Insurance Australia Group Ltd (ASX: IAG) shares have sunk 15% in the past week, which raises the question of whether the insurance giant is an opportunity or not.
Clearly, investors have not taken kindly to what the ASX insurance giant reported in its FY25 half-year result. This is the company behind names like CGU, NRMA, WFI, ROLLiN', Swann Insurance, AMI, State, NZI, and Lumley.
The company recently announced its performance for the six months ending 31 December 2024, so let's review what was reported to the market.
Earnings recap
On the face of it, the numbers seemed quite impressive.
IAG reported that its net profit after tax (NPAT) grew by 91.2% to $778 million, insurance profit rose 55.9% to $957 million, and the interim dividend per share was hiked by 20% to 12 cents per share.
These results were driven by gross written premium (GWP) growth of 6% to $8.4 billion, while the net earned premium increased 9.7% to $4.93 billion.
The company has guided that its reported insurance profit will be between $1.4 billion and $1.6 billion. This includes FY25 natural peril costs of $1.28 billion and FY25 second-half costs of $857 million (compared to $426 million in the first half of FY25).
Within that guidance, it also assumes continued positive momentum in its underlying performance, no material reserve releases or strengthening, and no material movement in macroeconomic conditions, including foreign exchange rates or investment markets.
IAG also said it expects GWP growth towards the lower end of the mid-to-high single digits, based on improving claims trends and lower reinsurance costs driving a moderation in premium increases.
Is the IAG share price a buy?
The broker UBS noted that while IAG expects to remain disciplined and price its insurance in line with slowing claims inflation, "it would appear something has to give – either pricing or volume ambitions".
UBS thinks there is lower scope for underlying earnings upside from here. The broker forecasts premium growth to slow to 4.3% in the second half of FY25, taking the overall FY25 growth forecast to 5.1%, which is consistent with IAG's outlook of the low end of its mid-to-high single-digit range.
Taking all of the above into account, UBS currently has a neutral rating on IAG shares, with a price target of $8.60. That implies the insurance business could see a rise of 14% from the current valuation.
So, the broker is seeing a potential double-digit return from where it is right now, but it may not be a major opportunity.
