Could wild spring weather threaten IAG stock performance?

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Insurance Australia Group Ltd (ASX:IAG) shares are down 1% today, currently trading at $4.60.

Despite this plunge, the S&P/ASX 200 Index (ASX: XJO) The general insurance group is still easily outperforming the benchmark this year.

But could wild spring weather threaten the performance of IAG shares in the months ahead?

Another La Niña?

If you like cooler, wetter temperatures, the Bureau of Meteorology (BOM) has good news for you. But not necessarily for the performance of IAG shares.

BOM published a La Nina Alert. The agency reports that “renewed cooling in the tropical Pacific Ocean along with climate patterns indicating that La Niña is likely in the southern spring and early summer.”

Based on historical trends, BOM estimates the probability of a La Niña event at around 70%. And that means another round of likely “above average rainfall for northern and eastern Australia in spring and summer”.

IAG Shares and Competitor Shares Suncorp Group Ltd. (ASX:SUN) have already been hit by outsized payments during the latest East Coast flooding.

And Morgan Stanley has warned that insurers could be in for another round of flood-related payouts that could exceed insurers’ catastrophe budgets.

According to Morgan Stanley financial analyst Andrei Stadnik (quoted by The Australian Financial Review):

Historically, an Indian Ocean negative dipole plus La Niña have resulted in record losses. We see earnings and dividend risks for Suncorp and Insurance Australia, as well as less capital option, as both started fiscal 2023 with little excess capital.

Both IAG and Suncorp have increased their FY23 disaster budgets, but Stadnik predicts that may not be enough.

“If a third season of La Niña occurs, the losses are likely to be more severe than Suncorp and Insurance Australia have budgeted,” he said.

Morgan Stanley has an underweight rating on Suncorp and IAG stocks.

He has a price target for IAG of $3.90, 15% below the current share price.

The broker has a price target of $10.20 for Suncorp, which is 8% below the current stock price.

How have IAG stocks tracked?

IAG shares are up 3% in 2022, outperforming the 6% year-to-date loss recorded by the ASX 200.