Warren Buffett is invested in IAG shares, should you be?

Woman looking at her smartphone and analysing share price.

Woman looking at her smartphone and analysing share price.

The Insurance Australia Group Ltd (ASX: IAG) share price is an interesting investment proposition in the current environment.

It claims to be the largest general insurance business in Australia and New Zealand. Its businesses underwrite over $13 billion of premiums per annum, selling insurance through a number of different brands.

In Australia, its brands include NRMA Insurance, CGU, SGIO, SGIC, Swann Insurance, WFI and ROLLiN’, while in New Zealand it owns the brands NZI, State and AMI.

As reported by my colleague Brooke Cooper, IAG created a strategic relationship with Berkshire Hathaway in 2015. Berkshire Hathaway invested $500 million for a 3.7% stake and agreed with IAG its stake would remain between 3.7% to 14.9%. However, it was recently announced that the strategic relationship agreement and equity ownership subscription previously they had made won’t continue.

However, a lot of the whole of account quota share (WAQS) was renewed with Berkshire Hathaway, while most of the rest was renewed with other reinsurers.

Berkshire Hathaway is also allowed to offer reinsurance to other competitors in the Australian industry.

Time to buy IAG shares?

The FY23 half-year result showed growth in a number of financial metrics. Gross written premium (GWP) grew by 7.5% to $7 billion. The net earned premium increased by 3.8% to $4.1 billion. IAG’s net profit after tax (NPAT) jumped 170.5% to $468 million, while cash earnings increased 26.7% to $223 million.

In FY23, the company is expecting to achieve FY23 GWP growth of around 10%. Last year it was expecting mid-to-high single-digit growth of GWP.

However. The business is only expecting its FY23 reported insurance margin to be around 10%, compared to the previous range of 14% to 16%. IAG put this largely down to the expected higher natural perils costs from the Auckland flood event.

I think IAG shares are in a good place at the moment, with rises in insurance premiums and the benefit that its bond investment portfolio gets from higher interest rates.

The business is currently trading at 14 times FY24’s estimated earnings with a dividend yield of 5.6% excluding the effect of franking credits.

On the one hand, I think it probably could be a good investment today. But, I’m wary of how often a damaging storm or an investment crash can hurt its earnings, so it’s not the type of business that I’d look at as a long-term holding with compounding potential.

The post Warren Buffett is invested in IAG shares, should you be? appeared first on The Motley Fool Australia.

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More reading

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.

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