Will Insurance Australia Group Ltd’s share price hit $7 in 2016?

Part of any investment decision involves asking yourself the question ‘where do I see the share price of this company in 1, 3, 5, or 10 years’ time?’

Every investor wants share prices to go up. Sure, some are more concerned with dividends and capital protection (not losing money) than capital gains, but you won’t find an investor who says ‘no’ to capital gains.

With this in mind, where is the share price of Insurance Australia Group Ltd (ASX: IAG) likely to head in 2016?

For a number of reasons, I find it unlikely that the performance of the company will drive its share price higher. The Australian and New Zealand regions are facing low interest rates and bond yields (that will possibly go lower) that will limit the returns on some of IAG’s investment portfolio.

The housing market is slowing, which could impact house values, hurt insurance premiums or at least limit premium growth. Consumer confidence is flat and while spending remains strong, higher unemployment and or market shocks (e.g. in housing, the stock market, or international markets) could cause consumers to start saving.

While less likely to have a direct impact this could reduce demand for insurance on new cars or household items as well as increase price competition between insurers, pressuring margins. Motor vehicle insurance is a major earner for IAG, accounting for approximately 30% of its revenue over the past decade.

All these factors are highly likely to impact IAG and Suncorp Group Ltd (ASX: SUN) because both insurers earn more than 97% of their Gross Written Premium from the ANZ region. By contrast, QBE Insurance Group Ltd (ASX: QBE) makes just 22% of its insurance revenue from that region.

There are a number of non-performance related outcomes that could prop up share prices. These are potential takeover interest from Chinese bidders, private equity, or additional buying interest from Warren Buffett, whose company owns 3.7% of IAG.

Without such a catalyst, though, I do not believe IAG’s business will perform well enough to drive its price substantially higher, and I do not believe shares will hit $7 apiece in 2016.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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