IAG has taken out reinsurance to mitigate natural hazard volatility for the next five years while protecting its long-tail reserves against adverse developments.
IAG has entered into a comprehensive five-year natural hazards reinsurance agreement with National Indemnity Company, a subsidiary of Berkshire Hathaway Inc. and Canada Life Reinsurance, effective July 2024, providing additional protection of up to $680 million per year and up to $2.8 billion over the entire five-year period.
Together with IAG’s quota share and traditional reinsurance protection, this transaction will effectively cap FY25 natural peril costs at $1.28 billion, representing 67.5% of gross loss costs of $1.9 billion and an increase of approximately 17% over the FY24 natural peril provision of approximately $1.1 billion.
As a result, the expected net cost of natural disasters in fiscal year 2025 is capped at $1.28 billion in over 90% of the modeled scenarios. To exceed this cap, gross costs of natural disasters must exceed $2.9 billion, with the pre-event quota portion capped at $500 million.
The annual cost of protection remains unchanged for the five years, with the annual natural disaster allowance of $1.28 billion in FY25 increasing in proportion to the underlying risks.
Nick Hawkins, Managing Director and Chief Executive Officer of IAG, commented: “Australia and New Zealand have experienced several extreme weather events over the past five years, resulting in higher reinsurance costs and ultimately higher property insurance premiums. This long-term agreement will help provide greater certainty around the costs of natural catastrophes as extreme weather events become more frequent and severe.”
“For our shareholders, this transaction builds on IAG’s comprehensive reinsurance strategy, 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 $430 million of excess coverage over and above the equivalent of $1.7 billion in underlying reserves related to certain long-tail insurance transactions.
This transaction includes product and public liability, automobile liability, professional hazards and workers’ compensation for losses occurring on or before June 30, 2023. The ADC includes explicit coverage for harassment and silicosis up to a sublimit of $50 million. Completion of the transaction is subject to regulatory approval and the satisfaction of various closing conditions.
Dominic Silvester, CEO of Enstar, commented: “We are delighted to be able to offer a tailored reinsurance solution to help IAG reduce financial risks, capital requirements and earnings volatility. This transaction demonstrates our strong capabilities in the Australian market and we continue to strengthen our position as a preferred partner in global markets.”
This purchase is in addition to existing long-tail insurance line coverage with reserves of approximately $2.5 billion as of January 1, 2024.
William McDonnell, IAG’s Chief Financial Officer, said: “This additional long-term protection is further evidence of IAG’s ability and ongoing efforts to reduce financial risk, capital requirements and earnings volatility.
“We are confident that our long-term liabilities are adequately secured and complement the improved underwriting risk profile of our intermediated business. This reinsurance protects against deterioration due to the inherent uncertainty of long-term insurance risks, such as adverse legal developments and superimposed inflation.”
Nick Hawkins, Managing Director and Chief Executive Officer of 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 enabled us to enter into an innovative reinsurance arrangement that benefits our customers and shareholders.
“Our long-term relationships with leading global reinsurers have enabled us to enter into an innovative reinsurance arrangement that benefits our clients and shareholders. It provides our clients with greater certainty regarding the cost of covering natural hazards, stabilizes our earnings and reduces our capital requirements.
“This cover, together with the long-term cover we are announcing today, provides IAG with a strong capital base on which to continue to grow our business in Australia and New Zealand. We continue to invest in our brands and customers and the company has now migrated more than five million insurance policies to our new Enterprise Platform technology. We are already seeing improvements in the customer experience and are able to offer the company better pricing and risk management.
“The platform is designed to support our existing business and enables us to operate at scale. We expect to accelerate the rollout of the platform over the remainder of the calendar year. We are also pleased to confirm that we are on track to deliver a reported underwriting profit and margin in fiscal 2024 that are around the upper end of the guidance ranges we set at the beginning of the fiscal year.”
