Morningstar | Sydney Hail Storms Increase IAG’s Natural Hazard Costs. AUD 7.50 FVE Unchanged
No-moat-rated Insurance Australia Group’s natural hazard update following the Sydney hail storm on Dec. 20, 2018 indicates a pre tax cost will be in line with the insurer’s maximum first event retention of AUD 169 million post-quota share. By 10am on Dec. 21, IAG had received more than 6,500 claims and this number is expected to increase significantly during the next few days. Most claims relate to home and motor vehicle damage. Fiscal 2019 year-to-date natural peril claim costs currently total AUD 410-430 million pretax post quota share, including AUD 150 million incurred during the five months ending Nov. 30, approximately AUD 70 million from storms in mid-December, AUD 169 million due to the Sydney hailstorm and AUD 20-40 million of attritional claims incurred so far in December. Due to aggregate reinsurance arrangements, the cost of any further natural peril event up to and including Dec. 31, 2018 will be capped at AUD 17 million pretax.Despite the severe hail storm, our positive view is intact with the business supported by a strong capital base, robust profitability and a positive business outlook. Our fair value estimate of AUD 7.50 is unchanged and at current prices, the stock is fairly valued trading 6% below our valuation. First-half fiscal 2019 results are due Feb. 6, 2019.
The fiscal 2018 net natural peril allowance of AUD 608 million pretax post quota share. The fiscal 2019 catastrophe reinsurance is strengthened by the financial year stop-loss cover of AUD 101 million of protection. The bulk of the firm’s catastrophe resets from Jan. 1, 2019 with details expected to be released in early January. The large losses estimated from the Sydney hailstorm highlights earnings volatility in the general insurance sector in Australia and New Zealand. Despite the first-half over-run in claims costs, Insurance Australia Group’s fiscal 2019 natural hazard allowance of AUD 608 million is unchanged at this stage.
Separate to the hail storm update, Insurance Australia Group’s capital management initiatives completed late November with the payment to shareholders of AUD 592 million comprising a capital return of AUD 19.5 cents per share and a fully franked special dividend of AUD 5.5 cents per share.
Equity capital is well above internal targets and regulatory requirements with limited material operational demand for capital. Insurance Australia Group has undertaken an equal and proportionate share consolidation to reduce ordinary shares on issue by approximately 2.4% to preserve consistency of the EPS calculation. To achieve the share consolidation, every ordinary share converted into 0.9760 ordinary shares. The proposed share consolidation will enable a consistent EPS calculation, not distorted by the capital return.
Our forecast dividend for fiscal 2019 of AUD 40.5 cps includes the AUD 5.5 cps fully franked special dividend. We expect a fully franked fiscal 2019 ordinary interim dividend of AUD 15 cents per share based on a 63% payout. We estimate a franking rate of 85% for the final fiscal 2019 dividend that will declared in August 2019 and subsequent dividends. The total number of ordinary shares on issue reduced to 2.311 billion from around 2.368 billion, a reduction of 57 million shares. Each shareholder will own the same proportionate interest in the company after the consolidation as they did before the consolidation.
Insurance Australia Group is engaged in the underwriting of general insurance and related corporate services and investing activities. Co.'s business divisions are: Consumer, which includes short tail insurance such as motor vehicle and long tail insurance such as compulsory third party, as well as travel insurance, life insurance, income protection and funeral products; Business, which provides business and farm insurance, and workers' compensation services; New Zealand, a general insurance provider in New Zealand; Asia, which provides personal and commercial insurance products through local brands in Asia; and Corporate and other, which includes placement of Co.'s reinsurance program.
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