IAG has reported a full-year profit of $347 million, recovering from a year-earlier loss, with the company releasing some business interruption provisions while strengthening commercial liability reserves following claims pressures.

Gross written premium (GWP) rose 5.7%, in line with guidance for “mid-single-digit” growth, but the reported insurance profit fell to $586 million, representing a margin of 7.4%, which was down from 13.5% last year and below the guidance range of 10-12%, preliminary results released today show.

CEO Nick Hawkins says the results reflect high natural perils, volatile investment markets and the inflationary environment, but positive momentum and increased investment yields will support a forecast stronger margin.

“Despite the challenges we have seen in the external environment over the year, our businesses have performed well, delivering strong GWP growth,” Mr Hawkins said.

“Our direct insurance business in Australia is growing in key segments, particularly as we roll out the NRMA Insurance brand in Western Australia and South Australia.”

IAG has released $200 million in business interruption provisions following a Federal Full Court judgment on the second industry test case in February, and taking into account the number and nature of claims received. The provision now stands at $975 million.

Reserves strengthening of $172 million, driven by the commercial liability portfolio, reflects inflation impacts on claims settlements and the late notification of large claims, mainly from the 2017 and 2018 accident years, in a trend assumed to have continued.

The company says around $45 million of the strengthening relates to silicosis exposures, and it has acted to reduce future impacts through previously exiting some accounts, exclusions and pricing.

Another challenging area is worker-to-worker activity, where claims are made under a workers’ compensation scheme, and then that scheme makes a claim on the public liability policy of the insurer’s customer.

IAG says the intermediated business is well positioned to deliver a targeted insurance profit of $250 million in the 2024 financial year, with steps taken to drive a turnaround showing promising signs.

“The underlying performance is improving,” intermediated division head Jarrod Hill said. “The external environment is challenging, but I still have confidence in delivering on the result, and the division has confidence in delivery on the result that we have committed to.”

Net natural peril costs of $1.119 billion were $354 million above the original allowance of $765 million and in line with a March update that indicated an expectation of about $1.1 billion.

The allowance this year will increase by about 19% to $909 million, post quota share, factoring in the increasing frequency and severity of natural perils.

For this year, IAG expects a reported insurance margin of 14-16% and GWP growth in the “mid-to-high single digit” range, mainly rate driven to cover claims inflation, higher reinsurance costs and the increased natural peril allowance.

Mr Hawkins says the group is seeing mid-to-high single digit claims inflation, compared to low single-digit levels 12 months ago.

“That is the operating environment that we are in now and I would say that is consistent across Australia and New Zealand. We are just seeing inflation everywhere, and we are factoring that into pricing,” he told a briefing.

IAG reported a headline loss of $427 million a year ago due to business interruption provisions, customer refund and payroll compliance issues, as well as a reserves strengthening at that time also for long-tail classes.

The company will release its detailed final audited results on August 12.