Insurance Australia Group: Setting a base to grow

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
14 February 2022, 10:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • Insurance Australia Group's (ASX:IAG) 1H22 cash NPAT of A$173m (1H21 -A$460m) came in below Bloomberg consensus (A$211m) and MorgansE (~A$200m), seemingly due to lower shareholder funds income than expected.
  • However, importantly FY22 reported insurance margin guidance (10%-12%) was re-affirmed, while FY22 GWP growth expectations were lifted (to mid-single-digit vs previously low-single-digit).
  • Broadly, we viewed this result as a pass mark versus modest expectations.
  • We downgrade future year NPAT forecasts by 2%-4% on more conservative insurance margin assumptions (offsetting stronger top-line growth forecasts).
  • Our target price is (login to view). We move to a HOLD recommendation.

Event

IAG’s 1H22 cash NPAT of A$173m (1H21 -A$460m) came in below Bloomberg consensus (A$211m) and MorgansE (~A$200m) seemingly due to lower shareholder funds income than expected. The 1H22 dividend (6cps) was also slightly below consensus (~A8cps). However, importantly FY22 reported insurance margin guidance (10%-12%) was re-affirmed, while FY22 GWP growth expectations were lifted (to mid-single-digit vs previously low-single-digit).

Broadly, we viewed this result as a pass mark versus modest expectations. IAG had better top line momentum than we expected and a stable 1H22 underlying insurance margin sets a base for future growth.

The good

  1. 1H21 group GWP rose 6% on the pcp, with IAG pointing to Direct Insurance Australia (DA) rate increases of >4% in home and motor classes, and 9% rates rises in Intermediated Insurance Australia (IIA). Volume growth was also >1% in DA short-tail personal lines classes.
  2. IAG’s group underlying insurance margin (UITR) of 14%, ex Covid-19 benefits and one-offs like discount rate timing differences, was also stable on the 2H21 level.
  3. The group’s underlying claims ratio (52%, ex Covid-19 benefits) was down on 52.8% in the pcp, showing price rises are offsetting inflation.
  4. IIA and NZ businesses saw UITR margin increases of 1% and ~2.5% on 2H21 levels respectively.
  5. There was no change to IAG’s business interruption claims provision (A$1.2bn).
  6. IAG’s capital ratio of 1.02x is solid and will move towards the top end of its target range (0.9x-1.1x) on completion of the AmGeneral sale.

The not so good

  1. As flagged, reported results were heavily affected by 1H22 hazard claims (A$681m) being well above allowances (A$382m).
  2. Shareholder funds income of +A$53m declined heavily on the pcp (+A$138m), mainly reflecting losses on defensive assets due to interest rate increases.
  3. Gross operating costs rose ~4.5% on the pcp, albeit largely reflecting higher transformation costs.
  4. Per guidance, IAG saw A$37m of reserve strengthening attributed to NSW CTP and the liability portfolio.
  5. While the IAG 1H22 IIA UITR (5%) improved on 3.9% in 2H21, this margin is still low versus an implied target level of ~>10%.

Changes to forecasts

We downgrade IAG future year NPAT forecasts by 2%-4% on more conservative insurance margin assumptions (offsetting stronger top-line growth forecasts). Our target price is cut to (login to view).

Investment view

Move to a HOLD recommendation.

IAG remains a quality franchise and we think the CEO’s clear strategy to improve core insurance performance is the correct one (arguably with some signs of initial progress at this result). However, IAG has now somewhat bridged the gap to our target price, and we see better value elsewhere in the sector.

Risks

Risks to our IAG valuation and target price revolve around the pricing and claims environment for insurers in Australia and New Zealand, including catastrophe events. Volatile investment markets, increasing competition and regulatory changes are also risks.

Find out more

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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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