IAG has announced that it has entered into three quota share agreements with international reinsurers.
The deal will see IAG share a combined 12.5% of its consolidated business from 1 January with
Munich Re,
Swiss Re and Hannover Re on a whole-of-account-basis covering IAG’s consolidated business in Australia, New Zealand and Thailand.
The reinsurers will receive a combined 12.5% of IAG’s consolidated gross earned premium and pay 12.5% of claims and expenses as part of the deal, which builds on a 10-year deal with
Berkshire Hathaway. The Berkshire deal has been in place for two years.
IAG will receive an exchange commission, with the majority paid in the form of a fixed fee as a percentage of premium, with an additional element in the form of a profit-share agreement dependent on IAG’s future profitability.
The three deals have an average initial running time of five years, but Nick Hawkins, IAG’s chief financial officer, told a briefing that the insurer sees these deals as long-term relationships that will benefit IAG.
“There are a number of positive financial effects for IAG from these transactions,” Hawkins said. “They reduce our earnings volatility, effectively converting insurance risk into a fee-based income stream and remove downside exposure in the process. In addition, the profit-share mechanism we have in place preserves significant upside earnings potential for our shareholders.”
The agreements are designed to reduce earnings volatility by trading some insurance risk for a more stable fee income stream. The deals will also see IAG reduce its need for catastrophe reinsurance and reduce exposure to volatility in associated premium rates.
Peter Harmer, CEO and managing director of IAG, told a briefing that the firm has “no immediate plans for any further transactions.”
“In combination with the existing Berkshire Hathaway agreement we have now removed downside earnings risk from 32.5% of our underwriting business,” he said. “We believe this is a very satisfactory outcome, as we emerge a much more capital-efficient organisation.”
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