IAG has announced it entered into three agreements to quota-share a combined 12.5% of its consolidated business from Jan. 1, which will improve
IAG’s capital mix by placing greater emphasis on the application of more efficient reinsurance capital.
According to IAG, the agreements, with reinsurers
Munich Re,
Swiss Re and Hannover Re, are on a whole-of-account basis, covering IAG’s consolidated business in Australia, New Zealand and Thailand. They have an average initial period of more than five years.
Starting January, the reinsurers will receive a combined 12.5% of IAG’s consolidated gross earned premium and pay 12.5% of claims and expenses. In addition, IAG will receive an exchange commission.
The agreements build on the 10-year, 20% whole-of-account quota-share arrangement between IAG and
Berkshire Hathaway, which has been in place for over two years, and are expected to deliver similar benefits and financial effects on a pro rata basis:
- Reduced earnings volatility, with 12.5% of insurance risk effectively exchanged for a more stable fee income stream;
- Lower requirement for catastrophe reinsurance and reduced exposure to volatility in associated premium rates;
- A reduction in regulatory capital requirement of approximately $435 million over a three-year period; and
- Broadly neutral EPS and ROE effects, prior to consideration of potential capital management impacts.
IAG managing director and chief executive officer Peter Harmer said the agreements are a logical next step for the company.
“In tandem with the Berkshire Hathaway quota share, we have removed downside earnings risk from 32.5% of our business while retaining significant exposure to earnings upside via the profit share arrangements,” Harmer said. “We believe this is a good outcome for IAG shareholders.”
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