Insurance Australia Group Ltd (ASX: IAG (LON:ICAG)) shares are over 8% higher after it announced strategic long-term reinsurance agreements to mitigate earnings volatility and enhance financial stability. These agreements include natural perils volatility protection with Berkshire Hathaway (NYSE:BRKa) Inc (NYSE:BRK.B) and Canada Life Reinsurance, alongside an Adverse Development Cover (ADC) with Enstar Group Limited.
IAG managing director and CEO Nick Hawkins stated: “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."
Capping perils costs
The five-year agreement with Berkshire Hathaway and Canada Life Reinsurance, effective from July 2024, provides up to US$680 million of additional protection annually, totalling US$2.8 billion over the period.
This reinsurance aims to cap net natural perils costs at US$1.283 billion in over 90% of modelled scenarios, offering significant downside protection against extreme weather events.
“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,” Hawkins said.
In addition, IAG has secured ADC for its long-tail reserves of approximately US$2.5 billion, offering US$650 million of protection. This transaction, pending regulatory approval, includes portfolios such as Product & Public Liability, Compulsory Third-Party Motor, Professional Risks, and Workers’ Compensation.
IAG Chief Financial Officer William McDonnell remarked, “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."
IAG confirmed it is on track to report its FY24 Reported Insurance Profit and Margin around the upper end of guidance ranges, with an expected capital benefit of approximately US$350 million from the new reinsurance protections. Formal FY25 guidance will be provided with the FY24 results announcement on August 21 2024.