Insurance Australia Group Limited

IAG Details

IAG Successfully Completes $650 Million Institutional Placement: Insurance Australia Group Limited (ASX: IAG) is a provider of general insurance, including a full range of personal and commercial insurance products. As on 23 November 2020, the market capitalisation of the company stood at ~$12.61 billion. The company has recently completed a fully underwritten institutional placement of $650 million, wherein it issued ~128.7 million new fully paid ordinary shares at a price of $5.05 per share. The share placement is likely to maintain the strength of the balance sheet and will position the company to execute its strategic plan.

Quarterly Highlights (Trading performance to 31 October 2020): During the first quarter of FY21, the company recorded low single-digit gross written premium growth despite the softer market conditions and reported capital position above the target levels. The capital raising is likely to maintain a CET1 capital of $2,851 million at a CET1 multiple of 1.34x.

FY20 Financial Highlights: Despite the global pandemic, the company reported a resilient business and retains a decent financial shape. During FY20, revenue from ordinary activities went up by 5.2% to $18,576 million from $17,658 million in FY19. In the same time span, GWP went up by 1.1% from $12,005 million to $12,135 million in FY20 but saw a decline of 35.5% in insurance profit to $741 million. At the end of the same period, insurance margin of the company stood at 10.1%, lower than the prior year’s margin of 16.9%. This reflects the impact of an unfavorable net natural peril claims cost outcome, strengthening of net prior period reserve, a negative credit spread effect and a modest reduction in IAG’s underlying insurance margin. During FY20, net cash inflows from operating activities went down to $381 million from $589 million in FY19, mainly due to higher claim costs and an increase in outwards reinsurance premiums.

FY20 Financial Highlights (Source: Company Reports)

Outlook and Guidance: The company is likely to report earnings in the range of $70-90 million (pre-tax charge) in 1H21 due to higher customer refunds in FY20. The company is focused on achieving an effective risk management system at every level of the organization and seems well-positioned to manage its business and benefit from the new opportunities.

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

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Mont

Stock Recommendation: As per ASX, the stock of IAG is trading close to its 52-weeks’ low levels of $4.380, proffering a decent opportunity for accumulation. The stock of IAG gave a return of 3.01% in the past three months and a return of 6.65% in the last one month. On a technical front, the stock of IAG has a support level of ~$4.65 and an immediate resistance level of ~$5.525. We have valued the stock using the P/CF multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in % terms). For the said purposes, we have considered QBE Insurance Group Ltd (ASX: QBE), Medibank Private Ltd (ASX: MPL) and NIB Holdings Ltd (ASX: NHF) as peers. Considering the attractive trading levels, returns in the past one month, capital raising, decent long term outlook, and key investment risks, we recommend a ‘Buy’ rating on the stock at the current market price of $5.13, down by 6.044% on 23 November 2020.

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

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