Insurance Australia Group Ltd (ASX: IAG) shares have soared 28% over the past 12 months.
And that's not including the dividends.
At the current price of $5.67, shares in the S&PASX 200 Index (ASX: XJO) insurance stock trade on a 2.6% trailing yield.
IAG's final FY 2023 dividend was up 80% from FY 2022 amid an 8.2% year on year increase in revenue, which reached $19.9 billion. And net profit after tax (NPAT) soared 140% year on year to $832 million.
The strong FY 2023 performance came during a period of rising interest rates and insurance premiums. And it was delivered despite soaring weather-related claims.
So, could IAG shares deliver a repeat or even stronger performance over the 12 months ahead?
El Nino and IAG shares
First, to the weather!
As mentioned, IAG shares managed to outperform over the past year despite a 20% increase in total claims, which reached approximately $10.2 billion.
This was driven by a series of inclement weather events linked to El Nina, which tends to bring cooler wetter weather. Those included the devastating rains and floods around Auckland, New Zealand. And the costly, damaging floods on Australia's east coast.
But we could be in for a big change. While the Bureau of Meteorology remains on the fence, it is still forecasting a 70% chance El Nino will impact Australia and New Zealand this summer.
That would usher in warmer, drier weather. While this could see more bushfires, those tend to be less costly for insurers than major floods, so would likely present a lesser drag on IAG shares.
Indeed, as The Syndey Morning Herald reported, Jarden analysts estimate that over the last 50 years insurers' catastrophe costs in Australia and New Zealand during El Nino periods have been roughly half of what they tend to be during El Nina periods.
Jarden noted this presented a potential "upside risk" for IAG shares.
Morgan Stanley analysts concurred, noting insurers like IAG are "well-placed to over-earn during El Nino".
UBS analyst Scott Russell added, "I think there's a cycle that benefits insurance claims as we move to El Nino. I think investors are conscious of it."
What else could impact the ASX 200 insurer?
IAG shares have also been benefiting from the steep increases in insurance premiums pushed through over the past 12 months.
And, unlike many companies hit with higher debt repayments amid fast rising interest rates, the higher rate environment has benefited the ASX 200 insurer, improving its returns from those premiums in which it invests.
In FY 2023 IAG's reported credit margin increased to 9.6%, up from 7.4% in FY 2022.
Mike O'Neill is a portfolio manager at IML, which owns IAG shares along with Suncorp Group Ltd (ASX: SUN) and Medibank Private Ltd (ASX: MPL).
Commenting on the impact of rising rates on the insurance sector, O'Neill said, "In 2022, the earnings they earned on their investments to back future claims was 1.5%. In the last year, it's risen to 5%. So this benefits companies we own such as Medibank, Suncorp and IAG."
