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IAG has purchased reinsurance protection to mitigate natural perils volatility for the next five years, alongside securing adverse development cover for its long-tail reserves from Enstar.
IAG has entered into a comprehensive five-year natural perils reinsurance agreement starting from July 2024 with National Indemnity Company, a subsidiary of Berkshire Hathaway Inc and Canada Life Reinsurance, providing up to $680 million of additional protection annually, and up to $2.8 billion over the entire five-year period.
Along with IAG’s quota share and traditional reinsurance protections, this transaction will effectively limit natural perils costs to $1.28 billion in FY25, which is 67.5% of gross claims costs of $1.9 billion, an increase of approximately 17% on the FY24 natural perils allowance of around $1.1 billion.
Consequently, the expected FY25 net natural perils costs are now capped at $1.28 billion in over 90% of modelled scenarios. To exceed this cap, gross natural perils costs will need to exceed $2.9 billion, pre-quota share for events capped at $500 million.
The annual cost of the protection will be flat for the five years, with the annual natural perils allowance for FY25 of $1.28 billion, increasing relative to the underlying exposures.
Nick Hawkins, Managing Director and Chief Executive Officer, IAG commented, “Australians and New Zealanders have experienced multiple extreme weather events over the past five years which has resulted in increased reinsurance costs and ultimately property insurance premiums. This long-term agreement will help to provide greater certainty over natural perils cost as extreme weather events become more frequent and severe.
“For our shareholders, this transaction builds on IAG’s comprehensive reinsurance strategy and provides greater earnings stability and reduces our capital requirements”
IAG has also signed an adverse development cover (ADC) agreement with Enstar Group Limited through one of its wholly-owned subsidiaries, Cavello Bay Reinsurance Limited.
Under the terms of the agreement, Enstar will provide approximately the equivalent of $430 million of excess cover over the equivalent of $1.7 billion of underlying reserves related to certain long-tail insurance businesses.
This transaction includes Product & Public Liability, Compulsory Third-Party Motor, Professional Risks and Workers’ Compensation for losses incurred on or before June 30th, 2023. The ADC includes explicit cover for Molestation and Silicosis up to a sub-limit of $50 million. The completion of the transaction is subject to regulatory approval and satisfaction of various closing conditions.
Dominic Silvester, Chief Executive Officer, Enstar, commented, “We are pleased to provide a bespoke reinsurance solution that will support IAG in reducing financial risk, capital requirements and earnings volatility. This transaction demonstrates our strong capabilities in the Australian market as we continue to strengthen our position as the partner of choice across global markets.”
This purchase is in addition to existing protections covering long-tail lines, with reserves of approximately $2.5 billion on 1st January 2024.
William McDonnell, Chief Financial Officer, IAG, said, “This additional long-tail protection is a further demonstration of IAG’s ability and ongoing effort to reduce financial risk, capital requirements and earnings volatility.
“We are confident that our long-tail liabilities are appropriately provisioned, complementing the improved underwriting risk profile of our Intermediated business. This reinsurance protects against deterioration due to the inherent uncertainty of long-tail insurance risks such as adverse judicial developments and superimposed inflation.”
Nick Hawkins, Managing Director and Chief Executive Officer, IAG commented: “Today’s announcement is an important milestone in our strategy to create a stronger, more resilient IAG. Our long-term relationships with leading global reinsurers have allowed us to secure an innovative reinsurance arrangement that benefits our customers and shareholders.
“Our long-term relationships with leading global reinsurers have allowed us to secure an innovative reinsurance arrangement that benefits our customers and shareholders. It will provide greater certainty over the cost of natural perils cover for our customers, stabilise our earnings and reduce our capital requirements.
“This cover, combined with the long-tail protection we are announcing today, provides IAG with a strong capital base on which to continue to develop our business in Australia and New Zealand. Investment in our brands and customers continues and the business now has more than five million insurance policies migrating to our new Enterprise Platform technology. We are already seeing improvements to the customer experience as well as delivering the business the ability to better price and manage risk.
“The platform is designed to support our existing business and allows us to execute at scale. We expect to accelerate the rollout of the platform through the remainder of the calendar year. We’re also pleased to confirm that we’re on track to achieve FY24 Reported Insurance Profit and Margin around the upper end of guidance ranges we set at the beginning of the financial year.”
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