Why are analysts so upbeat on IAG?

afr.com:

The barbs in the analyst assessments didn’t miss insurance giant IAG.

The insurer, behind brands such as NRMA and CGU, had just told its annual general meeting earlier this month that some older claims were causing trouble.

Massive flood damage struck last year, but insurers are hoping this year’s El Nino could mean fewer claims.  Tony Moore

And that would squeeze profit margins this financial year – not in the past year in which they actually struck.

Morgan Stanley’s Andrei Stadnik drily noted: “Had this top-up been taken at the end of [last financial year], profits [then] would have been lower.”

Over at Goldman Sachs, the broker wrote: “It may also be noteworthy that the weaker reserving at 30 June … would have supported [last financial year’s] reported margins.”

That gets to a problem IAG has suffered for several years: costs of settling claims or solving stuff-ups have ballooned beyond the insurer’s initial prediction. And in this latest example, it meant last year’s profits were higher than they should have been and a key earnings target was actually missed.

Yet enthusiasm remains for the company and the sector as premiums rise; of five specialist insurance analysts, three have buy recommendations for IAG.

IAG’s latest blowout arose partly from what’s known as claims development, where claims costs inflate more than initially anticipated.

That is usually associated with what’s called “long-tail” claims. Take, for example, someone being injured – the final bodily damage may only be known months or years later. Hence, bills balloon.

Damage from “short-tail” claims, such as a house burning down, are usually more obvious early on, so predictions are more accurate.

But claims development can still strike short-tail