Is Insurance Australia Group Ltd (ASX: IAG)("IAG") a buying opportunity after Berkshire Hathaway took a 3.7% stake in the company?
Investors were initially excited with the deal, sending shares up to $5.90 before a steady decline to today's prices of $5.53. Now 8% below its recent peak and down 6% for the year, is it a good time to stock up on IAG shares?
Maybe, but at its current price I'm not a big fan. After a heavier-than-expected year of disasters, analysts predict that IAG's earnings and dividends will decline this year, with the possibility of further dilution in 2016 thanks to Berkshire's 3.7% stake. With the full year results yet to be reported, I believe the company is vulnerable to a downward re-rating by the market.
The expected success of other insurers like Suncorp Group Ltd (ASX: SUN) and QBE Insurance Group Ltd (ASX: QBE) could also help to make IAG look worse by comparison. A poorer short-term outlook than its peers is another reason I would wait to buy into IAG.
On the other hand, the 'quota share' arrangement (sharing insurance premiums and risk) with Berkshire should help reduce earnings volatility over the next 10 years, while the extra capital freed up allows the company a substantial amount of financial flexibility – and with flexibility comes opportunity.
Insurance Australia Group looks likely to remain a solid income stock over the long term, but given its negative short-term outlook I don't believe that now is the right time to buy IAG shares.
