Earned Premium
On this front, the business has performed reasonably well, with gross written premium (GWP) for Home growing 13% while motor performed at a reasonable 8%. NZ added another 9% to growth on local currency terms. These numbers align with its counterpart Suncorp which saw higher numbers across motor and NZ. What was interesting for us was not this top-line number but how much of this accounted for premium increases vs. underlying customer growth. On this count, IAG does not compare particularly well with Suncorp, with the higher amount of its GWP growth driven primarily by rate inflation instead of member growth. However, the group has indicated quite ambitious targets for the coming year.
So on the first part of the equation, the business gets a manageable pass.
Investment Income
On this front, as compared to Suncorp, the firm’s investment mix leaves much to be said, given that the total yield remains lower by 140 bps (though a like-for-like comparison is a little on the creative side, given the substantial differences in the underlying business). Again, assuming the status quo in central bank policy, we should continue to see the increase in yields.
We rate the company as a pass on the second part of the equation.
Incurred Loss
Like Suncorp, the business continues to battle the weather, with NZ floods taking away and putting pressure on margins. 1H ’23 perils have come in around AUD $70 million above estimate, and inflation is significantly impacting claims, especially in the motor segment. While IAG has a broader geographic segmentation than Suncorp, the La Nina weather cycle has still significantly impacted overall losses.
This brings us to the second part of the definition, which is the firm’s ability to adequately forecast and manage its risk profile (hence reserves). Despite the lack of geographic concentration in the same manner as Suncorp, the firm’s actuaries still have much to answer for, given the lacklustre performance in forecasting the increasing frequency of climate-induced perils. This is not the exception to the rule but rather becoming more habitual. On this front, the firm could certainly have done a better job.
We still give the firm a moderately good rating on the third part of the equation, not for any reason to do with its risk management practices but purely based on its greater geographic diversification. Also, its lack of legacy issues makes it a pure-play insurance provider (Suncorp has been operating the bank in addition).
Underwriting Expense
On the insurance trading ratio (standing at 10.7%), the business also fails in comparison to Suncorp, though again, it may not be fair given its quota-sharing agreement with Berkshire, to whom it will give away the lion’s share. That is, the firm effectively gives away close to AUD $3 Billion of its AUD $3.5 Billion in premium income for a 32.5% quota share. This does significantly derisks the firm as a tradeoff.
Still, overall, we give the business a fail.
Overall Outlook & Growth
Would we still buy it?
From a pure valuation perspective, we still think it’s a reasonable allocation especially given that the insurance market remains a duopoly and the fact that it has a good geographic diversification. An average business at a great price is the best way to put it. We see the possibility of a price target or significant upside of 20% from where it is trading today ($5.80).