While many ASX shares have seen a rapid recovery since March, the Insurance Australia Group Ltd (ASX: IAG) share price has gone against the crowd and remained on a consistent trend down.
IAG share price chart
With the IAG share price around its 5-year low mark, I’m sure many investors have been left wondering if this represents a good buying opportunity.
What does IAG do?
IAG is a multinational insurance company with operations in Australia, New Zealand and Asia across multiple brands. One of its more popular brands is NRMA, which was eventually demutualised in 2000, forming IAG.
Recent IAG share price movements
IAG was unfortunately not a temporary beneficiary of COVID-19. Recent problems have arisen due to the technical details surrounding the definition of “quarantinable diseases”.
For IAG, this essentially means it would be paying out claims associated with losses that have arisen from COVID-19 business interruptions. While this is a win for the policyholder, this large sum of money required wasn’t originally provisioned and is a huge upset to insurance companies.
Last week, a ruling found that some businesses that were affected by COVID-19 might qualify for payments. As a result, IAG expects to set aside $865 million to fund the payouts. Soon after this ruling, IAG announced it would need to raise up to $750 million in response to the court ruling to strengthen its financial position.
Are IAG shares a buy today?
Remember, you’ve got the choice between investing in companies where the macroenvironment works in their favour, or perhaps not so much in their favour. I’m of the opinion that IAG is currently fitting under the latter category here.
Insurance companies must follow strict rules and regulations in order to be compliant in Australia. APRA determines the required capital an insurer must hold in reserve to pay claims, which in turn affects the premium the insurer can charge.
There’s very little pricing power here and IAG can’t simply raise premiums at any level it pleases. Last week’s court ruling was also a painful example of exactly what else can go wrong for players in this industry. For these reasons, I’m going to be holding on IAG shares for now.
What’s a better alternative?
On the topic of pricing power, I’m really liking road told operator Transurban Group (ASX: TCL) right now. Transurban currently operates 21 toll roads across Sydney, Melbourne, Brisbane and North America.
Transurban has abnormally strong pricing power and most of its toll fees can be increased by either the annual inflation rate or 4% per year (whichever is higher).
I view this as a far more attractive investment proposition compared to industries that are up against an ongoing battle with regulators.
If you’d like to know more, click here to read my recent article on Transurban Group shares.
