Investors see a silver lining in IAGs grey clouds

Investors continued to look past the negatives in Friday’s FY2021-22 trading update from Insurance Australia Group (ASX:IAG), with shares up more than 5% Monday to consolidate the solid gains made after the update was issued, closing at $4.46 – the highest they have been since May.

Despite the clear evidence of a weak insurance performance in 2021-22, investors preferred optimism and took on board IAG’s forecast for a turnaround in this area (as they forecast a year ago for 2021-22).

That confidence of a year ago was brought undone by the misery of high natural disaster costs from the heavy rain, floods and storms in the June 30 half especially, as well as earlier storms and ran.

The slide in the June 30 half in financial markets ensured poorer than forecast investment returns which came on top of higher reserving because of increased risks.

But IAG says it was more confident about the coming year with conditions are looking more positive, again forecasting wider margins and further growth in insurance premiums.

It also released $200 million that had been set aside for claims for COVID-19-affected business – and it said this cash would be factored into its decision on dividends for this year.

The year to June saw a reported net profit after tax of $347 million, compared to a loss of $427 million in 2020-21.

That profit was after a reported insurance profit of $586 million as the insurance margin missed guidance and fell 6.1 percentage points to 7.4%.

That was well short of guidance of 10% to 12% and reflected the negative impact of the storms, wet weather in NSW and Queensland during the year.

Growth in IAG’s Gross Written Premiums for the year was rose 1.9 percentage points to an OK 5.7%.

IAG blamed that on its net natural peril costs of $1.119 billion, which were $354 million above the original allowance of $765 million.

IAG CEO, Nick Hawkins, acknowledged that FY 2022 was a tough year:

“Our preliminary FY22 financial results reflect high natural perils and volatile investment markets. We have also strengthened our reserves following adverse experience in our commercial liability portfolio from prior accident years.

“Our direct insurance business in Australia is growing in key segments, particularly as we roll out the NRMA Insurance brand in Western Australia and South Australia,” he said.

And looking to the future IAG said it is expecting “strong underlying business momentum” in FY 2023.It is aiming for mid-to-high single digit growth.

This is expected to be primarily rate driven to cover claims inflation, higher reinsurance costs and an increased natural peril allowance. Management is also guiding to a much-improved reported insurance margin in the range of 14% to 16%.

That forecast is familiar: Here’s is what IAG said in July 2021 about the outlook for 2022:

GWP guidance for ‘low single-digit’ growth in FY22. This incorporates modest growth in customer numbers in Direct Insurance Australia (DIA), ongoing rate increases across personal and commercial lines and further portfolio remediation which is expected to constrain volume growth.”

“Reported insurance margin guidance of 13.5 – 15.5%.”

“An increase in the natural perils allowance to $765 million (post-quota share) reflecting underlying exposure growth. This has increased from $658 million in FY21 which benefitted from additional reinsurance cover provided by the calendar year 2020 aggregate catastrophe cover.”

As the company said on Friday – thanks to the floods and heavy rain, plus storms), the natural perils allowance ended up at more than $1.1 billion.

So that saw the natural perils allowance for 2022-23 lifted 19% to $909 million post quota-share (with reinsurers such as Berkshire Hathaway). That’s the impact of climate change at work there.