Insurance Australia Group Expected to Deliver a Strong Fiscal 2013 Result

We expect Insurance Australia Group to report a strong fiscal 2013 result driven by a relatively benign weather related claims environment continuing into the second half, positive premium repricing and productivity improvements. The general insurer reports earnings on 22 August and we forecast a fiscal 2013 cash net profit after tax of just over AUD 1.0 billion, up significantly on the AUD 583 million profit achieved in fiscal 2012. The stars have aligned for Insurance Australia Group in fiscal 2013, particularly with respect to claims. We have made some modest increases to our earnings forecasts, primarily reflecting lower claims assumptions. Our fiscal 2013 earnings forecast increases by 2.7% to AUD 48.6 cents per share and our full-year dividend forecast increases from AUD 26 cents per share to AUD 27 cents per share. We are forecasting an insurance margin of 16%, which is above the top end of the 12.5% to 14.5% guidance range. Our fair value estimate increases from AUD 5.00 to AUD 5.50. At current prices, the stock is trading at a 7% premium to our valuation and is moderately overvalued.