IAG has fortified its financial position through reinsurance agreements aimed at reducing earnings volatility from natural disasters.
These agreements, effective July 2024, involve a five-year natural perils reinsurance contract and an ADC for long-tail reserves.
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IAG has signed a five-year natural perils reinsurance agreement with National Indemnity Company, a Berkshire Hathaway subsidiary, and Canada Life Reinsurance.
This pact, commencing this month, provides up to A$680m ($453.49m) of additional protection annually, with a total of up to A$2.8bn over the five years.
The arrangement complements IAG’s existing quota share and traditional reinsurance measures, effectively capping natural perils costs at A$1.28bn in the 2025 financial year, which is 67.5% of the anticipated gross claims costs of A$1.9bn.
The reinsurance against natural perils events offers protection against potential earnings fluctuations due to extreme weather events and changing weather patterns.
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By GlobalDataConsequently, the projected net natural perils costs for the 2025 financial year are limited to A$1.28bn in more than 90% of modelled scenarios.
To breach this threshold, gross natural perils costs would need to surpass A$2.9bn, prior to a quota share for capped events at A$500m.
In addition to the natural perils coverage, IAG secured an ADC from Cavello Bay Reinsurance, an Enstar Group subsidiary.
This ADC provides A$650m of protection for IAG’s long-tail reserves, valued at approximately A$2.5bn as of 1 January 2024.
The cover extends to various portfolios across Australia, including product and public liability, compulsory third-party motor, professional risks and workers’ compensation, and specifically includes up to A$50m for molestation and silicosis claims.
IAG managing director and CEO Nick Hawkins said: “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 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. This cover, combined with the long-tail protection we are announcing today, provides IAG with a strong capital base on which to continue to develop our business in Australia and New Zealand.”
In a move to mitigate risks associated with extreme weather, IAG joined the Cyclone Reinsurance Pool in November 2023.
Managed by the Australian Reinsurance Pool Corporation, this federal government initiative aims to reduce insurance premiums for policyholders in cyclone-prone areas such as Queensland, the Northern Territory and Western Australia.
