Insurance Australia Group (IAG)
HOLD

$350m buyback

 17 Oct 2022
Sector: Financials

Need To Know

  • IAG has released $350m out of its $965m Covid-19 provision following the High Court ruling last week.
  • $350m on-market share buyback beginning in November.
  • IAG flags the potential for further provision release from the remaining $615m on the balance sheet

The announcement of a buy-back is not unexpected following the High Court’s ruling last week for insurance claims related to Business Interruption (BI) insurance over the Covid period of 2020-21.

IAG at its peak had a $1.2bn BI provision. Today’s announcement of a $350m on-market buy-back (or ~3% of shares on issue) comes off the back of $200m provision release in August (paid out via ordinary dividend). As a reminder, IAG raised $750m of equity in 2020 to provide for this provision.

The remaining $615m of BI provision on the balance sheet, could be released over time. Just how much will be released is not unknown, we would expect the majority. Certainty on this amount will take a further 12 months from here.

Separately, insurance peer Suncorp (SUN) has also flagged the release of the majority of their $179m BI provision. SUN always had a much smaller exposure to BI vs IAG.

Investment Implications

Last week’s ruling by the High Court is a clear positive for the insurance industry and IAG.

$550m of the IAG’s BI provision has now been returned to shareholders, with further releases expected to come over time. Investor focus is likely to return to the margin and earnings outlook for IAG across FY23E.

We would expect IAG to go reasonably quickly with its buy-back from November, particularly if the share price is below $5.50.

We prefer QBE Insurance (QBE) over IAG and SUN given exposure to rising inflation premiums globally, with lower exposure to the Australian summer which is likely to again see elevated insurance claims costs.

We note both IAG and SUN have ~20% greater natural disaster coverage in FY23E vs FY22A.

Next Update: AGM 21 October 2022.

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Stock overview

Share Price

Company overview

Insurance Australia Group Limited is engaged in general insurance operations in Australia and New Zealand.

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