IAG has modest expectations for the year ahead as small gains on home and car insurance are weighed down by NSW compulsory third party costs and a difficult commercial insurance market.
The insurance giant's net profit in the year to June 30 sank 14 per cent to $625 million on the back of a $100 million fall in investment income, a higher tax rate and one-off charge for software assets.
But chief executive Peter Harmer said the company's core insurance business, which includes the NRMA Insurance and CGU brands, remained strong, with insurance profit up seven per cent to $1.18 billion in 2015/16.
"It's a real reflection of the underlying health of the business and something we're really pleased with," he said.
IAG's insurance profit margin rose to 14.3 per cent despite payouts on east coast storms in June totalling $59 million over its natural disaster allowance.
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The company has forecast a similar or slightly weaker insurance profit margin in 2016/17, and said premium income would be relatively flat.
Modest rises in home insurance volumes and car insurance in South Australia, a market they entered on July 1, would be offset by tough conditions in the commercial insurance market, IAG said.
It also expects ongoing pressure from rising volumes of compulsory third party insurance payouts in NSW, and lower premium revenue following the recent $130 million sale of Swann Insurance's motor vehicle dealership.
However, Mr Harmer said there would be reduced earnings volatility for a second year in a row due to the company's quota for share deal with Warren Buffett's Berkshire Hathaway.
The deal, in which IAG cedes 20 per cent of all premiums to Mr Buffett's firm and they pay 20 per cent of IAG's claims, has been in place since July 1, 2015.
The insurer also announced it would buy back $300 million in shares.
IAG shares dropped three cents to $5.82.
IAG ANNUAL PROFIT SLUMPS
* Net profit down 14.1pct to $625m
* Insurance profit up 6.8pct to $1.2bn
* Revenue up 11.8pct to $16.8bn
* Final dividend down three cents to 13 cents, fully franked
