Suncorp tops-up aggregate reinsurance as nat cat losses exceed budget

Australian primary insurer Suncorp has purchased an additional $75 million in aggregate excess-of-loss reinsurance in December in response to its natural catastrophe costs coming in well-above budget for the first-half of its fiscal year.

Suncorp reported this morning that its natural catastrophe claims came in well-above budget for its first-half of the financial year to end of December 2021.

The insurer actually saw its natural hazard costs exceeding the pre-set budget by $205 million and reaching $695 million, which helped to drive a $490 million erosion of its $650 million aggregate reinsurance deductible before the end of last year.

As a result, the insurer has added a new $150 million layer of aggregate reinsurance to the top of its tower, but only 50% placed, so now has $75 million of additional aggregate limit to tap into should its catastrophe claims rise in the second-half of the fiscal year.

Because of this, Suncorp now says that its, “Natural hazards costs are expected to be significantly less than the allowance in H2 as any continued natural hazard experience will likely result in reinsurance recoveries.”

Steve Johnston, Group CEO of Suncorp, commented on the additional aggregate reinsurance purchase during a Q&A this morning, when he was asked whether this top-up aggregate layer might imply a larger reinsurance purchase for the next fiscal-year.

He explained that, “Buying that cover was pretty much a reflection of seeing the actuals; natural hazard costs coming through in October and the proximity that we had to triggering that aggregate cover. I mean, it was a discretionary purchase; it was one we pondered over for a period of time and ultimately took a view that based on the conservative settings that we have for our business going forward, it was the right thing to do.

“It doesn’t inherently dictate or roll forward from there that that’s a strategy that we’re going to take into the next renewal. We’ll look at how we land at the end of this year and work our way through the pre-placement to see what pricing and capacity is available in the market and as we always do, we’ll look to pre-bind as much of the program as we can.

“As you know, we don’t construct the allowance specifically to take a linear pattern into account. We didn’t do that last year and we certainly haven’t done it in this financial year, so we would expect in a La Nina year to have an exceedance of the allowance and again, we’ll go about that the same way next year.”

Jeremy Robson, Group CFO, added, “The re-insurance program we have in place we think optimises for our strategy, which just to remind is about optimising return on equity. But we also need to have a lens on P&L volatility and the program we have in place, we think that does that. We’ve obviously got to go through the renewal process and look at pricing capacity, but we think the program we have in place does optimise for that, probably more appropriately in a non-La Nina weather pattern year.

“I wouldn’t necessarily at this stage see why we would be changing our preferred program for next year relative to what we’ve got this year, excluding that top-up.”

Robson also commented on Suncorp’s reinsurance pricing for the current fiscal-year and said that, “The renewal was relatively flat. It’s not to say each of the covers was flat of course, there’s a reasonable mix across the full program of property covers and casualty covers and main cat and drop downs and AXLs and so on, so in aggregate, relatively flat.

“We have seen of course as well some reduction in exposures. We have seen reduced exposures in the portfolio exits in both Consumer and Commercial and unit growth in Home whilst positive hasn’t changed the dial too much on the overall level of exposure. It’s probably a, in terms of reinsurance pricing, a very modest increase in reinsurance pricing being offset by some reduced exposure.”

At the start of this fiscal-year, Suncorp had set its natural hazards budget at $980 million, however, after the run-rate exceeded expectations in the first-half, Suncorp has now increased its full-year outlook for natural hazards costs to $1.075 billion.

The insurer is clearly anticipating claiming on its aggregate catastrophe reinsurance through the second-half of its financial year, with full coverage available, as well as three drop-down treaties and reinstatements available.

Adding to which, the additional $75 million of aggregate reinsurance, across 50% of a $150 million layer sitting on top of the current aggregate tower now extends Suncorp’s protection further for the rest of this financial year.

Suncorp is now just $160 million of qualifying catastrophe and severe weather losses away from triggering its aggregate reinsurance, having eaten through $490 million of the deductible that runs to $650 million.

Including the new top-up, Suncorp now has $475 million of aggregate reinsurance protection in-force for the rest of this financial year, while it also has a maximum single event retention of a $250 million loss thanks to its occurrence towers protection that runs up to $6.5 billion.

But in recent years Suncorp’s recoveries have large come from the aggregate reinsurance and given the La Nina conditions being experienced in Australia, it seems that is once again the most likely source of protection, if recent weather patterns experienced persist.