Shares in Insurance Australia Group Limited (ASX: IAG) rose another 2.9% today after the company rebounded from a three-month low of A$8.24 on Monday. The rise comes as UBS upgraded the stock to a 'Buy' rating with a revised target price of A$9.40.
The upgrade reflects a more optimistic assessment of IAG’s reinsurance strategy and its potential to support earnings growth in financial year 2025 (FY25).
“While IAG’s increased earnings resilience under its CAT reinsurance aggregate cover is widely appreciated, in our view, the economics are not,” UBS analyst Kieren Chidgey said.
“Providing P&L protection in over 90 per cent of CAT scenarios comes at a cost with IAG’s combined RI cost and CAT budget increases of about $250 million in FY25 adjusting for exposure growth equivalent to a 2.5 per cent ITR margin drag,” Chidgey noted.
“While these cost increases now appear fully embedded in consensus, little consideration seems to have been given to RI profit commission prospects which enhance overall economics.
“However, our analysis suggests RI profit commissions could boost IAG’s ITR margin about 60bps and EPS outlook about 5 per cent. Combined with potential upside from a range of other strategic initiatives, we see EPS and value risks skewed to the upside.”