Insurance Australia Group (ASX: IAG) shares have slipped this morning after Macquarie Group Ltd (ASX: MQG) downgraded its rating to neutral.
As of mid-morning, IAG shares are trading at $8.66, down 1.03% from yesterday.
Over the year, the stock is up 34.26%. That's despite an overnight price plummet of 12.55% to $7.80 in early February when the ASX insurance giant reported its financial performance for the 6 months ending 31 December 2024.
At the time, IAG reported that its net profit after tax (NPAT) grew by 91.2% to $778 million, insurance profit rose 55.9% to $957 million, and the interim dividend per share was hiked by 20% to 12 cents per share. But analysts at the time stated there could be lower growth going forward.
In a note to investors yesterday, Macquarie downgraded its rating on the shares from outperform to neutral.
At the same time, the broker revised its 12-month target price to $8.70, up from $8.50.
The new target price would represent a 0.46% increase on this morning's value.
"Trading ~360bps above weighted peers (a ~23.0% premium), we deem the current valuation as stretched and downgrade our recommendation to Neutral (from Outperform)", the note said.
Here's why, according to the broker.
We don't think IAG's WA acquisition is in the spirit of competition law – it seems unlikely to proceed, despite findings to the alternative for Qld.
Within the ACCC's commentary on the RACQ deal, Macquarie believes there is information on the pending RACI (WA) deal, which suggests the acquisition may not be approved.
"RACQI has not been a particularly vigorous competitor in recent times and … has been losing market share since 2019", ACCC commentary says.
This compares with RACI (WA), which Macquarie estimates has grown the share of the WA market from around 24% in FY 2015 to around 44% in FY 2024.
At the same time, the ACCC flagged RACQ's declining market share and higher pricing vs. the market. "Neither of which are read-throughs for WA in our view", Macquarie says.
The note explains that the ACCC stated [RACQ's] prices are generally higher than many alternative suppliers. However, Macquarie thinks their prices are closer to average in the WA market.
Macquarie notes that while it has downgraded its rating on IAG shares to neutral, its investment thesis comes with some risk.
In the short term, the broker acknowledges that more frequent catastrophes could lead to higher reinsurance costs and sustained claims inflation.
In the long term, Macquarie notes that any inability to compete in the market may harm IAG's business.
"The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices," Macquarie said.
"From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures."
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