To my mind, Insurance Australia Group Ltd (ASX: IAG) ("IAG") is in an awkward place. After its recent plans to attempt expansion into China were reportedly scotched by shareholders, the company is left without any major growth options.
One of my favourite definitions of insurance (as an investment option) describes it as a semi-commoditised product, meaning companies often compete on price and can find it difficult to establish a competitive advantage. This means that selling more policies or finding more new customers (or both) is one of the main ways to grow the business – as long as the insurance is priced right.
IAG is a solid company, but is over-reliant on a handful of business lines, namely its Australian Motor and Home insurance businesses:
| Insurance revenue by sector (in %) | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2005 |
| Motor | 30 | 32 | 33 | 34 | 35 | 37 | 34 |
| Home | 26 | 27 | 27 | 24 | 23 | 23 | 21 |
| Short-tail commercial | 24 | 19 | 19 | 19 | 18 | 17 | 22 |
| CTP (compulsory third party; motor liability) | 8 | 9 | 10 | 11 | 12 | 12 | 10 |
| Liability | 6 | 5 | 4 | 5 | 5 | 5 | 6 |
| Other short-tail | 3 | 4 | 4 | 4 | 4 | 4 | 4 |
| Workers compensation | 3 | 4 | 3 | 3 | 3 | 2 | 3 |
(source: IAG company reports)
As readers can see, Insurance Australia Group's sources of revenue have remained pretty much identical for the past ten years, with slight decreases in Motor insurance and CTP as well as increases in Home insurance.
The Australian business carries most of the load, helped out by New Zealand, with a token appearance from 'Asia':
| Insurance revenue by geography (%) | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2005 |
| Australia | 77 | 78 | 80 | 79 | 79 | 77 | 85 |
| New Zealand | 20 | 19 | 17 | 13 | 12 | 12 | 15* |
| United Kingdom | – | – | – | 6 | 7 | 9 | – |
| Asia | 3 | 3 | 3 | 2 | 2 | 2 | – |
(source: IAG reports)
* revenues for other regions eg Thailand were collapsed into the 'International' segment in this year and described as 'primarily New Zealand'
Given the competitive, global nature of the insurance business, investors will find it helpful to read a number of free reports on the industry – such as those by accounting firm Ernst & Young – that are available online. The suggestions made for the future of insurance are encouraging – unless your main lines of business are in Australia and New Zealand, which are expected to have slower growth in premiums and demand and are more exposed to some asset risks (e.g., falls in house prices).
Although Australians are often described as under-insured (and in fact, probably are), we are extremely well insured compared to regions like India, in which (according to Ernst & Young) only 15% of the population has government health insurance, and just 2.2% has private health insurance.
Making an acceptable return on funds invested could be challenging, given low wages in China and India, but the potential for growth is there. The Asia-Pacific region is expected to contain more than half of the world's middle class by 2020 and, given that the middle class is a prime market for selling insurance, staying out of Asia doesn't make a lot of sense in the long run.
Without some progress here, I do not see an attractive growth runway ahead for IAG, and would not buy shares in the company today.
