Should You Sell Insurance Australia Group Shares Today?

What Happened to the IAG Share Price?

Insurance Australia Group [ASX:IAG] saw its share price slashed by more than 7% by around 2pm today. The ASX was actually higher for the day due to a massive takeover offer for logistics company Toll; its stock rallied more than 45%. Energy prices also climbed overnight, helping to offset weakness in the Australian financials.

Why Did This Happen to IAG Shares?

There is nothing too special behind today’s fall. The insurance group missed its profit target and handed in a rather poor report card for its half yearly position. IAG experienced a 10% fall in its six months profit, coming at $579 millions, lower than $642 millions from a year ago. The consensus expectation was close to that figure, but the actual result managed to be lower.

A double-whammy from lower shareholder funds income and higher payouts led to the decline in profitability. On the payout front, there was a massive ‘hole’ in natural disaster claims due to the storms in Brisbane, Queensland. The costs from the natural disaster claims grew to $421 million, up 26% from the previous year. This figure is also much higher than the company’s own assumptions.

On the income front, investment income was 40% down from last year. The company cited strong equity market returns as the main factor for last year’s performance. This is concerning because a 40% decline in investment income is hardly justifiable given the performance in equity markets around the world in 2014.

What Now for Insurance Australia Group?

IAG did drop the ball this time. The company failed to correctly take into account the potential downside in its natural disaster segment, it failed to generate enough premium growth, and it failed to create enough investment return. It seems all forces are working against IAG.

2015 will likely be a tough year for IAG, with premium growth to be at the lower end of the 17–20% range. The company currently has a $700 million assumption for its natural disaster claims in June. IAG will no doubt take a closer look at its risk measurement, as well as its investment portfolio.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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