Up 26% this year, what's the view on IAG Shares?

Momentum is behind the insurance giant's stock.

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Insurance Australia Group Ltd (ASX: IAG) shares have surged 26% this year to date and are trading at $7.16 per share at the time of writing.

It's been a blockbuster twelve months for the insurance giant. From July through December 2023, the stock traded in a range of around $5.50 to $6.10 per share.

But as we rolled into the new year, things changed. It has now rallied from lows of $5.55 in January to its current levels.

With such impressive gains, you might wonder if it's too late to buy IAG shares. Let's dive into what's driving this performance and what to expect moving forward.

IAG shares surge this year

IAG shares are up this year following a number of company-specific updates. The most recent gains are partly due to a $2.5 billion, five-year agreement with Berkshire Hathaway Inc's subsidiaries for reinsurance protection.

This deal provides IAG with up to $680 million in additional protection per annum starting in FY 2025. It aims to cap natural perils costs at $1.28 billion this financial year.

Investors may have been bullish, given that Berkshire is Warren Buffett's conglomerate. Or, it may be due to the company's reinforced position, as its CEO said it plays a "critical role as an economic shock absorber" in Australia and New Zealand.

IAG's HY FY24 financials were also reasonably strong.

Gross written premium (GWP) increased by 12.5% to $7.9 billion, whereas insurance profit rose by nearly 75% to $614 million.

The company also declared an interim dividend of 10 cents per share and announced a $200 million on-market share buyback. These are shareholder-friendly moves, in my view.

Investors seem to think so as well. Since the insurer posted its half-year numbers in February, IAG is up by $1.10 per share.

What's the view on IAG shares?

We can never predict the stock market's future movements. But one thing for sure is that we don't want to overpay to buy a share.

IAG shares currently trade on a price-to-earnings ratio (P/E) of 22.6 times. This says that investors are paying $22 for every $1 of the company's earnings.

This is more expensive than the 18 times multiple for the iShares Core S&P/ASX 200 ETF (ASX: IOZ), which tracks the benchmark index.

Therefore, you are paying a premium in buying IAG today.

What do analysts say?

Analysts are also split on whether to buy the company now or not.

Goldman Sachs has a neutral rating on IAG shares and a 12-month price target of $6.72. It notes potential risks like volume loss due to rate increases and persistent claims inflation.

However, it also acknowledges IAG's strong rate cycle and capital flexibility. The "operating leverage on its expense ratio" could also drive growth, it says.

Citi, on the other hand, favours IAG over rival Suncorp Group Ltd (ASX: SUN) due to its cost-cutting opportunities and earnings growth. But it values the stock at $6.75 apiece – around 6% lower than where it currently trades.

CommSec data indicates that the consensus of analyst ratings for IAG shares is a moderate buy, with 5 buy ratings and 7 hold ratings.

At the time my colleague Bronwyn covered IAG back in May, this split was 4 rating it a buy, 9 rating it a hold, and 1 analyst rating it a sell.

As such there is now 1 more firm that rates IAG a buy versus 2 months ago, and none rating it a sell.

Foolish takeaway

In my opinion, the view on IAG shares is currently bullish. Although, whilst some brokers are bullish, the stock has rallied past their price targets. There is no saying if they will revise these numbers.

One thing is true – the stock has several tailwinds behind it. But the risk is in overpaying at a 22 times P/E ratio, which is higher than the ETF tracking the benchmark index.

Regardless of the outcome, remember to conduct your own due diligence.

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