3 reasons why I would consider buying IAG shares now

It's a stronger environment for insurers these days.

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Insurance Australia Group Ltd (ASX: IAG) shares have had a good run, rising by 28% in 2023. For investors interested in the insurance giant, this could be a good time to consider the business as the company has a few positives going for it.  

It has been a very volatile time for the insurer over the past three years, as we can see on the chart below.

However, there are three big positives going for IAG shares at the moment that I'll point to.

Premium increases

One of the most useful things for an insurer is being able to charge more for the insurance offered to customers.

Inflation has enabled IAG and Suncorp Group Ltd (ASX: SUN) to increase their premiums. In FY23, the business is expecting to report that in FY23 its gross written premium (GWP) will grow by around 10%.

In a recent investor update given by the business, managing director and CEO Nick Hawkins said that its Australian second-half result could say "strong top-line growth, increased earned premiums, and improving claims trends".

Its New Zealand business is also seeing top-line growth and increased earned premiums.

This is the sort of business where it helps that Australia's population is rising because it means there are more cars and homes that need insuring.

If IAG maintains the same margins, then double-digit GWP growth will help increase the net profit in dollar terms, which can then help IAG shares.

Better margins are expected

IAG says the business is trending towards a reported insurance margin for the full 2023 financial year of around 10%.

The company recently increased its medium-term return on equity (ROE) target by one percentage point to a range of between 13% to 14%.

That improved ROE expectation is based on a medium-term insurance margin target of 15%. If it's able to achieve that target then it will be able to make stronger profits based on its GWP growth and profit margin growth.

It suggested the ROE target of 13% to 14% is "realistic and achievable over the medium term".

Stronger investment portfolio returns

A large part of the job of an insurer is to earn investment returns on the pool of premium money (until it's needed to pay a claim).

In the FY23 first-half result, the company said that higher yields will drive investment performance. Its $7.2 billion technical reserves were invested in fixed interest and cash, which can now earn much stronger yields thanks to higher interest rates.

In the first half of FY23, the technical reserve investment yield was 3.7%. IAG is expecting to report an 80 basis point improvement in the investment yield in the second half compared to the first half of FY23.

Stronger returns here are a real bonus for shareholders.

What's the IAG share price valuation?

According to Commsec, the IAG share price is valued at 16x FY24's estimated earnings. This isn't the cheapest price/earnings (P/E) ratio ever, but it reflects the stronger earnings environment for the ASX insurance share.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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