Looking beyond stormy weather - Matt Williams - Perpetual Head of Equities

One of the most important aspects of our investment philosophy at Perpetual is that we don't just 'move with the pack' and invest in stocks that are in the index, or that other investors like. We conduct rigorous analysis on stocks and draw our own conclusions about whether they're worth holding in our portfolios or not.

A good example of this is Insurance Australia Group (IAG). At the start of the year, IAG was hit with high insurance claim costs resulting from some natural disasters, including floods in Thailand and a severe storm in Melbourne last Christmas. IAG was being abandoned by investors and its share price was beaten down. We realised that we needed to look 'beyond the hype' surrounding these natural disasters and consider how the company would perform under 'normal' conditions.

There were a number of factors that led us to find value in IAG at these lower price levels. For instance, the company has a number of strong brands. Its flagship NRMA brand has exceptional customer longevity, with 46% of customers staying for longer than 10 years, and high retention rates at around 91% compared to the industry average of 75%.

IAG is an Australian market leader in general insurance and operates within a duopoly in personal insurance, allowing it substantial pricing power. We have confidence that the CEO, Mike Wilkins will utilise his substantial industry experience and take advantage of the company's strong market position to deliver consistent earnings after a long period of weather-related volatility.

In February IAG announced that its half-year insurance profit was $271 million, representing a margin of 7.1%. While both of these figures were lower than the corresponding period last year, they represented a healthy result considering the tough operating environment. On an underlying basis, which excludes some of the natural disaster claim costs (among other items), the insurance margin actually improved over the year.

About Perpetual

Perpetual is an independent financial services group operating in funds management, financial advisory and trustee services. Our origin as a trustee company, coupled with our strong track record of investment performance, has created our reputation as one of the strongest brands in financial services in Australia.