ASX code: IAG
Share price: $6.07
Industry: Insurance
Forecast FY2017 Dividend: 26.0 cents fully franked
Insurance Australia Group (IAG) is one of Australia’s largest general insurers, with annual premium revenues of over $11 billion. It owns the leading brands NRMA Insurance, CGU, SGIO, SGIC and Swann Insurance in Australia, and NZI, State, AMI and Lumley Insurance in New Zealand. IAG also has smaller interests in Thailand, Vietnam, Indonesia, Malaysia and India. IAG is one of the ASX’s most widely owned stocks due to its demutualisation and ASX listing in 2000, when it was known as NRMA Insurance.
The wide ownership means many retail investors are interested in IAG’s dividend and its direction, and the elevated level of weather claims so far this financial year including now Cyclone Debbie has these shareholders wondering if IAG’s dividend is sustainable.
Including specials the dividend has fluctuated between 29.5 cents in 2007-08 and 13 cents in 2008-09. Dividends paid in respect of 2016-17 were 26 cents including a 10-cent special. The volatility is attributable to the risky nature of the insurance business, which reflects unpredictable insured natural disasters, cyclical premium rates, claims costs and margins, claims trends in CTP and workers’ compensation businesses, and fluctuations in investment returns on shareholder and policyholder funds. General insurers typically struggle to budget accurately for natural catastrophe claims, especially as global warming increases the frequency and intensity of weather events and the value of insured assets in affected coastal areas rises. The lows in the dividend late last decade also followed heavy losses on the failed UK expansion.
The perennial volatility in the insurance business means general insurance stocks should not have the largest weights in an income portfolio, where the priority is typically to grow the dividend income stream annually as part of a retirement funding plan.
The final claims cost of Cyclone Debbie and subsequent storm and flood damage further down the east coast will not be known for some months, though we expect IAG and its peers will progressively update the market on their exposure in coming weeks. This will be one of Australia’s more expensive insured catastrophes without being the most expensive.
IAG last updated the market on its natural peril claims exposure on 6 March after the 18 February Sydney hailstorm. At that time financial year-to-date net claims from natural perils were $650 million, which compared with the company’s full-year budget of $776 million after reinsurance. This meant IAG could absorb approximately $130 million of further net claims before falling short of its insurance margin guidance of 12.5-14.5 per cent. IAG’s maximum exposure for the next event was $140 million.
The magnitude of the Cyclone Debbie disaster, and IAG’s exposure to damaged businesses and strata unit blocks in the affected areas, mean a downwards revision to the guidance is possible and investors’ base case for the final dividend should be a flat 13 cents with some risk of a modest reduction.
The base case is for a flat dividend, not a cut, because reserve releases to earnings were strong in the first half and IAG assumed only minimal releases in the second half when setting its guidance. The reserve releases are from the NSW and ACT CTP books, where claims cost inflation is less than the embedded actuarial assumptions. There is also no need to cut the dividend to protect the capital position, which is very strong.
Originally published in The Australian on Tuesday 4 April 2017.