IAG posts profit after 2021 loss, but dividend cut due to insurance cash crunch

IAG has paused increasing policy charges and hopes consumers will like that, but investors will receive a shaved dividend despite a profit about-face.

Insurance Australia Group hopes consumers will reward it for holding back policy pricing increases despite higher inflation – with the company slicing dividend payouts as challenges erode cash.

IAG reported a big turnaround on Friday, swinging to a $347m net profit for the year ending June 30, despite a blowout in natural catastrophe costs. It posted a $427m loss in the year prior.

The $774m rebound comes after IAG unwound provisions, but the insurer was cautious in doling out dividends to shareholders. Cash earnings were down 71.5 per cent in the year to just $213m, on the back of higher catastrophe claims.

IAG’s insurance business was badly affected by the higher costs, with profits falling 41.8 per cent from $1bn in the 2021 financial year to $586m in the last year.

The ASX-listed insurer unwound part of its provisions to cover payouts from businesses seeking to claim for the pandemic, which buoyed results by $200m.

IAG declared a 5c final dividend, taking the full-year payout to 11c. That was down 45 per cent on last year’s 20c payout to shareholders. Total dividends represented 78.1 per cent of net profits.

IAG chief executive Nick Hawkins says the past few years have been tough for investors. Picture: Gaye Gerard

IAG chief executive Nick Hawkins conceded it “has been a tough time for investors” over the past few years, as a run of weather catastrophes and the overhang over past poor insurance practices have haunted the company.

IAG revenues fell slightly to $18.3bn in the 2022 financial year, from $18.8bn a year before.

Total gross written premium stands at $13.3bn.

IAG’s gross written premiums lifted at a higher rate of 5.7 per cent lift in, up on its 2021 results which saw overall growth of 3.8 per cent. Growth was led by rate increases moving to offset rising inflationary pressures.

IAG’s direct lines, which cover NRMA, RACV, SGIO, and SGIC, saw stronger premium growth. Motor policies saw a 6.4 per cent lift, while home lifted 8.6 per cent.

The Sydney-based insurer said it expects to see further mid-to-high single digital gross written premium growth in the year ahead and is aiming for a 14-16 per cent insurance margin.

Mr Hawkins said the company had looked to pass through much of the inflation cost as it waited to see how high the tide would rise.

Australian Defence Force personnel helping flood-affected residents at Windsor in NSW. Picture: Flavio Brancaleone

But he signalled IAG would be more cautious in passing through further inflationary costs as it looked to hit its goal of adding a million customers in the next five years. “Our view is we should be able to deal with those issues better than most,” he said.

“We can share with customers and help mitigate some of the inflationary pressure we‘re seeing at the moment.”

IAG reported an insurance margin of 7.4 per cent “below our expectations” due to $1.1bn in natural catastrophe costs as well as $45m in negative credit spreads and another $172m in prior year reserve strengthening.

Mr Hawkins said the insurer was aiming to pull its margins higher, to 15-17 per cent, and hit a 12-13 per cent return on equity over the medium term.

IAG is targeting a $250m profit by 2024 for its Intermediated Australia business as well as holding costs at $2.5bn through simplification and efficiencies.

Investments in a new tech platform, which has already been rolled out to cover customer, policy, and pricing claims for NRMA customers in Western Australia, South Australia and the Northern Territory is a key pillar of this cost strategy. But IAG is facing hefty costs from the transformation, with $315m marked against costs to transform the business in the 2022 financial year.

UBS analysts Scott Russell, Shreyas Patel, and Fraser Noye noted the earnings were below consensus but IAG’s margin trajectory was “ahead of our expectations overall”. “All up, this is not as bad as we had feared and may support improved profitability in FY23 if claims inflation behaves.”

IAG shares were up 0.98 per cent to $4.66 by close.

Originally published as IAG posts profit after 2021 loss, but dividend cut due to insurance cash crunch