Insurance Australia Group: Premium Rate Increases to Moderate as Industry Profitability Improves

Earnings tailwinds from premium rate increases and higher investment income on shareholder and policyholder funds underpin our forecast that no-moat Insurance Australia Group IAG roughly doubles EPS in fiscal 2024. Management maintained fiscal 2024 guidance, including low-double-digit premium growth and an insurance margin between 13.5% and 15.5%, 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 on an insurance margin of 9.6%.

We think the earnings tailwinds, and the risk of claims inflation and larger-than-expected natural hazards eating into profits, are adequately reflected in the current share price, which trades at a modest premium to our unchanged AUD 5.50 fair value estimate.

Our forecasts are at the bottom end of the guidance range for fiscal 2024, but we see 15% margins as achievable over the medium term. Given likely much stronger investment income over the next five years, we estimate after premium rate increases of around 10% in fiscal 2024, increases will be more modest at 3%-4% per year from fiscal 2025. A more profitable industry is likely to mean participants are less aggressive on price hikes. Challenger brands like Youi, Budget Direct, and Hollard (real insurance and numerous partnerships including Commonwealth Bank and Woolworths), are more likely to set premium rates to take market share rather than simply follow the pricing of the larger insurers.

Youi Australia, for example, with a gross written premium of AUD 1.4 billion, compared with Insurance Australia Group’s AUD 13.3 billion, grew premiums by 21.5% in fiscal 2023. In motor, Youi’s key segment, we estimate has a 4% market share compared with Insurance Australia Group’s 16%. Youi has a combined ratio, measured as claims and operating expenses/earned premium, of 87.5% already better than the 93.6% for Insurance Australia Group. In other words, Youi is already very profitable.