Insurance Australia Group Ltd (ASX: IAG) shares would have been a great addition to a portfolio in 2023.
That's because the insurance giant's shares absolutely thumped the market with a very strong gain over the 12 months.
Over the period, IAG shares rose an impressive 19.2%, which is more than double the return of the ASX 200 index.
In addition, the company paid out 15 cents per share in dividends. This represents a 3.15% dividend yield and stretches its total return to almost 22.5%.
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Why did IAG shares race higher last year?
Investors were buying IAG and other ASX insurance shares last year for a number of reasons.
In the case of IAG, a recent note out of Goldman Sachs summarises why investors were hitting the buy button. It said:
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.
In addition, a strong performance in FY 2023 helped drive IAG shares higher.
For the 12 months ended 30 June, the company reported a 10.6% increase in gross written premium to $14.7 billion and a massive 140% increase in net profit after tax to $832 million.
Management advised that its FY 2023 result was driven by steps it took in 2021 to reset the business with a simpler operating model and a greater focus on our core business.
Where next for its shares?
Goldman Sachs feels its shares are about fair value now. It has a neutral rating and a $6 price target, which is just a touch higher than its current share price of $5.84.
However, Macquarie has an outperform rating and a $6.30 price target and Citi has a buy rating and a $6.50 price target. The latter suggests a potential upside of 11% for investors.
