The day prior to the closure of the Share Purchase Plan, Insurance Australia Group Limited (ASX: IAG) has upgraded its guidance for FY 2014. The market is currently offering shares at $5.55, less than 2% more than the price of $5.47 available under the SPP. With the significant chance of a scale back, I think investors are better off buying shares on market.
In 2013, IAG boasted an insurance margin of 17.2% and gross written premium growth of 5%. As Motley Fool contributor Peter Andersen writes, the company will maintain dominance in the Australian insurance marketplace, thanks to the acquisition of Wesfarmers' (ASX: WES) insurance brands.
The good news for shareholders is that the company believes that the insurance margin for FY 2014 will be 14.5% – 16.5%. That is a very impressive margin for an insurance company, and IAG will also get to keep interest earned on the float. The new guidance is an improvement of 2% on the previously proffered figures. However, the group expects to grow gross written premiums by 3%-5% rather than the 5%-7% previously forecast. Taken together, the new forecast is still an improvement.
According to IAG's CEO, Mike Wilkins, the company expects to "record a strong first-half underlying performance" and "to benefit from higher than originally anticipated reserve releases." This arises from favourable experience in Australian long-tail classes, and suggests that the company has adequately reserved in the past.
As I showed in this article, IAG has achieved an underwriting profit in seven out of the last 10 years, making it an investment-grade insurance company. Nonetheless, the company will pay when bushfires and floods ravage Australia. The forecast of $640 million in natural peril claim costs assumes that 2014 is a relatively good year.
While QBE Insurance Group Ltd (ASX: QBE) and IAG are dominating the headlines, investors looking to buy shares in an insurance company should consider all the options. Health insurance provider NIB Holdings Limited (ASX: NHF) benefits from a disproportionate share of younger customers who have lower healthcare costs. The company currently trades on a trailing yield of over 4%, and has recently received approval to increase its premiums by almost 8%.
Alternatively, Clearview Wealth Ltd (ASX: CVW) is a small-cap life insurer that is growing gross premiums written, and yields 2.8% fully franked. The board is so confident that the shares are underpriced that they have instituted a buyback. However, the company has also announced an intention to raise capital in the near future.
Foolish takeaway
Today's price of $5.55 probably vindicates my recommendation that small investors buy on market rather than taking part in the SPP (we'll see what the scale back is). Certainly, the current price is attractive. With another good year likely in FY 2014, the best time to buy IAG shares will probably be in the next few days. NIB and Clearview are also trading at attractive prices, but IAG's size and apparent conservatism make it an attractive blue-chip investment.
