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%.
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.
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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.
