IAG says the business is “trending towards” its reported insurance margin guidance for this financial year as double-digit pricing increases in the second half drive expected gross written premium (GWP) growth of around 10%.

CEO Nick Hawkins told a briefing today that the company had materially repriced its business to reflect the challenges around inflation as well as reinsurance and natural perils costs.

The Australian direct and intermediated divisions are set to deliver stronger reported and underlying margins in the current half, reflecting top-line growth, earned premiums and improving claims trends, while New Zealand margin improvement has been slower to emerge following North Island catastrophes, he said.

“Our New Zealand business, after experiencing the second and third largest natural disaster loss events on record, is experiencing the elevated inflation impact on non-peril motor and home claims costs,” Mr Hawkins said.

IAG in February cut its reported insurance margin guidance to around 10% following the Auckland floods and first-half inflationary impacts, while it raised full-year GWP growth expectation to around 10% from mid-to-high single digits.

The company said today that the North Island floods and Cyclone Gabrielle had had a group net cost of $284 million. About 30% of the claims have been closed, including more than 90% of motor claims, and 70% of contents claims.

Looking further ahead, Mr Hawkins says IAG has increased its medium-term return on equity (ROE) target by one percentage point to 13-14%, reflecting top-line growth and improved investment returns on shareholder funds. The company sees a medium-term insurance margin of 15%.

“That 15% is really us taking into account the current environment, inflationary pressures that we’re seeing, perils, reinsurance, and of course customer affordability,” he said.

Mr Hawkins told the briefing that IAG has been simplifying its technology and consolidating multiple systems to create more value through digital, and has introduced an enterprise-wide claims management system.

“IAG has made excellent progress in simplifying its operations and resolving legacy issues but some of this has been masked by the challenging operating environment including the sudden increase in inflation which immediately impacts our claims costs, three years of a La Nina weather cycle amplified by climate change, and material changes in global reinsurance markets,” he said.

Mr Hawkins said IAG has been responding appropriately to the external environment, holding operating costs flat and putting through premium increases that anticipate future claims and reinsurance costs.

The group says it’s on track to deliver on its target to deliver a profit of at least $250 million in the intermediated Australian business next financial year.

Mr Hawkins says there is a strong focus on customer retention, but an ambition to add one million new customers, announced in 2021 as part of a five-year plan and targeted mainly through the geographic expansion of the NRMA brand, will take longer to achieve as margins are prioritised.

IAG will release its full-year results on August 21.