IAG gets five-year natural perils reinsurance from Berkshire and Canada Life Re

Australian primary insurer IAG has entered into a long-term natural peril reinsurance agreement with Berkshire Hathaway and Canada Life Re, with the company saying the arrangement gives it material downside protection against weather volatility and severe weather event impacts.

Australian insurers have been impacted year after year by natural catastrophe and severe weather losses that have reduced their profitability and IAG is taking action to make its results more predictable and less volatile, with the help of reinsurance it seems.

The company said that the natural perils cover will run across five-years, beginning July 2024, and sees Berkshire Hathaway subsidiary National Indemnity Company and Canada Life Re providing it with up to $680m of additional reinsurance protection annually, and up to $2.8 billion over the entire five-year period.

Alongside IAG’s quota share and other traditional reinsurance arrangements, this new nat cat cover will effectively limit the insurer’s natural perils costs to $1.283 billion in Fiscal Year 25 (67.5% of gross claims costs of $1.9bn), which is an increase of approximately 17% on the FY24 natural perils allowance of $1.098bn.

The reinsurance gives “material downside protection for future earnings volatility against extreme weather events and weather patterns,” IAG explained, saying that its natural perils costs will be capped in at least 90% of scenarios, and that in order to exceed the cap, its gross natural perils costs will need to exceed $2.9bn (pre-quota share for events capped at $500m).

Under the modelled scenarios, IAG said that a profit commission should offset premiums paid, meaning that “the range of potential financial outcomes are weighted to the upside.”

The cost of the protection will be flat over the next five years, and the annual natural perils allowance will only increase in line with exposure, IAG explained.

IAG Managing Director and CEO Nick Hawkins commented, “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 natural perils cost as extreme weather events become more frequent and severe.

“For our shareholders, this transaction builds on IAG’s comprehensive reinsurance strategy and provides greater earnings stability and reduces our capital requirements.”

He added, “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.”

In addition, this morning IAG announced it has entered into a reinsurance arrangement for longer-tailed exposures as well, partnering with legacy specialist Enstar on this.

An Adverse Development Cover from Enstar will provide IAG with $650 million of protection for its long-tail reserves of approximately $2.5bn at 1 January 2024.

The ADC reinsurance has been entered into with Enstar subsidiary Cavello Bay Reinsurance Limited, and will apply to portfolios across Australia including Product & Public Liability, Compulsory Third-Party Motor, Professional Risks and Workers’ Compensation. The ADC also includes explicit cover for Molestation and Silicosis up to a sublimit of $50 million.

IAG Chief Financial Officer William McDonnell said, “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.

“We are confident that our long-tail liabilities are appropriately provisioned, complementing the improved underwriting risk profile of our Intermediated business. This reinsurance protects against deterioration due to the inherent uncertainty of long-tail insurance risks such as adverse judicial developments and superimposed inflation.”

Dominic Silvester, Enstar’s Chief Executive Officer, added, “We are pleased to provide a bespoke reinsurance solution that will support IAG in reducing financial risk, capital requirements and earnings volatility. This transaction demonstrates our strong capabilities in the Australian market as we continue to strengthen our position as the partner of choice across global markets.”