IAG warns of profit hit after Auckland floods, inflation

ASX-listed insurer IAG has warned investors its profits would be crimped after a $236m hit from the Auckland floods, alongside inflationary pressures.

New Zealand's largest city, Auckland, was hit with a historic amount of torrential rainfall last week, causing severe flooding which inundated roads and property across the city. Getty Images

Insurance Australia Group has warned of a major haircut in its insurance margins in the wake of massive floods in New Zealand and inflation impacts on claims, flagging big premium rises in a bid to lift returns.

The ASX-listed insurer said its underlying margin would fall from 15.1 per cent reported in the first half of the financial year to just 10.7 per cent.

In its first-half trading update IAG revealed natural perils costs in the period were expected to be $524m, $70m above its allowance.

This was on top of $48m in prior period reserve strengthening to cover the inflating costs of covering short tail personal claims.

But IAG said it would bank a $29m benefit from narrowing credit spreads.

In the first half net profit after tax attributable to shareholders was expected to be $468m, up from $173m at the same time in 2022.

However, this is only after IAG unwound $252m in reserves locked away by the insurer to cover claims arising from the pandemic.

IAG said its unaudited results showed gross written premium had lifted across its book by 7.5 per cent in the first half of the 2023 financial year.

On an underlying basis, adjusting for the impact of portfolio exits and currency fluctuations, IAG is expected to book a 9.8 per cent growth in gross written premium.

IAG chief executive Nick Hawkins said the insurer’s top line growth reflected the hefty increases in premiums charged to customers, as well as new customer growth from its expansion into new markets.

“Premium rates continue to increase in response to claims inflation and in anticipation of additional reinsurance and natural perils costs,” he said.

“Our retention rates have remained at very high levels, reflecting the value of insurance to our customers and the trust they place in our products and brands.”

Mr Hawkins said IAG’s results were being heavily impacted by the recognition of the rising cost of replacing damaged goods and property in an inflationary environment.

“We anticipate the reversal of this in the second half of the year with a subsequent strong improvement in the underlying margin,” he said.

IAG reported a deterioration in its loss ratio in the first half of the financial year to 70.8 per cent.

This was up on the 68.8 per cent reported in the same time last year.

Mr Hawkins said the insurer was hopeful inflation costs in its supply chain had stabilised.

“Heading into the second half of the year, we will also benefit from the earnings impact of the strong top-line growth which will significantly improve our margins,” he said.

IAG CEO Nick Hawkins has warned premium prices will rise in response to higher costs Picture: Nikki Short

IAG said it was facing a $236m deterioration to its natural catastrophe budget from the Auckland floods, which hammered New Zealand’s biggest city last week.

“Perils experience in Australia was relatively benign during January and, excluding the Auckland event, the actual experience to 31 January 2023 is expected to be broadly

in line with the allowance,“ the company said.

The floods which hammered Auckland have seen IAG slapped with more than 15,000 claims for damage with costs expected at the insurer’s $236m retention level.

IAG’s deal with its reinsurance and quota share partners limits the insurer’s costs in the event of a massive damage claim.

The insurer said it expected the Auckland floods to incur more than $350m in claims costs from its customers alone.

But IAG said its second event drop-down cover would kick in if the insurer was faced with another major event in the remaining half of the financial year.

This would reduce its retention to $192m, however an additional premium will be payable on a pro-rata basis for the second drop down cover given the high costs from Auckland.

The Auckland disaster prompted IAG’s to increase its FY23 forecast for natural perils by $236m to $1.14bn.

This comes as the third time in as many years IAG has been forced to revise its natural perils budgets, after the insurer which operates in Australia and New Zealand has been battered with natural disasters.

IAG said it expects to increase its growth written premium across the 2023 financial year by “around 10 per cent” in an increase from previous guidance of “mid to high single digit” growth.

The insurer said this increase reflected further increases in premiums in response to inflation, natural perils experience, and additional reinsurance costs.

IAG said expected to increase its underlying margins in the second half by increasing premiums and would retain its goal to lock in a 15-17 per cent insurance margin.

Mr Hawkins said Auckland had delayed IAG’s “ability to fully demonstrate our strategic and operational progress in FY23”.

“IAG’s unique attributes, its trusted brands, strong growth and capital position, mean we are well positioned to respond to the challenging environment and meet the needs of all our stakeholders,” he said.