IAG has cut its full-year margin guidance as a result of the Auckland floods and an anticipated increase in natural perils costs and with inflationary impacts exceeding expectations during the first half.

The reported insurance margin is expected to be around 10% compared to the previously anticipated 14-16% range. The company continues to target a 15-17% margin in the medium term.

“The Auckland event, combined with the escalation in supply chain inflation has delayed our ability to fully demonstrate our strategic and operational progress in FY23,” CEO Nick Hawkins said today.

IAG estimates gross costs from the Auckland floods will top $350 million, and that after reinsurance the cost will be at the $236 million retention level announced recently as part of its renewed program.

As a result, the financial year forecast for natural perils has been increased by the same amount, rising to $1.145 billion from the $909 million level set at the start of the financial year. IAG had substantially increased the allowance, after natural perils costs last fiscal year reached $1.119 billion topping the allowed $765 million.

More than 15,000 claims from Auckland severe storms and flooding had been lodged as of today across IAG’s AMI, State, NZI and other partner brands. The New Zealand event hit amid a relatively benign Australian summer perils period to date.

IAG says preliminary first-half figures show net profit is expected to be $468 million, compared to $173 million in the previous corresponding period, bolstered by a post-tax $252 million benefit from a reduction in the business interruption provision.

The reported insurance margin for the half is expected to improve to 8.5% from 7.1%, but the underlying margin is expected to be 10.7% compared to 15.1% previously due to natural peril and inflation impacts.

Mr Hawkins told an analysts briefing that inflation was particularly apparent in motor during the first half as a result of rising labour and parts expenses and with longer repair periods adding to costs. The company is putting through pricing increases, with benefits to show up more strongly in the second half.

The insurer expects first half gross written premium (GWP) growth of 7.5%, or 9.8% adjusted for portfolio exits and currency fluctuations.

IAG has raised its forecast for full-year GWP growth to around 10% compared to the previous “mid-to high single digit” outlook, reflecting increases in response to inflation, natural perils experience and additional reinsurance costs.

The company says it has reinsurance cover for further events this financial year, but its program has involved taking on more risk at lower levels given expensive pricing for those layers of protection.

“There’s just more and more reluctance from the reinsurers to play in that space because they get hit so frequently,” CFO Michelle McPherson told the briefing.

The insurer says a second event drop down cover and aggregate reinsurance will reduce its retention for another event this financial year to $192 million, but an additional premium will be payable on a pro-rata basis given the Auckland costs.

Mr Hawkins says there are early signs that the impact of supply chain inflation on claims costs has stabilised and forward-looking indicators provide the firm with confidence in the outlook.

“Heading into the second half of the year, we will also benefit from the earnings impact of the strong top-line growth which will significantly improve our margins,” he said.

IAG will provide more details when it releases its half-year results on February 13.