Insurance Australia Group (ASX:IAG) is one of the largest general insurers in Australia and New Zealand, providing home, motor and commercial insurance through brands including NRMA Insurance, CGU, WFI, SGIO, State and AMI. Its FY26 result showed strong premium growth, helped by the addition of RACQ Insurance, while statutory profit declined as natural peril costs and other items weighed on earnings. The central FY27 issue is whether higher premium income can translate more consistently into insurance profit.

Premium Growth Accelerates With RACQ Contribution

For the year ended 30 June 2026, gross Written Premium increased 7.6 per cent to $18.4 billion.

RACQ Insurance contributed approximately $1.27 billion over ten months, making the Acquisition an important driver of the reported growth rate.

Excluding RACQ Insurance, gross written premium growth was approximately 1.9 per cent.

Gross written premium represents the value of insurance premiums written before deductions such as Reinsurance and is a key measure of an insurer's scale and pricing activity.

The difference between reported and underlying growth shows that FY26 expansion was influenced materially by acquisition activity rather than organic premium growth alone.

Statutory Profit Falls Despite Better Underlying Insurance Performance

Net profit after tax was $1,022 million, down from $1,359 million in FY25.

This represented a decline of approximately 25 per cent.

Reported insurance profit was $1,552 million, while underlying insurance profit increased 2.3 per cent to $1,578 million.

The distinction between reported and underlying insurance profit is important because underlying measures exclude or adjust for certain items that may not reflect normal operating performance.

The increase in underlying insurance profit suggests that core Underwriting performance improved modestly even though statutory Earnings declined.

For Insurance Australia Group (ASX:IAG), the FY26 result therefore showed different trends depending on whether the focus is placed on reported profit or underlying insurance operations.

Claims and Expense Ratios Show Improvement

The underlying claims ratio improved by 50 basis points to 51.6 per cent.

The administration expense ratio improved by 60 basis points to 11.6 per cent.

The claims ratio measures the proportion of premium income used to pay claims, while the expense ratio reflects operating costs associated with running the insurance business.

Lower ratios generally indicate improved operating efficiency, provided pricing and customer retention remain sustainable.

The underlying insurance Margin was 15.0 per cent.

Excluding RACQ Insurance, the margin was 16.0 per cent.

These figures show that the acquired Business initially carried a lower margin than the rest of the group, making integration and synergy delivery important to future profitability.

Natural Perils Remain a Major Earnings Variable

Net natural peril costs were $1,579 million in FY26.

This was approximately $114 million above the company's allowance.

Natural peril costs include claims arising from events such as storms, floods and bushfires and can vary significantly between years.

Queensland storms affected RACQ Insurance before reinsurance responded, demonstrating the importance of both catastrophe exposure and reinsurance protection.

For FY27, IAG has set a perils allowance of $1,491 million.

This allowance is an estimate rather than a fixed cost, meaning actual outcomes could be higher or lower depending on the severity and frequency of weather events.

RACQ Integration Remains a Key FY27 Focus

Management indicated that integration of RACQ Insurance was progressing in line with expectations.

More than $50 million of reinsurance synergies had already been achieved.

Synergies refer to cost savings or Revenue benefits generated by combining operations, systems or purchasing arrangements after an acquisition.

Further integration benefits could improve the profitability of the RACQ business over time.

However, integration also carries execution risk, particularly where technology platforms, pricing systems, reinsurance arrangements and Customer Service processes need to be aligned.

The degree to which RACQ's margin moves closer to the rest of the group will therefore be an important measure of the acquisition's financial contribution.

Dividend and Capital Returns Continue

IAG declared a final Dividend of 20 cents per share, taking the total FY26 dividend to 32 cents per share compared with 31 cents in FY25.

The reported Payout Ratio was approximately 74 per cent.

The company also completed a $200 million share buy-back, repurchasing approximately 27.3 million shares at an average price of around $7.30.

These capital returns were made alongside Investment in integration, reinsurance and technology.

Future distributions will continue to depend on earnings, capital requirements and the level of claims activity.

FY27 Guidance Sets a Margin Range

For FY27, IAG expects gross written premium growth of 5 to 8 per cent.

The company is also guiding to a reported insurance margin of between 14.5 and 16.5 per cent.

This range provides a benchmark for assessing whether premium growth is converting effectively into underwriting profitability.

The guidance also reflects the interaction between pricing, claims inflation, reinsurance costs, weather events and operating expenses.

A perils allowance of $1,491 million has been set for FY27, while technology investment is expected to be approximately $400 million.

The scale of technology spending means efficiency benefits will need to be weighed against near-term cost requirements.

Claims Inflation Remains a Significant Risk

Home claims inflation was running at approximately 15 per cent.

Repair costs, labour availability and the severity of water damage contributed to that pressure.

If claims inflation continues to exceed premium increases, margins could come under pressure even if customer numbers remain stable.

Pricing therefore remains central to FY27 performance.

Insurance companies need to raise premiums enough to reflect higher claims costs while remaining competitive in markets where customers can switch providers.

This creates a constant trade-off between margin protection and customer retention.

New Zealand Performance Adds Another Pressure Point

The New Zealand intermediated business recorded an 11 per cent decline in premium.

Its margin compressed to 8.9 per cent.

This shows that not all parts of the group participated equally in FY26 growth.

The weaker New Zealand performance adds another area for management to address alongside RACQ integration and Australian claims inflation.

Any improvement will depend on pricing, customer retention, claims experience and broader market conditions.

Legal, Technology and Reinsurance Risks Persist

Legal proceedings linked to Greensill remain a source of uncertainty.

Potential outcomes may affect future costs, although their timing and scale remain uncertain.

Technology investment also carries execution risk because large programmes can involve implementation delays, cost overruns or slower-than-expected efficiency gains.

Reinsurance pricing is another important Factor because insurers use reinsurance to transfer part of their catastrophe exposure.

Higher reinsurance costs can reduce margins, while lower levels of cover can increase exposure to severe weather events.

For IAG, balancing these factors will remain important in protecting profitability.

What to Watch in FY27

The first-half FY27 result will provide the next broad test of whether reported insurance margins are tracking within the 14.5 to 16.5 per cent guidance range.

Gross written premium growth will also be important, particularly whether underlying growth strengthens beyond the contribution from RACQ.

Natural peril costs through the Australian summer will remain one of the largest variables.

Further RACQ synergies will provide evidence of integration progress, while trends in home claims inflation will show whether pricing is keeping pace with repair costs.

The technology programme and the use of automation and artificial intelligence in claims handling will also be worth monitoring for evidence of efficiency gains.

For Insurance Australia Group (ASX:IAG), FY26 showed that premium growth alone does not guarantee higher profit. FY27 will test whether improved underlying claims and expense ratios can be sustained while the group absorbs weather volatility, claims inflation and integration costs.