Insurance Australia Group (IAG)
HOLD

Little to add...

 13 Feb 2023
Sector: Financials

1H23 RESULT

Need To Know

  • Earnings and Guidance in-line with downgrade from Feb 3rd release. 
  • Underlying premiums and margins growth remains key focus for 2H FY23 earnings recovery. 

Investment View

IAG’s 1H23 result presented little information to add from what was disclosed in the prior release (3rd Feb Financial update addressing Auckland floods). Clearly a weak half on earnings with notable loss ratio expansion (+7.7%), both flagged to the market earlier this month. IAG’s outlook was maintained with what was released earlier this month. 

Key Results

  1. Gross Written Premiums (GWP): A$7,061m vs A$7,026m market. 
  2. Net earned premiums (NEP): In-line at A$4,113m. 
  3. Net profit after tax (NPAT): in-line at A$468m.
  4. Underlying Insurance margins of 10.7% and Reported Margins were 8.5% are in-line with the prior release.
  5. Dividend of 6cps in-line with consensus and represents a 68% payout ratio of business interruption (BI) adjusted NPAT. 

Guidance

  1. FY23 GWP growth around ~10%. (Unchanged from prior release).
  2. FY23 Reported margins of ~10%. Implies a 2H FY23 reported margin of ~11-12%.
  3. FY23 perils estimate of A$1,145m due to Auckland floods.

A weak 1H23 result albeit with some underlying improvements sprinkled in. The proforma CET1 capital position was weaker than expected at 0.94x (0.97x 2H22). IAG remain slower than peers in passing on premium increases but are aiming to catch up in the 2H. Underlying margin improvements of ~4.5-5.0% is guided for 2H FY23 due to NEP reinsurance and inflation moderation. 

The strong underlying premiums growth (+10%) and expectation that natural peril costs unwind (post La Nina & NZ floods) indicates that group earnings should rebound for 2H FY23 and FY24. The continuation of one-off natural peril events has been the key driver for pushing the earnings recovery further out. 

Underlying premiums growth and expectation of capital return from BI should provide some support in mid-longer term. Alongside this, IAG has ~A$275m of its buyback to go which we expect will be continued within the half. 

We maintain our Hold rating. We expect the share price to largely hold up today given most of the downgrades were put through earlier this month.

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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. The Company's segments include Direct Insurance Australia, Intermediated Insurance Australia and New Zealand.

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