Shares in insurers Insurance Australia Group Ltd (ASX: IAG) and Medibank Private Ltd (ASX: MPL) have been choppy recently as investors debate their value in the lead-up to both companies' annual reports.
Insurance Australia Group again recently confirmed guidance for an average year at the bottom end of guidance, with natural perils claims remaining within the group's established allowance. Revenue is expected to come in flat, and investors can expect a dividend of approximately 5.6% fully franked, although this might be higher as the company increased its target payout ratio recently.
Asides from a recent oversubscribed issue of convertible notes in New Zealand that marginally strengthened the group's capital position, there's little else to note with IAG. The potential for weaker economic conditions in Australia and New Zealand to impact on earnings should not be overlooked, and investors should look closely for updates on the group's (insignificant) South-East Asian and Indian operations.
At 15 times earnings and with limited growth expected (which is possibly why the group increased its dividend ratio), it's tough to argue that Insurance Australia Group is a buy today. There are other companies out there that are higher risk due to expansion activity, but they also offer comparable dividends and greater growth prospects. There's no compelling reason to sell IAG, but equally I wouldn't call it more than a 'Hold'.
Is Medibank any better?
This health insurer on the other hand, recently upgraded its profits, was awarded sizeable premium increases by the Federal Government, and also landed ex-National Australia Bank Ltd. (ASX: NAB) alumnus Craig Drummond as its new Managing Director, which will bring the company into a new era. After 14 (successful) years under George Savvides, it might be time for some new blood.
Medibank carries the tailwinds of an ageing population, growing demand for healthcare services, and government legislated increases to premiums. On the other hand, we could also say it carries the burden of consumers who are living longer and getting less healthy, but are highly reluctant to pay more for their insurance even though the cost demands on insurers are rising. Other pressures come from intense competition from the likes of Bupa as well as possibly declining overall levels of private health cover in the market.
Medibank itself has reported that cost is becoming a critical issue to customers, although some of its recent cost-cutting activities may have landed it in hot water with the Australian Competition and Consumer Commission (ACCC) over alleged hidden changes to customer cover.
Trading at 20 times its forecast operating profit, Medibank looks expensive for an insurer and also appears to lack a margin of safety to account for the potential for a downturn in business conditions. It's also uncertain if the gains from cost-cutting activities that were conducted this year can be repeated next year, so buyers factoring in significant growth might be disappointed.
Medibank is a solid business, but I'm not convinced it's better than other potential buys out there and would also call it a 'Hold' today.
