IAG (ASX:IAG) share price on watch following trading update

The insurance group outlines its latest business forecast.

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The Insurance Australia Group Ltd (ASX: IAG) share price will be in focus this morning after it released its latest business update.

The group outlined its growth agenda and outlined its FY22 guidance on margin and gross written premium (GWP).

Shareholders will be hoping that the update will help the IAG share price find a floor after a dismal year.

IAG’s margin squeeze

Management is forecasting low single-digit growth in GWP, which is in line with its previous prediction. The reported margin is tipped to range between 10% and 12% for the current financial year.

That’s below the 13.5% and 15.5% target that it outlined in its FY21 results presentation. The shortfall is largely driven by a $280 million increase in its natural perils allowance to just over $1 billion.

That equates to a 350-basis point (3.5 percentage points) impact on its reported margin.

Silver-lining for the IAG share price

But perhaps that is a tad conservative as modest tailwinds from the impact of COVID-19 aren’t factored into the guidance.

The rolling lockdowns in Victoria and New South Wales have meant fewer motor vehicle accident claims, although inflation will eat away at some of these gains.

Medium-term targets

“Over the past couple of years, as an industry and particularly as a company, we’ve had to face some serious challenges,” IAG’s chief executive Nick Hawkins said.

“We’ve appropriately provided for these and restored capital where required to address all the issues from a balance sheet point of view.

“We haven’t changed our value proposition since we presented it in February this year. Over the medium-term, we are aiming to deliver a targeted cash ROE of 12-13%, an insurance margin of 15-17%, and a growth profile. Our aspiration is to deliver these financial goals on a sustainable basis.”

Hunting for 1 million new customers

IAG’s goal of adding a million new customers over the next five years will also provide economies of scale. The group currently has 8.5 million customers and believes it can keep expenses flat in FY22.

It plans to win new customers by targeting new regions and market segments and using technology to increase efficiency and reach.

The insurer told investors it should have confidence in the group’s longer-term outlook. The turnaround in its Intermediated Insurance Australia business should add at least $250 million of insurance profit by FY24.

Meanwhile, its Direct Insurance Australia division and New Zealand business is rolling out an ambitious growth strategy.

IAG share price lagging its peers

It’s yet to be seen whether management will be able to deliver on its growth targets given the underwhelming performance of the IAG share price.

The ASX insurer has lost around 16% of its value over the past year. In contrast, the QBE Insurance Group Ltd (ASX: QBE) share price and Suncorp Group Ltd (ASX: SUN) share price have rallied 20% and 7%, respectively.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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