Insurance Australia Group Limited

IAG Details

Completion of 2022 Catastrophe Reinsurance Program: Insurance Australia Group Limited (ASX: IAG) engages in the underwriting of general insurance, associated corporate services and investing activities. Recently, the company has finalised its 2022 catastrophe reinsurance program, thus keeping its gross reinsurance protection cover at up to $10 billion, which was in line with the level of 2021. The catastrophe reinsurance program continues to be an essential part of IAG’s capital management strategy.

Managerial Changes: The company’s Board recently appointed Peter Taylor to the role of Group Chief Risk Officer (Group CRO). In another update, the company informed the market about the resignation of Virginia Papaluca as an additional Company Secretary of IAG, which came into effect on 17 December 2021.

Business Update:

• The company unveiled a new digital business, Rollin, targeting customers in the 20s and 30s, delivering a customer-centric, flexible, and integrated subscription-like insurance proposal.

• Overall gross written premium (GWP) went up by 3.8% on pcp basis, primarily driven by growth in Australia and New Zealand.
• IAG registered insurance profit of $1,007 million, up 35.9% YoY in FY21. The underlying insurance margin in FY21 stood at 14.7% versus 16.0% earned in FY20.
• The company reported solid cash earnings of $747 million in FY21, thus supporting dividend payments. IAG has decided to pay an unfranked final dividend of 20 cents per security to shareholders, retaining a pay-out policy of 60-80% of cash earnings.

Five Year Plan of IAG, Highlights (Source: Analysis by Kalkine Group)

Key Risks: The company faces insurance risks due to inadequate underwriting or unsuitable product pricing, reduced volumes in the reinsurance market, and COVID-19 impact of increased default risk from premium debtors

Outlook: IAG expects to generate at least ~$250 million of insurance profit by FY24 for the Intermediated Insurance Australia segment. In the next five years, IAG expects to add 250k new customers in the consumer business. It now expects to earn a lower insurance margin between ~10% - 12%, down from the initial view of ~13.5%-15.5% in FY22. GWP is expected to grow at low single-digit for FY22. The company expects to report its 1HFY22 results on 11 February 2022.

Valuation Methodology: Price to Book Value 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 ~14.45% in the past three months. The stock is currently trading below the average of its 52 weeks’ low and high levels of $4.19 and $5.51, respectively. The stock has been valued using the Price to Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers, considering losses in FY21, lower insurance margin guidance for FY22, COVID-19 led uncertainties, etc. For this purpose of valuation, few peers like Suncorp Group Limited (ASX: SUN), NIB Holdings Ltd (ASX: NHF), QBE Insurance Group Limited (ASX: QBE), and others have been considered. Considering the current trading levels, increase in GWP, decent liquidity position, cost efficiency measures, new product launches, and indicative upside in the valuation, we give a ‘Buy’ rating on the stock at the current market price of $4.34, as of 6 January 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

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

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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