Why this ASX 200 insurance stock is sinking today

Insurance Australia Group Ltd (ASX: IAG) shares are having a rough finish to the week.

At the time of writing, the IAG share price is down 4.54% to $7.78.

The fall adds to a difficult 12 months for shareholders, with the ASX 200 insurance stock now down 11% over the past year.

It has recovered 4.2% since this time last month, but today’s move shows investors are still quick to sell when concerns start to appear.

The stock also remains well below its 52-week high of $9.18.

So, what has changed today?

Citi downgrade weighs on IAG shares

According to CMC Markets, Citi has downgraded IAG to ‘neutral’ from ‘buy’.

The downgrade comes as investors digest fresh commentary around the insurer’s possible exposure to the Greensill collapse.

Greensill Capital collapsed in 2021, triggering a long-running legal and financial fallout across several markets.

Citi analyst Nigel Pittaway has warned IAG could face a claim in an upcoming Greensill court fight, according to The Australian.

IAG writes well known insurance brands including NRMA, RACV and CGU, and has previously maintained that it avoided exposure to the Greensill disaster.

But the issue appears to have moved back into focus after recent developments involving other insurers and litigation reserves.

The company has provisioned $432 million for legal fees and claims handling, while saying it expects no net exposure.

Pittaway said this does not provide a major reason to question IAG’s declared net nil position by itself.

But he also said there’s a potential for the issue to resurface.

Why investors are nervous

Insurance stocks can look fairly defensive when premiums are rising and claims are manageable.

However, legal uncertainty can change how investors think about risk.

IAG is one of the biggest insurance businesses on the ASX with a market capitalisation of about $18.2 billion.

It also trades on a price-to-earnings ratio (P/E) of about 17 and has a dividend yield near 4%.

So, investors are not really looking at a distressed business. The concern is whether the unexpected legal costs could become larger than the market had expected.

The comparison with other insurers is also weighing on sentiment.

The Australian noted that Tokio Marine recently warned of significant litigation losses and reserve increases.

It also said Marsh has booked a US$425 million charge linked to Greensill litigation.

Foolish takeaway

The IAG share price is being hit today because investors took on another reason to question risk.

The business itself isn’t suddenly under pressure, but legal uncertainty can be enough to change sentiment.

And with the stock already down over the past year, today’s downgrade is adding more pressure.

The post Why this ASX 200 insurance stock is sinking today appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.