IAG places reinsurance, Berkshire equity deal ends

IAG has placed its reinsurance for this year, at an increased expense and with a higher retention, while the insurer has also announced changes in its arrangements with Berkshire Hathaway.

CFO Michelle McPherson says global reinsurance has become more challenging over the past year due to capital market impacts and Australian and international natural disasters, but IAG continues to have strong support from long-term partners.

“We have increased our first event retention reflecting inflation and global reinsurance market impacts,” she said.

“This was a rational economic decision balancing the interests of all our stakeholders, including minimising the impact of additional reinsurance costs on our customers.”

After allowance for whole of account quota share arrangements, the combination of all catastrophe covers at January 1 results in IAG having a maximum first event retention of $236 million, up from $135 million as of July last year.

The total non-quota share insurance expense for fiscal 2023 is anticipated at $790-820 million, compared to $659 million last financial year.

IAG has renewed 30% of the 32.5% whole of account quota share (WAQS) agreements with Berkshire Hathaway, Munich Re and Swiss Re, with negotiations on the remaining 2.5% expected to be completed in coming months.

The quota share agreement with Berkshire’s National Indemnity Company (NICO), accounting for 20% of the WAQS total, has been extended until December 31 2029, while the end to an equity agreement means Berkshire is able to sell-down its IAG shareholding.

IAG announced a strategic relationship agreement with Berkshire Hathaway in 2015 that included the quota share, a $500 million share placement that gave the US insurer a 3.7% stake and a swap of some businesses.

Ms McPherson says the renewed quota share agreement delivers “a materially consistent financial outcome” to the original agreement and supports IAG’s 15-17% medium-term reported margin target.

“The terms of the renewed agreement with Berkshire Hathaway’s NICO reflect the maturing of our partnership, and the removal of supporting Subscription and Strategic Relationship Agreements provides consistency with our other quota share partner arrangements,” Ms McPherson said.

Arrangements agreed with Munich Re and Swiss Re, representing 10% of a 12.5% whole of account program, are effective from January 1 and have a five-year term.

“IAG and its quota share reinsurers have engaged positively to renew their long-term partnerships ahead of the expiry of the original agreements,” Ms McPherson said. “The willingness of leading global reinsurers to renew their arrangements with us reflects their confidence in the IAG franchise and the strength of our financial outlook.”

IAG’s reinsurance program provides a main catastrophe cover for two events up to $10 billion, with a retention of $338, representing 67.5% of $500 million. A further drop-down cover of $150 million reduces the insurer’s retention on the two events to $236 million, with an additional premium payable if the drop-down cover is used on a first event.

Arrangements also include third and fourth event covers of $250 million, above $250 million, and further drop-down protection as well as additional aggregate cover.