Australian insurer IAG has said that a preliminary assessment of expected claims from the Auckland flooding suggests that the natural perils cost impact, after reinsurance, will be at the $236 million retention level of its catastrophe and whole-of-account quota share arrangements.
IAG says that gross costs for the Auckland event are expected to be above $350 million, and with an anticipated claims cost, net of reinsurance, at the $236 million retention level, this suggests at least $114 million will be recovered from its reinsurance protection.
The company says that it has a strong reinsurance program in place for any further catastrophe events in 2023, which includes a second event drop-down cover and aggregate cover which lowered the maximum event retention for a second during the 2023 financial year to $192 million.
An additional premium will be payable on a pro-rata basis for a second drop-down cover, given that the gross costs for the flooding event are expected to exceed $350 million.
So far, more than 15,000 claims have been filed across the insurer’s AMI, State, NZI and partner brands as of February 3rd, 2023.
Nick Hawkins, Group Managing Director and Chief Executive Officer (CEO), commented: “Our focus is on supporting customers impacted by this devastating event, with temporary accommodation and other emergency arrangements, as we look to assess claims as quickly as possible.
“We have a large team, led by our New Zealand CEO Amanda Whiting, on the ground to provide immediate support and in the longer term, to help our customers and their communities recover.”
This Auckland flood update comes alongside the announcement of IAG’s preliminary financial results for the half-year ended December 31st, 2022.
For the period, natural peril costs are expected to be $524 million, which is $70 million above the allowance. To reflect the Auckland flood event, the firm’s FY23 forecast for natural perils has been increased by $236 million to $1.145 billion.
IAG says that this new figure takes into account adjustments to its reinsurance programme, the benign Australian summer perils environment to date, and a weakening La Niña weather pattern.
As a result of the natural perils costs, prior period reserve strengthening, and inflationary impacts, the firm’s loss ratio increased from 68.8% in 1H22 to 70.8% 1H23.
“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,” said Hawkins.
The insurer expects GWP growth of 7.5%, or 9.8% on an underlying basis in 1H23.
“Our strong top-line growth over the half reflects significant premium increases and new customer growth. Premium rates continue to increase in response to claims inflation and in anticipation of additional reinsurance and natural perils costs. 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,” added Hawkins.
Additionally, IAG expects a 1H23 reported insurance margin of 8.5% compared with 7.1% a year earlier. Adjusting for natural perils impacts, $48 million in prior period reserve strengthening primarily due to inflation on short-tail personal claims, and a $29 million benefit from narrowing credit spreads, the 1H23 underlying margin is expected to be 10.7%, says the firm.
1H23 net profit after tax attributable to shareholders is expected to be $468 million, up from $173 million for the same period last year. This includes the benefit of the post-tax $252 million reduction in the business interruption provision.
“The underlying result for the half has been heavily impacted by the immediate recognition of inflation on claims costs and the timing of the earning pattern of strong premium increases. We anticipate the reversal of this in the second half of the year with a subsequent strong improvement in the underlying margin,” said Hawkins.
Looking forward, IAG says that it expects FY23 GWP growth of roughly 10%, reflecting further increases in premiums in response to inflation, natural perils experience, and additional reinsurance costs.
The combination of the increase in the expectation for natural perils, the additional reinsurance drop-down reinstatement premium, the anticipated inflationary impact on claims following the Auckland flooding, and the overall macro environment results in the FY23 reported insurance margin being revised to around 10% from the previous range of 14% to 16%.
“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. 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,” said Hawkins.
