Since the start of the year, Insurance Australia Group Ltd (ASX: IAG) has risen by 9%. That's ahead of financial sector peers such as QBE Insurance Group Ltd (ASX: QBE) and Westpac Banking Corp (ASX: WBC) which are down by 10% and 8% respectively. Here are three reasons why I think IAG is worth another look.
Income appeal
Following the RBA's cut in interest rates to 1.5%, IAG's yield of 5.4% holds greater appeal. It is 120 basis points higher than the ASX's yield. IAG has increased its dividend payout ratio to 60-80% of cash earnings, up from 50-70%. It also offers the potential for special dividends such as the 10 cents per share from the first half of the current financial year.
IAG's capital position is strong at 1.8 times the Prescribed Capital Amount (PCA) as at 31 December 2015. This is above IAG's targeted range of 1.4-1.6. Its common equity tier 1 (CET1) ratio was 1.23 at 31 December 2015, which is above its target benchmark of 0.9-1.1. Further, its credit rating is 'A' and IAG's debt to total tangible capitalisation ratio is 33.4%, which places it within the targeted range of 30-40%. This shows that the new dividend payout ratio is sustainable, while a beta of 0.77 equates to a low volatility shareholder experience.
Changing structure
IAG has realised over $50 million of pre-tax reinsurance synergies from the integration of the former Wesfarmers business and is on track to meet $180 million of pre-tax non-reinsurance benefits from the integration and new operating model by the end of FY 2016.
Further, IAG's quota share arrangement with Berkshire Hathaway delivers a more stable income stream on a significant proportion of IAG's business. This is through the receipt of a percentage-based fee from Berkshire Hathaway as well as reduced exposure to potential volatility in reinsurance rates. It also means that IAG's capital requirement will be reduced by $700 million over a five-year period.
Strategy
IAG's strategy has been refreshed to make it more customer focused and more nimble as it seeks to adapt to the rapidly changing environment it faces. For example, it has invested in digital capabilities through the Digital Labs division which provides digital and design innovation while simplifying existing core platforms. Its Customer Labs division will also improve the customer experience and drive product innovation through data and insights.
IAG's international growth potential is high. Consolidated gross written premiums rose in Asia by 20% in the first half of FY 2016 as increased penetration of the used car market and improved customer retention in Thailand positively impacted its results. Growth is expected to come from a rising middle class, with Asia set to represent nearly 60% of global middle class consumption by 2030. Relatively low insurance penetration rates compared to more developed economies equate to growth potential for IAG.
