Insurance Australia Group: Outlining the value proposition
About the author:
- 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.
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 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;
- The 1H21 normalised UIM of ~14% was broadly flat on 2H20, indicating underlying profitability is stabilising post some recent pressure;
- Group underlying GWP growth of 5% showed reasonable positive momentum, with 7% rate increases in commercial insurance a highlight;
- There was no change to the business interruption provision announced in November (A$1.2bn pre-tax); and
- 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
- IAG booked a 1H21 group reported loss of A$460m, impacted by significant business interruption claims and some provision top-ups;
- Group expenses rose at a mid-singledigit level on an underlying basis due to items like higher compliance costs and annual leave provisions, etc;
- 1H21 Australian motor GWP growth of 1.5% on pcp lagged SUN’s 1H21 performance (+5%); and
- 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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