IAG punished on premium slowdown

The insurer’s interim net profit jumped 90 per cent in the first half, but investors are more concerned about the premium outlook.

IAG CEO Nick Hawkins says the insurer is on track to meet its full-year guidance. Picture: Nikki Short/NewsWire

Easing inflation will keep a lid on insurance premiums this year, with single-digit hikes a win for customers after a punishing period of price rises, according to IAG.

But the slowdown in premium growth -- the insurer recorded a 6 per cent lift in gross written premiums in the first half as against the 12.5 per cent recorded a year ago -- saw investors punish the insurer on Thursday, with its shares slumping 10 per cent to $8.05 in morning trade.

Chief executive Nick Hawkins, speaking to The Australian after handing down a bumper $778m profit for the six months through to December 31, said IAG was passing on the benefits of a more subdued pricing environment.

“It’s been challenging in this high inflationary environment, this high perils environment, with the (higher) cost of reinsurance. Many of those themes are a lot better, and what we’re doing is reflecting that in our pricing to customers,” he said.

“We know that the customers and communities have been under pressure in the last couple of years. So from a customer point of view, this is better. What IAG is experiencing is what the market is experiencing, it’s a theme seen everywhere.”

Mr Hawkins added that premium growth was now back to a level more in line with long term averages. ASX-listed IAG houses a suite of brands including NRMA, CGU and WFI.

Despite the premium pressure, the general insurer’s $778m profit for the first half was a 91 per cent surge on the prior corresponding period, with favourable weather, a $200m Covid-19 business interruption provision release and a higher insurance profit all adding to the result.

Insurance profit for the half jumped to $957m, up 56 per cent on the $614m reported in the first half of fiscal 2024.

On the back of the bumper earnings, IAG will pay a 12c per share dividend on March 7, up from 10c per share for the prior corresponding period.

Mr Hawkins said the insurer was on track to reach its previously disclosed profit guidance of $1.4bn to $1.6bn for the full year, adding that the reported insurance margin should come in at the top end of the 13.5 per cent to 15.5 per cent range, while GWP would be in line with the first half, at 6 per cent, or at the lower end of mid to high single digits.

“Our results reflect the volatility of our sector and the fact we’re often subject to factors outside our control – the good years help us weather the bad and be well positioned to pay future customer claims,” Mr Hawkins said.

“We continue to focus on customers as we help keep communities safe and support those experiencing cost of living pressures. Recent storms, floods and the LA fires are a stark reminder of the need to be a well-prepared nation.”

The company’s natural perils costs were $215m below allowance for the half amid favourable weather conditions.

Mr Hawkins said the insurer was entering the second half in a position of strength.

“With our streamlined structure, investment in technology, and commitment to quality customer service, we have a scalable business ready to grow beyond our current 7.2 million direct and partner customers,” he said.

But analysts and the market took a different view.

UBS analysts said commentary from both IAG and peer Suncorp, which reported on Wednesday, showed signs competition in the market was heating up.

“With ‘relatively flat’ volumes across home and motor in Australia and modest declines in New Zealand, IAG is flagging a moderation in premium increases ahead, suggesting a pivot in focus towards volume now...With Suncorp also looking to increase unit growth, this points to increasing competitive tension ahead and suggests lower scope for upside underlying

earnings surprises and valuation metric expansion from here,” UBS analyst Kieren Chidgey wrote in a note to clients.

Barrenjoey analysts said investor focus would be on the “significant slowdown in premium rates, home and motor now at around a 6 per cent rate versus 17 per cent and 15 per cent (respectively) six months ago”.

“The updated guidance will arguably lead to minimal consensus earnings changes, and while the margin is elevated and can be sustained, the medium-term growth outlook is softer than expected, and softer than (Suncorp). We expect the stock to be weak on premium cycle fears,” Barrenjoey’s Andrew Adams said.

Mr Hawkins said the market had always been competitive and that he had not seen a change in that dynamic in recent months.

Investors hoping for a buyback were left disappointed.

Addressing the cost-of-living challenges impacting IAG’s customers, he said 10,000 of the insurer’s customers had reached out with hardship requests in the last six months alone.

“We’ve definitely seen more of that in the last year or two than before but as a general theme, retention levels are very strong.

Insurers IAG, Suncorp and QBE were among insurers blasted by regulators late last year for failing their customers.

ASIC said insurers were denying customers “critical protections” by failing to log complaints and warned internal dispute resolution regimes were failing.

ASIC said its review of 11 general insurers found shortcomings across the sector, highlighted by a 50 per cent surge in complaints at the Australian Financial Complaints Authority disputes body.

Addressing these criticisms, Mr Hawkins on Thursday said IAG had been “investing heavily in the customer experience” for the past four to five years as he put the blame for some of the shortcomings on extreme weather events.

“Unfortunately, we’ve had to assume some of these one offs and (weather) events that are actually a lot more frequent than we want. And so resourcing, people, yes, we have more of that. We’ve just set up, effectively, a claim center where we manage these large events, so we can ensure we’re allocating our resources as quickly as possible to those most in need.”

Originally published as IAG punished on premium slowdown