Insurance Australia Group faces fresh questions over its earnings outlook after Citi warned that a run of severe Queensland weather could push RACQ Insurance’s catastrophe costs beyond budget and spill into IAG’s own natural peril allowance for the first half of FY26.
In a note to clients, the broker estimated that heavy storm activity has the potential to overshoot RACQ’s A$154 million allowance by around A$100 million, with any excess expected to wash through IAG’s 1H26 natural hazards budget. Citi has accordingly cut its target price for IAG shares from A$10 to A$9 and shaved earnings forecasts for FY26, FY27 and FY28 by 5%, 1% and 1% respectively.
The call comes at a sensitive moment for Australia’s largest general insurer, which is looking to absorb the RACQ book while handling an elevated season of convective storms and hail across Queensland and Victoria. The stock is down 8.4% so far this year.
Citi’s analysis points to a growing risk that the recent burst of severe weather across south‑east Queensland will not be fully contained within RACQ Insurance’s own protections. The broker notes that the regional insurer has an allowance of A$154 million for significant weather events, but warns that “overrun” is now a live prospect, with an estimated A$100 million potentially falling to IAG’s 1H26 natural hazards allowance if conditions deteriorate further.
The concern is not simply the number of storms, but their clustering in heavily populated areas and the rising cost of repairs. For insurers already grappling with higher construction inflation, supply chain delays and labour shortages, each new hailstorm can have a disproportionate impact on loss ratios. For IAG, which has positioned the RACQ business as a key plank of its Queensland strategy, the short‑term financial drag could be material if the season continues at pace.
Citi also highlights that while RACQ’s reinsurance structure has yet to be fully brought under the IAG umbrella, the scope for a benign outcome via lower‑than‑expected catastrophe activity elsewhere is now slimmer. In other words, a favourable variance in one part of the group is less likely to offset an overrun in Queensland.
The warning comes against a backdrop of intense storm activity. In late October, violent thunderstorms and hail swept through south‑east Queensland and parts of Victoria, prompting an industry‑wide mobilisation. The Insurance Council of Australia (ICA) classified the Brisbane hail event as a Significant Event and activated early catastrophe protocols as claims began to mount across home, motor and small business portfolios.
By 28 October, insurers had logged around 11,000 claims spanning smashed windscreens, dented panels, damaged roofs, internal water damage and secondary losses such as food spoilage. Major carriers, including IAG and Suncorp, deployed assessors, builders and specialist hail repair teams, opened mobile hubs and urged policyholders to lodge claims promptly and to prioritise personal safety during the clean‑up.
For underwriters, these events underline how quickly a run of “ordinary” storms can tip a portfolio towards its peril limits, even before the core summer cyclone and flood season begins in earnest.
Citi’s note also draws attention to regulatory headwinds around IAG’s expansion plans. The Australian Competition and Consumer Commission has moved to block IAG’s proposed purchase of RAC Insurance in Western Australia, a separate deal to the RACQ transaction in Queensland. The broker says this decision will delay the RAC transaction by at least 12 months.
IAG “still remains hopeful that the 'public interests test' will ultimately see a favourable verdict, something we view as plausible”, Citi adds.
The setback on RAC comes despite strong messaging from IAG about the benefits of scale and technology in its recent RACQ acquisition. IAG has argued that combining RACQ’s brand and local presence with the group’s national claims and pricing systems will strengthen service for Queenslanders while helping to absorb rising natural peril costs.
At its annual general meeting in October, IAG upgraded its FY26 guidance on the back of the RACQ deal, lifting expected gross written premium growth to around 10% and increasing its projected reported insurance profit range. Management signalled a FY26 natural peril allowance of A$1.47 billion, adjusted to include RACQ, and said the RACQI business was performing “slightly ahead of our expectations.”
Citi’s latest assessment suggests investors may now need to treat that allowance as a line that could be tested rather than a comfortable buffer.
For Australian insurance professionals, the broker’s intervention highlights the tension at the heart of IAG’s strategy: leveraging acquisitions to grow in key motor and home markets while operating in one of the world’s most volatile natural catastrophe zones.
The RACQ portfolio gives IAG deeper penetration in a state that has long been a focal point for floods, cyclones and hailstorms. At the same time, it concentrates peril exposure in regions where climate variability and urban density are combining to push losses higher and to test the robustness of catastrophe modelling.
Citi’s decision to trim its target and earnings forecasts, rather than issue a more drastic downgrade, indicates it still sees long‑term value in the IAG story, particularly if the company can navigate the current weather cycle without breaching its peril budgets and if the regulatory process on the RAC deal resolves in its favour.
But the episode also serves as a reminder to the wider market. Natural peril allowances, however carefully calibrated, remain estimates. A single bad season in Queensland can force even the biggest carriers to revisit their numbers – and investors, brokers and underwriters alike will be watching closely to see whether IAG’s RACQ‑era risk appetite proves a help or a hindrance as the storms roll through.
