Insurance Australia Group Ltd (ASX: IAG) shares are down 1% today, currently trading for $4.60.
Despite that dip, the S&P/ASX 200 Index (ASX: XJO) general insurance group is still handily outperforming the benchmark index this year.
But could some wild spring weather threaten the performance of IAG shares in the months ahead?
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Another La Niña?
If you're a fan of cooler, wetter weather, the Bureau of Meteorology (BOM) has some potentially good news for you. Though not necessarily for the performance of IAG shares.
BOM has issued a La Niña alert. The agency reports that "renewed cooling in the tropical Pacific Ocean as well as climate models indicating La Niña is likely during the austral spring and early summer".
Based on historical trends, BOM estimates the likelihood of a La Niña event at some 70%. And that spells another run of probable "above-average rainfall for northern and eastern Australia during spring and summer".
IAG shares and shares of competitor Suncorp Group Ltd (ASX: SUN) were already hit with outsized payouts from the last rounds of flooding on the eastern coast.
And Morgan Stanley has warned that the insurers might be in for another round of flood-related payouts that could exceed the insurers' catastrophe budgets.
According to Morgan Stanley financials analyst, Andrei Stadnik (quoted by The Australian Financial Review):
Historically, a negative Indian Ocean Dipole plus La Niña have led to record losses. We see earnings and dividend risks for Suncorp and Insurance Australia, plus less capital optionality as both began the 2023 financial year with little excess capital.
IAG and Suncorp have both upped their catastrophe budgets for FY23, but Stadnik forecasts this may not be sufficient.
"If a third La Niña season eventuates, losses are likely to be more severe than what Suncorp and Insurance Australia have priced into budgets," he said.
Morgan Stanley has an underweight rating on both Suncorp and IAG shares.
It has a price target for IAG of $3.90, 15% below the current share price.
The broker has a $10.20 price target for Suncorp, 8% below the current share price.
How have IAG shares been tracking?
IAG shares are up 3% in 2022, outperforming the 6% year-to-date loss posted by the ASX 200.
