Insurance Australia Group (IAG) has announced new reinsurance agreements to reduce earnings volatility over the next five years.
The company has secured protection for natural perils and adverse development for its $2.5 billion long-tail reserves. It expects to meet the upper end of its FY24 Reported Insurance Profit and Margin guidance.
IAG managing director and CEO Nick Hawkins said these new agreements are critical to the company’s strategy to bolster resilience.
He explained that the reinsurance deals provide stability for earnings and lower capital requirements.
“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,” he said.
Starting in July 2024, IAG’s five-year reinsurance agreement with National Indemnity Company (a Berkshire Hathaway subsidiary) and Canada Life Reinsurance will provide up to $680 million annually in natural perils protection, totalling $2.8 billion over the period.
This reinsurance, along with IAG’s quota share and traditional protections, will cap FY25 natural perils costs at $1,283 million, which is 67.5% of gross claims costs. The coverage aims to protect against earnings volatility from extreme weather events.
Hawkins highlighted that the flat cost of the protection over five years allows for predictable financial planning.
“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,” he said. “For our shareholders, this transaction builds on IAG’s comprehensive reinsurance strategy and provides greater earnings stability and reduces our capital requirements.”
Additionally, IAG secured $650 million in adverse development cover (ADC) from Cavello Bay Reinsurance Limited, an Enstar Group (Enstar) subsidiary, for long-tail reserves as of January 1, 2024.
The cover applies to multiple portfolios, including product & public liability, compulsory third-party motor, professional risks, and workers’ compensation.
IAG CFO William McDonnell noted the cover as another step in reducing financial risk and earnings volatility.
“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,” he said. “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.”
Enstar CEO Dominic Silvester expressed satisfaction with the reinsurance solution provided to IAG.
“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,” he said.
The reinsurance agreements come on the heels of IAG’s new renewable energy partnerships for its Australian and New Zealand operations.
IAG confirmed it is on track to report FY24 Reported Insurance Profit and Margin at the upper end of its guidance range.
The expected FY24 Reported Insurance Profit is around $1.2 billion to $1.45 billion, and the Reported Insurance Margin is expected to be 13.5% to 15.5%. The FY24 Underlying Insurance Margin is projected to be in the midpoint of the same range.
Due to the new reinsurance protections, IAG anticipates a $350 million reduction in its Prescribed Capital Amount, pending approval from the Australian Prudential Regulation Authority (APRA). The company will provide formal FY25 guidance alongside its FY24 results announcement on August 21, 2024.
The insurance giant’s target Reported Insurance Margin through the cycle remains 15%, with recent growth expected to boost Return on Equity to 14% to 15%.
