Is Insurance Australia Group Limited a bargain?

Insurance Australia Group Limited (ASX: IAG) is the parent company of a general insurance group operating in Australia, New Zealand, Thailand and Vietnam. Its businesses underwrite $10 billion of gross written premiums per annum. Insurance is sold under many leading brands, including NRMA Insurance, CGU, SGIO, SGIC and Swann (Australia), NZI, State and AMI (New Zealand); Safety and NZI (Thailand), and AAA Assurance (Vietnam). The company also has interests in general insurance joint ventures in Malaysia, India and China. Standard & Poor’s has assigned a ‘Very Strong’ Insurer Financial Strength Rating of ‘AA-’ to the company’s core operating subsidiaries, indicating a sound balance sheet for the company.

The company’s strategy is to enhance value by managing a portfolio of high performing, customer focused diverse operations that provide general insurance in a way that delivers superior performance for shareholders, customers and employees.

The Group’s strategic priorities are to:

  • accelerate profitable growth in Australia;
  • sustain its leading position in New Zealand;
  • realise the potential of its Asian platform;
  • concentrate on customer focused delivery and execution; and
  • leverage its cultural strengths.

Currently P/E is 10.8 times, significantly better than 15.6 times for Suncorp Group Ltd  (ASX: SUN), or 19.8 times for AMP Limited (ASX: AMP). Likewise, dividend yield of 6.2% compares very favourably with Suncorp at 5.0% and AMP at 4.7%. Insurance Australia reported the best return on investment of 22.2% as at June 2013, compared with 3.5% for Suncorp for the same period and AMP of 8.2% for the year ending December 2013.

The company has total investments of over $13.6 billion, with over 80% in fixed interest and cash; the rest are in shares. Insurance Australia announced on 16 December 2013 that it had agreed to purchase the insurance underwriting businesses of Wesfarmers Ltd (ASX: WES) for $1.845 billion. It remains the Group’s expectation that the transaction will be completed by 30 June 2014. The purchase significantly strengthens the company’s position in its traditional markets. Earnings per share for Insurance Australia show a sustained pattern of solid growth. They were 16.3 cents per share in the year ending June 2011 and 49.9 cents per share in June last year.

For both dividend income and capital gains, Insurance Australia is a share I would purchase for the long term, especially if share prices pull back in the short term due to seasonal factors around the May/June period.

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Motley Fool contributor Chris Koenig does not have shares in the companies mentioned.

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