Industry-leading general insurance company Insurance Australia Group [ASX:IAG] said recent floods in Auckland and the ongoing strain of rising inflation are taking their toll on the company’s margins.
This might seem a moment of déjà vu to IAG shareholders, who were warned of slashed margins during Australia’s flooding mid-last year.
By the early afternoon, IAG’s stock was declining 3.5%, at $4.66 a share.
Despite a rough start to 2023, the share price holds onto a 6.5% rise across the last 52 weeks.
Source: tradingview.com
Insurance Australia and Auckland’s cost of peril
The group reported natural disaster costs for the first half of 2023 are now expected to be around $524 million, blowing the budget by $70 million.
In seeking to forecast the effects of Auckland’s disaster, the group increased natural peril costs to between $236–1,145 million by adjusting its reinsurance program that was already announced on 10 January this year.
IAG claimed that if it weren’t for the flooding disaster in New Zealand, the company would be broadly in line with allowance, having experienced a ‘relatively benign’ January.
IAG expects a 1H23 insurance margin of 8.5%, adjusting for natural perils impacts and considering the $48 million in prior period reserves.
With a strengthening position of inflation impacts on short-tail personal claims and a $29 million benefit from narrowing credit spreads, the 1H23 underlying margin is expected to be 10.7% (down from 15.1% in 1H22).
Nick Hawkins, IAG’s CEO, said:
‘The Auckland event, combined with the escalation in supply chain inflation has delayed our ability to fully demonstrate our strategic and operational progress in FY23. The strong premium growth we’re delivering, along with the strength of our business and brands, provides us with confidence in the outlook and the ability to deliver our targeted 15% to 17% margin over the medium term.’
Financial year finalisations and inflation
While the group is still in the process of finalising its financial half-year results, the group did say it expects GWP (gross written premium) growth of 7.5%.
The company flagged continuing increases in inflationary impacts during the first half of 2023, and combined with natural perils costs and prior period reserves, IAG’s loss ratio increased to 70.8%, up from the first half of 2022’s 68.8%.
Mr Hawkins said:
‘There are early signs that the impact of supply chain inflation on our claims costs has stabilised and our forward-looking indicators provide us with confidence in the outlook. 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.’
Mr Hawkins expects a reversal of inflation-affected claims and strong premium increases in the year’s second half, expected to improve the company’s underlying margin.
Yet speculation is high, as this is the second time in just more than six months the company has missed its margin targets, claiming, back in the time of the NSW flooding, that margins would regain before 2023.
IAG expects net profits for the six months to hit $468 million, compared with 1H22’s $173 million.
A more detailed report is expected on 13 February.
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Regards,
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For Money Morning
