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IAG share price tumbles 5% lower on guidance downgrade

The Insurance Australia Group Ltd (ASX: IAG) share price looks set to end the week in the red.

In morning trade the insurance giant’s shares are down 5.5% to $7.29.

Why is the Insurance Australia Group share price tumbling lower?

Investors have been selling Insurance Australia Group’s shares today after it provided an update on its expectations for FY 2020.

This follows a review of its full year net natural peril claim costs in the wake of a recent hailstorm event. Over the period the company’s net natural peril claim costs are expected to be $419 million.

As a result, Insurance Australia Group now expects its FY 2020 reported insurance margin to be in the range of 14.5% to 16.5%. This compares to its previous guidance of 16% to 18%.

In addition to this, the insurer has also indicated that its half year results will contain a post-tax provision of approximately $80 million for a customer refund program.

This provision relates to a specific multi-year pricing issue where discounts were not always applied in full to premiums for all customers who may have been eligible. Insurance Australia Group reported this issue to ASIC in September 2019.

This item will be recorded in the net corporate expense line and does not impact the reported insurance margin.

GWP growth.

Management has also revealed that it expects to report gross written premium (GWP) growth of 1.4% during the half. This compares to GWP growth of 4.1% a year earlier, but is consistent with its full year guidance for “low single digit” GWP growth.

The company’s managing director and CEO, Peter Harmer, said: “We are pleased with our underlying business performance, which continues to track in line with our expectations, both at the GWP and underlying margin levels, and in terms of the net benefits being realised from our optimisation program.”

“We have, however, revised our reported insurance margin guidance for the full year, to reflect the recent heavy natural peril activity and a reduced expectation for prior period reserve releases following the lower than anticipated first half net reserve release outcome,” Mr Harmer added.

The company’s CEO revealed that he was disappointed that its customers had not received the discounts they were entitled to.

He said: “We’re disappointed that some of our customers have not received the full premium discount they should have. We will put this right as quickly as possible. We have a team in place which is working hard to identify individual customers who have been affected and to arrange refunds.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.