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Quota share deals temper business risk: IAG

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IAG’s new quota share agreements will remove nearly one-third of the group’s downside earnings risk, CEO Peter Harmer says.

The separate deals with Munich Re, Swiss Re and Hannover Re will see the three reinsurers assume a combined 12.5% of IAG’s claims and expenses, in exchange for the same percentage of its consolidated gross earned premium from January 1.

Munich Re Australasia MD Ralph Ronnenberg told the deal “positively adds to the economic value to Munich Re shareholders, providing an additional revenue stream from Australian insurance risk”.

The arrangements build on the 10-year quota share deal IAG announced in 2015 with Berkshire Hathaway, in which the Warren Buffett-owned investment conglomerate receives 20% of consolidated gross written premium and pays the same percentage of claims.

“In tandem with the Berkshire Hathaway quota share, we have removed downside earnings risk from 32.5% of our business while retaining significant exposure to earnings upside via the profit share arrangements,” Mr Harmer said.

“We believe this is a good outcome for IAG shareholders. While our strategic priorities of customer, simplification and agility go to the heart of maximising the value of our customer platform, it is important we continue to pursue initiatives that optimise the mix of the supporting capital platform.

“These transactions are a clear step forward on that front.”

The agreements, first reported in a Breaking News bulletin last Friday, have an average initial period of more than five years and apply to IAG’s consolidated business in the domestic market, New Zealand and Thailand.

They are expected to improve IAG’s reported insurance margin for this financial year, which has been revised to 13.75-15.75% from previous guidance of 12.5-14.5%.

IAG has also lowered its financial-year natural perils allowance to $627 million from $680 million to reflect the new quota deals, and has reduced placement of gross cover for next calendar year’s catastrophe reinsurance, down to 67.5% from 80%.

The insurer will receive an exchange commission, mostly in the form of a fixed fee calculated as a percentage of premium.