It's been a tough year for Insurance Australia Group Ltd (ASX:IAG), with the company's share price reaching its lowest point in the past 12 months on May 12 ($5.43). Since the start of the year the stock has lost 10% of its value, despite a healthy gain of 6% for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). Investors may now be waking up to what appears to be a bargain opportunity, with the stock trading on a forecasted price-to-earnings ratio of just 11.6, and offering a partially franked dividend yield of 6.9%.
However, the outlook is not all rosy for the major insurer, whose brands include NRMA Insurance and CGU. At the end of April, Insurance Australia Group lowered its 2015 margin guidance significantly, from 13.5-15% to 10.5-12.5%. The main driver behind the lower guidance was storm damage in New South Wales, with the company receiving nearly 30,000 insurance claims from its customers following the event. Insurance Australia Group estimates that the net cost from these claims will be around $250 million. In addition, the company has revised its net cost forecast from claims related to Tropical Cyclone Marcia to $140 million versus earlier expectations of $60-90 million.
Insurance Australia Group now expects its full-year net claim costs to come in at $1 billion in FY15, a big increase from the previous guidance of $700 million. CEO Mike Wilkins summed up the situation by noting that, "As an insurer, managing events like those we have seen in the past few months is part of our normal business activity, but their incidence and size are unpredictable."
While unpredictable weather remains a risk to all insurers, there are a few positive areas that those considering an investment in Insurance Australia Group should note. Despite the reduced margin guidance, the company reiterated that its gross written premium growth should come in at the lower end of the guidance of 17-20% provided in February this year. In addition, the adverse weather events in New South Wales and Queensland may actually provide a boon for insurance companies, with a likely increase in new customers signing up.
Relative to its peers, shares in Insurance Australia Group are also more attractively priced. Suncorp Group and QBE Insurance are both trading on forecasted price-to-earnings ratios above 20, compared to just 11.5 for Insurance Australia Group. In addition, the dividend yield on offer for investors in Insurance Australia Group (nearly 7%) is well ahead of Suncorp (5.9%) and QBE (2.6%).
Foolish takeaway
Storms are not a complete negative for insurers — without any adverse weather conditions these companies would struggle to gain any customers! With Insurance Australia Group trading at close to the lowest point in the last 12 months, and offering a dividend yield of nearly 7%, the stock is well worth considering as an addition to any portfolio.
