Will Insurance Australia Group Ltd's share price hit $7 in 2016?

Or are investors better off forgetting Insurance Australia Group Ltd (ASX:IAG)?

| More on:
a woman

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

Part of any investment decision involves asking yourself the question 'where do I see the share price of this company in 1, 3, 5, or 10 years' time?'

Every investor wants share prices to go up. Sure, some are more concerned with dividends and capital protection (not losing money) than capital gains, but you won't find an investor who says 'no' to capital gains.

With this in mind, where is the share price of Insurance Australia Group Ltd (ASX: IAG) likely to head in 2016?

For a number of reasons, I find it unlikely that the performance of the company will drive its share price higher. The Australian and New Zealand regions are facing low interest rates and bond yields (that will possibly go lower) that will limit the returns on some of IAG's investment portfolio.

The housing market is slowing, which could impact house values, hurt insurance premiums or at least limit premium growth. Consumer confidence is flat and while spending remains strong, higher unemployment and or market shocks (e.g. in housing, the stock market, or international markets) could cause consumers to start saving.

While less likely to have a direct impact this could reduce demand for insurance on new cars or household items as well as increase price competition between insurers, pressuring margins. Motor vehicle insurance is a major earner for IAG, accounting for approximately 30% of its revenue over the past decade.

All these factors are highly likely to impact IAG and Suncorp Group Ltd (ASX: SUN) because both insurers earn more than 97% of their Gross Written Premium from the ANZ region. By contrast, QBE Insurance Group Ltd (ASX: QBE) makes just 22% of its insurance revenue from that region.

There are a number of non-performance related outcomes that could prop up share prices. These are potential takeover interest from Chinese bidders, private equity, or additional buying interest from Warren Buffett, whose company owns 3.7% of IAG.

Without such a catalyst, though, I do not believe IAG's business will perform well enough to drive its price substantially higher, and I do not believe shares will hit $7 apiece in 2016.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »