Insurance Australia Group
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- Indepth analysis of ASX listed shares
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Insurance Australia Group’s forecast insurance margin of between 10% and 12% for the 2012 financial year is in jeopardy. Floods in Thailand and the Christmas hailstorms in Victoria are expected to cost between $134m and $154m net of reinsurance protection. IAG’s comprehensive reinsurance program for 2012 has bought more protection, but it’s expected to increase annual insurance costs to between $700m and $720m, up from $600m in 2011. With lower interest rates reducing investment returns in Australia, a profit downgrade seems likely without large reserve releases.
We’re also watching IAG’s regulatory capital levels closely. IAG is awaiting regulatory approval to cement its position as New Zealand’s largest general insurer with the acquisition of AMI for NZ$380m (three times book value). IAG increased its debt issuing NZ$325m of bonds in November to help meet the cost. While the price looks high, chief executive Mike Wilkins expects $30m in annual ‘synergies’ (AMI produced an insurance profit of NZ$27m in 2011). The New Zealand government will also assume responsibility for AMI’s past earthquake liabilities.
Looking ahead, higher premium prices in Australia should offset higher reinsurance costs in future years. Once the UK business produces a decent profit or is sold and there are fewer natural disasters, IAG should produce earnings per share well above 30 cents. That’s significantly more than the 20 cents expected in 2012, which puts the stock on a forecast price to earnings ratio of 15.
The share price has fallen 6% since 1 Nov 11 (Long Term Buy – $3.15), and is on the cusp of an upgrade. But for now we’re sticking with LONG TERM BUY.
Note: The model Income portfolio owns shares in Insurance Australia Group.
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