Shares in insurance giant Insurance Australia Group Ltd (ASX: IAG) continue their horrendous run and now trade 0.45% in the red on Monday.
Make no mistake, IAG shares are swimming in a sea of red. They are 13% down in the past month, 18% in the red over the previous 3-months and down 6% this year to date.
It seems whenever one looks, there is a sharp downturn in the IAG share price. As such, top brokers are keeping a close eye on this share's activity.
No one can predict the future, especially in the financial markets. Whilst many have tried, equally as many have failed at doing so.
Nonetheless, analyst estimates are one of the many drops in an investors bucket when forming an investment decision.
And with several brokers covering IAG shares, it is useful to gather the consensus of their opinion, in order to gauge the market's sentiment on this floundering insurance giant.
Without further ado, here are what the experts are saying about the outlook for IAG investors.
Can the IAG share price fall even more?
The team at Swiss investment bank UBS reckon this could be the case. It doesn't see a clear vision of growth for IAG shareholders.
Due to IAG's recent perils activity, which has plagued its share price over the past few months, UBS reckons there is a downside risk to the company's earnings. This, especially given "limited sideways insurance cover remaining" if the perils activity is drawn out.
Not only that, UBS is cautious on the spate of regulatory scandals IAG is tied up in, which could bode poorly to its share price, the broker says.
Morgan Stanley expects further downgrades like this, especially as driving activity has almost returned to pre-lockdown levels on NSW and Victorian roads.
This, it reckons, means that there is little protection over IAG's earnings from what it calls 'catastrophe risk'. IAG's shifting business into "short-tail lines..[also] tend to be more catastrophe risk prone" according to the broker.
Not only that, but Morgan Stanley also is cautious on the regulatory proceedings against IAG, and notes there is little shield on IAG's earnings from this risk either.
It had previously been noted that the regulators choice to launch action against IAG reduces capital flexibility and increases earnings uncertainty.
What other expert opinion is there?
Fellow brokers Macquarie Group Ltd (ASX: MQG), and Jarden agree with this sentiment, compounding the point with their own analysis.
Both Macquarie and Jarden recently lowered their price targets by 5.3% and 2.6% to $5.40 and $5.65 per share respectively.
However, Macquarie retained its outperform rating on the outlook of IAG shares even with its target revision.
Other recent earnings downgrades come out of Morgans and Credit Suisse. Both recently trimmed IAG price targets by 5% each.
Yet, despite the cut to valuations, both brokers are optimistic about the direction of IAG's share price. Alongside Macquarie, each of the brokers is bullish on IAG shares.
The team at Credit Suisse maintained its outperform rating, even when cutting its target to $5.60. It states that IAG is likely to absorb the net peril costs plaguing its outlook in FY22. But it likes IAG at its current valuation.
Even still, the broker is cautious on IAG's earnings outlook, stating it "may elect to manage higher insurance margins and increase reinsurance costs by adjusting its cover, but this could come at the expense of increased volatility".
It remains constructive on the sector nonetheless, citing a favourable interest rate cycle and rational pricing in its reasoning.
Meanwhile, Morgans reckons that IAG looks cheap at these current levels, and encourages an add recommendation for prudent investors.
For those patient investors, it says, IAG could return to profitability from FY23, as insurance premiums are set to lift beyond FY22 for IAG.
Even though IAG recently revised its FY22 natural perils claims cost to $1.04 billion – up from an estimate of $765 million – Morgans notes that "it's another 6-month period affected by weather for IAG, which is becoming a consistent theme for the general insurers".
As such, despite a small haircut to its target, it reckons IAG shares can reach $5.36 given the right environment.
What is the sentiment?
Interestingly, out of the 13 brokers covering IAG, 61.5% have a buy rating on its shares, whereas the remaining 38.5% have a hold.
Curiously, there are no sells on the ratings list provided by Bloomberg Intelligence.
The average price target from all brokers is $5.31, and the spread between the highest and lowest valuation is 85 cents of 18%.
At the time of writing, this implies an upside potential of around 20%. However, it is the market's opinion that matters most.
And with each decrease in share price, IAG has to recover even more to reach this $5.31 consensus target.
Not to mention the raft of regulatory headwinds IAG is currently embroiled in, which several brokers acknowledge could be a negative for investors.
Alas, as it stands, the opinion appears to be tilted towards an upside target for the IAG share price.
