IAG has raised its natural perils forecast due to the Auckland floods and has cut its full-year insurance margin guidance as a result of catastrophe and inflation impacts.

The Auckland floods are expected to cost the insurer $236 million after reinsurance, leading the company to boost its perils allowance for the financial year by the same amount to $1.145 billion. Gross costs from the event are expected to top $350 million.

The reported insurance margin guidance was lowered to around 10% from 14-16% previously, reflecting the disaster and flow-on impacts, including an additional reinsurance dropdown reinstatement premium, as well as the wider economic environment.

IAG expects GWP growth for the financial year to be around 10%, an increase from the previous ‘mid to high-single digit’ guidance as it puts through stronger pricing increases.

The company on Friday updated the market on the Auckland flood situation, released preliminary details from its half-year result and provided updated full-year guidance.

First-half net profit after tax is expected to rise to $468 million from $173 million a year earlier, boosted by a post-tax $252 million reduction in the business interruption provision.

IAG expects first half GWP growth of 7.5%, or 9.8% on an underlying basis, supported by rising prices, new customer growth and retention levels that have remained high.

“Premium rates continue to increase in response to claims inflation and in anticipation of additional reinsurance and natural perils costs,” CEO Nick Hawkins said.

Mr Hawkins told an analyst briefing that inflation accelerated in motor during the December half as driving activity returned to normal, labour and parts expenses rose and with longer repair times adding to costs. Pricing increases have been put through in response.

Signs suggest the impact of supply chain inflation on claims costs has stabilised and forward-looking indicators provide the firm with confidence in the outlook, he says.

“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,” he said.

IAG will provide more details when it releases its half-year results on February 13.

See ANALYSIS.