Insurance Australia Group: Outlining the value proposition

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
10 February 2021, 11:00 AM
Sectors Covered:
Insurance and Diversified Financials

  • Insurance Australia Group's (ASX:IAG) 1H21 NPAT loss of A$460m came in slightly below MorgansE (-A$494m).
  • While IAG has given no specific FY21 guidance, the 1H21 underlying insurance margin (UIM) of 14% and GWP growth of ~4% were broadly in-line with rough management expectations flagged to the market.
  • IAG has disclosed new mid-term profitability targets of a 12%-13% ROE and a reported insurance margin (IM) of 15%-17% as part of its refreshed strategy.
  • We lift IAG FY21F/FY22F cash NPAT by 1%-5% on higher IM expectations. Our PT rises from A$5.28 (login to view). IAG remains a quality franchise, however trading on ~17x FY22F PE, we see better value elsewhere in the sector and maintain our Hold call.

Result summary

IAG’s 1H21 NPAT loss of A$460m came in slightly below MorgansE (-A$494m). The 1H21 dividend of 7cps compared to our expectations of no dividend.

Overall, the reported result was impacted by a -A$1.2bn provision loss (pre-tax) being booked due to Business Interruption (BI) claims (as announced in November).

At an underlying level, while IAG has given no official FY21 guidance, the 1H21 UIM of ~14% and GWP growth of ~4% were broadly per management expectations flagged previously to the market

IAG has also disclosed new mid-term profitability targets of a 12%-13% cash ROE and a reported IM margin of 15%-17% as part of its refreshed group strategy.

The good

  1. The strategic direction given by the new CEO appears logical, e.g. grow by focusing on brands/digital, update systems/processes to lower costs and improve client experience and remediate under-performing portfolios;
  2. The 1H21 normalised UIM of ~14% was broadly flat on 2H20, indicating underlying profitability is stabilising post some recent pressure;
  3. Group underlying GWP growth of 5% showed reasonable positive momentum, with 7% rate increases in commercial insurance a highlight;
  4. There was no change to the business interruption provision announced in November (A$1.2bn pre-tax); and
  5. IAG’s capital position remains robust with a CET1 ratio of 1.12x (post dividend) at the top of managements target range (0.9-1.1x).

The not so good

  1. IAG booked a 1H21 group reported loss of A$460m, impacted by significant business interruption claims and some provision top-ups;
  2. Group expenses rose at a mid-singledigit level on an underlying basis due to items like higher compliance costs and annual leave provisions, etc;
  3. 1H21 Australian motor GWP growth of 1.5% on pcp lagged SUN’s 1H21 performance (+5%); and
  4. IAG saw reserve top-ups of 0.4% of NEP linked to some strengthening in commercial insurance classes.

Changes to forecasts and investment view

We lift IAG FY21F/FY22F cash NPAT by 1%-5% on higher IM expectations. Our PT previously A$5.29, rises (login to view).

IAG has had to navigate a difficult 1H21, but we see an improved outlook with the BI issue seemingly off the table and a clear strategy being put in place to drive margin expansion. However, trading on ~17x FY22F PE, we see better value elsewhere in the sector and maintain our Hold call.

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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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