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IAG enters into risk sharing deals with Munich Re, Swiss Re, Hannover Re

8th December 2017 - Author: Steve Evans

Insurance Australia Group Limited (IAG) said this morning that it has entered into reinsurance arrangements with three of the biggest companies in the world, as it looks to better manage the volatility in its results.

IAG logoThe 3 quota share reinsurance agreements will see IAG cede 12.5% of its underwriting business through to Munich Re, Swiss Re and Hannover Re from January 1st 2018, an arrangement that the insurer said will “improve IAG’s capital mix through placing greater emphasis on the application of more efficient reinsurance capital.”

The quota share agreements are on a whole-of-account basis, and cover IAG’s consolidated business across Australia, New Zealand and Thailand. The transactions will have an average initial term of more than five years.

For the three major reinsurers the arrangement will help them to secure more risk from the diversifying regions of Australia, New Zealand and Asia, so meet their goals of expanding their books into these territories.

The underlying agreement means that Munich Re, Swiss Re and Hannover Re will take on a combined 12.5% of IAG’s consolidated gross earned premium and pay 12.5% of claims and expenses.

IAG will also take an exchange commission, recognising the value of its franchise. This will largely be in the form of a fixed fee (as a % of premium) as well as some profit-sharing.

IAG Managing Director and Chief Executive Officer Peter Harmer commented on the announcement, “While our strategic priorities of customer, simplification and agility go to the heart of maximising the value of our customer platform, it is important we continue to pursue initiatives that optimise the mix of the supporting capital platform. These transactions are a clear step forward on that front.

“In tandem with the Berkshire Hathaway quota share, we have removed downside earnings risk from 32.5% of our business while retaining significant exposure to earnings upside via the profit share arrangements. We believe this is a good outcome for IAG shareholders.”

Chief Financial Officer Nick Hawkins added, “We have previously indicated our intent to explore further quota share opportunities and are pleased we have been able to meet our return criteria via agreements with three of our key reinsurance counterparties.

“The agreements further reduce the volatility of our earnings, while delivering greater diversity of quota share counterparties and maturities. We see this form of reinsurance capital as an integral part of our capital mix and long-term sustainability.”

These quota share arrangements will reduce IAG’s reliance on catastrophe reinsurance, and as they lock in coverage for a five-year minimum term they also remove the chances of volatility in reinsurance rates.

The company said that with these quota shares in place it will reduce its 2018 catastrophe renewal, with gross cover placed set to drop from 80% to 67.5%.

The 12.5% quota share agreements are expected to reduce IAG’s regulatory capital requirement over a three-year period by around $435 million, most of which is expected to occur within 18 months, including more than $100 million identified at 31st December 2017.

Additionally, the quota shares mean that IAG’s natural perils allowance will drop to $627 million (from $680 million) to reflect the added protection.

IAG touts the arrangements as set to reduce its earnings volatility, as it exchanges 12.5% of its insurance risk for a steady stream of income, less catastrophe reinsurance required as effectively its book is smaller, lower regulatory capital and a broadly neutral effect on EPS and ROE.

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