IAG plans to raise $400m via capital notes

As part of its capital management strategy, Insurance Australia Group (ASX: IAG), whose brands include NRMA and a joint venture with RACV, is targeting a $400m raise through the issue of its second capital notes offering.

Proceeds will be used for general corporate purposes and to refinance existing Capital Notes 1 issued in December 2016 that are reinvested in Capital Notes 2.

Eligible Capital Note 1 Holders may apply to reinvest some or all of their Capital Notes 1 in IAG Capital Notes 2.

To facilitate the Reinvestment Offer, IAG has amended the terms of the Capital Notes 1.

Two distributions

The Capital Notes 1 Distribution scheduled to be paid on 15 March 2023 has been split into two distributions:

• The First Pro Rata Distribution is scheduled to be paid on all Capital Notes 1 on the Issue Date for the Capital Notes 2 (which is expected to be 22 December 2022).

• the Second Pro Rata Distribution is scheduled to be paid on 15 March 2023 on all Capital Notes 1 outstanding.

All Reinvestment Capital Notes will be transferred to the Purchaser at a purchase price per Reinvestment Capital Note equal to $100, being the Issue Price of each Reinvestment Capital Note.

IAG is a top pick: WAM Capital

While IAG’s share price has been treading water year-to-date, it started recovering lost ground mid-November after Wilson Asset Management - which operates two LICs WAM Capital Limited (ASX: WAM) and WAM Research Limited (ASX: WAX) – identified the insurance stock as one of its top investment picks.

The fund manager believes that after recent events, including multiple significant one-offs”, business interruption lawsuits, elevated natural disasters and management turnover, the share price has been pushed too low.

WAM retains IAG as a “core holding” within its portfolio and rates it a “high-quality company” due to continued strength in the premium rate cycle, leverage to higher bond yields, the internal turnaround program and the potential for a capital return.

Morgans upgrades

Wilson's note on IAG followed a recent upgrade by Morgans to Add from Hold after management left FY23 guidance unchanged at the AGM and announced plans to buy-back $350m shares on-market.

With business interruption (BI) claim outcomes looking decidedly more favourable and following an investment mark-to-market exercise, the broker increases its target to $5.24 from $4.95.

What happened at the full year?

Reflecting the performance of the underlying core business and a $200m pre-tax release from the business interruption provision, IAG reported a full year FY22 net profit after tax of $347m (FY21: -$427m loss).

Gross written premium (GWP) grew 5.7% (FY21: 3.8%), while a reported insurance margin of 7.4% was below expectations due to higher natural perils cost of $1,119m versus an allowance of $765m.

Unlike its rival Suncorp (ASX: SUN) the “peak summer weather season” appears to have only mildly negative implications for IAG.

The group paid a total FY22 dividend of 11cps, down -45% on the previous year.

Looking forward

To deal with the increasing severity and frequency of extreme weather events, IAG put in place its largest to date perils allowance, increasing it by 19% to $909m for FY23.

IAG is forecasting a FY23 mid-to-high single digit GWP growth and a reported Insurance margin of 14% to 16%.

Overall, the group’s FY23 guidance aligns with its aspirational goals of achieving a 15% to 17% insurance margin and a reported return on equity (ROE) of 12 to 13% over the medium term.

ROE in FY22 was 5.59%.

IAG Share price over 12 months.