IAG says pricing will continue to increase due to inflation, reinsurance and perils impacts, while it’s mindful of challenges its customers are experiencing and issues around affordability. 

The company says its trending towards reported margin guidance of 10% for this financial year, while it has adjusted a medium-term target to 15% compared to a previous range of 15-17%. 

CEO Nick Hawkins told an investor day that the narrowing of the medium-term margin outlook reflected the changed environment. 

“We are going to have to continue to reprice the portfolio going forward,” he said. “Affordability just becomes more and more of an issue and so we are being, what we think is sensible on that margin.” 

IAG has increased its medium-term return on equity target by one percentage point to 13-14% as a result of top-line growth and improved investment returns on shareholder funds. 

Mr Hawkins said natural perils were likely to be moderately above the estimate for this financial year, assuming a normal June, and allowances will be going up again as part of the firm’s forward thinking. The company is taking on more perils risk given the rising cost of reinsurance for events that have increased in frequency. 

Inflation also remains elevated, while moderating from the fiscal first-half, with the combination of market influences driving top-line growth at a pace that Mr Hawkins says he hasn’t previously seen while at IAG. 

“We’ve had to materially reprice our business, reflecting the changes that we’ve seen around inflation, we’ve had to adapt to the changing environment around our reinsurance costs and our perils costs,” he said.  

The Australian direct and intermediated divisions are set to deliver stronger reported and underlying margins in the current half, while New Zealand margin improvement has been slower to emerge following the North Island flooding and impact from Cyclone Gabrielle.  

In New Zealand, rate gains of 20% are being seen in personal motor and 20-30% on home, adjusted for the Earthquake Commission impact, amid market conditions fuelling the increases. 

Mr Hawkins says there is a strong focus on customer retention, but an IAG ambition to add one million new customers, announced in 2021 as part of a five-year plan and targeted mainly through the geographic expansion of the NRMA brand, will take longer to achieve as margins are prioritised. 

The insurer says it is continuing to simplify its business, has made “excellent progress” on resolving legacy issues, is rolling out technology improvements and is on track to deliver a $250 million profit next financial year in the previously loss-making intermediated business. 

Intermediated Insurance Australia Group Executive Jarrod Hill says rate increases were put through last October in anticipation of increased January reinsurance renewals, while further adjustments were made in March. 

“This is the longest firm pricing market cycle we have seen in commercial in my 30 years in the industry,” he said. “But there’s different cost drivers.” 

The only real area of weakness is in commercial directors’ and officers’ cover, where there had previously been significant increases for a number of years, he said. 

IAG will release its full-year results on August 21.