Insurance Australia Group
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 21 November 2016, 10:49 AM
- Sectors Covered:
- Insurance, Diversified Financials
Key points
- Insurance Australia Group (IAG) has announced that it expects a net claims cost of A$200m will be incurred from the recent trans-Tasman storm and NZ earthquake.
- Despite this, IAG reaffirmed FY17 reported insurance margin guidance of 12.5%-14.5%.
- We now see the stock trading at closer to fair value.
What happened
Insurance Australia Group (IAG) announced that it expects total net claims costs of A$200m will be incurred from the recent trans-Tasman storm and NZ earthquake. Following this, year-to-date natural perils claims costs are approximately A$340m, versus IAG's full-year allowance of A$680m, which is included in IAG's FY17 reported insurance margin guidance (12.5%-14.5%).
Given the strength of IAG's reinsurance covers, which includes A$96m protection above the A$680m perils allowance, management has retained its existing guidance range. IAG has disclosed that its maximum event loss, until 31 December 2016, now falls to A$20m in Australia and NZ$20m in New Zealand.
Ticks for protection but upside removed
That guidance has been reaffirmed despite two significant recent events highlights the strength of IAG's reinsurance planning. However such events, in our view, take away potential upside for IAG in FY17 (ex any particularly large reserve releases). While we commend IAG on its efforts to insulate the business, and acknowledge it has avoided some of the potholes experienced by peers, we find it hard to see near-term upside and growth for the stock.
No changes to forecasts
We leave our earnings forecasts unchanged for IAG, ex adjusting for the recent off-market share buyback, and continue to forecast an FY17 insurance margin of 14.1%. Our insurance margin forecast is in line with IAG's FY16 underlying margin performance. While there is potential for larger-than-expected FY17 reserve releases, we note IAG's underlying margin has been under pressure (declining by 1.6% in FY16), ex the Berkshire Quota Share benefits.
Investment view
Following the FY16 result, we moved IAG to a Reduce recommendation when we thought its share price of ~A$5.80 was becoming stretched. With the share price coming off ~7% since this time, we think IAG has moved somewhat closer to fair value.
We move recommendation from Reduce to Hold.
More information
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