Insurance Australia Group Earnings: Margins Improve on Price Increases and Higher Investment Income

Insurance Australia Group’s IAG fiscal 2023 net profit of AUD 832 million was a material turnaround from AUD 347 million last year but was largely as expected. Adjusted for unusual items, predominantly the release of business interruption provisions, cash profit increased 112% to AUD 452 million. We maintain our AUD 5.50 fair value estimate and view the insurer as slightly overvalued.

While gross written premium growth of 10.6% was better than expected, gross earned premium was up only 6.6%. The difference was heightened in the second half, where gross earned premium was just 1.9%, despite GWP being up 8.6% half on half. This has positive implications for fiscal 2024 and 2025 revenue though, which are expected to benefit from price increases on policies written in fiscal 2023, in addition to ongoing rate increases.

The story for general insurers remains one of earnings tailwinds from price increases and higher investment income on shareholder funds, as always, balanced against claims inflation and the swings in natural peril costs. Fiscal 2023 insurance margin improved to 9.6% from 7.4% last year, with management guiding to an insurance margin between 13.5% and 15.5% in fiscal 2024, equating to an insurance profit in the range of AUD 1.20 billion to AUD 1.45 billion. This is a notable increase from the AUD 803 million reported in fiscal 2023. Price increases, higher investment income, and natural peril costs being around 5% lower than last year, underpin the expected improvement. Management sees claims inflation in motor and home between 5% and 10% in fiscal 2024, so policyholders should brace for additional price increases.

Our forecasts are at the bottom end of the guidance range for fiscal 2024, but see 15% margins as achievable over the medium term. We expect price increases will eventually see the claims ratio improve to 66%, close to the historical 10-year average of 65%, and margins benefiting from administrative cost growth rates below premiums.