##{"id":59637,"date":"2012-03-12T11:54:42","date_gmt":"2012-03-12T00:54:42","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/03\/12\/how-much-iag-upside-from-cgu-restructuring\/"},"modified":"2012-03-12T11:54:42","modified_gmt":"2012-03-12T00:54:42","slug":"how-much-iag-upside-from-cgu-restructuring","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/03\/12\/how-much-iag-upside-from-cgu-restructuring\/","title":{"rendered":"How Much IAG Upside From CGU Restructuring?"},"content":{"rendered":"

\n\t – IAG<\/span> has updated investors on CGU<\/span> restructuring
\n\t – Focus now on costs and margins
\n\t – Some upside potential relative to guidance
\n\t – Stockbrokers views on IAG<\/span> remain mixed<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tLast week Insurance Australia Group ((IAG<\/span>)) briefed the market on plans for improving growth and profitability at its CGU<\/span> division. The division is significant, accounting for 31% and 29% of 1H12<\/span> premiums and insurance profit respectively.<\/p>\n

\n\tRBS<\/span> notes the next phase of restructuring at CGU<\/span> will be a cost cutting story, with the focus being consolidating key processes such as underwriting, claims and account management. The process is likely to see a net reduction in head count of around 600 over the next three years.<\/p>\n

\n\tThe target is pre-tax synergies of $65 million by the end of FY15<\/span> and will involve implementation costs of $75 million. As these had already been announced at IAG's<\/span> recent interim result, forecasts across the market have not seen significant adjustments post the latest briefing.<\/p>\n

\n\tFurther upside is possible in the view of Citi<\/span>, particularly from increased cross-selling of group products given a move to more of a whole-of-account coverage structure. This should help strengthen relationships with insurance brokers and see delivery of a more uniform service according to Citi<\/span>.<\/p>\n

\n\tUBS agrees there is scope for additional upside assuming CGU<\/span> can execute its changes cleanly and if pricing risk in the market continues to firm. On UBS's numbers, an additional 2% increase in “Intermediated”<\/span> margins could translate into a cash earnings per share uplift of around 5%.<\/p>\n

\n\tAs BA Merrill Lynch notes, at the same time as IAG<\/span> is making some progress with its CGU<\/span> restructuring, premium rates are also trending higher. As well, interest rates and credit spreads have likely bottomed and claims inflation appears manageable.<\/p>\n

\n\tThis tide of better market conditions has the potential to 'lift all boats' including IAG<\/span> in the view of BA-ML, though the broker continues to suggest there is limited valuation upside in IAG<\/span> relative to fair value. This is reflected in the fact BA-ML's price target of $3.50 is not far from last week's closing price for IAG<\/span> of $3.29.<\/p>\n

\n\tMost in the market agree value upside in IAG<\/span> is limited at present, as the FNArena<\/span> database shows IAG<\/span> is rated as Buy twice and Hold six times, with a consensus price target of $3.51. This is up from $3.49 prior to the update.<\/p>\n

\n\tRBS<\/span> Australia is one to agree IAG<\/span> is trading around fair value at current levels. While recent margin improvements at CGU<\/span> have been impressive, FY12<\/span> earnings guidance remains something of a stretch and the group's capital position remains tight. This suggests to RBS<\/span> further evidence of progress in terms of improvements in margins is required before any re-rating of the stock in the market can be expected.<\/p>\n

\n\tIn contrast, the potential for more upside is enough for Citi<\/span> to retain a Buy rating on IAG<\/span>, as the expectation is margin improvements and premium growth will most likely roll through into FY13<\/span> and FY14<\/span>. The other positive for Citi<\/span> is broker views on premium growth are higher than the numbers being assumed by IAG<\/span>, which suggests some conservatism on the part of the company with its guidance.<\/p>\n

\n\tJP Morgan takes a similar view, expecting the initiatives being undertaken in terms of improving performance at CGU<\/span> will eventually pay off. This implies upside, as evidenced by JP Morgan's above consensus price target of $4.00. Citi<\/span> is similarly positive with a target for IAG<\/span> of $3.95, while UBS is the most conservative with a target of $3.25.<\/p>\n

\n\tUBS sees better value elsewhere, preferring to invest in either QBE<\/span> Insurance ((QBE<\/span>)) or Suncorp<\/span> Group ((SUN)) to play the improving insurance sector thematic.<\/p>\n

\n\tShares in IAG<\/span> today are unchanged with a last sale at $3.29, which compares to a range over the past 12 months of $2.74 to $3.66. The current share price implies upside relative to the consensus price target in the FNArena<\/span> database of around 6%.
\n\t <\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"