Insurance Australia Group (IAG)
HOLD

The last umbrella

 3 Feb 2023
Sector: Financials

1H23 PRE-RELEASE

Need To Know

  • Reported margin guidance downgraded to 10% vs 14%-16% due to higher inflation + NZ floods
  • FY23 premiums guidance upgraded to 10% vs market at 6.8%
  • Underlying earnings improvement suggest ex-floods operations ahead of consensus.

Investment view

IAG released a pre-1H23 financial update on the Auckland flood impact. Results due 13 February.The update provides plenty of ammunition for both the bulls and bears on IAG.

Key changes include:

  1. Upgrade of FY23 Gross Written Premium (GWP) guidance to 10% (vs. street expectations of 6.8%).
  2. 1H23 natural perils costs A$524 million, ~A$70 million above the allowance.
  3. FY23 underlying margin guidance downgraded from 14-16% to 10% due to high claims inflation and Auckland flood impacts. 
  4. No updates on Dividend per share (DPS) or capital management. IAG has $350m buyback underway, which was 20% complete.
  5. Reiteration of 15%-17% insurance margin as a long-term goal.

Normalisation in motor insurance:

IAG stated that normalisation in the motor segment is progressing post-pandemic, with a return to normal motor activity and claims inflation having peaked. Claims inflation accelerated from 8% to 10% in 2Q, due to supply chain delays on vehicle parts, labour constraints and additional time require to repair vehicles. Claims inflation has slowed in December and January.

Overview

The share price will likely come under pressure today off the back of the release. The underlying earnings improvement and strong capital position may provide necessary reassurance for investors to not jump ship in the short term. IAG has accelerated price increases across home and motor to address the higher claims inflation.

With claims inflation likely peaking, strong premium increases and likelihood that natural perils costs can fall (post La Nina) the potential for strong rebound in earnings across 2H23 and into FY24 remain.

Our rating for IAG remains Hold, looking for details at Results in mid- February with regards to the outlook. 

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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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