Insurance Australia Group (IAG) has received an upgraded rating from UBS analyst Kieren Chidgey, moving from a neutral recommendation to a ‘buy’. This decision is based on IAG’s improved earnings resilience and potential upside risks to current consensus forecasts. According to Chidgey, the market is currently undervaluing the potential earnings boost from reinsurance profit commissions, as well as the acquisition of Royal Automobile Club of WA (RAC WA). IAG provides general insurance services across Australia and New Zealand, offering a range of products, including home, car, and business insurance. The company aims to protect what matters most to its customers and communities.
Chidgey noted that while the market acknowledges IAG’s increased earnings resilience under its catastrophe reinsurance aggregate cover, the economics of this resilience are not fully appreciated. He suggests that reinsurance profit commissions could significantly enhance IAG’s insurance trading result (ITR) margin by 60 basis points, potentially boosting the earnings per share (EPS) outlook by 5 per cent.
Additional factors that may further support margins and earnings moving forward include sustained strength in IAG’s home and motor insurance business. Moreover, the earnings accretion from the RAC WA acquisition, the potential for reduced administrative expenses, and the opportunity to improve or unwind its existing reinsurance quota share contribute to a positive outlook.
UBS has subsequently raised its price target for IAG shares to $9.50, indicating a total shareholder return of 20 per cent. Following the announcement, IAG shares experienced a 2.2 per cent increase, reaching $8.44.
