IAG has reported a $427 million full-year loss based on preliminary figures, with provisions hitting the bottom line, and the insurer flagging claim cost impacts in liability classes.

The result compares to a year earlier net profit of $435 million and includes the $1.15 billion business interruption provision stated at the half-year as well as second-half provisions of $200 million that mostly relate to customer refunds and payroll compliance.

“Our underlying financial results for the year are sound and within expectations,” CEO Nick Hawkins said today. “However, we have had challenges with issues that have been identified and provisioned for in our preliminary results.”

IAG says a prior-year reserve strengthening of $81 million, following a previous $48 million strengthening, reflects adverse claim development across long-tail classes, particularly in commercial liability, where there’s been a “sharp deterioration” in average claim size.

Trends have been driven by “systemic issues where mixed economic conditions have enhanced focus on personal injury compensation”, the company says.

The results include a full-year $238 million customer refund provision for a previously identified issue where discounts to premiums were not always applied in full, as well as $51 million related to a review into whether some employees had received full entitlements.

Mr Hawkins says the firm is remediating its intermediated business, which includes commercial insurance and personal lines outside IAG’s direct sales, and is repricing long-tail classes.

“We recognise that our intermediated business has underperformed which is why I have set specific goals for this business to simplify its structure, upgrade its risk and underwriting disciplines, further strengthen relationships with broker partners and improve its financial returns,” he said.

IAG last year reorganised its Australian operation, splitting it into direct and intermediated, and in March announced the appointment of executives to lead the new divisions.

The insurer says the roll-off related to outdated business interruption wordings citing the repealed Quarantine Act will continue over the next couple of months, but current lockdowns won’t require any additional provisioning for the issue.

“Any impact from the current lock-down is included within the existing business interruption provision that we put in place in November last year,” Mr Hawkins said. “We don’t believe there will be any additional cost from the tail from business interruption over and above the provision we have already booked.”

The preliminary results outline gross written premium (GWP) growth of 3.8%, net earned premium growth of 1.5% to $7.5 billion, an underlying insurance margin of 14.7% and a reported margin of 13.5%.

IAG today restarted giving earnings guidance, after listed firms widely withdrew outlooks last year amid COVID-19 uncertainty.

The insurer expects fiscal 2022 GWP to achieve “low single-digit” growth, while the reported insurance margin is anticipated to reach 13.5-15.5%.

The GWP outlook includes modest growth in direct Australia customer numbers, ongoing rate increases across personal and commercial lines and further portfolio remediation, which is expected to constrain intermediated volumes.

The guidance also includes an increase in the natural perils allowance to $765 million (post quota share), compared to $658 million in the past financial year, reflecting underlying exposure growth.

IAG will release its finalised full-year results on August 11.