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Will climate change rout Warren Buffett’s bet on IAG?

When Warren Buffett struck a high-profile investment deal with Insurance Australia Group in mid-2015, it was seen as an endorsement from the world’s most famous investor.

While the transaction with Buffett’s holding company Berkshire Hathaway was complex, it included Berkshire taking a 3.7 per cent stake in IAG – marking Buffett’s first investment in an Australian company.

When Warren Buffett struck a high-profile investment deal with IAG, it was seen as an endorsement by the world’s most famous investor.Credit:Kirsten Burghard

Over the next few years, IAG’s share price performed strongly, and it looked like Buffett had picked yet another winner.

However, almost seven years later, IAG’s share price is about 25 per cent lower than when Buffet bought in, and it has also markedly underperformed the benchmark S&P/ASX 200 Index over the past year. Berkshire still holds about 4 per cent of the company’s shares.

Still, after recent share price falls, some market professionals are beginning to wonder if IAG is worth looking at as a future investment, as the industry benefits from rising insurance premiums and higher bond yields.

How it started: IAG is the company behind some of the biggest insurance brands in the country, including NRMA Insurance, CGU and SGIO.

The company first listed on the Australian Securities Exchange (ASX) in 2000, following the demutualisation of the NRMA, and it was initially known as NRMA Insurance Group. It changed its name to IAG in 2002, and its shares are among the most widely held in the country.

How it’s going: IAG has underperformed. In the past year alone, its share price is down 19 per cent, compared with a 1 per cent decline in the S&P/ASX 200. Shares in rival insurer Suncorp are down a more moderate 2 per cent over the same period.

Like all insurers, IAG has been hit by a series of natural disaster claims that exceeded expectations – at first widespread bushfires, then floods in northern NSW and Queensland.

There remains plenty of debate about the long-term risks to the company from climate change.

IAG also took heavy provisions during the pandemic for possible payouts to lockdown-affected business customers.

Industry: Insurance.

Main products: Home, car and commercial insurance.

Key figures: Chief executive Nick Hawkins, chairman Tom Pockett.

The bull case: IAG faces plenty of challenges, but some sharemarket watchers think its stock looks cheap, given that insurance premiums are rising briskly.

Jarden analyst Kieren Chidgey, who has a “buy” rating on the stock, says a key risk for all insurers is claims inflation – the mounting cost of paying out claims, such as rising expenses for building materials and car parts.

However, he says insurers, including IAG, are responding by lifting their premiums.

In the year ended March 31, home insurance premiums rose 7 per cent across the industry, and car insurance premiums by 5.5 per cent.

Insurers have plans to raise premiums further. Chidgey says these increases are one reason to expect wider profit margins at IAG, together with its stated intention to keep its cost base flat.

Insurance companies also make revenue from their investment portfolios, and Chidgey says a sharp rise in bond yields from their lows during the pandemic should help.

Finally, there are hopes of a capital return. IAG has made $1.2 billion in provisions for claims from business customers who suffered pandemic-induced losses. They are the subject of a long-running court battle affecting the entire industry, however, recent Federal Court decisions have tended to favour the insurers.

“If those outcomes were ratified by the High Court, that could lead to some significant capital management optionality next year,” Chidgey says.

The bear case: Wild weather has battered the insurance industry, and some worry IAG is further behind its rivals in adjusting its claims allowances to reflect the reality of climate change.

Morgan Stanley analysts, led by Andrei Stadnik, state in a recent report that the two biggest domestic insurers – IAG and Suncorp – face more volatile earnings and a higher cost of capital as a result of climate-change risks.


The report states Australia has almost eight times the exposure to natural catastrophe costs than the global average, and adds it would be hard for insurers to pass on all of these associated costs to households.

It argues IAG and Suncorp would eventually need to lift their catastrophe budgets substantially, to restore credibility with investors.

The analysts state insurers are working hard to raise awareness about climate-change risks, but the issue is so big it would require substantial government support. “As a result, we expect the [catastrophe] impacts for the insurers to get worse before they get better,” the report concludes.