IAG faces down flood fears but avoids shareholder wrath over pandemic, catastrophe losses

Australia’s largest insurer faces a growing list of flood-related claims but at its AGM offered shareholders a bumper year of premium growth.

IAG managing director and chief executive Nick Hawkins AGM on Friday. Picture: Dan Gray

The country’s largest insurer, Insurance Australia Group, warns that policy premiums will continue to rise as an increasing number of natural disasters push up reinsurance costs and hit margins.

Like its rivals, IAG – which operates under the CGU and NRMA brands – has faced a difficult few years as repeated natural catastrophes have dented profits.

The latest floods, which have hit Victoria and NSW, are expected to add thousands of claims to the tally, with the industry reporting 7837 claims this week.

But IAG said it remained confident that – despite warnings of further wild weather in Queensland and in Sydney – the flooding will not be so costly as to trigger its reinsurance arrangements.

On Friday, IAG chief executive Nick Hawkins said the company had no plan to stop providing policies to customers in areas which had been repeatedly hit by flooding, but added many in those areas would see rising insurance premiums if the government did not act.

“What we have done is tried to understand the risk profile of individual customers and make sure that we’re appropriately pricing for that,” Mr Hawkins said.

“We know that infrastructure, levees, things like that, will make a difference in these communities.”

Premiums have been on the march at IAG, with gross written premium up 6 per cent in the past financial year to $13.3bn.

Mr Hawkins said IAG was forecasting a further “mid-to-high single-digit” lift in gross written premium in the year ahead.

Maribyrnong residents in Victoria clean up after local flooding. Picture: David Crosling

“In response to these pressures, and in anticipation of higher reinsurance costs, we have been increasing our premiums across home, motor and our commercial insurance classes,” he said.

“You will see greater earn-through of that in the second half, as policies are renewed.”

Mr Hawkins said IAG was targeting an insurance margin of 14-16 per cent, “This is a step towards our aspirational goals to deliver a 15 per cent to 17 per cent insurance margin and a 12 per cent to 13 per cent Return on Equity over the medium term,” he said.

JP Morgan analyst Siddarth Parameswaran said that although IAG was suffering further natural catastrophe losses, the insurer was well placed to offer returns and was likely to unwind a further $350m in pandemic provisions.

But he warned insurers may face up to $500m in costs from the floods, noting IAG’s $909m perils allowance appeared “a little light”. “We think considerable pressures are evident in both motor and home from rising used car prices and material inflation,” he said.

At its annual meeting on Friday, IAG chairman David Armstrong said the company was keen to avoid the shareholder anger of 2021, which resulted in the company’s remuneration report being voted down despite $6.9m in executive bonuses being scrapped.

Ahead of the meeting, IAG announced it would shower shareholders in a $350m buyback and freeze executive pay.

Residents of Echuca sandbag in preparation for the rising water. Picture: Jason Edwards

The buyback comes after IAG moved to unwind a significant portion of provisions put in place to cover potential losses arising from the Covid-19 pandemic.

IAG, like fellow insurer Suncorp, moved to unlock the funds after the High Court chucked out an attempt by insured business to appeal a court decision but retained $615m which may be used to cover claims arising from losses suffered by business during the early days of the pandemic.

But shareholders took issue with the buyback, questioning the IAG board over why the company had not issued a dividend to return the money. Mr Armstrong said IAG had chosen to pursue a buyback due to a lack of franking credits, noting it had “reflected deeply” on the shareholder anger at the company’s 2021 results.

“We have made changes to more closely align executive remuneration outcomes with shareholder outcomes,” he said.

Mr Armstrong said IAG had frozen pay awarded to executives and fees for board members for the 2023 financial year.

This stands in contrast to fellow insurer Suncorp which announced plans to boost its executive bonus scheme this year.

IAG also said it would end insuring companies that “predominantly participate in fossil fuels extraction”, a move it had flagged several years ago. Shares in IAG closed down 2.06 per cent to $4.75.

In August, IAG swung 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.

At the time, UBS equities analysts said the earnings were below consensus forecasts but IAG’s margin trajectory was “ahead of our expectations overall”.