IAG keeps reinsurance program at 2021 levels

Despite dealing with a litany of issues that could potentially see the cost of capital rise, Insurance Australia Group (ASX: IAG) has maintained the level of its 2022 catastrophe reinsurance program at up to $10bn.

Just as it did in 2021, what IAG’s gross reinsurance protection does is cover the company for losses of up to $10bn, including one prepaid reinstatement.

In line with the assumptions incorporated into IAG’s internal planning processes, the cost of the program has increased by mid-single digits to reflect, in part, an increase in disaster costs.

It’s understood that around 60% of the overall main catastrophe program for calendar 2022 is protected by multi-year coverage, providing certainty of future reinsurance cover.

Capital management

Commenting on the decision to keep the reinsurance program at 2021 levels, IAG’s chief financial officer, Michelle McPherson, noted that the catastrophe reinsurance program remains an intrinsic part of IAG’s capital management strategy.

IAG management advised that the overall credit quality of the 2022 program is strong, with over 90% placed with entities rated A+ or higher, an increase compared to 2021.

“As previously disclosed, IAG’s program also includes an aggregate sideways cover for the 12-month period to 30 June 2022. This provides $350m of protection in excess of $90m, following an estimated $310m erosion of the $400m deductible during the six months to 31 December 2021 (pre-quota share).”

IAG said after allowing for the quota share arrangements, the combination of all catastrophe covers at January 1, 2022, results in the insurer having a maximum event retention of $95m.

What brokers think

After opening lower on the news that the group has finalised its catastrophe reinsurance program for the 2022 calendar year, the share price was up 1.14% going into lunch.

While the IAG share price has seriously underperformed in the last 12 months (-5.96%), relative to the ASX 200 (up 13%), the stock has jumped 3.76% in the year to date, while the ASX 200 is down 0.28% (at time of writing).

However, brokers are divided as to whether the recent share price kicker is shades of a fuller recover in 2022.

IAG is targeting 12% customer growth over five years and flat operating expenditure of $2.5bn per annum through to FY23.

However, to reflect the company’s numerous challenges – UBS downgraded the group to Sell from Neutral mid-December. As a result, the broker’s price target fell to $4.20 from $5.35.

Adding to IAG’s headwinds, the Australian Securities and Investment Commission (ASIC) has again launched proceedings against the company for erroneous actions to customers.

ASIC and other issues aside, Citi expects the group to ultilise its scale to target $400m of value via increased claims and supply-chain effectiveness and has retained a Buy rating and $5.60 target price.

Consensus on IAG is Moderate Buy.

Based on Morningstar’s fair value of $5.10 (27 October 2021), the stock is undervalued.