The Insurance Australia Group Ltd (ASX: IAG) share price has gone up 26% over the past year, markedly outperforming the S&P/ASX 200 Index (ASX: XJO) which has only gone up by 5.5% over the same time period.
IAG is one of the largest insurers in Australia and New Zealand. In Australia, it operates brands like NRMA Insurance, CGU, SGIO, SGIC, Swann Insurance, WFI and ROLLiN'. In New Zealand, it has brands like NZI, State and AMI (New Zealand).
The ASX insurance giant says that it underwrites more than $13 billion of premiums per annum.
What has been driving the IAG share price higher?
The company has been reporting a pleasing increase in profitability.
In the FY23 first-half result, it said that gross written premium (GWP) went up 7.5% to $7 billion, while the net earned premium rose by 3.8% to $4.1 billion. The insurance profit was 24.1% higher than the prior corresponding period.
The insurer also reported that the reported insurance margin improved by 140 basis points to 8.5% and the net profit at tax (NPAT) grew by 170.5% to $468 million. Meanwhile, the cash earnings went up by 26.7% to $223 million.
IAG said that it "maintained good cost discipline" and its focus on growth and profitability delivered the strongest first-half gross written premium growth in seven years.
GWP growth for IAG shares was "driven by rate increases, to offset the high inflation in the supply chain, as well as customer number growth in the home and motor portfolios."
What to expect in FY24 (or beyond)?
The company says that it's making "solid inroads" against its strategic priorities and medium-term ambitions.
The intermediated insurance Australia (IIA) business is aiming for a $250 million profit in FY24, benefiting from a number of initiatives, such as "embedding a simplified operating model and upgraded pricing and underwriting capabilities."
Pleasingly, IAG said that customer take-up of digital channels gained traction, which could help with margins.
Another element to consider is that the wetter La Nina period is coming to an end, which could mean fewer damaging storms and floods that hurt IAG's earnings. I think El Nino, which means hotter, drier weather, may mean increased profitability.
IAG and other insurers are pushing through large price increases, which could help boost the company's profitability as well. The company said that its retention levels in the first half of FY23 were high for motor and home, at more than 91% and respectively.
In the medium term, the company is targeting an insurance margin of between 15% to 17%, and it's aiming for a reported return on equity (ROE) of 12% to 13%. IAG shares would likely benefit if the company can hit these targets.
The company is aiming to increase its customer base by 1 million to 9.5 million by FY26, with more than 80% of its customer interactions done digitally across its channels.
Further simplification and efficiencies in the business are aimed at maintaining its cost base at around $2.5 billion.
In FY24, the business is projected to generate earnings per share (EPS) of 35.2 cents. At the current IAG share price that puts the insurer at 16 times FY24's estimated earnings.
The combination of higher interest rates, higher insurance premiums and a change of the weather could be a really good boost for earnings over the next year or two.
