Insurance Australia Group Ltd (ASX: IAG) shares are underperforming the market on Friday, down 2.4% to $8.69 apiece.

Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is 0.55% higher at 8,343.2 points.

There is no official news from the insurance giant today.

Its share price fall may be a simple adjustment following a big day of gains yesterday.

The IAG share price zoomed 5.95% higher to finish at $8.90 yesterday after the insurer revealed a new market partnership.

Let's recap.

IAG shares in the red on Friday

As we reported yesterday, IAG has announced a strategic alliance with The Royal Automobile Club of Western Australia.

This entails acquiring 100% of RAC Insurance (RACI) and securing a 20-year exclusive distribution agreement to provide RAC-branded general insurance products.

IAG will pay $400 million to buy RACI, and outlay a further $950 million for the long-term distribution and brand licensing rights.

IAG will fund the deal through surplus capital, debt, and organic capital generation.

The insurer expects that on completion in 2H FY26, the RACI portfolio will add about $1.5 billion to its Gross Written Premium (GWP).

That's pretty big when you consider IAG reported a $16.4 billion GWP for FY24, so the RACI portfolio alone will deliver a 9% bump.

IAG also offered a guidance update yesterday, stating:

IAG maintains its FY25 perils expectation of $1,283 million which is the basis of its FY25 guidance.

If the current perils favourability (~$250 million) continues for the remainder of FY25, the reported insurance profit guidance will increase to $1,650 million to $1,850 million, from $1,400 million to $1,600 million.

Similarly, the reported insurance margin range guidance will increase to towards the top end of the 16% to 18% range, from towards the top end of the 13.5% to 15.5% range.

Top broker's verdict

Top broker Goldman Sachs issued a note today outlining the deal and revealing a neutral (or hold) rating on IAG shares.

Goldman has a 12-month price target of $8.30 on IAG shares, implying a potential 4.5% downside from here.

The broker said:

We like IAG because 1) Margins in a strong position 2) IAG is targeting ongoing earnings improvement in its Intermediated Insurance business. 3) IAG has capital flexibility noting possible redundancy in its reserving position with respect to business interruption.

However, Goldman noted some risks ahead for the IAG business:

However, we are concerned about 1) Volume loss in response to rate increases; 2) Cost associated with IAG's reinsurance aggregate protection; 3) Greensill exposures.