It can be a challenge to outperform the S&P/ASX 200 Index (ASX: XJO) at the best of times. Yet, the Insurance Australia Group Ltd (ASX: IAG) share price has been one of the top 20 index constituents to outperform the benchmark the most this year.
Over the last 10 months, shares in the general insurance company have surged 14.8% to the upside. Meanwhile, the broad market index has fallen more than 10% to the wayside.
So, how has a seemingly 'boring' business like IAG made such a solid return for investors of late?
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Boring can be beautiful
At its core, investing is about owning portions of great companies with the ability to accrue profits over time. Ideally, you want to invest in a company at the right price. Though, what the 'right price' is a question only answered in retrospect.
One way a company can be temporarily undervalued — or cheap — is for the broader market to underestimate its earning potential. This opportunity can manifest when most underestimate the duration for which the company can generate profits or the size of those annual earnings.
This situation might be playing out for the IAG share price in 2022, as we look at the company's earnings and share price fluctuations over the last couple of years.
Between the start of 2020 and 2022, shares in the insurance provider fell 44%. The combination of an increase in natural disaster occurrences and COVID-19 weighed on the company.
Namely, IAG created a $950 million provision in the event it would need to cover claims pertaining to business interruption insurance due to the pandemic. Due to the provision, IAG's statutory earnings have been reduced.
Meanwhile, the company's cash from operations between the start of 2020 and now have increased. Specifically, IAG generated $899 million in operational cash flow for the 12 months ending 30 June 2022. This compares with $407 million as at December 2020.
As we recently reported, $350 million of those provisions are now being returned to shareholders in the form of a share buyback. This follows the High Court denying appeals against COVID-19-related claims.
Is the IAG share price a buy still?
At present, IAG shares are trading on a rather rich price-to-earnings (P/E) ratio of 36 times. For reference, the global insurance industry average is 11.4 times earnings.
Despite this, deputy head of equities at Perpetual Limited (ASX: PPT) Vince Pezzullo shared his liking for IAG in a post on Livewire last month. According to the portfolio manager, IAG could be trading at a discount.
In addition to the solid IAG share price growth, the company offers a reasonable dividend yield of 2.3%.
