Insurance Australia Group Limited

IAG Details

Insurance Australia Group Limited (ASX: IAG) is the parent company of a General Insurance Group with operations in Australia and New Zealand. It sells insurance under brands including NRMA Insurance, CGU Insurance, SGIO, SGIC, Swann Insurance and WFI (Australia); and NZI, State, AMI and Lumley (New Zealand). It has a market capitalization of ~AU$11.58 billion as on 27^th April 2021.

Results Performance (Half-Year ended 31 December 2020)

For the first half-year ended 31 December 2020, gross written premium (GWP) grew by 3.8% to $6,188 million versus $5,962 million in H1FY20 driven by a combination of premium rates, strong retention, and sound new business levels. The company reported rise of 4.6% to $4,819 million in Australia premium and a 1.5% rise in New Zealand premium to $1,368 million, including an unfavourable foreign exchange translation effect of ~130bps. The company, for the period, reported $460 million as net loss after tax and cash earnings excluding unusual items of $462 million equate to 15.5% cash ROE. It further strengthened the capital position by a $776 million capital raise, with a CET1 ratio above the upper end of the targeted range.

Key Data (Source: Company Reports)

Recent Updates:

• On 15 March 2021, the company announced a dividend of $1.194 per share with ex-date as 4 June 2021 and a payment date as 15 June 2021.
• On 10 March 2021, the company announced the change in leadership team wherein Julie Batch was appointed as Group Executive Director Australia with immediate effect, among other developments.

Key Risks:

The company is exposed to economic and environmental challenges across Australia and New Zealand that includes climate change, bushfires of exceptional ferocity, floods and major hailstorms, and the outbreak of the pandemic.

Outlook:

There persists considerable uncertainty on the ongoing pandemic and its broader economic repercussion. However, with 8.5 million customers, market leadership position in Australia and New Zealand, the credit rating of ‘A’ from S&P, long term strategic reinsurance partnerships, the company is well-positioned to capitalize on the opportunities which are likely to arise with the return of new normal. Fortunately, these two economies are least impacted by the 2^nd wave of COVID-19 and businesses are opening. An improved economic environment would lead to the lower number of claim cases, thereby, improving gross written premium for the company. Further, it has cemented the financial position for future growth. In line with this, focused branding and digital experiences at user end will drive customer growth. Meanwhile, strengthened underwriting and pricing potential on the back of managing underperforming portfolios might result in value creation and increased profitability.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

After the previous week of sell-off, the stock has given a stronger close for the week with a ‘Bullish Harami’ chart pattern formed on the weekly chart which signals bullish reversal for trend. The technical indicator RSI with a reading around $45 and a curve at the end pointing up, suggests gaining of bullish momentum for the stock.

Going forward, the stock may have resistance around the 38.2% retracement level of $5.10 whereas support could be around the lower Bollinger band of $4.56.

Stock Recommendation:

We have valued the stock using a Price/Book Value multiple-based illustrative relative valuation and have arrived at the target price with low double-digit upside potential for the stock.  We believe that the company can trade at a premium to its peer Price/Book Value (NTM trading multiple) (Peer Average) considering resilient business performance and strong capitalization.

The stock declined by ~19.9% in 1 year. It has made a 52-week low and high of $4.300 and $6.420, respectively. It is trading towards the 52-week lower levels.

Considering the current trading levels, strategic expansion plan, growth in client wins and microeconomic factors, we give a “Buy” rating on the stock at the current market price of $4.740, up by 0.851% on 27^th April 2021.

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

Note: 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.

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