Insurance Australia Group: Natural perils hit

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

02 November 2021, 11:30 AM

Sectors Covered:

Insurance, Diversified Financials

• Insurance Australia Group (ASX:IAG) has provided a market update on its natural perils financial year-to-date, after severe storm activity in October.
• IAG has seen estimated claims costs of A$535m for the first four months of FY22 versus a previous claims assumption for that period of A$280m. IAG has now revised its expected FY22 natural perils claims cost to A$1.04bn compared to the previous assumption of $765m.
• We downgrade IAG FY22F EPS by 26% on revised guidance with nominal changes to future year earnings. Our Price Target is lowered to (login to view).
• IAG had a difficult FY21 and FY22 is set to be a weather affected year. However, we believe for the patient investor the stock is cheap trading on ~13.5x FY23F earnings, and we expect continuing insurance price increases (further assisted by current bad weather), combined with management’s strategy to improve performance to drive improved profitability over time. ADD maintained.

Event

IAG has provided a market update on its natural perils financial year-to-date, after severe storm activity in October.

IAG has seen estimated claims cost of A$535m for the first four months of FY22 versus a previous claims assumption for that period of A$280m.

IAG has now revised its expected FY22 natural perils claims cost to A$1.04bn compared to the previous assumption of $765m. The revised natural hazard budget allows for ~A$510m of perils events for the remainder of the financial year.

IAG is now guiding to a reported insurance margin of 10%-12% versus 13.5%- 15.5% previously

Analysis

It’s another 6 month period affected by weather for IAG, which is becoming a consistent theme for the general insurers. 

While IAG had spoken to remaining confident on its operational momentum in FY22, a difficult 1H22 reported result means stock catalysts are lacking near term, in our view (outside any favourable Federal Court ruling on Business Interruption claims).

Forecast and valuation update

We downgrade IAG FY22F EPS by 26% on revised guidance with nominal changes to future year earnings. Our price target is lowered to (login to view).

Investment view

IAG had a difficult FY21 and FY22 is set to be a weather affected year.

However, we believe for the patient investor the stock is cheap trading on ~13.5x FY23F earnings, and we expect continuing insurance price increases (further assisted by current bad weather), combined with management’s strategy to improve performance to drive improved profitability over time. ADD maintained.

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