Company Reports

Insurance Australia Group's fiscal 2024 net profit doubled to AUD 905 million. The strong result is no surprise, given earnings tailwinds from price increases and higher investment income on policyholder and shareholder funds, which, combined, more than offset claims inflation. The 5% miss against our forecast masks the strong underlying performance. Insurance profit—earnings on insurance policies plus investment income on policyholder funds—beat our forecast by around 9%. The claims ratio was lower than expected, thanks to the rare occurrence of lower-than-allowance natural peril costs. Claims inflation appears to be tracking below premium rate increases pushed into the market in recent years, and the insurer should also be benefiting from its motor repair centers keeping claims growth below industry. A higher tax rate and losses from minority investments took the shine off the result.

Insurance Australia Group is a general insurer with around AUD 16 billion of annual gross written premiums operating in Australia and New Zealand. It is a custodian of well-known heritage brands that include NRMA, CGU, SGIO, SGIC, and Swann Insurance in Australia and State, NZI, AMI, and Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand.

Australia's largest general insurers are currently in a sweet spot: Higher interest rates are boosting investment income, and material premium rate increases are improving underwriting profitability. Breaking from what had become the norm, natural peril events are not exceeding expectations either. These tailwinds are well recognized by the market, with shares in Insurance Australia Group and Suncorp up 19% and 22%, respectively, beating the 8% return of the Morningstar Australia Index over the last 12 months.

Insurance Australia Group is a general insurer with around AUD 15 billion of annual gross written premiums operating in Australia and New Zealand. It is a custodian of well-known heritage brands that include NRMA, CGU, SGIO, SGIC, and Swann Insurance in Australia and State, NZI, AMI, and Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand.

We raise our fair value estimate for no-moat Insurance Australia Group by 4% to AUD 5.70 per share due to premium rate increases persisting for longer than we anticipated. Strong investment income, a function of higher interest rates, increases our fiscal 2024 insurance profit forecast by 6% to AUD 1.3 billion. This is 64% up on fiscal 2023 and within management’s reaffirmed guidance range of AUD 1.20 billion-AUD 1.45 billion.

Insurance Australia Group is a general insurer with around AUD 15 billion of annual gross written premiums operating in Australia and New Zealand. It is a custodian of well-known heritage brands that include NRMA, CGU, SGIO, SGIC, and Swann Insurance in Australia and State, NZI, AMI, and Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand.

Insurance Australia Group is a general insurer with around AUD 14 billion of annual gross written premiums operating in Australia and New Zealand. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia; and State, NZI, AMI, Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand.

Earnings tailwinds from premium rate increases and higher investment income on shareholder and policyholder funds underpin our forecast that no-moat Insurance Australia Group roughly doubles EPS in fiscal 2024. Management maintained fiscal 2024 guidance, including low-double-digit premium growth and an insurance margin between 13.5% and 15.5%, equating to an insurance profit in the range of AUD 1.20 billion to AUD 1.45 billion. This is a notable increase from the AUD 803 million reported in fiscal 2023 on an insurance margin of 9.6%.

Insurance Australia Group's fiscal 2023 net profit of AUD 832 million was a material turnaround from AUD 347 million last year but was largely as expected. Adjusted for unusual items, predominantly the release of business interruption provisions, cash profit increased 112% to AUD 452 million. We maintain our AUD 5.50 fair value estimate and view the insurer as slightly overvalued.

The market was concerned IAG could be on the hook for large claims associated with the potential failure of Greensill, marking the shares down 10% intraday on Tuesday. IAG halted trading to clear up the issue and the shares subsequently recovered part of the losses that afternoon. We believe shares in the no-moat-rated insurer screen as undervalued compared with our unchanged AUD 6.00 fair value estimate. While uncertainty around business interruption claims and now this will weigh on the shares, we remain positive in an earnings recovery on premiums' rate increases and well controlled operating costs.

Insurance Australia Group reported a 22% increase in first-half fiscal 2021 cash NPAT to AUD 462 million. The result was stronger than we expected but largely due to items that are unlikely to repeat. These included lower motor claims as customers drove less during COVID-19 lockdowns, higher investment income on policyholder and shareholder funds, and natural peril costs below allowances. These items have no bearing on our long-term forecasts. Our fiscal 2021 profit forecast is increased 8% to AUD 890 million, but this alone is not material enough to move our AUD 6 fair value estimate.

Insurance Australia Group is a general insurer with around AUD 12 billion of annual gross written premiums, operating in Australia and New Zealand. Stakes in a Malaysian and Vietnamese insurer are the only remaining remnants of an abandoned Asia growth strategy. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia and State, NZI, AMI, Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand.

Insurance Australia Group is a general insurer with around AUD 12 billion of annual gross written premiums, operating in Australia and New Zealand. Stakes in a Malaysian and Vietnamese insurer are the only remaining remnants of an abandoned Asia growth strategy. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia and State, NZI, AMI, Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand.

Last week we reiterated our upbeat outlook for Insurance Australia Group, underpinned by a benign claims environment, reserve releases, and claims cost control, leading to our insurance margin forecast for fiscal 2014 of 16.5%, towards the top end of guidance. In a welcome surprise, the company has now increased insurance margin guidance to between 18% and 18.3%, reflecting less natural-peril activity and narrower credit spreads than previously expected. Incorporating guided gross written premium growth of 3% and the stronger insurance margin, our fiscal 2014 net profit after tax forecast is increased by 7% to AUD 1.3 billion. Our dividend forecast is similarly increased from AUD 0.37 to AUD 0.39 per share.

Wesfarmers has completed the sale of its insurance underwriting operations to Insurance Australia Group (IAG) following approval from Australia’s competition regulator in March, and regulatory approvals from the Reserve Bank of New Zealand and the Commonwealth Acting Assistant Treasurer in June. The acquisition was funded from internal sources and AUD 1.44 billion in new capital. We’ve previously incorporated the acquisition in our forecasts. The deal should see IAG’s market position strengthen. At current prices, the stock trades at a 16% discount to our fair value estimate of AUD 7.

We recommend investors subscribe to Insurance Australia Group's recently announced share purchase plan, or SPP. Participants in the SPP can purchase up to AUD 15,000 worth of shares at the lower of AUD 5.47 or at a 2% discount to the five-day volume weighted average price. The AUD 5.47 issue price represents a forward price earnings ratio of 11.5 times and a fully franked dividend yield of 5.7%, which we consider relatively attractive. The SPP will raise up to AUD 200 million to help finance the proposed acquisition of Wesfarmers' insurance arm. The SPP closes on 24 January 2014.

We are impressed with Insurance Australia Group's confirmation of its fiscal 2014 insurance margin and gross written premium growth guidance. Pleasingly, the major insurer continues to achieve strong underlying operating performance in the opening months of fiscal 2014. Management is guiding for a reported insurance margin range of 12.5% to 14.5%, subject to the usual caveats of natural peril claims in line with allowance, reserve releases between 1% to 2% of net earned premium and no material change in exchange rates and investment markets. Gross written premium is expected to grow by 5% to 7%.

Insurance Australia Group reported fiscal 2013 cash net profit after tax of AUD 1,156 million, up 98% on fiscal 2012. Reported insurance margin came in at an impressive 17.2% versus 11.5% in fiscal 2012, at the top end of guidance. After several tough years, everything that could go right did. The huge profit increase reflects double-digit gross written premium growth, natural peril claims below allowance, higher-than-expected reserve releases, and a positive credit spread impact. The 13 cent-per-share increase in the final dividend, to 25 cents fully franked, was a feature. Fiscal 2014 guidance is for an insurance margin range of 12.5% to 14.5%. In our opinion, near- to medium-term profitability will likely be more in line with longer-term trends rather than a repeat of 2013's stellar result.

Insurance Australia Group upgraded its fiscal 2013 insurance margin guidance from a 12.5% to 14.5% range to 16.8% to 17.2% driven by favourable natural perils claims experience, reserve releases and credit spreads.

We expect Insurance Australia Group to report a strong fiscal 2013 result driven by a relatively benign weather related claims environment continuing into the second half, positive premium repricing and productivity improvements. The general insurer reports earnings on 22 August and we forecast a fiscal 2013 cash net profit after tax of just over AUD 1.0 billion, up significantly on the AUD 583 million profit achieved in fiscal 2012. The stars have aligned for Insurance Australia Group in fiscal 2013, particularly with respect to claims. We have made some modest increases to our earnings forecasts, primarily reflecting lower claims assumptions. Our fiscal 2013 earnings forecast increases by 2.7% to AUD 48.6 cents per share and our full-year dividend forecast increases from AUD 26 cents per share to AUD 27 cents per share. We are forecasting an insurance margin of 16%, which is above the top end of the 12.5% to 14.5% guidance range. Our fair value estimate increases from AUD 5.00 to AUD 5.50. At current prices, the stock is trading at a 7% premium to our valuation and is moderately overvalued.