The Insurance Australia Group Ltd (ASX: IAG) share price has risen 33% since the start of 2024. After such a strong run, investors may be wondering whether the business can keep rising.
Investors have been impressed by the company's profit growth and expectations for the upcoming financial year.
The inflationary period has been challenging for many households and businesses, though some sectors have benefited. The insurance giants are one area where there has been abundant profit growth over the last couple of years.
The FY24 result saw overall net profit increase by 7.9% to $898 million and insurance profit jump 79.1% to $1.44 billion. This was helped by an 11.3% rise in gross written premiums to $16.4 billion and an 11% increase in net earned premiums to $9.2 billion. Natural perils costs were $983 million, $115 million below the $1.1 billion allowance, which also helped the insurance profit.
Strong, better-than-expected profit growth can excite investors, and I think that's what we've seen with the IAG share price since 2024.
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What are the prospects for FY25?
The market is already expecting a good 2025 financial year.
Broker UBS believes the overall net profit could increase to $1.09 billion in FY25, a 21% increase from the previous year.
The broker thinks IAG's FY24 result demonstrated "strong margin expansion" and that the FY25 profit margin guidance range of between 13.5% to 15.5% appears to be "on the conservative side".
UBS' analysts suggest that a lower attritional loss ratio and costs were the consistent drivers in each division. Due to recent repricing "in excess of claims inflation", the broker thinks margins will remain strong into FY25. However, UBS is expecting higher reinsurance costs from 1 July and a higher catastrophe budget.
Therefore, UBS is forecasting that the FY25 margin will be at the top end of the guidance range at 15.5%.
The broker is also expecting IAG to pay an annual dividend per share of 29 cents. This would be a partially franked dividend yield of 3.9%.
Can the IAG share price keep rising?
UBS has a price target of $7.10, which is where analysts think the IAG share price will be in 12 months from now. That implies that the insurance business could fall 5% from where it is today.
The broker explained its view:
We continue to like the GI [general insurance] space at present and see strong profitability sustaining into FY25 at least. However, IAG shares are not cheap, in our view, and so we retain a neutral rating with a price target of $7.10.
According to UBS, the IAG share price is valued at 17x FY25's estimated earnings.
