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.
