Why the Insurance Australia Group Ltd Share Price Sank Today

What Happened to Insurance Australia Group Ltd’s Share Price?

Shares in the nation’s largest insurer to small and medium businesses, Insurance Australia Group Ltd [ASX:IAG], took a beating today, with the stock shedding 8.45% of its value. Today’s price action erases all the gains IAG shares have racked up over the past seven months.

Why Did This Happen to IAG Shares?

This morning IAG reported that net profit fell by 10% to $579 million in the six months ending 31 December 2014. Stiffer competition for customers’ business may have crimped IAG’s profit.

CEO Mike Wilkins highlighted the ‘significant progress in moving to our new operating model in Australia, and integrating the former Wesfarmers business. This ensures we can efficiently respond to the changing business environment, while also maintaining our strong underwriting discipline.’

The moves that Mike referred to seem to have kept a lid on IAG’s underlying margin, which is a key indicator of insurers’ profitability. The margin hit 13.3% for the period — a weaker result than the 13.7% achieved last year.

With few positive surprises in the result, investors saw little reason to bid up the shares today. When buying support erodes, stock prices of large-cap stocks like IAG can suffer sharp drops.

What Now for Insurance Australia Group Ltd?

IAG remains one of Australia’s strongest insurance groups. Its brands, which include CGU and NRMA, are successful…and the company’s profit margins on insurance premiums are still enviable.

IAG still has scope to boost margins and profitability as it integrates the former Wesfarmers business. Its interim dividend of 13 cents per share seems healthy enough to attract investors who seek income.

Today’s outsized pullback could represent an opportunity for you to buy into a good operator at a more reasonable price. But if you seek explosive gains from small firms before they hit mainstream investors’ radars, go here to find out more.

Cheers, Tim Dohrmann
Small-Cap Analyst, Australian Small-Cap Investigator

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