Kalkine has a fully transformed New Avatar.

KALIN®

INSURANCE AUSTRALIA GROUP

Jul 18, 2014

IAG:ASX
Investment Type
Large-cap
Risk Level
Action
Rec. Price ($)
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.
  

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.
Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).
The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.
Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.
The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide.