By Robb M. Stewart
MELBOURNE, Australia--Insurance Australia Group Ltd. has struck deals with a trio of European reinsurers to swap a share of the premiums it collects in exchange for help paying claims and expenses, in a bid to reduce earnings volatility and bolster capital.
The agreements, which take effect from January, build on a larger deal Insurance Australia signed more than two years ago with billionaire investor Warren Buffett's Berkshire Hathaway Inc.
The Australian insurer said Friday it had entered three quota-share agreements with Germany's Munich Re AG and Hannover Re AG and Swiss Re AG covering its businesses in Australia, New Zealand and Thailand. The agreements, which have an average initial period of more than five years, will see the reinsurers receive a combined 12.5% of Insurance Australia's consolidated gross earned premium and pay 12.5% of claims and expenses.
Insurance Australia also will receive a percentage-based fee for access to its franchise.
The agreements will lower Insurance Australia's requirements for natural-disaster reinsurance and reduce its exposure to volatility in associated premium rates, the company said. It also will reduce its regulatory capital requirement by about 435 million Australian dollars (US$326.8 million) over a three year period, but will be broadly earnings and return-on-equity neutral.
In tandem with the Berkshire Hathaway deal, the company had removed earnings risk from a third of its business but retains exposure to earnings potential from profit sharing arrangements, Managing Director and Chief Executive Peter Harmer said.
Insurance Australia, one of Australia's largest general insurers, in mid-2015 agreed to sell a 3.7% stake to Berkshire Hathaway for A$500 million as part of a 10-year partnership that sees it collect 20% of the Australian company's gross written premiums and pay 20% of claims.
Insurance Australia's core businesses are in Australia and New Zealand, where it competes with the likes of QBE Insurance Group Ltd. and Suncorp Group Ltd. Underwriting more than A$11 billion in premiums a year, it also has operations in Thailand, Vietnam and Indonesia and interests in general-insurance ventures in Malaysia and India.
Insurance Australia raised its target for its reported insurance margin by 1.25 percentage points to 13.75%-15.75% for the current financial year, which will cover six months with the new quota-share agreements. Its natural-disasters allowance also reduced to A$627 million from A$680 million.
Write to Robb M. Stewart at [email protected]