Looking to buy IAG shares but worried about where the growth will … – The Motley Fool Australia

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The outlook for the insurance group’s share price is clouded but here’s what you need to know.
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The Insurance Australia Group Ltd (ASX: IAG) share price closed in the green today, recovering from a dip after the company released its FY22 results last week.
The insurance giant’s shares gained 1.53% during Wednesday trade to $4.65 apiece. That takes the company’s share price to around the same level it was when it delivered its results last Friday.
Financial year 2022 was a mixed bag for IAG with uncertainty clouding its future growth. However, the insurance company’s management seems confident about its outlook.
But could it be looking through rose-tinted glasses? Let’s find out.
Whilst net profit improved dramatically from a $427 million loss in FY21 to $347 million in FY22, the same cannot be said for cash earnings.
IAG’s cash earnings took a tumble from $747 million to $213 million.
The company had to slash its dividend from 20 cents per share in FY21 to 11 cents per share in FY22.
As reported in the Australian Financial Review, IAG CEO Nick Hawkins said, “We had a tough … 24 months really but we can see genuine momentum within the organisation.”
In response to concerns over a growing price war that could potentially compress margins for insurers, the company maintains a medium-term margins target of between 15% to 17%.
Hawkins told the AFR Weekend, “That drives everything we do. We’re not going to make a decision against that in pursuit of something.”
This is after recording underlying insurance margins of 14.7% in FY21 and 14.6% in FY22.
Hawkins also advised growth would be driven by IAG’s “wonderful brands that we probably haven’t done as much with as we should have”.
Some of IAG’s brands include NRMA, SGIO, RACV in Victoria, and CGU Insurance.
And Hawkins was also upbeat on customer retention, saying it was “as strong as I can remember”.
As reported in the AFR, a Jarden analyst advised clients that “accelerated premium rate momentum is required in our view to meet … margin targets”.
IAG management expects premium increases will likely absorb inflationary impacts.
I tend to err on the side of caution when management may appear overly confident in their guidance. In this case, I’m trying to understand how reasonable Hawkis’ predictions are relative to IAG’s past performance.
If you review the top line and bottom line for the last decade, IAG has produced quite volatile financial results.
It’s because the very nature of the products it sells is subject to forces outside its control.
Who would have predicted a war in Ukraine and the record-breaking floods this year?
So, how is Hawkins in a position to be so confident about IAG’s future if there are so many variables outside of his control?
I’m not asserting that his statements will prove to be false. Rather, I’m trying to frame his point of view in the context of the cold hard numbers.
Whilst management is confident in addressing inflation through higher premiums, Content Editor of Livewire Markets Glenn Freeman makes a great point about IAG.
He noted that IAG offers insurance products that are for shorter durations, like house and car insurance. If inflation keeps rising, this could spell significant price hikes for cars, automotive parts, wages, and building material supply.
All these factors will affect IAG, putting it in a vulnerable position.
In the last 12 months, the IAG share price has fallen 13% but is making ground with a 5% jump in the last month.
The S&P/ASX 200 Index (ASX: XJO) fared better in the last year, falling by 5% and gaining 7% in the last month.
IAG’s market capitalisation is around $11.4 billion. It’s currently trading at a price-to-earnings multiple of 34.69 times.

Motley Fool contributor Raymond Jang has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 
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