IAG share price reaches new 5-year high! What next?

It's been a great period for the insurance giant. Could it keep rising?

| More on:
A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Insurance Australia Group Ltd (ASX: IAG) share price reached a new five-year high of $8.30 in morning trade today. However, it has dropped back since then.

As the chart above shows, the IAG share price has climbed more than 40% in 2024 to date. That compares to a rise of just 9% for the S&P/ASX 200 Index (ASX: XJO), so clearly, the insurance giant has delivered significant outperformance.

What is IAG exactly? The business is the name behind insurance brands like NRMA Insurance, CGU, WFI, ROLLiN', NZI, State and AMI.

From my perspective, the IAG share price is being driven by good operating conditions for the company. Let's look into its recent financial updates.

Strong performance for insurance

FY24 was a strong year for the business, with an 11% increase in net earned premiums to $9.2 billion and an improvement in the underlying insurance margin. These factors enabled the company to make a pre-tax insurance profit of $1.4 billion and $898 million in net profit. It also achieved higher investment income on shareholders' funds.

The stronger profits helped the business hike its annual dividend per share by 80% to 27 cents per share. It also announced a further on-market share buyback of up to $350 million, which was on top of the $550 million share buyback it had already been carrying out.

IAG continues to target a high level of profitability.

The business is aiming for through-the-cycle returns of a 15% insurance margin and a return on equity (ROE) of between 14% and 15%. For FY25, it's targeting an insurance margin of between 13.5% and 15.5%, with gross written premium (GWP) growth in the mid to high single digits.

The above guidance includes an assumption that natural perils will be around 18% more than the allowance last year. IAG said at its annual general meeting (AGM) that it had relatively low natural perils in the first quarter and that it's on track to deliver its guidance.

Can the IAG share price keep rising?

I often say that earnings growth is essential for a share price to sustainably rise.

The broker UBS is forecasting that IAG's net profit could rise by 21% to $1.09 billion. At the current IAG share price, UBS' numbers suggest the IAG share price is trading at 19x FY25's estimated earnings.

However, based on the current valuation, UBS thinks the insurance business is priced fairly expensively. It currently has a neutral rating on the business but with a price target of $7.10.

A price target is where analysts think the share price will be in a year from the time of the investment call. The UBS price target implies the IAG share price could decline 13% from here during 2025. So, while it's possible the IAG share price could keep rising in the shorter term, the more it climbs, the more expensive it would become. That could make future shorter-term gains less likely, in my view.

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.

More on Financial Shares

A man holds his head as he looks at his laptop and contemplates more bills to pay.
Financial Shares

Down 19%! Is the GQG share price selloff an overreaction and buying opportunity?

Is now the time to pounce on this beaten down stock? Let's see what Goldman Sachs is saying.

Read more »

Shot of a young businesswoman looking stressed out while working in an office.
Financial Shares

This $7 billion ASX 200 stock just crashed 11%. What's going on?

There's trouble in India and it's weighing on this stock today.

Read more »

A happy male investor turns around on his chair to look at a friend while a laptop runs on his desk showing share price movements
Financial Shares

Here's what this top broker is saying about Macquarie shares

Is this investment bank heading to a new record high?

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Financial Shares

Up 25% in a year, why this ASX All Ords stock has 'plenty more upside'

Analysts think this stock could still have plenty of gas left in its tank.

Read more »

Two people climb to the summit and raise their arms in success as the sun rises brightly over the mountains.
Financial Shares

'Strong momentum': 2 ASX financial shares backed by top fundie for 2025

ASX financial shares had a strong trading session on Tuesday with several new price records set.

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Financial Shares

AMP shares on radar as M&A spotlight shines bright

The stock has rallied hard in 2024.

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Financial Shares

Are IAG shares still a buy for dividends at a 5-year high?

Here's my take on IAG's place in an income portfolio today.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Financial Shares

After ResMed's 60% rise, this investor is now bullish on the 'most hated' ASX stock

Sometimes it pays to be a contrarian.

Read more »