Monday is proving to be rough for the Insurance Australia Group Ltd (ASX: IAG) share price. Its struggle comes after a top broker downgraded the company's stock.
UBS dropped its price target for IAG shares to $4.20 over the weekend, slapping them with a sell rating.
At the time of writing, the IAG share price is $4.25, 3.52% lower than its previous close of $4.40.
For context, the S&P/ASX 200 Index (ASX: XJO) is recording a 0.6% gain today.
Let's take a closer look at what the broker has to say about the insurance provider's shares.
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IAG share price tumbles amid broker downgrade
The IAG share price is suffering amid a flurry of broker downgrades.
As The Motley Fool Australia reported yesterday, the company's shares were recently downgraded to 'underweight' by Morgan Stanley and plastered with a $3.75 price target.
Now, UBS has followed suit. According to reporting by The Australian, the broker told clients that it's concerned by a lawsuit facing an IAG subsidiary and the company's growth prospects. UBS analysts were quoted as saying:
The preeminent NRMA franchise is being sued by the corporate regulator for overcharging. The commercial lines business is addressing a cost problem and undergoing remediation work.
The group's volume outlook is weak after divesting most of its growth options in recent years. The net positive impacts presented by COVID over the past two years are now reversing as supply-side constraints drive a spike in claims.
Indeed, IAG announced that the Australian Securities and Investments Commission (ASIC) launched civil proceedings against its subsidiary in October.
The watchdog alleges the company increased premiums for some NRMA insurance customers before applying loyalty and 'no claim' discounts.
The analysts also reportedly stated:
We understand there is substantial claims "catch-up" now coming through as states open up and building and motor supply bottlenecks tighten.
This will not only utilise the lockdown savings of [the first quarter of financial year 2022], but likely require further home and motor repricing into [2022].
This comes at the same time as ASIC's impending lawsuit into overcharging, which implies that Direct Insurance Australia has over-earned by ~3% of annual margin since [the second half of financial year 2018].
Today's tumble included, the IAG share price is 10% lower than it was at the start of 2021. It has also fallen 3.9% over the last 30 days.
