IAG

IAG was out on Friday, we look at the result more deeply now.

Gross written premiums continue to rise, as do net earned (netting out what you send to/for the reinsurer). The below opening from mgmt is a good summary of the result, customers grew, retention rates were strong (~90%) and that’s even after putting through fairly enormous price increases, increases that are required to offset inflation and increased costs.

They continue to win awards, which is good. Brand strength matters. Net promoter scores moved up slightly also.

A common problem for the financials, overall, is messy, patchy systems from all the bolt-on acquisitions and band-aids that have been applied over time. We see the below as a good indicator that a key historical problem is, well, receding.

I think this could be material tailwind over time. The below gives you a sense of just how enormous this enterprise resource planning program is. 600K to 5m, which means better pricing and risk decisions, in theory.

Strong premium growth (+12%) and good cost control has meant improved insurance margins.

The insurance margin includes the income from technical reserves, which do better in high(er) interest rates. The numbers here are slightly below what IAG thinks is sustainable through cycle (13-15.5%).

You can see just how much of a tailwind the higher investment income is, to overall profitability. Whilst there are some bumps in the below, you can clearly see returns to float dropped by ~80%, and are now much higher.

The negative on the result is probably around volumes and market share. We’ve written about how GWP growth was strong, but it is the pricing outcomes that are leading the way. Unit volumes are not great, and although mgmt pointed to growing customer numbers, is does seem somewhat contradicted at the margin in the below. It’s also the case that retention rates were about 90-95%, and are now down to 90%, still strong, but less.

Mgmt’s answers acknowledge that new business is very hard to come by, due to affordability, and competitors are pricing more aggressively, and that IAG have chosen to prioritise profits (they frame it as more cautious, conservative underwriting, but it just means holding the line on price). They point to population growth overall, and the strength of their brands, as sufficient to ensure volumes grow over time.

IAG is on a PE of 17x, slightly above the market multiple. It operates in what used to be broadly considered an oligopoly, although the company does suggest that’s not quite true, and that competition has increased, but we’d still suggest it is still a better industry structure than that of the broader market.

Given the strong execution and solid fundamentals above, selling what is, in our view, a non-discretionary product, is appealing in the current uncertain macroeconomic environment. The insurance companies are one of the few genuine “rates beneficiaries”, in this context used to mean stocks that do better when the rates go up, and thus from an overall portfolio perspective gives us good optionality in the event that rates do stay high (not our base case, but it could happen). Plus the buyback is a good cherry-on-top.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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