Insurance Company An Unsure Bet

Sun Herald

Sunday November 18, 2007

David Potts

Is bad luck or poor decisions to blame for IAG's woes? David Potts ponders its fortunes.

H-E-L-P seems to have done the trick for NRMA Insurance, so maybe it's time its parent, Insurance Australia Group (IAG), tried L-U-C-K.

The only good thing to come out of the recent results for IAG, which recorded a 27 per cent profit slump to $552 million for last financial year, was the turnaround in its home and car insurance arm, which, despite fierce competition, picked up market share.

Otherwise the company has been either very unlucky or there's something wrong with its execution.

The market is inclining to the latter. Only persistent speculation that IAG is a takeover target, especially by the far more successful QBE Insurance, has prevented a much bigger slide in its share price.

As it is, during the past three years its shares have been the worst performer among blue chips. Considering it dominates car and home insurance and pays a generous fully franked dividend, that's some feat.

So what has gone wrong?

Foremost has been a touch of the AMPs, where it has expanded into Britain at the wrong time and paid too much. All right, comparing it with AMP is a bit unfair but what is it about the British and Australian insurance companies?

The other problem is falling premiums for property insurance, apparently due to increased competition from new players.

But there's no doubt there has been a lot of bad luck. It took a drubbing from the NSW floods and the worst floods in Britain in modern history in June and July.

The British motor and insurance broking businesses that IAG bought last year are showing signs of turning around, suggesting it bought too early. They might not be the bargains IAG would have liked but at least it didn't pay over the top for them. The company is also diversifying its risk by making progress in Asia although a foothold in China fell through at the last minute.

ADVANTAGES

? Takeover target

? Asia push

? Dividend yield

? Top brand

DISADVANTAGES

? Track record

? Problems in Britain

? Stiff competition

? Growth doubts

VERDICT

Out of favour with brokers because of a disappointing profit and, two months later, a downgrade. Most say it is a hold or sell.

© 2007 Sun Herald

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