Shares in Insurance Australia Group Ltd (ASX: IAG) are trading down today and are currently around 1% in the red at $4.56 apiece.
Whilst other sectors have struggled this year to date, financial stocks like IAG have out-crept most peers, with the insurance giant gaining 7% in 2022 so far.
After a choppy year last year, IAG shareholders will surely be hoping the future holds a better outcome than the volatility of 2021.
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One broker is cautious, but bullish on IAG shares
Analysts at JP Morgan are overweight on IAG shares and reckon the stock has room to grow on grounds of valuation and earnings.
After IAG provided its most recent claims update following the east coast flooding events, the broker was satisfied the insurer has most of its bases covered but still thinks reinsurance costs and perils allowances will increase.
"We think that there will be increases in both reinsurance costs for IAG's aggregate due to renew in July 2022, and some increase in perils allowances for FY22 to reflect the experience likely being around $335 million worse than the $765 million originally guided," it said.
"We think this could be worth perhaps a $90 million headwind to underlying insurance profit in FY22; equal to 1.1% of NEP in the absence of the government cyclone and related flood damage pool".
JP Morgan also said there's "no doubt" direct pricing on home premiums will rise, but there might be a lag effect considering the outplay of similar events in the past, it reckons.
Offsetting these pressures, the broker says, "will be strong upward pressures evident in commercial insurance pricing."
Even with these points in mind, its analysts are bullish on the stock, valuing the company at $5.50 on a blend of its discounted cash flow model and forward earnings multiples.
However, despite its enthusiasm on valuation, the broker is treading carefully and cautioned its investors on the uncertainties moving forward.
"We maintain an element of caution in setting our price target, reflecting uncertainty as to how personal lines insurers may trade coming as economies emerge from COVID-19 induced lockdowns, and mobility increases," JP Morgan said.
IAG share price snapshot
In the last 12 months, the IAG share price has fallen more than 6% into the red but it is up 7% this year to date.
During the past month, the IAG share price slid again and is 4% down.
