Insurance Australia Group: Hopefully through the worst
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 15 August 2022, 9:30 AM
- Sectors Covered:
- Insurance, Diversified Financials
- Insurance Australia Group's (ASX:IAG) FY22 headline results had been largely pre-released. The FY22 NPAT of A$374m was in-line with flagged expectations and versus -A$474m in the pcp.
- In our view, there were certainly some weaknesses in IAG’s FY22 result, e.g. reserve strengthening, higher natural perils etc. Nevertheless, we also saw some brighter spots with the adjusted UIM improving in 2H22 on 1H22 and FY23 guidance pointing to improved overall momentum into next year. Managing inflation pressures appears to be the key risk into FY23.
- We lower our IAG FY23F/FY24F EPS by ~9% mainly on lower investment income forecasts over time. Our PT is set at (login to view). Move to HOLD.
Event
IAG’s FY22 headline results had been largely pre-released. The FY22 NPAT of A$347m was in-line with flagged expectations and versus -A$474m in the pcp.
FY22 reported GWP (A$13.3bn) was +6% on the pcp, with the FY22 reported insurance margin (IM) of 7.4% (13.5% in pcp) being impacted by natural perils, reserve strengthening and investment market movements. The 2H22 dividend of 5cps was down on the pcp (A13cps).
FY23guidance is for high-single-digit GWP growth and an underlying insurance margin (UIM) in the 14%-16% range (FY22 14.6%). In our view, there were certainly some weaknesses in IAG’s FY22 result, e.g. reserve strengthening, higher natural perils etc.
Nevertheless, we also saw some brighter spots with the adjusted UIM improving in 2H22 on 1H22 and FY23 guidance pointing to improved overall momentum into next year. Managing inflation pressures appears the key risk into FY23.
The good
- FY22 underlying GWP growth was reasonably robust at +7.4% on the pcp (ex CV-19 impacts, portfolio exits and FX).
- IAG added 100k new customers in Direct Insurance Australia during the year.
- IAG’s adjusted UIM (ex CV-19 and discount rate timing impacts) improved 2H22 on 1H22 (14.8% vs 14%) on higher investment income and lower expense ratios; 3) Gross operating costs (A$2.5bn) were largely flat on the pcp (consistent with IAG’s aim to hold costs at this level).
- IAG released ~A$200m (pre-tax) of its Business Interruption provision for CV-19 claims post scenario testing.
- FY23 GWP and UIM guidance metrics (see above) point to continued improved profitability/momentum next year.
- The FY22 pro-forma CET1 capital ratio (0.98) is per the middle of managements target range.
The bad
- There was no 2H22 improvement in the Intermediated Insurance Australia (IIA) UIM which at 5% was in-line with 1H22. There remains a long way to go for this business to reach its goal of producing its target of A$250m insurance profit by FY24 (FY22 A$130m underlying).
- IAG strengthened its reserves by A$172m in FY22 (FY21 A$81m) reflecting increased 2017/2018 accident year worker injury claims and some claims inflation related to the commercial liability portfolio.
- There is still some market concerns about whether rate increases are adequately exceeding inflation highlighted by the underlying loss ratio (ex CV-19) contracting in 2H22 versus 1H22 (54.5% vs 54% ex CV-19 benefit).
- As mentioned the FY22 reported insurance profit was down -42% on the pcp affected by natural perils, investment market movements, etc.
- IAG’s CET1 ratio declined marginally over the half (0.97x vs 1.02x) impacted by increased capitalised technology costs (-0.05 impact).
Changes to forecasts
We lower our IAG FY23F/FY24F EPS by ~9% mainly on lower investment income forecasts over time. Our price target is set at (login to view).
Investment view
Move to HOLD. 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, with IAG having bridged the gap to our target price, we see better value elsewhere in the sector.
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