From the afrWhy Wilson’s John Lockton thinks IAG is...

From the afr

Why Wilson’s John Lockton thinks IAG is undervalued

Underpressure thanks to fears of a blow out in business interruption claims on theback of the COVID-19 pandemic, multibillion-dollar insurer IAG is now in thespotlight, with Wilsons’ John Lockton suggesting these fears were significantlyoverblown.

Lockton,who is head of Australian equities at Wilsons, said IAG could have over-provisioned for business insurance claims by as much as two times, thanks to data out of the UK indicating the average payout for claims in that region is only $54,000, despite its lengthier lockdowns.

Butwith its share price still in a rut thanks to ongoing investor concerns, thebusiness now looks like an attractive proposition - and not just to investors.

Locktonsays IAG is priced low enough that it could fall into the gaze of the majoroffshore insurers as a possible acquisition target.

Overseasinsurance businesses such as Japan’s Nippon Life and Dai-ichi Life have alreadyshown interest in local companies.

Nipponacquired an 80 per cent stake in MLC Life Insurance from NAB in 2016, while in2011 Dai-ichi Life acquired Tower Australia (now called TAL), before buyingSuncorp’s life insurance business in 2018.

“Berkshirehas just under [a significant holding] in IAG, but the register is otherwiseopen,” Lockton said.

“[It’sa] duopoly market [and it has] strong cash generation. Global players as wehave seen with Life insurance don’t mind Australia.”

Locktonsaid IAG was the highest quality stock of the local insurers, but its shareprice recovery had lagged others in the industry like QBE and Suncorp, sincethe market-wide plummet in early last year.

Whilethe company has the highest exposure to business interruption insurance, sinceFebruary only 500 claims had been made, but the business has provisioned $1.2billion for such claims.

Thepandemic was deemed an insurable event in a court decision last year and thisdecision was reaffirmed by the High Court last week.

Shouldthe insurers lose, if the Australian market follows suit with the UK, Lockton’sresearch suggests the payout for the 500 business interruption claims made todate would be closer to $30 million, rather than $1.2 billion. If the claimsjump substantially and escalate to the order of 13x current levels, IAG wouldbe up for $650 million of payouts, based on the average UK payout of $54,000.

“Whileit will likely take several months to know for sure if our view holds, thepotential for a material re-rating of the IAG share price remains,” Locktonsaid.

“Wesee similarities between how IAG is being priced today and how the large bankswere valued in the depths of COVID.”