Stock of the Day – Insurance Australia Group   (IAG)

We believe IAG’s business is currently in good shape and the flagship personal lines division is well positions to defend its dominant market position. Looking forward while we consider IAG’s insurance margin to be sustainable in the near term, gross written premiums (GWP) growth is likely to be minimal for IAG and with an increased exposure to commercial lines post the Wesfarmers acquisition there is potential for GWP decline in our view.


IAG NPAT  (Source – Company Reports)

India’s new BJP government has recently stated in its first budget that it would increase the foreign ownership caps on insurers to 49% to encourage foreign investment. IAG has a joint venture with state Bank of India. Currently the SBI General business writes about A$200m of GWP, and annualizes an A$7m loss. In the light of the ownership rule changes we think it is very likely that IAG will exercise this option (could cost on our estimates about $150m).

  

IAG Dividend (Source – Company Reports)

IAG had stated very tough targets for its Asian operations of 10% of Group GWP by 2016 and 15% ROE pre development costs by 2017. In our view the ROE target is increasingly unlikely with larger loss making operations in India  and any future  (likely to be low ROE) business in Indonesia (although both may be good for long term value).


IAG Daily Chart (Source – Thomson Reuters)

IAG said at a previous result that its investment in Asia was $865m. With the potential acquisitions in Indonesia and India this could increase to over $1bn, implying a target $150m NPAT vs current of around $30m. The potential upside from Asia we think will take substantial time to be reflected in the share price and less patient equity investors may point to low ROE’s particularly given some of the difficulties in the Thai economy/ political environment affecting one of their largest operations. The main focus over the coming year will be on the targets for insurance margins for the combined IAG/WES business. We put a HOLD recommendation on the stock at the current price.
  

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