IAG’s earnings declined in the first half after the severe Sydney hailstorm in December increased claim costs and reduced the insurance result, while the company says it also faces higher compliance and regulatory costs stemming from the Hayne royal commission findings.

Net profit in the first half fell 9.3% to $500 million, while the insurance margin slipped to 13.7% from 17.9% a year earlier, the company reported today.

Gross written premium (GWP) increased 4.1% to $5.881 billion, largely driven by rate increases amid relatively flat overall volumes. The combined operating ratio increased to 89.1% from 85.1% in the year-earlier half.

MD Peter Harmer says the group achieved a sound performance in Australia, while the New Zealand business was supported by solid GWP growth and sustained margins.

“IAG’s underlying performance has continued to improve over the half and was broadly in line with expectations,” he said.

The company remains on track to cut operating costs by $100 million this financial year from an optimisation program to simplify the business.

But a $250 million target to be achieved in 2020 will be reduced by $30 million due to increased compliance and regulatory costs flowing from the Hayne royal commission and other reviews and changes.

Mr Harmer says IAG supports the recommendations from the royal commission, and will examine the details over coming days and weeks. He says the company was anticipating changes such as the end of exemptions for unfair contract terms and claims-handling.

“There is nothing unexpected in the report that we have not begun preparing for already,” he said.

“We continue to see the royal commission and its findings as an opportunity to learn and be even more customer-focussed.”

Mr Harmer spoke to broking partners about the review of commissions that will take place in three years, and says they view the move as an opportunity to better articulate the value they bring to customers.

“I think the industry will approach this with a very open mind and will be very focussed on what creates the best possible transparency, and therefore the best possible outcomes for customers,” he said.

IAG reported ongoing growth in average commercial rates, while forecasting a further decline in volumes amid ongoing remediation.

“We for our part have spent the past three years remediating our underperforming portfolios in our commercial book and we think we are getting pretty close to getting there,” Mr Harmer said.

“I think we will probably start to see price rises beginning to taper off, flatten out, but I would say prices are probably still shy of where they were 10 years ago.”

The company has reaffirmed its outlook for GWP growth this financial year of 2-4% and a reported insurance margin of 16-18%.