IAG is taking action to improve the performance of its Australian intermediated business with its profitability well short of expectations, CEO Nick Hawkins has told a briefing.

“We are looking at significant change in that over the next couple of years to really return the profitability there,” he told a preliminary full-year results briefing on Friday.

IAG last year split its Australian operation in two and in March announced the appointment of Julie Batch to Head Direct Insurance Australia, while Jarrod Hill will join from Chubb in September to lead the intermediated division.

Results for the divisions will be reported when IAG releases its finalised financial figures on August 11 but restated comparative results for the financial 2020 period provided on Friday show Intermediated Insurance Australia would have had an underwriting loss of $263 million that year, with Direct Insurance Australia making a profit of $557 million.

“Our direct insurance businesses in Australia and New Zealand are growing and we expect this growth to continue as we build out our premium brands across Australia,” Mr Hawkins said.

“We recognise that our intermediated business has underperformed which is why I have set specific goals for this business to simplify its structure, upgrade its risk and underwriting disciplines, further strengthen relationships with broker partners and improve its financial returns.”

Mr Hawkins told the briefing that his expectation is that the intermediated business should be able to generate profit of around $250 million.

IAG last week reported a $427 million full-year loss, based on preliminary figures, down from a net profit of $435 million in the previous corresponding period.

The result includes the $1.15 billion business interruption provision announced at the half-year as well as additional second-half provisions totalling $200 million mainly due to customer refunds and payroll compliance. IAG was also affected by strengthened reserving for long-tail classes following sharp increases in average claim size.

S&P Global Ratings says the preliminary loss figure is largely from one-off factors and does not detract from its opinion on the solid underlying business performance.

“Overall, we see ongoing underlying business strength contributing to solid cash earnings and very strong capital metrics,” it says. “The unusual items contributing to the fiscal 2021 loss are conservative in our view, with the new CEO looking to rule off any further deterioration from COVID-19 or consumer remediation initiatives.”

IAG expects fiscal 2022 gross written premium to achieve “low single-digit growth, while the reported insurance margin is anticipated to reach 13.5-15.5%. The natural perils allowance will increase to $765 million, post quota share, from $658 million.

See ANALYSIS.