After reassuring investors that all was well after the Cyclone Marcia claims earlier this year, Insurance Australia Group Ltd (ASX: IAG) shares have been slammed today, after the insurer announced costs of $300 million were expected in the aftermath of the recent Sydney storms.
The total bill for natural perils this year is likely to top $1 billion, and investors have been told to expect reduced insurance margins of 10.5-12.5%, down from 13.5-15.5% previously.
(Get the full coverage on IAG in contributor Ryan Newman's excellent article here)
It's inevitable that insurers occasionally have to pay out more than they expect– after all, the nature of the business is protecting against unforeseeable circumstances.
With the total number of policies still growing strongly and IAG already trading at a rock bottom Price to Earnings (P/E) multiple of 11 – far below the ASX average – I think today's fall represents a good opportunity to buy shares in Insurance Australia Group.
Sims Metal Management Ltd (ASX: SGM) is another business hit by a falling share price today, after a trading update warned that steel scrap volumes and prices have plummeted after falls in the market value of iron ore.
Given that the company's much touted reform plan has mitigated some of the difficult trading conditions, management announced that second half 2015 results would be roughly in line with those achieved in 2014.
Investors apparently weren't reassured, and shares have declined 7% so far today.
As I warned in my earlier article, reform plans are just that until backed up by results. Given that tough trading conditions are keeping things subdued, it would be wise to keep Sims at arms-length until things improve.
On a more positive note, Orocobre Limited (ASX: ORE) delivered an upside surprise to investors today after announcing the first commercial sales from its Olaroz lithium facility in Argentina.
With demand apparently growing faster than supply and lithium prices rising, Orocobre's entry into the lithium market appears to be well timed and shares enjoyed a well-deserved 12% leap so far today.
However given that it has just commenced production and information on earnings and profits are limited, I believe Orocobre shares are still speculative and only for the risk-focussed investor. Lithium market conditions do appear to be favourable though and further rises in Orocobre shares are definitely possible.
