IAG in double digit growth plans after posting insurance profit turnaround

Insurance Australia Group will perform a $200m share buyback as it grows prices by ‘low double digits’ in the second half of the financial year.

IAG chief executive Nick Hawkins. Picture: Jane Dempster

Insurance Australia Group says there will be no let-up in premium price rises after a profit rebound on the back of double-digit price increases.

But the listed insurer has injected another $200m into its share buyback program.

Announcing its first half profits on Friday, IAG revealed its earnings had slid to $407m for the six months to December, down on the high watermark set by the insurer in the 2023 financial year.

But this only came after IAG unwound almost $252m in business interruption provisions sitting on its balance sheet in the wake of the Covid-19 pandemic.

IAG’s profits were instead driven by returns from the financial giant’s insurance arm as well as its investment operations which churned out cash despite a number of hefty payout hits.

IAG noted its insurance business was churning out cash, with insurance profits topping $614m in the first half of the financial year, marking a 13.7 per cent margin, up on the $350m insurance profit posted in the first half of last year.

This came after the company, with retail and commercial exposure, pumped up gross written premiums across its lines by 12.5 per cent, hitting $7.9bn for the first half of the financial year.

IAG chief executive Nick Hawkins said despite the premium increases “customer retention remained high, reflecting the strength of our brand”, despite the price rises.

Mr Hawkins said customer retention was seeing nine in ten customers rolling over insurance policies, noting almost everyone had faced significant price rises over the last few years.

“We know that’s tough,” he said.

But IAG reaffirmed its full year financial guidance of further premium price growth in the “low double digits” to cover claims inflation and reinsurance costs in the year ahead.

The insurer also benefited from a somewhat benign period for natural perils, with claims coming in $28m below allowance for the first half of the year.

This saw IAG shave its full year target for natural catastrophe losses by $48m to $1.098bn, noting its entry into the cyclone reinsurance pool would offset some claims costs.

Mr Hawkins said the increase in natural perils and inflation costs, alongside with higher reinsurance bills for IAG, which act as insurance for its major payouts, “have flowed through to premium increases”.

IAG signed its new reinsurance program in January, alongside its quota share program, which shares both its risks and premium profits with a handful of other insurers.

This deal saw IAG take a considerable haircut on its maximum retention on its first two major catastrophe events to just $236m, down on the $338m in cover it previously held.

“We know this has added to our customers’ cost of living pressure in a difficult economic environment,” Mr Hawkins said.

“We’ve worked hard to minimise premium increases and continue to work with government, businesses, and communities to improve community resilience and reduce risk.”

Mr Hawkins also noted IAG was now planning to push through a major technology change across the group, with plans to shift 5 million retail and partner policies to its new enterprise platform, after already transferring 600,000 customers to the system.

IAG also said it was seeking to hold or lift its insurance margins to a guided range of 13.5 to 15.5 per cent.

The insurer is also aiming for “strong investment income” from its $12.4bn portfolio, which delivered a 5.9 per cent return in the six months to December.

IAG declared a 10c interim dividend, at 40 per cent franked, up on the 6c paid out at the same time last year.

The insurer also bulked up its share buybacks, tipping another $200m into potential on-market support for its shares, this comes on top of almost $350m dumped into supporting the company’s share price since October 2022.

This came as IAG unwound its pandemic war chest, assembled to cover Covid-19 losses.

IAG is still sitting on $384m in pandemic provisions, after paying out $13m since June last year.

But UBS warned IAG’s results were “ on the disappointing side” coming in below consensus estimates.

Barrenjoey analyst Andrew Adams said IAG’s cash earnings were a “miss”, noting the insurer’s perils claims were closer to its allowance “than we assumed”.

Mr Adams also noted commercial lines volumes loss was “far larger than we expected”.

“Underlying tracking roughly in line with expectations and guidance implies minimal earnings changes to guidance, but quality of the result still not as strong as hoped,” he said.

IAG chief executive Nick Hawkins said, despite the premium increases, “customer retention remained high, reflecting the strength of our brand”.

The insurer also benefited from a somewhat benign period for natural perils, which have proved an upset for several years running.

IAG said it was tracking $28m below its allowance, at $521m for the year.

This saw IAG shave its full-year target for natural catastrophe losses by $49m to $1.1bn, noting its entry into the cyclone reinsurance pool would offset some claims costs.

But Mr Hawkins said the increase in natural perils and inflation costs, along with higher reinsurance bills for IAG, which act as insurance for its major payouts, “have flowed through to premium increases”.

IAG signed its new reinsurance program in January, alongside its quota share program, which shares both its risks and premium profits with a handful of other insurers.

But this deal saw IAG take a considerable haircut on its maximum retention on its first two major catastrophe events to just $236m, down on the $338m in cover it previously held.

“We know this has added to our customers’ cost of living pressure in a difficult economic environment,” Mr Hawkins said.

“We’ve worked hard to minimise premium increases and continue to work with government, businesses, and communities to improve community resilience and reduce risk.”

Mr Hawkins also noted IAG was now planning to push through a major technology change across the group, with plans to shift 5 million retail and partner policies to its new enterprise platform, after already transferring 600,000 customers to the system.

But IAG reaffirmed its full year financial guidance of further premium growths in the “low double digits” to cover claims inflation and reinsurance costs.

IAG also said it was seeking to hold or lift its insurance margins to a guided range of 13.5 to 15.5 per cent.

The insurer is also aiming for “strong investment income” from its $12.4bn portfolio, which delivered a 5.9 per cent return in the six months to December.

IAG declared a 10c interim dividend, at 40 per cent franked, up on the 6c paid out at the same time last year.

Barrenjoey analyst Andrew Adams said IAG’s cash earnings were a “miss”, noting the insurers perils claims were closer to its allowance “than we assumed”.

Mr Adams also noted commercial lines volumes loss was “far larger than we expected”.

“Underlying tracking roughly in line with expectations and guidance implies minimal earnings changes to guidance, but quality of the result still not as strong as hoped,” he said.

Shares in IAG closed down 3.8 per cent to $6.08.