Thanks to its cosy reinsurance deal with Warren Buffet’s Berkshire Hathaway reinsurance arm, Insurance Australia Group (IAG) is now more like a utility rather than a general insurer with a more volatile claims and earnings pattern thanks to global warming, climate change and the rise of extreme weather events.
Berkshire and IAG struck the deal in mid 2015. It is what’s called a 10-year 20% quota share agreement across IAG’s consolidated insurance business; reduces IAG’s earnings volatility and capital requirement.
At the same time Berkshire Hathaway took a 3.7% stake in IAG via $500 million placement which effectively protects the company from any larger foreign group wanting a foothold in Australia and NZ.
The deal means that IAG,which owns the NRMA and CGU insurance brands, signed away 20% premium income to Berkshire as part of the 10-year quota share arrangement. That’s around $2.3 billion a year s flowing to Berkshire.
In exchange Berkshire will pay 20% the claims. For IAG it meant enjoying a $700 million reduction in its capital requirements over four years, cheaper access to one of the world’s biggest reinsurers, and $500 million that it could use for further expansion.
It is designed to smooth out the year to year volatilty, cut IAG’s capital needs, and generate more consistent earnings.
So 4.3% dip in interim profit will not rock the boat. The company said it earned $446 million in the December half year down from $466 million from in the previous corresponding period.
Gross written premium grew by 4.7% to $5.8 billion, which IAG said was slightly higher than it forecast.
The company said the bigger rise than forecast was “predominantly due to rate increases to counter higher claim costs in short tail personal lines in Australia and New Zealand, and improved commercial pricing."
IAG said gross written premiums were expected to rise at low single-digit levels for the full-year, up from its prior guidance of relatively flat growth.
That’s despite increased claim pressures, especially in disaster (earthquakes and storms for example in NZ and Australia), and third party insurance in NSW.
"This is a sound result for our core businesses in Australia and New Zealand, reinforced by the strength and integrity of our brands, our sharpened customer focus, and the quality and passion of our people," IAG chief executive Peter Harmer said.
The Australian consumer division which makes up 53% of the insurer’s GWP and includes CTP insurance, saw its own GWP increase by 7.4% to a little over $3 billion.
IAG’s Asian businesses saw a 7.7% drop in consolidated GWP on lower premiums from greater competition in Thailand and claims pressures. Overall, the company’s Net Earned Premiums rose 3.5% to $4.244 billion in the December half.
IAG reported a slightly softer insurance margin of 12.6% for the half-year, near the bottom of its target range of 12.5% to 14.5%. IAG says full-year margins were expected to fall in the middle of the range.
The recent Northern Sydney hailstorm saw the insurer receive 13,000 claims so far from the storm on Saturday, February 18. Most are for motor vehicle damage.
IAG though believes the cost will still be within its margin for storm claims, unlike the NZ quakes claims from the South Island event last November.
That quake helped push its natural peril claim costs over allowance, with the company saying that the quake resulted in $117 million of claims, pushing its total natural peril claims $80 million over allowance.
IAG shares rose 0.1% to $5.92, utility – like.
