Question of the Week

Are insurance companies worth holding on to – or buying?

Print This Post A A A

Question 1: I have the opportunity to purchase additional shares in IAG through its share purchase plan – should I take up the offer? Is it good for the shareholder or only for the share-offerer?

Answer (By Paul Rickard): I don’t like insurance as an industry and am pretty ambivalent about both IAG and their acquisition of the Wesfarmer’s insurance business. My guess is that they have paid too much and like most acquisitions, it will turn out in the long run to be shareholder decretive rather than shareholder accretive.

That said, given the price for the new shares is no higher than $5.47 and the current market price is around $5.80 – you would (on paper) be mad not to take them up. The 6.0% gain should more than cover transaction costs if you decide not to keep the shares and sell them back on market. The offer doesn’t close till Friday 24 January – so if you are paying by BPay, you don’t need to make a call till around Wednesday 22 January (check with your bank).

Question 2: I purchased 1400 QBE shares at $14.80. Should I keep them?

Answer 2 (By Paul Rickard): I think that if you can wear the pain, I would hang on to them.

I am in a similar situation – and feel that the QBE business is fundamentally sound and that they will benefit from both a falling Australian dollar and higher US interest rates.

That said, I don’t expect any material recovery in the share price in the short to medium term. The QBE board and senior management has lost all credibility with the market – the last announcement was just such a surprise and their third strike – so it will now take the scoring of a number of home runs by QBE before credibility is regained. I think it will be at least 12 to 18 months before you start to see analysts putting a ‘buy’ recommendation out on QBE.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

Also from this edition