Ripe for ‘recovery’ exposure
Insurance Australia Group (ASX:IAG)
Insurance Australia Group (IAG) is the largest domestic general insurer in Australia and New Zealand and has materially underperformed over the past 12 months (lagging the market by ~30%) as investors discounted returns available on premium pools (earnings from interest) due to falling interest rates and potential insurance claim costs, not only related to the COVID-19 pandemic, but also the early 2020 bushfires and more recent hailstorm events.
While the immediate future for the pandemic remains uncertain, and indeed current case rates overseas are worsening as their winter drives a second wave, recent news of successful vaccine developments together with the general passage of time has begun to trigger a more constructive medium and longer-term view.
We have seen an initial move by investors to shift some investments away from segments of the market that have been seen as ‘safer’ towards those more affected by the pandemic. While we cannot be certain of the pace of this rotation we do believe that, due to the extreme positioning of investors prior to the recent positive news, there is a strong potential for the trend to continue well into 2021.
Accordingly, IAG represents an opportunity amongst the diversified financials that have lagged offering a ‘recovery’ exposure. As such, IAG is a very high-quality company (which counts Warren Buffet’s Berkshire Hathaway as a major shareholder) that stands to benefit from the eventual post-pandemic recovery (stabilisation and eventual increase in interest rates, to return to more statistically normal claims) and is still trading more than 30% below its February pre-pandemic levels.
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