IAG Finalizes $4.86 Billion Reinsurance Program for 2012

January 4, 2012

Insurance Australia Group Limited announced that it has finalized its catastrophe reinsurance program for the period commencing January 1, 2012 with up to A$4.7 billion [US$4.86 billion] in coverage, compared to A$4.1 billion [US$4.24 billion] in 2011.

“Our reinsurance program is an important part of our overall approach to capital management,” explained IAG’s CEO and managing director Mike Wilkins. “In challenging market conditions, we are pleased to have concluded a program which provides us with increased coverage and the additional security of some multi-year protection.”

He added that IAG has “fixed its main program retention at a maximum of A$250 million [US$259 million] until the end of calendar 2014 at agreed prices. We also have the benefit of a buy down arrangement, which commenced in 2011, that reduces the maximum cost of our next event to A$150 million [US$155.3 million].

Wilkins explained that “while the overall cost of the program has risen, the outcome is consistent with the assumptions contained in the insurance margin guidance of 10 to 12 percent provided by the Group at the outset of the financial year.”

IAG said the 2012 reinsurance program “includes cover for flood, which is being introduced across Australia by CGU, and extended into Queensland and Victoria by Australia Direct, in early calendar 2012.” The catastrophe reinsurance protection runs on a calendar year and operates on an excess of loss basis. It covers all of the territories in which IAG operates.

The integrated program comprises the following key components:
— A main catastrophe cover for losses up to A$4.2 billion [US$4.348 billion], including one prepaid reinstatement.
— The Group retains the first A$250 million of each loss, with the lower layer of the main program (A$250 million excess of A$250 million) fixed for a period of three years. Two reinstatements of this layer have been secured;
— An upper layer, from A$4.2 billion to A$4.7 billion, providing earthquake cover in respect of Australia and New Zealand for a period of three years at agreed prices;
— A buy down arrangement that reduces the maximum cost of a first event to A$150 million;
— Subsequent event cover providing protection above A$150 million; and
— An aggregate sideways cover of A$250 million excess of A$300 million, with qualifying events capped at a maximum contribution of $125 million excess of A$25 million, per event.

IAG also explained that the combination of coverage in place as of January 1, 2012 results in “maximum first event retentions of A$150 million for Australia, A$130 million for New Zealand and A$50 million for the UK. The overall credit quality of the program is high and has improved over that of 2011, with more than 90 percent placed with entities rated ‘A+’ or better.

“For the financial year ended 30 June 2012 (FY12), the Group expects to report a total reinsurance expense, inclusive of catastrophe cover, casualty cover and expected facultative arrangements, of between A$700 million and A$720 million [US$724.8 million to US$745.5 million]. This compares to a total reported reinsurance expense of A$620 million [US$642 million] in FY11.

“The program outlined above, and the indicated FY12 reinsurance expense, exclude the AMI insurance business in New Zealand, the acquisition of which remains subject to regulatory approval. If acquired, the AMI business will initially carry specific reinsurance protection of up to NZ$1.4 billion [US$1.1 billion].

Source: Insurance Australia Group

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