How do you value the IAG (ASX:IAG) share price?

What are the company's shares really worth?

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The Insurance Australia Group Ltd (ASX: IAG) share price has been moving in circles throughout the year. This comes as the insurance giant has been battling allegations and regulatory headwinds.

Nonetheless, investors appear to have mixed feelings about the value of IAG shares in the current climate.

At Thursday's market close, IAG shares finished down 1.79% to $4.94.

How do you value IAG shares?

The most common way to value an ASX share is to calculate the company's price-to-earnings (P/E) ratio. Traditionally, this metric is used to provide more clarity if a company is overvalued or undervalued.

A P/E ratio can be broken down as the relationship between a company's share price and its earnings per share (EPS).

Currently, IAG has a P/E ratio of 28.99. The formula to work out the P/E ratio is the current share price divided by EPS.

Essentially, this means that the company can be viewed as expensive when compared to its peers. Banking and insurance company, Suncorp Group Ltd (ASX: SUN) holds a P/E ratio of 15.85, while QBE Insurance Group Ltd (ASX: QBE) is hovering around 16.37.

How is IAG performing lately?

IAG released a trading update at its annual general meeting (AGM) last week, highlighting growth for FY22.

Gross written premium (GWP) improved in the first quarter of the financial year, lifting in the mid-single digit range. Guidance for the full-year is forecasted to increase in the low single-digit area.

IAG is also on track to meet its reported insurance margin guidance of 13.5% to 15.5%. During the lockdowns in both Australia and New Zealand, lower vehicle claims were made by customers. This is partly offset by inflationary pressure on claims costs in the company's motor and home portfolios.

However, weighing down the overall result for the Q1 FY22 period came from elevated natural perils costs. Rough storm activity and the earthquakes in Victoria were primarily to blame. IAG has set aside $765 million as a natural perils allowance buffer for the financial year.

Swiss investment firm, UBS cut its rating on IAG shares to "neutral" from "buy" in mid-October. Its analysts reduced the 12-month price target by 5.3% to $5.35 apiece. At the present price, this implies an upside of about 8%.

IAG share price summary

It's been a rollercoaster ride for IAG shares, having moved unpredictably over the past 12 months. Its shares are currently up just 5% since this time last year.

Based on valuation metrics, IAG has a market capitalisation of around $12.18 billion, with approximately 2.47 billion shares on issue.

Motley Fool contributor Aaron Teboneras 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 owns shares of and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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