Why these brokers are telling you to buy the crashing IAG share price today

The Insurance Australia Group Ltd (ASX: IAG) tanked for a second day, but bargain hunters might soon swoop as a number of top brokers highlighted the stock as a value buy.

Shares in the insurer tumbled 4.2% in after lunch trade to a five year low of $5.09 when the S&P/ASX 200 Index (Index:^AXJO) inched up 0.1%.

Today’s loss comes after the IAG share price crashed around 8% yesterday on the back of a disappointing profit update.

Management warned that it suffered a pre-tax loss on investment income of around $280 million since the start of the financial year to end April and is unlikely to pay a dividend.

Missing the ASX rebound

The insurer blamed falling equity markets for part of its woes. I guess it’s safe to say it didn’t invest in superstar stocks like the Afterpay Ltd (ASX: APT) share price or Fortescue Metals Group Limited (ASX: FMG) share price during the market sell-off.

In fact, it cut its exposure to risk assets through the COVID-19 turmoil as its exposure to growth assets fell to 30% of its total investment portfolio from 49% at the end of the 2019 calendar year. IAG wasn’t expecting a big rebound in March.

This reinforces the view that mum and dad investors have been beating the experts for all the right or wrong reasons.

More defensive than its peers

But I digress. The more important question to investors looking for the next bargain is whether the IAG share price is too cheap to ignore.

A number of leading brokers think so. Citigroup believes at this price, IAG is looking more defensive in this highly uncertain COVID-19 environment than other stocks.

This is because of IAG’s limited downside exposure to insurance claims from disasters as its reinsurance arrangement provides a stop-loss for FY21.

Citi commented that while the reinsurance cover was expensive, it means IAG’s perils allowance for FY21 only rises by $17 million to $658 million.

The broker reiterated its “buy” recommendation on the stock even as it cut its price target to $6.15 from $6.60 a share.

Bad news more than priced in

Meanwhile, Credit Suisse is sticking to its “outperform” rating on the stock after upgrading IAG on May 25.

“Clearly this has not been a good call and the momentum is against IAG currently,” said the broker.

“However, we stick to our fundamental approach in picking stocks and maintain the view that IAG is ahead of the curve on the challenges that lie ahead and its valuation appeal is compelling.”

The broker incorporated the higher long-tail loss ratio and lower expected reserve release in to its forecasts. This resulted in a 6% downgrade to FY20 earnings and 3% to 5% downgrades in the outer years.

Credit Suisse’s 12-month price target on the stock falls to $6.25 from $6.40 a share.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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