The Insurance Australia Group Ltd (ASX: IAG) share price hit a three-year high of $5.92 today.
IAG shares are among a trio of ASX insurance stocks to hit new price highs this month.
One of the drivers behind the IAG share price surge is steadily rising premiums well above inflation.
Insurers have been able to bump up their prices pretty easily because insurance is among the goods and services that Aussies still want despite cost of living pressures.
IAG recently announced it expects to achieve 10% gross written premium growth in FY23. This is above even the peak rate of annual inflation in Australia, which was 8.4% back in December 2022.
In its FY23 half-year results, IAG announced a 170.5% increase in net profit after tax (NPAT) to $468 million.
This has been driven by IAG's Australian businesses, which are expected to deliver "improved second half results reflecting strong top-line growth, increased earned premiums, and improving claims trends", according to IAG CEO Nick Hawkins.
IAG share price up 31% in 12 months
If we take a look at the 12-month share price performance of the three major ASX insurance shares, we see the IAG share price has experienced 31% growth.
- The QBE Insurance Group Ltd (ASX: QBE) share price is up 35.7%
- The Insurance Australia Group Ltd (ASX: IAG) share price is up 31.2%
- The Suncorp Group Ltd (ASX: SUN) share price is up 21.8%.
The IAG share price was among the top five best-performing ASX financial shares of FY23.
Is it too late to buy IAG shares?
IAG held a successful investor day last month and released a new presentation.
Hawkins revealed IAG has increased its medium-term return on equity (ROE) target by 1% to a range of 13% to 14%. This is based on a medium-term insurance margin target of 15%.
Hawkins explains:
The strong top-line growth we're achieving, and the improved investment returns we are seeing on shareholder funds, means an increased ROE target of 13%-14% is realistic and achievable over the medium term.
The investment team at the listed investment company (LIC) WAM Leaders Ltd (ASX: WLE) thought the investor day was a "turning point" for a "beleaguered stock" over the past few years.
The fund manager said:
We remain optimistic on Insurance Australia Group as premium rate increases exceed claims inflation and we are likely entering an El Nino weather event, which is typically associated with less frequent natural catastrophes.
However, Goldman Sachs thinks a share price pullback is likely for IAG.
The broker has a neutral rating on IAG shares with a price target of $5.29. This implies a 10.6% potential downside from today's three-year high.
The broker likes the business but has a few concerns:
IAG is one of Australia's largest Personal and Commercial insurance companies. We are Neutral on IAG on a relative basis.
We like IAG because 1) Rate cycle is strong across both personal and commercial in Australia. 2) IAG is targeting substantial earnings improvement on its Intermediated Insurance business. 3) Operating leverage on its expense ratio from largely rate driven strong top line growth. 4) IAG has capital flexibility noting possible redundancy in its reserving position with respect to business interruption. 5) Yield curve benefits. However, we are concerned about 1) Volume loss in response to rate increases. 2) Sufficiency of FY23 perils allowance. 3) Continuing non QS reinsurance cost pressures.
The Australian reports that Morgan Stanley thinks rising premiums are a short-term tailwind for IAG.
At some point though, customers will stop accepting the premium increases and start shopping around.
The broker reckons IAG is already "exposed to losing market share to rivals".
IAG will release its full-year results on 21 August.
