IAG boosts catastrophe reinsurance as natural disasters bite deep
Catastrophe reinsurance allows insurers to share the risk against major natural disasters, such as Hurricane Sandy in the US.
IAG's reinsurance covers all territories in which IAG operates, except its AMI business in New Zealand and the group's joint-venture interests in Asia.
IAG chief financial officer Nick Hawkins said the structure of the program was similar to that for 2012, but included "increased coverage, both at the upper and lower end of the main program and with respect to the aggregate cover".
"The overall cost of the program is in line with the assumptions incorporated into our full-year 2013 insurance margin guidance," he said.
The company said 87 per cent of its credit was rated A+ or higher.
Commonwealth Bank analyst Ross Curran said the move took pressure off the insurer to raise capital. "Regulators and credit agencies are always pushing for insurers to hold more capital," he said. "[IAG is] taking the opportunity, when pricing is good, to increase their reinsurance slightly."
Mr Curran said insurers were likely to continue to push through price rises in Australia to recover losses made during the 2011 floods in Brisbane and the New Zealand earthquake last year. "It will take years to recover from those," he said.
IAG's share price fell slightly on the news but after a rally rose to $4.75 from a previous close of $4.69.
IAG owns the NRMA and CGU insurance brands in Australia.
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IAG said it increased its catastrophe reinsurance to $5 billion for 2013, up from $4.7 billion the previous year, expanding protection against major natural disasters.
Catastrophe reinsurance lets insurers share the financial risk of major natural disasters (like Hurricane Sandy). IAG uses it to protect the group from large, concentrated losses across its businesses.
IAG’s reinsurance covers all territories where the group operates except for its AMI business in New Zealand and the group’s joint-venture interests in Asia.
IAG’s CFO said the program’s structure is similar to 2012 but includes increased coverage at both the upper and lower ends and for aggregate cover. The overall cost is in line with the assumptions used in IAG’s full-year 2013 insurance margin guidance.
The company said 87% of its reinsurance credit was rated A+ or higher, indicating a high portion of well-rated reinsurance counterparties.
Commonwealth Bank analyst Ross Curran said increasing reinsurance takes pressure off IAG to raise capital, noting regulators and credit agencies push insurers to hold more capital and that IAG is taking the opportunity to increase reinsurance while pricing is favourable.
According to analyst Ross Curran quoted in the article, insurers are likely to continue pushing through price rises in Australia to help recover losses from the 2011 Brisbane floods and last year’s New Zealand earthquake, and it could take years to fully recover from those events.
IAG’s share price initially fell slightly on the news but then rose to $4.75 from a previous close of $4.69. The article also notes IAG owns the NRMA and CGU insurance brands in Australia.
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