Company Interview / Rising premiums boost IAG's profit

William McDonnell, the CFO of Insurance Australia Group (ASX:IAG), says IAG has recently posted an almost 8% increase in full year profits, now standing at $898 million. Not only did the insurance profits jump by 79.1%, he notes, but strong double-digit growth of 11.3% was also recorded. As IAG’s capital position is fundamentally robust, William mentions these markers aren’t solely financial. Operational achievements have been made, such as the national rollout of the NRMA brand and a unified set of platforms for claims, policies, and pricing across their retail businesses in Australia and New Zealand.

William also reflects on the impact of rising premiums and how IAG has been proactive in addressing customer vulnerabilities. He reveals that they have aided 20,000 customers in financial distress through special measures in the past year. Beyond merely offering assistance, they have also developed AI tools to proactively identify customers who require aid. William discusses the impact of harsh climate conditions, explaining that the firm has significantly increased its allowances and reinsurance. He reveals that implementation of a considerable reinsurance deal in June will bolster customer protection against possible severe weather volatility over the next five years.

On dividends and shareholder value, William confirms that IAG aims to sustain a consistent payout growth to shareholders, with the company's guidance for insurance profit for FY 25 sitting between 1.4 to 1.6 billion. IAG's future tech investments and a focus on cost reduction are cited as foundations for promising returns for shareholders. The $350 million buyback plan is currently in execution as part of this strategy. Finally, he touches on potential growth areas for IAG, particularly their general insurance offering. He discused their commitment to investing in the business and affirms that all these strategic decisions aim to improve shareholder value and customer service.

Full unedited transcript:

0:11

Insurer IAG, posting a near 8% jump in full year profit to $898 million in lifting its full year dividend by 80% to $0.27. IAG's insurance profit jumped 79.1% to $1.44 billion, and it paid out $10.7 billion in claims over the 12 months. The final dividend of $0.17 per share is an 89% jump on full year 23. Let's get now to IAG CFO William McDonnell, who joins me. Thanks so much for your time on Orbis. William, just talk us through, in your words some of the highlights of the past year.

0:46

Well, hey Juliet, and thanks for having me on. Yeah. So so highlights for the year. So you you mentioned the profit. The insurance profit is actually up almost 80%. And that also then led to how we could, uh lift the dividend 80% as well. Um, growth was strong double digit 11.3% growth. We now got $16.4 billion of GWP. Um, and then the capital position is also, uh, really strong at the end of the year. So, so those are all great markers. But it's not just the financials. We've also had a great year operationally. So we've gone national with the NRA, NRMA brand. Um, and then also our enterprise platform, which is like the core technology. We run the business on. We've now got one common set of claims platform policy platform pricing platform across all of our retail business in both Australia and New Zealand. And that's really setting us up

1:46

well for the future, to be able to scale a business further and deliver a great customer experience as well. I mentioned a large part of the profit that you have is on the back of rising premiums. How much further do you expect them to grow And I mean, is there any sort of relief for people as well, facing higher cost of living pressures. Yeah, that's a great question. And we're absolutely aware that, you know customers are doing it tough. It it there's you know cost of living everything else. So we have a whole range of measures in place. In the past 12 months we've supported 20,000 customers where we could identify customer financial vulnerabilities and we can provide some relief. We're actually using some AI tools now to to help us identify such customers. We also have a range of measures where we can give customers discounts, where they take steps to reduce their risk. So both we there's a wildfire bushfire

2:46

uh, um, peril tool that the customers can use also if they improve their um meet me the latest standards in terms of the flood resilience or cyclone resilience of their property. We can give them discounts. So there's a whole range of of of measures that we can take. There It was less volatile in terms of weather conditions over the full year, which is always an encouraging sign. But I'm here in a basically summer dress in August. It's very hot out there today in Sydney. What are you sort of hedging for in case we do see a bad bushfire season or more volatile weather in the next financial year?

3:24

Well, look, and I've actually researched climate change myself in the past and before I was CFO here, I had a couple of years running a climate organisation. Um, but in Australia and New Zealand we are at the pointy end of climate change. We've seen natural perils increase, so both the money we set aside for it, but also the reinsurance that we buy. So that has been going up dramatically. It's probably around doubled over five years. Um, we went up 20%. But for FY 24 we've lifted our perils allowance another 17% into 25. And uh, but when I say pointy end in Australia and New Zealand, the the cost of weather whether insurance as a proportion of property, it's about ten times what it is in northern Europe. So, so so those are those are really important. And that's why we entered into this very large reinsurance deal that we announced at the end of

4:24

June, which had a very positive market reaction. And that's because what that deal does is it means that we're very well protected. We've very well protected our customers. So against future increases, if there's more volatile weather over the next five years, but also for our shareholders, and it stabilizes our returns, reduces volatility and protects the capital position as well. Now you mentioned shareholders there. We did mention that your dividend has jumped quite nicely. Can you continue to sort of try and pay out to shareholders at that kind of growth as

5:04

well. So, so we're um, you know, we're expecting we've lifted our guidance, uh, for A profit for FY 25. Now 1.4 to 1.6 billion. Insurance profit. That's our guidance at a similar margin range to FY 24. But obviously there's some some business growth. Um, and then our dividend policy remains to pay out between 60 and 80%. This year we're paying out 72%, uh, of the profit. Let's talk about your GWP as well. And I guess where you see some growth and scalability for full year 25. You did mention NRMA previously.

5:46

Yeah. That's right. So I mean, we're expecting growth across all of our businesses. I mean, overall, we would aim to grow in line with system or slightly ahead. Um, you know, we provide cover, uh, you know, across all areas of Australia and New Zealand and commercial and retail business. Um, and yeah so, so broad based.

6:12

You've also announced a $350 million buyback. I know that you as a CFO cannot control the stock market, but just tell us where you're sitting in terms of shareholder value at the moment.

6:26

Well, we we're, uh, we're obviously, um, pleased with the share price performance over the last, um, over the last 12 months. We think that reflects the, the great investments that we've made in the business and that we're continuing to make. Um, and I mentioned that like that big technology program. So that's absolutely now live. We're migrating customers across. We've already got 2 million customers on the new platform. And that's going to keep going. We've also commenced another program to invest in the, uh, commercial business, the commercial enablement program across Australia and New Zealand. So we're absolutely investing for the, for, for, for the future. And one other thing, you know, we've got to focus on bringing our costs down further. Uh, and add something you know, for me as CFO, that's pretty important to and we'll say more about that at our Investor Day in December. All right. I was going to try and ask you a little bit more about that. William. I'll at least try my best. Part of that cost reduction mean that there could be job cuts on the horizon.

7:27

Well, I mean, we we, uh, we job cuts. I think it's more the question of, um, you know, how have we got the, the, the right support for the business and for our customers? And indeed, this year we've actually, um, added 150, uh, to our claims staff. And that's to make sure that both we're providing great claims service, but also we've got the resilience when major events happen, um, to, to to be able to cope with a surge of customer, of helping customers. Um, but of course, you know, we look across the efficiency of all of our business and, and the nature of roles. Um, so, um, you know. Yeah. And how do you think that you're faring, William, compared to some of your competitors? We know in terms of the market, your shares are performing well, but just in terms of business and competitive advantage.

8:24

Well, look, I mean, you know, I'm focused on how we're running our business, uh, rather than our competitors. We're very pleased with the progress we're making. I think our insurance, um, margins and underwriting property profitability is measuring up very well. And I think that reflects the real investment that we've made in capability, uh, around underwriting excellence, uh, and the rigor of that as well as, you know, peril modeling and, and these other things and our profitability also, um, perhaps what's distinctive for us is also the the way we use reinsurance. So the returns that our shareholders benefit from are enhanced by all of the reinsurance arrangements we have in place, which, which reduces volatility and means we can be more capital light. We've in fact through share buybacks We've reduced our share count by around 95 million over the last 12 months, and we'll

9:24

continue to pursue a strategy that is is what you could call a capital lite strategy. Um, so so that should be of benefit to shareholders. And we are now sort of two months into full year 25. How are things tracking along?

9:40

Well, so, um, we're actually really pleased with how the, the enterprise platform that I described, that technology, we went live with that, um, initially in Western Australia, but we really went live with, with, with Eastern Australia and parts of New Zealand over the last few months. And we're very pleased with how that's going, both in terms of the of colleague experience in customer experience. And there's uptake in, in use of digital channel, but also what it means in terms of more sophisticated pricing. And we can manage the risk. And and we're getting higher conversion rate. Uh from, from um the, the lower risk customers, which is pleasing to see as well.