Insurance Australia Group Limited

IAG Details

A Quick Look at 1H21 Results: Insurance Australia Group Limited (ASX: IAG) engages in the underwriting of general insurance, associated corporate services and investing activities. IAG has segmented busines operations under Australia, New Zealand, and corporate & other activities. As on 10^th February 2021, the market capitalisation of the company stood at ~$12.47 billion. For 1H21, the company reported growth in revenue by 7.2% YoY to $9,659 million versus $9,012 million for 1H20. Overall gross written premium (GWP) went up by 3.8% to $6,188 million in 1H21 on pcp basis primarily driven by growth in Australia (4.6%) and New Zealand (1.5%). IAG registered insurance profit (pre-tax) of $667 million, up 33% YoY for 1H21. This resulted in insurance margin of 17.9% in 1H21 versus 13.5% earned in 1H20, owing to positive impacts from motor claims experience, and reduction in credit spreads. However, the company suffered a net loss after tax of $456 million for 1H21 versus net profit of $287 million in 1H20, depicting a decline of 258.9% on pcp. The company earned net cash inflows from operations of $800 million in 1H21, up by $617 million on pcp basis. IAG has decided to pay an unfranked interim dividend of 7 cents per security to shareholders in 1HFY21, payable on 30 March 2021.

Key Highlights in 1HFY21 (Source: Company Reports)

Outlook: From FY21, IAG will not factor in an allowance for reserve releases in the definition of underlying margin. This is due to the company’s view of the uncertainty associated with the long-tail reserve development in the current economic scenario. In line with its FY20 approach, IAG has decided not to provide guidance outlook for the current FY and will review this decision on a periodical basis.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of IAG gave a negative return of 0.75% in the past three months and a positive return of 3.32% in the past six months. The stock is currently trading slightly towards its 52 weeks’ low level of $4.38. The stock of IAG has a support level of ~$5.108 and a resistance level of ~$5.476. We have valued the stock using the Price to Cash Flow multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a discount as compared to its peer average, considering provision of potential business disruption claims, provision for customer refunds and an estimated reduction in GWP of ~$50 million in 1H21 on pcp basis. For the purpose, we have taken peers like AUB Group Limited (ASX: AUB), NIB Holdings Limited (ASX: NHF), Medibank Private Ltd (ASX: MPL), to name a few. Considering the current trading levels, decent results of 1H21, interim dividend payout for 1H21, valuation and associated risks with the business, we give a ‘Hold’ rating on the stock at the current market price of $5.290, up by ~4.545% on 10^th February 2021.

IAG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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