IAG’s net profit for the year to June 30 fell 41% to $728 million, reflecting a year of heavy storm activity on the east coast, including Tropical Cyclone Marcia in Queensland.

However, MD and CEO Mike Wilkins has talked up the insurer’s prospects in the “fast-growing” Asian market.

“China in particular is a key focus for us as we pursue opportunities that have more of a national presence, enabling us to capitalise on a market that remains under-penetrated and with significant growth potential,” he said.

IAG’s reported insurance margin was 10.7%, well down on the previous year’s 18.3%.

Mr Wilkins attributes IAG’s poor performance to a “substantial increase in net natural peril claim costs, particularly in the second half”. These costs totalled $1.05 billion – $348 million above the allowance of $700 million for the year and up $495 million on the previous year.

The underlying insurance margin – which is IAG’s preferred measure of business performance – was relatively stable at 13.1%, compared with 14.2%.

Gross written premium (GWP) grew 17% to $11.4 billion. Commercial insurance GWP gained 40.7%, reflecting the addition of the former Wesfarmers business.

Mr Wilkins says the insurer is “well positioned” to respond to competitive pressures, citing its digital transformation strategy, which the new IAG Labs division is driving.

“Customer expectations and preferences are changing, and digital technology is enabling new and innovative approaches in anticipating, meeting and exceeding these expectations,” he said.

“Our creation of IAG Labs will drive digitisation and innovation across IAG and its brands.”

The results were not affected by the 20% quota share arrangement with Warren Buffett’s Berkshire Hathaway, which was effective from July 1.

Under the 10-year deal Berkshire Hathaway will receive 20% of IAG’s consolidated GWP and pay 20% of claims. Berkshire Hathaway also acquired a 3.7% stake in the insurer for $500 million.

IAG expects the quota share arrangement will result in a reduced capital requirement of about $700 million over the next five years, with $400 million to be realised this financial year.

The deal gives IAG “significant capital flexibility” and is considered critical to plans for expansion in Asia. Mr Wilkins has targeted six markets in the region: India, Thailand, Malaysia, Vietnam, Indonesia and China, with the latter considered a “source of enormous potential growth”.

Asia contributed $21 million to earnings in the year to June 30, up on the previous year’s $14 million.

This financial year IAG expects a “low-growth environment, characterised by challenging market conditions and subdued inflationary pressures”. It has forecast a reported insurance margin of 14-16%.