Insurance Australia Group upgraded its fiscal 2013 insurance margin guidance from a 12.5% to 14.5% range to 16.8% to 17.2% driven by favorable natural perils claims experience, reserve releases and credit spreads. This is ahead of the insurance margin forecast of 16% and broadly consistent with the earnings upgrade implemented a few days ago.
The increased fiscal 2013 earnings forecast is 2.4% to AUD 49.8 cents per share and now forecast an insurance margin of 17%. Our full-year dividend forecast increases from AUD 27 cents per share to AUD 28 cents per share. This is in line with Insurance Australia Group’s target payout ratio range of between 50% and 70% of cash net profit after tax. The estimate is unchanged at AUD 5.50.
At current prices the stock is trading at an 8% premium to a fair value and is moderately overvalued. There is no change to the investment thesis for the no-moat general insurer. Property and casualty insurers generally do not benefit from favorable competitive positions due to aggressive industry competition and commodity-like products. However, general insurers can create durable competitive advantages through superior underwriting skills and cost advantages, evident from consistently good insurance profitability, excluding investment returns.
Fiscal 2013 has been an exceptional year for Insurance Australia Group where almost everything went its way. However, Insurance Australia Group has not been able to deliver sustained periods of underwriting profitability to justify an economic moat. Insurance Australia Group reported underwriting losses in 2010 and 2012. QBE Insurance has a long history of profitable underwriting and we expect upside for the company from a U.S. economic recovery, a stronger U.S. dollar and higher long-term interest rates.
Insurance Australia Group expects net natural peril claims expense to be around AUD 470 million and below guidance of AUD 620 million. The favourable credit spread impact is expected to be about AUD 110 million, versus guidance of AUD 90 million. Reserve releases are expected to amount to 2.5% of net earned premiums and above guidance of 1% to 2% due to continued favourable claims experience in long tail insurance classes. Net earned premiums are expected to be around AUD 8.3 billion. Gross written premium growth is expected to be 11.8%, just above the top end of the 9.5% to 11.5% guidance range due primarily to favourable exchange rate movements.
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