

  1. IAG said the first quarter had “started well” and FY22 key guidance metrics were re-affirmed;
  2. 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);
  3. 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;
  4. 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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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.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely 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%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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