IAG upgrades profit – notes offer good value

Key points

On 24 July 2014, IAG released a statement to the ASX which was, in effect, a profit upgrade. It also detailed greater than first expected ongoing synergy savings (but with a larger one-off restructuring cost) from the Wesfarmers Insurance acquisition and implementation of a new operating model in Australia.

A summary of the key points is below:

• IAG has raised its forecast insurance margin for FY14 from 14.5%-16.5% to 18.0%-18.3% due to lower natural catastrophe occurrence/claims (around $85m better than originally forecast) and tightening credit spreads which have increased the value of their fixed income investment portfolio (around $61m better than forecast).
• “Reserve releases” or reduction in provisions for future insurance claims have also had a positive impact on the FY14 profit numbers.
• Gross written premium growth is expected to be approximately 3% for FY14 which is at the bottom end of the 3-5% guidance presented in January 2014.
• IAG previously identified synergies and costs stemming from the integration of the Wesfarmers Insurance underwriting business of $140m and $120m pre-tax respectively. Combined with the effects of the new operating model, IAG now expects to realise an annualised/on-going pre-tax benefit of approximately $230m (an increase of $90m) and recognise one-off pre-tax costs of approximately $220m (up $100m) over the course of the next two years
• Managing Director and CEO Mike Wilkins said: “The underlying performance of the Group has remained strong...The underlying quality of our expected results for FY14 places IAG in a strong position to deliver on the next phase of the Group’s development, as we integrate the Wesfarmers insurance underwriting business in both Australia and New Zealand and realise the associated synergies, and as we move to our new operating model in Australia. In addition, we remain confident of improved returns from our Asian operations over the medium to longer term”.
• The Group will announce full details of its FY14 results on 19 August 2014.

Relative value of the Insurance Australia Ltd 19 March 2019 (call) subordinated FRN

The subordinated FRN from IAG’s wholly owned subsidiary, Insurance Australia Limited, is the highest yielding of any of the existing Tier 2 subordinated FRNs on the DirectBonds list (see chart below) and one of the highest yielding FRNs in the investment grade market (currently offered at an indicative yield to call date of circa 4.90%).

Moreover, the subordinated Insurance Australia Limited issue is one of the highest rated of its peers and is viewed as an excellent switch opportunity for those looking to take profits from any long dated fixed rate bonds that have rallied strongly in recent months, many of which are rated many notches lower.

For further details on the Insurance Australia Ltd 19 March 2019 (call) subordinated FRN, please see the WIRE article from 11 March 2014, written at the time of the new issue or talk to your FIIG representative.

Insurance Australia Ltd 19 March 2019 (call) subordinated FRN is available to wholesale investors only in minimum (face value) parcel sizes of $10,000.

 All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.

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