The Insurance Australia Group Ltd (ASX: IAG) share price has done very well in 2023, it has risen by over 20%. The S&P/ASX 200 Index (ASX: XJO) has only gone up by 1.2%.
After such strong outperformance, it's worth asking whether IAG shares are still worth buying.
The last few years have been tricky for the company – storms and flooding hurt profitability, and low interest rates meant it wasn't able to earn much on its bond investments.
Things are looking up for the company, so let's look at some of those positive factors.
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Are IAG shares worth buying?
The weather has been a negative in recent years, but that may become less of a headwind for the foreseeable future.
La Nina has now changed into El Nino, and there is also now a positive Indian Ocean Dipole (IOD). It's the first time in eight years that both climate patterns have happened at once, which could mean fewer storms and flooding. That could be a very material benefit for profitability over the next few years.
As reported by my colleague Bernd Struben, Jarden analysis suggests that in the past 50 years, insurers' catastrophe costs in Australia and New Zealand during El Nino periods have been roughly half of what they tend to be during La Nina periods. This could be very helpful for IAG shares.
Second, with interest rates now much higher, the company is able to generate a very solid return on its cash and bond holdings. In FY23, the company saw an approximate 250 basis point (2.50%) investment yield improvement in FY23, with a 4.3% return versus 1.8% in FY22. In the second half of FY23, the yield was 5%.
Third, there is likely to be another good year of gross written premium (GWP) growth. In FY24, GWP growth is expected to be in the low double digits.
Fourth, profit margins are expected to increase. In FY24 the business is expecting the reported insurance margin will be between 13.5% to 15.5%. In F23, its reported insurance margin was 9.6% and the underlying insurance margin was 12.6%.
According to Factset, there are currently three buy ratings on the business, seven hold ratings and two sell ratings.
Valuation
On Commsec, the business is currently valued at under 17 times FY24's estimated earnings.
Things are going IAG's way, though the IAG share price has gone up and investors have certainly recognised that better potential.
Time will tell whether it's still underappreciated or whether this is now a fair value.
