Insurance Australia Group Ltd (ASX: IAG) shares have continued their ascent on Monday.
So much so, the insurance giant's shares hit a new 52-week high of $5.59 earlier today.
This means that IAG's shares are now up approximately 33% since this time last year, as you can see on the chart below.
What is driving IAG shares higher?
Investors have been bidding IAG shares higher on the belief that rising policy premiums are going to boost the company's profits.
This follows the company's recent investor day update, which revealed that management is confident it will achieve its guidance of around 10% gross written premium (GWP) growth in FY 2023.
The company's CEO, Nick Hawkins, commented:
Our Australian businesses are expected to deliver improved second half results reflecting strong top-line growth, increased earned premiums, and improving claims trends.
But how sustainable are premium increases in the current environment? Well, at the moment, it is looking good for the company, with retention levels remaining elevated. But with the cost of living crisis starting to squeeze budgets, there are a few concerns that premium increases could soon start to hit customer numbers.
A recent note out of Goldman Sachs highlights that there are emerging signs that policyholders could be starting to feel the effect of these rises.
Commenting on the company's decision to recalibrate its medium-term margin guidance down to 15%, the broker said:
We think these target settings are intended to reflect more sustainable earnings targets that are also conducive to organic growth in what is being flagged as a competitive environment alongside possible emerging affordability pressures (noting comments suggest retention is still strong).
Medium-term organic customer growth targets have been adjusted to reflect short-term focus on margin repair – i.e., 750k new customers targeted by FY26 in Direct down from 1 million (which will likely take a couple of years longer).
Can its shares keep rising?
Goldman isn't buying at current levels and appears to believe the risk is now to the downside for IAG shares. It adds:
We maintain a Neutral rating on IAG reflecting ongoing caution on 2H23 underlying margin guidance. We think the margin trajectory into FY24 may not be as strong as underlying trends suggest reflecting commentary from management around reinsurance / perils allowances against a backdrop of a 15% medium-term margin target and an increasingly competitive environment.
Goldman has a neutral rating and $5.29 price target on its shares.
