Insurance Australia Group Ltd (ASX: IAG) shares have been in sensational form over the last 12 months.
As you can see on the chart below, during this time the insurance giant's shares have risen 33%.
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Can IAG shares keep rising?
Unfortunately, one leading broker believes that IAG shares could now have peaked and be in danger of a sizeable pullback.
According to a note out of Goldman Sachs, its analysts have retained their neutral rating and $5.29 price target on the company's shares.
Based on the current IAG share price of $5.78, this implies a potential downside of 8.5% for investors over the next 12 months.
What did the broker say?
While Goldman is a fan of the company, it believes a better risk/reward is on offer with rival Suncorp Group Ltd (ASX: SUN). It currently has a buy rating and a $14.53 price target on its shares.
The broker also highlights that it has concerns that recent price increases could impact volumes and fears that IAG's FY 2023 perils allowance may not be sufficient. It explains:
IAG is one of Australia's largest Personal and Commercial insurance companies. We are Neutral on IAG on a relative basis. IAG is slightly more expensive than SUN and there is less upside to our TP.
We like IAG because 1) Rate cycle is strong across both personal and commercial in Australia. 2) IAG is targeting substantial earnings improvement on its Intermediated Insurance business. 3) Operating leverage on its expense ratio from largely rate driven strong top line growth. 4) IAG has capital flexibility noting possible redundancy in its reserving position with respect to business interruption. 5) Yield curve benefits. However, we are concerned about 1) Volume loss in response to rate increases. 2) Sufficiency of FY23 perils allowance. 3) Continuing non QS reinsurance cost pressures.
