Are IAG shares a buy before reporting season?

Is this blue-chip a good buy today?

| More on:
A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Insurance Australia Group Ltd (ASX: IAG) share price performance has been very pleasing in 2024 to date. It has risen almost 30%, while the S&P/ASX 200 Index (ASX: XJO) has only risen around 6%.

Created with Highcharts 11.4.3Insurance Australia Group PriceZoom1M3M6MYTD1Y5Y10YALL31 Dec 202317 Jul 2024Zoom ▾Jan '24Feb '24Mar '24Apr '24May '24Jun '24Jul '24Jan '24Jan '24Mar '24Mar '24May '24May '24Jul '24Jul '24www.fool.com.au

We shouldn't try to predict where the IAG share price will be in two months. But, we can evaluate whether the ASX share is a good longer-term opportunity today.

Several factors have helped the insurer in recent times, including elevated premium increases (amid higher inflation), stronger investment earnings (thanks to higher bond yields and strong equity markets), and relatively stable natural peril events.

Soon enough, we will see the company's FY24 results during the August reporting season.

Recent developments

IAG announced last month that it had signed two five-year strategic agreements with global reinsurers to improve its "future financial stability".

The ASX insurance share said the long-term natural perils volatility protection with Berkshire Hathaway and Canada Lie Reinsurance provides "greater certainty over natural perils costs for customers." This provides up to $680 million of additional protection annually and up to $2.8 billion over the five-year period.

This will "effectively limit" IAG's natural peril costs to $1.28 billion in FY25, a 17% increase on the FY24 figure.

It also said it had purchased adverse development cover (ADC), which provides $650 million of protection for IAG's long-tail reserves of approximately $2.5 billion.

The company revealed it expects the FY24 reported insurance profit to be at the upper end of its $1.2 billion to $1.45 billion guidance range, compared to $803 million in FY23. The reported insurance margin is expected to be at the upper end of the 13.5% to 15.5% guidance range, taking into account the ADC cost.

FY24 gross written premium growth is expected to be consistent with its "low double-digit" guidance.

So, things are going well for the company, and it has made moves to reduce long-term volatility.

Is the IAG share price an opportunity?

The broker UBS suggested the reinsurance deals are "likely to improve investor perceptions of earnings quality."

UBS thinks the insurance margin will "push up through 16%" during FY25 after double-digit repricing during FY24. The broker then said:

We continue to believe consensus is under estimating peak-cycle margins, albeit the reinsurance deals announced today likely present a near-term drag. We are modelling a margin overshoot over the next 12-18 months, relative to mid-cycle guidance.

…A profit commission is payable in the event of favourable perils, effectively skewing IAG's exposure to the upside whilst protecting downside.

UBS then noted that the 10-year average for IAG shares' price/earnings (P/E) ratio is 15.5x, compared to the current IAG share valuation of 16.5x UBS' estimated earnings for FY25.

UBS concluded with comments on the valuation:

This looks somewhat demanding and we see better value in other GI [general insurance] names at present.

The broker has a $7.10 price target on IAG shares, which implies that shareholders will not see any capital growth in 12 months, considering the current share price is $7.11.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Financial Shares

A young boy wearing a hat, sunnies and striped singlet looks fierce and flexes his arm in victory.
Small Cap Shares

Forget CBA shares. What about small-cap ASX financial shares?

Analysts discuss 2 small-cap ASX financial shares that are up by more than 40% in 2025.

Read more »

Shot of a young businesswoman looking stressed out while working in an office.
Financial Shares

Challenger shares fall on big APRA news

Let's see what is weighing on this stock on Friday.

Read more »

Buy and sell written on silver cubes on a stock market chart.
Broker Notes

2 buys and 2 sells in the ASX 200 financials sector: analysts

We reveal what the experts think of these ASX 200 financial shares.

Read more »

Man smiling at a laptop because of a rising share price.
Financial Shares

Macquarie tips around 40% upside for GQG Partners shares

This stock could deliver big returns.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
Financial Shares

Macquarie tips 17% return for this ASX 200 stock

The broker is feeling bullish about this stock. Let's find out why.

Read more »

A female financial services professional with a manicured black afro hairstyle turns an ipad screen to show a client across the table a set of ASX shares figures in graph format.
Share Market News

Record CBA share price and blockbuster merger push ASX 200 financials sector to the top

ASX financial stocks led the 11 market sectors last week with a 1.95% gain.

Read more »

Man with rocket wings which have flames coming out of them.
Financial Shares

Up more than 900% in 5 years, can this ASX All Ords financials stock go higher?

The share price of this company has left others behind in the dust.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Financial Shares

HMC Capital shares are down 50% in 2025, can they turn around?

HMC Capital shares have plunged more than 50% this year, but with solid investments in energy, private credit, and data…

Read more »