IAG has entered into five-year reinsurance agreements with Berkshire Hathaway and Canada Life, along with securing adverse development cover (ADC) for its long-tail risks from Enstar Group.
The first deal allows IAG to receive long-term natural peril volatility protection from Berkshire Hathaway and Canada Life, providing up to US$680 million of additional protection annually and up to US$2.8 billion over the entire five year period.
In conjunction with IAG’s quota share and traditional reinsurance protections, this will effectively limit natural peril costs to US$1.28 billion in this fiscal year, an increase of approximately 17 per cent from US$1.1 billion estimated last year.
The reinsurance against natural perilous events provides material downside protection for future earnings volatility against extreme weather events and weather patterns.
Nick Hawkins, managing director and CEO at IAG, notes: “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 the cost of the cost of natural perils as extreme weather events become more frequent and severe.”
He continues: “For our shareholders, this transaction builds on IAG’s comprehensive reinsurance strategy, provides greater earnings stability, and reduces our capital requirements.”
In addition to existing protections covering long-tail lines, IAG has also purchased an ADC from Cavello Bay Reinsurance, a subsidiary of Enstar Group. This will provide US$650 million of protection for the long-tail reserves of approximately US$2.5 billion.
It applies to portfolios across Australia, including product and public liability, compulsory third-party motor, professional risks, and workers’ compensation. The agreement also includes explicit coverage for molestation and silicosis, up to a sublimit of US$50 million.
The new long-tail protection plan, combined with the existing cover, strengthens IAG's capital base, providing a solid foundation for the company's ongoing business development efforts in both Australia and New Zealand.
William McDonnel, chief financial officer at IAG, states: “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.
“This reinsurance protects against deterioration due to the inherent uncertainty of long-tail insurance risks such as adverse judicial developments and superimposed inflation.”
