IAG enters three quota share agreements

Australia’s IAG has entered into three agreements to quota share a combined 12.5 percent of its consolidated business from Jan. 1, 2018.

The transactions will improve IAG’s capital mix through placing greater emphasis on the application of more efficient reinsurance capital, according to a press release.

The agreements, with reinsurers Munich Re, Swiss Re and Hannover Re, are on a whole-of-account basis, covering IAG’s consolidated business in Australia, New Zealand and Thailand. They have an average initial period of more than five years.

From Jan. 1, 2018, the reinsurers will receive a combined 12.5 percent of IAG’s consolidated gross earned premium and pay 12.5 percent of claims and expenses. In addition, IAG will receive an exchange commission which recognises the value of accessing IAG’s franchise.

The majority of the exchange commission will be in the form of a fixed fee (as a percentage of premium) with an additional element in the form of a profit share arrangement which depends on IAG’s future profitability.

The agreements build on the 10-year, 20 percent whole-of-account quota share arrangement with Berkshire Hathaway which has been in place for over two years, and are expected to deliver similar benefits and financial effects on a pro rata basis.

The benefits include reduced earnings volatility, lower requirement for catastrophe reinsurance and reduced exposure to volatility in associated premium rates, a reduction in regulatory capital requirement, and broadly neutral earnings per share (EPS) and return on equity (ROE) effects, prior to consideration of potential capital management impacts.

“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,” said CEO Peter Harmer.

“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 percent 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,” Harmer said.

The combined 12.5 percent quota share agreements will further reduce IAG’s reliance on catastrophe reinsurance cover and its exposure to future volatility in reinsurance rates. In recognition of the new quota share agreements, at its calendar 2018 catastrophe renewal IAG will reduce the placement of its gross cover, from 80 percent to 67.5 percent.

The new quota share agreements are anticipated to enhance IAG’s reported insurance margin by approximately 250 basis points per annum. This is driven by a lower net earned premium, following the identification of the 12.5 percent of gross earned premium as a reinsurance expense. IAG has raised its full-year 2018 reported insurance margin guidance by 125 basis points, to 13.75-15.75 percent.

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