AMI, State Insurance owner IAG forecasts margin squeeze on Auckland floods

Insurer IAG is expecting a big bill from the Auckland floods. Photo / Alex Burton

The Auckland floods are set to squeeze margins for the country’s largest insurer as it faces a high payout amid ongoing inflation pressure.

Nick Hawkins, chief executive of IAG, whose brands include AMI, State Insurance and NZI, told analysts at a briefing today that it was still too early to quantify the cost of the major flooding event.

“So far we have had over 15,000 claims that have been lodged with us through AMI, State and partners’ brands and we expect that number to increase. Of course, we are focused on supporting our customers. We have a large team on the ground providing immediate support including temporary accommodation and other emergency arrangements.”

But he said the company now had some clarity about the impact the floods would have on its 2023 financial-year result and the guidance it had in the market.

“What we know is this is a very large event and we will exceed our reinsurance retention and so the net cost will be our [maximum event retention] of A$236 million, leading to an increase in our full-year perils assumption of A$1,145 million.”

The gross cost of the Auckland flood event was expected to exceed A$350m. IAG said it had a strong reinsurance programme in place for further catastrophe events during 2023 which would reduce the maximum cost of a second major event to A$192m but an additional premium would be payable on a pro-rata basis for the second drop-down cover.

Shares in the ASX-listed company fell A13.9 cents to A$4.69 on the update. The insurer is due to report its half-year result for the six months to December 31, 2022 on February 13.

However, the scale of the Auckland floods meant it had to update its guidance for its full financial year, which runs until June 30.

Contractors try to clear surface flooding on Porana Rd in Wairau Park, Glenfield, as heavy rain hits Auckland. Photo / Brett Phibbs

Hawkins said he now expected premium growth to be around 10 per cent for the year.

“That’s an increase from our previous guidance of high single digits. And that change reflects further increases in premiums in response to inflation, perils experience and additional reinsurance costs that we see flowing through the portfolio.”

But he reduced the company’s margin guidance.

“In light of the Auckland event we have revised our reported margin guidance to around 10 per cent and that’s down from the previous range we had in the market of 14 to 16 per cent.

“In doing that we have reflected the combination of the increase in natural perils, where we have included the full cost to IAG of the Auckland event, some additional reinsurance reinstatement premium that we will be paying based upon the Auckland event and also the anticipated inflationary impact on claims following the Auckland event and the overall macro environment.”

Hawkins said a combination of those three factors - the largest of which was the A$236m increase in its perils allowance, had led it to revise the guidance. The A$236m is the maximum it will pay before its reinsurance kicks in, but if it has to buy more reinsurance cover that is likely to come at a higher price.

“Within this we do expect an improvement in the second-half reported and underlying margin - driven by three things: Increase in earned premiums; reflected benefit of higher premiums flowing through the portfolio and benefit from claims initiatives moderating underlying inflation across the supply chain.”

Hawkins said it was already seeing signs of supply-chain inflation moderating. On top of that, it was expecting an increase in its investment yields.

“Our first half has been challenging, driven by the inflationary environment we have all had to operate our businesses under.”

Hawkins said underlying premium growth for the first half was 9.8 per cent. It expected natural perils cost for the first half to be A$524m, which was A$70m above its allowance for the first six months.

“Offsetting that, we have had a relatively benign perils experience in Australia in January.” He said excluding the Auckland event it expected its actual peril insurance cost for the seven months to January to be broadly in line with its allowances.

“In terms of claims costs, we have seen inflationary impacts continue to increase, particularly in motor claims. That said, there are early signs that the impact of supply-chain inflation on our claim costs has stabilised and our forward-looking indicators provide us with more confidence in the outlook.”

He said the first-half reported margin would be 8.5 per cent, which included A$48m of prior period reserve strengthening primarily due to inflation on personal lines.

Its first-half net profit after tax was expected to be A$468m including the benefit of a post-tax A$252m provision put aside for Covid-19 costs, which was released in October.

He said the insurer’s capital position remained strong.

Despite the Auckland flooding, Hawkins was upbeat about the second half of the IAG financial year, with higher premium rates flowing through, high customer retention rates and its long-term reinsurance plan.

“We remain confident in our ability to achieve a 15 to 17 per cent insurance margin over the medium term.”