IAG returns to profit despite a torrid year for natural perils

An easing of provisions for business interruption claims has helped Insurance Australia Group (ASX: IAG) return to profit in FY22, although the group faced a tough battle to prop up profit margins in its insurance business.

IAG has revealed an unaudited net profit of $347 million for FY22, a significant turnaround from the previous year’s $427 million loss.

However, insurance margins have slumped to 7.4 per cent – well below guidance of 10 to 12 per cent.

IAG reported a profit of $586 million from its insurance business, down from a little over $1 billion in FY21. The company has recorded net natural peril costs of $1.12 billion, or $354 million above the original allowance of $765 million. IAG says this is consistent with the forecast announced in March this year.

While Australia’s largest insurer highlights several positives in its latest result, it also notes challenging conditions over the past year with a ‘high incidence of natural perils, volatile investment markets, and a higher inflationary environment’.

The bottom line was aided by a $200 million pre-tax release from the group’s business interruption provision, reflecting the easing of risks associated with pandemic lockdowns. This compares with a $1.51 billion hit a year earlier.

CEO Nick Hawkins says the underlying profit result demonstrate ‘positive momentum’ for the group.

“Despite the challenges we have seen in the external environment over the year, our businesses have performed well, delivering strong GWP (gross written premium) growth,” says Hawkins.

“Our direct insurance business in Australia is growing in key segments, particularly as we roll out the NRMA Insurance brand in Western Australia and South Australia.”

IAG’s gross written premiums have risen 5.7 per cent, compared to 3.8 per cent growth a year earlier, which was in line with guidance.

The group is confident of improved conditions in the current year, including a return to insurance margins of between 14 and 16 per cent.

“As we enter FY23, our guidance demonstrates both top-line and margin improvement,” says Hawkins.

“We have been impacted by claims inflation in our key home and motor portfolios and have significantly increased our natural perils allowance to help ensure the business can withstand the impact of increasing frequency and severity of natural perils.

“In our intermediated business, the steps we’ve taken to improve the performance are showing promising signs and positions us well to deliver the targeted insurance profit of $250 million in FY24.”

Hawkins last year vowed that the group’s insurance business would achieve at least $250 million in annual profit over the following three to five years.

“By creating a more focused operating model, a leadership team with deep expertise, and a clear strategy for growth we have confidence in the future,” he says.

IAG plans to announce its final audited FY22 results on 12 August 2022.