The Australian economy – and, by extension, the ASX – tends to move in cycles. Fortunately, some S&P/ASX 200 Index (ASX: XJO) shares, like Insurance Australia Group Ltd (ASX: IAG), have inbuilt protection from the market's ebbs and flows.
With most experts agreeing 2023 will likely be a year of slowing economic growth in Australia, is now a good time to buy IAG shares? Let's take a look.
The IAG share price is currently trading at $4.96, 3.33% higher than its previous close. Meanwhile, the ASX 200 is down 0.07% in late trading.
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What makes IAG a defensive ASX 200 stock?
ASX shares tend to fall into one of two categories – defensive and cyclical. Generally, the earnings of cyclical companies, and their share prices, expand and contract alongside the economy and the market. Thus, investors might choose to lean on defensive shares during a downturn.
So, what might make IAG a defensive ASX 200 share? Answer: Pricing power.
The company provides insurance through brands including NRMA and CGU, to name a few.
Insurance providers can, within reason, set their own prices, as Wilsons equity strategist Rob Crookston notes, courtesy of my colleague Tony. And, boy, are they benefiting.
IAG posted a 25% jump in underlying profits for the first half, coming in at $252 million, thanks in part to a 7.5% jump in gross written premiums.
It's worth noting, however, that insurers can be cyclical in ways other than economic ebbs and flows. KPMG insurance partner Scott Guse recently commented:
Insurance is by its nature cyclical and only 3 years ago the insurers' profits were minimal, due to huge claims from the bushfires.
Is the ASX insurance share a buy right now?
Does that mean IAG shares are worth buying right now? Well, that depends on who you ask.
JPMorgan seems to think so. The broker has slapped an overweight rating and a $5.75 price target on the ASX 200 stock, The Australian reports. That marks a potential 15.9% upside.
But Goldman Sachs hasn't been convinced. It has a neutral rating and a $5.18 price target on IAG shares – a potential 4.4% upside.
Not to mention, the insurer revealed its natural perils costs reached $524 million last half – $70 million higher than its allowance. That concerned Shaw and Partners senior investment adviser Jeb Richards, who labelled IAG's shares a sell last month. He said, courtesy of The Bull:
Factors, such as global warming, continue to drive more volatile weather patterns and rising claims across the broader Australian insurance industry. We see better opportunities elsewhere.
