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Insurance Australia Group Ltd (ASX:IAG) has demonstrated a stellar performance in 2024, significantly outperforming the broader market. While the S&P/ASX 200 Index (ASX:XJO) has posted a modest gain of 3.5% this year, IAG's share price has surged over 26%, highlighting its exceptional run.
This impressive growth can be attributed to several key factors. Firstly, IAG has benefited from elevated insurance premiums, with many policies indexed to inflation, which has boosted revenue. Additionally, stronger investment earnings from higher bond yields have further supported the company’s financial performance. The broader stock market’s robust performance and a relatively stable period free from major natural peril events have also contributed to IAG’s positive results.
Reflecting on IAG's progress, it is clear that the groundwork laid in late 2023 has paid off. By December of that year, IAG had set the stage for a strong 2024, and its shares have since climbed substantially. However, with recent signs of a potential equity market slowdown, investors are questioning whether IAG remains a strong buy.
In June 2024, IAG announced significant strategic agreements with global reinsurers, including subsidiaries of Berkshire Hathaway, the conglomerate led by Warren Buffett. These five-year agreements are designed to enhance IAG’s financial stability by providing up to AU$680 million of additional protection annually, extending to AU$2.8 billion over the full term. This arrangement is expected to cap IAG's natural peril costs at AU$1.28 billion for FY25, marking a 17% increase from FY24. Additionally, IAG secured approximately AU$2.5 billion of cover for its long-tail reserves.
These measures are seen as crucial for managing risk and ensuring financial resilience. Investors responded positively to these updates, alongside IAG’s confirmation of its FY24 guidance for insurance profits. The company projected insurance profits to range between AU$ 1.2 billion and AU$ 1.45 billion, with an insurance margin of 13.5%–15.5%. In its first-half FY24 results, IAG reported a 12.5% increase in gross written premiums to AU$ 7.9 billion and a near 75% rise in insurance profit to AU$ 614 million. The interim dividend of 10 cents per share further buoyed investor confidence, driving IAG’s share price to a 52-week high of AU$7.17 on July 11.
Goldman Sachs also maintains a neutral stance on IAG, with a 12-month price target of AU$6.72. The firm highlights risks such as potential volume loss due to rate increases and persistent claims inflation, though it recognizes IAG's robust performance in the current interest rate cycle.
