IAG placed its reinsurance for this year at an increased cost and with a higher retention, while the insurer also announced changes to its arrangements with Berkshire Hathaway.
According to CFO Michelle McPherson, global reinsurance has become more challenging over the past year due to the impact on capital markets and Australian and international natural catastrophes, but IAG remains strongly supported by long-standing partners.
“We have increased our first event retention reflecting inflation and the impact on the global reinsurance market,” she said.
“This was a rational commercial decision that balanced the interests of all our stakeholders, including minimizing the impact of additional reinsurance costs on our clients.”
After accounting for account-wide quota agreements, the combination of all catastrophe covers as of January 1 results in IAG having a maximum first event retention of $236 million, up from $135 million in July last year.
Total non-quota stock insurance costs for fiscal 2023 are estimated to be between $790 million and $820 million, compared to $659 million last fiscal year.
IAG has renewed 30% of WAQS (WQS) agreements with Berkshire Hathaway, Munich Re and Swiss Re for 32.5%, with negotiations for the remaining 2.5% expected to be completed in the coming months.
The quota agreement with Berkshire’s National Indemnity Company (NICO), which accounts for 20% of total WAQS, has been extended to December 31, 2029, while the end of an equity agreement means Berkshire can sell its IAG stake.
IAG announced a strategic relationship agreement with Berkshire Hathaway in 2015 that included the quota share, a $500 million stock placement that gave the US insurer a 3.7% stake and a swap of some companies.
Ms McPherson says the renewed quota agreement delivers “a materially consistent financial outcome” to the original agreement and supports IAG’s mid-term margin target of 15-17%.
“The terms of Berkshire Hathaway’s renewed agreement with NICO reflect the maturing of our partnership, and the cancellation of the supporting subscription and strategic relationship agreements provides consistency with our other quota partner agreements,” said Ms. McPherson.
Agreements with Munich Re and Swiss Re, representing 10% of a 12.5% whole-of-account program, come into effect on January 1 and have a term of five years.
“IAG and its quota share reinsurers have made a positive commitment to renewing their long-term partnerships prior to the expiry of the original agreements,” said Ms. McPherson. “The willingness of leading global reinsurers to renew their agreements with us reflects their confidence in the IAG franchise and the strength of our financial prospects.”
IAG’s reinsurance program provides up to $10 billion in two-event major catastrophe coverage with a retention of $338, which is 67.5% of $500 million. An additional $150 million in drop-down coverage reduces the insurer’s deductible to $236 million on the two events, with an additional premium payable if the drop-down coverage is on a first event is used.
The agreements also include coverage for $250 million, over $250 million, third and fourth events, and additional drop-down protection, as well as additional aggregate coverage.