Advertisement

UPDATE 2-Australia's IAG makes premium sharing arrangements to curb earnings volatility

UPDATE 2-Australia's IAG makes premium sharing arrangements to curb earnings volatility
From Reuters - December 7, 2017

SYDNEY (Reuters) - Insurance Australia Group Ltd (IAG.AX) said on Friday it will share 12.5 percent of its premiums and costs with Munich Re (MUVGn.DE), Swiss Re (SRENH.S) and Hannover Re (HNRGn.DE), in a series of deals that will release capital for Australias biggest general insurer.

The arrangement, common in the reinsurance industry, increases the portion of business IAG sells on to offshore companies attracted by the traditionally higher margins available in Australia, to 32.5 percent, with Warren Buffetts Berkshire Hathaway Inc (BRKa.N) holding a pre-existing 20 percent quota.

IAG Chief Executive Peter Harmer said in a statement on Friday the deal removed downside earnings risk from a portion of the business while retaining significant exposure to earnings upside.

Harmer said on a subsequent briefing call on Friday that the insurer would not sit on excess capital, backing analyst expectations the company is likely to launch a share buy-back to return capital to investors.

Under the new agreements, the three reinsurers will receive a combined 12.5 percent of the companys consolidated gross earned premium and take 12.5 percent of claims and expenses from Jan. 1, 2018, IAG said in a statement. In exchange, IAG would receive an undisclosed flat fee.

Its a pretty good move, Bell Potter analyst TS Lim said.

This sets them off for the future and there is more capital efficiency coming through.

The agreements would cover business in Australia, New Zealand and Thailand, and cut its regulatory capital requirement by about A$435 million ($326.73 million) over three years.

Advertisement

Continue reading at Reuters »