IAG has forecast a stronger second half as it puts through double-digit pricing increases in response to an inflation rate that accelerated faster than expected in the first six months.

CEO Nick Hawkins said the company had “clearly had a tough first half” but inflation was not expected to accelerate at the same pace in the current period, while results would increasingly reflect higher pricing across the Direct, Intermediated and New Zealand divisions.

“Clearly our results are going to get the benefit of the pricing that we have already put through in the portfolio,” he told an earnings briefing.

The reported insurance margin for the half rose to 8.5% from 7.1% a year earlier, but the underlying margin deteriorated to 10.7% from 15.1%, mainly driven by a 4.2% deterioration in the claims ratio.

Mr Hawkins said there was almost a “perfect storm” in motor” as labour and parts costs rose, deliveries were delayed, repair times extended and consequently car rental costs increased. Soaring second-hand car values, which are now easing, also had an impact.

Home was also affected by rising costs as well as pressures from the increased frequency of perils and rising reinsurance impacts.

IAG earlier this month released preliminary net profit figures and downgraded its full-year margin guidance to 10% compared to the previously anticipated 14-16% margin range. It also raised its outlook for gross written premium (GWP) growth to 10%.

The company today affirmed net profit after tax increased to $468 million from $173 million and provided more detail on its divisions and performance.

Headline reported profit was supported by rising GWP and a $252 million post-tax benefit from a reduction in the covid-related business interruption provision following an industry test case outcome favouring insurers.

The total pre-tax provision for business interruption claims remains at $606 million, as the company waits to see if more claims may emerge, while it’s also defending a class action filed in the Federal Court.

“We are writing to all our customers around the outcomes from the test case and making sure they understand where they sit with their policy,” Mr Hawkins said. “We haven’t had a material change in the number of claims, but we are writing to everyone and taking a conservative view, and will allow a bit of time to pass, and then we will be reassessing that provision.”

GWP increased 7.5% to $7.061 billion for the half, while an acceleration in rate increases in response to inflation could drive the enterprise-wide percentage gain to around 12% in the second half, Mr Hawkins says.

Direct Insurance Australia, the largest division, reported an insurance profit of $167 million, down from $189 million. The underlying margin fell to 13.2% from 21.8%, reflecting claims inflation, the delayed earn-through of premium gains, and a year-earlier covid benefit from lower motor claims frequency.

New Zealand profit rose to $136 million from $99 million, while the underlying margin fell to 13.2% compared to 16.8%.

Intermediated Insurance Australia, returned to profit, with earnings of $49 million compared to a year-earlier $4 million loss. The underlying margin at the division, which includes the CGU and WFI brands, improved to 5.7% compared to 5%.

Mr Hawkins says pricing increases are flowing through in the intermediated division and the company remains confident it will deliver on its $250 million profit target by fiscal 2024.

Despite price rises, Mr Hawkins said consumer retention rates remained high, and IAG benefitted from the high quality of its brands.

“Despite the challenges from the high inflation and perils experience impacting our business in the half, I believe we have a sound basis for confidence as we move into the second half,” he said.