IAG

The IAG result was solid. Premiums continue to increase, as they have for all insurers, reflecting the hardening cycle (global repricing of risk due to higher frequency of claims, higher costs of claims).

The combined operating ratio remains well below 100…

…which results in solid underwriting profits, that are continuing their general recovery from the pandemic related impacts, and the various bushfires and floods and supply chain woes that have defined so much of the past few years.

You get a sense of just how difficult the past few years has been, with the 2nd and 3rd largest events in NZ history, highlighted below.

You can also point to the margin improvement stemming from those price increases shown in the first graph (GWP growth), and in the above-highlighted text, 400bps in the 2H (the difference between the two lines is the credit spread movement, and the difference between actual claims and the estimated or normalised (budgeted for) claims experience. The other big one is the reserve releases (you budget for losses that don’t wind up happening, at least by as much as you thought, over time).

The returns to float, which comes from the income on technical reserves, and that of shareholder funds, which you add to the underwriting profits, to get the insurance return, remains compelling.

The outlook statement is positive, with material GWP growth expected to continue, and a strong insurance margin of 13.5%.

That guidance does seem somewhat conservative, given they are already at 14.6% in the 2H. I.e., if they are going to have a material double-digit revenue/pricing uplift, combined with a possibly more benign administration rate, then even adjusting for the higher catastrophe claims budget would still leave them fairly well positioned to beat their own guidance.

Are they lowballing the earnings hurdle? It is possible. It is also possible that “tapped out consumers” mean IAG doesn’t get traction with pricing, although they continue to point to low churn and very strong retention rates. Given the vagaries of the insurance markets, and the temperature of the stock market (as I think of IRESS, which reported earlier today) some conservatism is wise.

Overall, we see the insurance companies as a solid hedge against “higher for longer” interest rates, and as an inflation hedge through their ability to lift premiums. The remaining $400m business interruption provision is also a “hollow log” for the company to tap if needs be.

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