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Is it time you sold your Insurance Australia Group Ltd shares?

What: No doubt to the surprise of many investors, even with the backing of Warren Buffett, Insurance Australia Group Ltd (ASX: IAG) has failed to meaningfully boost its share price.

In fact, since the announcement in mid-June 2015 regarding the deal with Buffett’s Berkshire Hathaway, IAG’s share price has fallen around 2%.

While that’s good compared with the 11% fall in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), considering the boost a company could expect to receive from the backing of the world’s most famous investor, it’s disappointing.

So What: The lack of a positive share price performance could suggest that it’s time for shareholders to revisit their investment thesis for the stock…

One interesting development since the Buffett deal has been IAG’s decision (announced in mid-October 2015) that it would not pursue further investment opportunities in China.

The now retired CEO Mr Wilkins stated at the time that “while we believe in the fundamentals of China, our future focus will be on pursuing growth opportunities in our other Asian markets and our core businesses in Australia and New Zealand.”  

IAG’s strategic decision is interesting in its own right, but is particularly interesting considering commentary made by Buffett regarding Berkshire Hathaway’s motivation for its IAG investment.

At the time of the deal, Buffett was quoted in the Australian Financial Review as saying: “The idea of participating in Asia in a significant way with someone who knows what they are doing is enormously appealing to us.”

IAG’s involvement in Asia could arguably now be much less significant given its decision to not pursue opportunities within Asia’s most populous nation. It should be noted however that IAG does still have a presence in a range of other Asian countries including Thailand, Malaysia, Indonesia, Vietnam and India.

Now What: The fact that IAG is not pursuing growth in China may in fact be a prudent decision and investors need to assess the company in its entirety.

Based on guidance provided at the time of IAG’s interim results release in February, management is expecting the insurer to achieve:

  • Relatively flat gross written premium growth
  • A reported margin at the lower end of the 14% and 16% range

Management’s guidance would suggest earnings per share will be roughly in line with the prior year, implying a price-to-earnings multiple of 14.5 times. In my opinion, that’s a pretty full price to pay for an insurance stock.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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