IAG has flagged insurance margins for the 2019/20 financial year will fall short of its 12.5-14.5% guidance, as earnings take a huge hit from adverse natural perils, prior period reserving and credit spread factors.

The insurance group says in an investor update today it expects to report an insurance margin of about 10% on August 7 when the business unveils its results for the year to June 30. In the 2018/19 year, the business recorded an insurance margin of 16.9%.

Higher than anticipated attritional perils experience in the June quarter has probably pushed up net natural peril claim costs to $904 million, IAG said. It had forecast in February a figure of $850 million.

Preliminary figures show cash profit is set to drop 70% from a year earlier to $279 million, while net profit will fall to $435 million from $1.08 billion.

IAG did see a short-term drop in new business volumes in the March-May period when the economy was hit by nation-wide lockdown measures, reducing gross written premium (GWP) by $80 million. But volumes have since returned to normal levels in most of its core portfolios.

“These are not the numbers we envisaged at the beginning of the year,” CEO Peter Harmer said in a conference call with analysts.

He says IAG will not be giving earnings projections for the current financial year because of the pandemic.

“Along practically with every other company out there, the broad repercussions of COVID-19 mean that the outlook for us is unusually uncertain,” he said. “As a result we have decided not to provide guidance but we will review that if and when conditions change.”

GWP growth is about 1%, which is consistent with the “low single digit” guidance the business has maintained throughout the last financial year. The GWP growth includes adverse effects from business exits completed in the 2018/19 financial year, lower compulsory third party pricing and a “modestly negative estimated” impact from the virus pandemic.

While the pandemic has had a “broadly neutral impact” on its reported insurance margin, IAG has set aside around $100 million in provision for potential claim cost impacts from business interruption (BI), landlords and other lines.

Deputy CEO Nick Hawkins says the business maintains the view “there is a specific exclusion for pandemics in our policy wordings” for BI policies.

He calls the $100 million provision a “conservative” position taken by the company to factor in possible fallout from the pandemic, which includes the estimated impact of an economic downturn on the settlement of long tail claims.

“Certainly in the next 12 months, we have uncertainties over how long we are going to be uncertain for,” Mr Hawkins said. “We know that the Australian long tail classes are under a bit more pressure in that environment and not just IAG’s portfolios but all long tail classes.”

IAG says it has taken measures to bolster its overall reinsurance position. These include the purchase of aggregate catastrophe reinsurance cover for the current financial year that will provide $350 million of gross protection in excess of $400 million.

“This facilitates the transition of IAG’s aggregate protection to a financial year format, avoiding the intersection with peak period catastrophe activity that can disrupt the renewal process at calendar year-end," IAG said.