Why IAG shares are skyrocketing

What a difference a year can make. Just over a year ago, shares in general insurance company IAG Limited (ASX: IAG) could be picked up for a touch under $3.00. Yesterday the company closed at $5.80 – up over 90%; a seven-year high and close to double the insurer’s January 2012 price. So what’s changed?

In short, the weather. Fewer natural disasters, both domestically and internationally, have resulted in significantly lower claims expenses year on year and have driven a massive increase in earnings for IAG. In the company’s first half of FY13, results insurance profits were up 195% from $276 to $815 million with net natural peril claims $180 million below the budgeted allowance. 2012 was peppered with significant weather events, like Cyclone Lua which skirted North Western Australia in March shutting some of the country’s main iron ore mines.

IAG has also been benefiting from the favourable investment market conditions that have pushed share markets around the world up towards pre-GFC levels. The favourable conditions will undoubtedly see very positive results emerging from some of Australia’s other large insurance companies, including QBE Insurance (ASX: QBE) and Suncorp Group (ASX: SUN), not to mention an especially good vintage for Treasury Wine Estate (ASX: TWE)!

A third reason for IAG’s skyrocketing share price is the good news surrounding the company’s carefully transacted Asian expansion. The company has established businesses in Thailand and Malaysia as well as recently acquiring a 20% stake in Bohai Property Insurance. IAG’s Asia businesses contribute around 6% of total revenues and the company estimates the potentially huge Chinese insurance will grow by at least 15% annually for the next 10 years.

Foolish takeaway

Most people can happily sing you the virtues of having a quiet year of natural disasters. But in eventful years few businesses feel the effects as directly, or as significantly as the insurance industry. IAG has done particularly well over the last year at maximizing earnings while the sun is out and pursuing international growth strategies. The question on everybody’s minds is whether the other insurance companies can keep up.

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