Insurance

IAG returns to profit but margin squeeze unnerves investors

Fri 22 Jul 22, 11:17am (AEST)
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Key Points

  • IAG is on track to report $347m in net profit (NPAT) for FY22
  • IAG's underlying insurance margin during the second half also rose to 14.1%
  • Reported insurance margin of 7.4% was well below the company’s prior guidance of 10% to 12%

Having range traded since the start of the year, Insurance Australia Group (ASX: IAG) couldn’t turn a trick this morning – share price down -3.28% at the open – despite the insurer revealing its on track to report $347m in net profit (NPAT) for FY22, compared with a -$427m loss last year and a gross written premium of 5.7%.

At face value the announcement looked encouraging, with the insurer experiencing mid-to-high single digit gross written premium (GWP) growth and a reported insurance margin of 14 to 16% for FY23.

IAG's underlying insurance margin during the second half also rose to 14.1% from 13.5% in previous period.

Margin compression

But what clearly worried investors this morning were accompanying revelations that despite company’s profit from insurance of $586m, the reported insurance margin of 7.4% was well below the company’s prior guidance of 10% to 12% and virtually half the insurance profit margin of 13.5% in FY21.

While management is confident FY23 will be a much stronger year for the company, today’s result may also force investors to rethink the stock’s defensive qualities and perceived pricing power ability to pass on higher costs.

Management noted that underlying weakness in margins reflected “net natural peril costs” of $1.1bn, which was roughly a third ($354m) more than initially provided for.

The company also flagged a reserve strengthening of $172m plus negative credit spread impacts of $45m.

There was also a $200m pre-tax release from the business interruption provision.

Brave face

Putting a brave face on today’s result, CEO Nick Hawkins suggested to investors that today’s guidance demonstrates both top-line and margin improvement.

Having been impacted by claims inflation in key home and motor portfolios, Hawkins also noted that a major increase in the group’s natural perils allowance helped to ensure the business can withstand the impact of increasing frequency and severity of natural perils.

“In our intermediated business, the steps we’ve taken to improve the performance are showing promising signs and positions us well to deliver the targeted insurance profit of $250 million in FY24,” he stated.

“By creating a more focused operating model, a leadership team with deep expertise, and a clear strategy for growth we have confidence in the future.”

IAG will release final audited FY22 results 12 August.

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Insurance Group Australia: Share price over 12 months.

 

What brokers think

Consensus on IAG is Moderate buy.

Based on Morningstar’s fair value of $4.93 the stock appears to be undervalued.

Based on the seven brokers that cover IAG (as reported on by FN Arena) the stock is currently trading with 15.8% upside to the target price of $4.94.

Citi expects margin headwinds, especially in FY23 from reinsurance costs and foresees a significant jump in the group's FY23 CAT allowance. 

However, due to price rises and increasing interest rates, the broker expects to see overall margin expansion, and retains a Buy rating with the target price falling to $5.05 from $5.75. (20/07/22).

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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