Wilson Asset Management: Insurance Australia Group
Ticker ASX: IAG
Sector Financials
Insurance Australia Group Limited (ASX: IAG) is the largest general insurance company in Australia and New Zealand, selling consumer and business insurance products under many leading brands. Record low interest rates and the coronavirus pandemic have severely impacted the financial sector, however we believe significant opportunities will emerge as the economy stabilises and the macro trends move to tailwinds from the current headwinds.
Financials have underperformed for the last 12 months with low interest rates, poor economic conditions and a flat yield curve. In response to the pandemic the Reserve Bank of Australia (RBA) cut the cash rates, also pushing the three year rate to 25 basis points to match the cash rate.
As economic conditions improve, we believe the RBA’s first act will be to allow the three year rate to rise, providing relief to the financial sector and allowing investment income to improve gradually.
While Insurance Australia Group’s share price currently trades at decade lows, the recent appointment of a new Chief Executive Officer, a sound balance sheet and strong premium growth should see the share price recover. We believe that business insurance claims implied by the share price are overstated versus the reality and we expect clarity within a few months on this key catalyst.
Although business insurance and the closure of businesses through the coronavirus pandemic are a potential risk for the company, IAG is taking a very conservative approach factoring in these claims and we believe these will be significantly less than the market anticipates.
This information has been prepared and provided by Wilson Asset Management. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.
