IAG And Suncorp Secure Long-Term Re-Insurance Agreements, Update Guidance

IAG and Suncorp have completed agreements to improve future financial stability and provide long-term natural perils volatility protection.

IAG entered into a comprehensive five-year natural perils re-insurance agreement with the National Indemnity Company to provide up to $680 million of additional protection annually and up to $2.8 billion over a five-year period.

In conjunction with IAG’s quota share and traditional re-insurance protections, this effectively limits natural perils costs to $1.283 billion in FY 2025 (67.5 per cent of gross claims costs of $1.900 billion), an increase of approximately 17 per cent on the FY 2024 natural perils allowance of $1.098 billion.

The re-insurance provides material downside protection for future earnings volatility against extreme weather events and weather patterns. As a result, the expected FY 2025 net natural perils costs are capped at $1.283 billion in more than 90 per cent of modelled scenarios. To exceed this cap, gross natural perils costs will need to be above $2.9 billion.

Based on IAG modelling, in the majority of years of the agreement, a profit commission arrangement will deliver a graduated premium offset. This is in addition to the financial benefit of any favourable natural perils experience and as a result, the range of potential financial outcomes are weighted to the upside.

The annual cost of the protection will be flat for the five years, with the annual natural perils allowance (FY 2025: $1.283 billion) only increasing relative to the underlying exposures.

“For our shareholders, this transaction builds on IAG’s comprehensive re-insurance strategy, provides greater earnings stability and reduces our capital requirements,” said Nick Hawkins, Managing Director and CEO at IAG.

The group also purchased adverse development cover (ADC), providing $650 million of protection for IAG’s long-tail reserves of approximately $2.5 billion as of 1 January 2024.

The transaction, which is subject to regulatory approval, is with Cavello Bay Reinsurance Limited and applies to portfolios across Australia, including Product & Public Liability, Compulsory Third-Party Motor, Professional Risks and Workers’ Compensation.

The company also confirmed it is on track to achieve its FY 2024 reported insurance profit and margin, expected to be around the upper end of the $1.2 billion to $1.45 billion guidance range (FY 2023: $803 million). The FY 2024 reported insurance margin is also expected to be around the upper end of the 13.5 per cent to 15.5 per cent guidance range, considering the additional ADC cost and assuming net natural perils costs for June are in line with seasonal expectations.

The FY 2024 underlying insurance margin, which includes the additional ADC cost and removes the impact of natural perils experience, is expected to be around the mid-point of the 13.5 per cent to 15.5 per cent range.

FY 2024 gross written premium growth is expected to be consistent with the company’s low-double digit guidance.

SUNCORP

Suncorp also successfully placed its FY 2025 re-insurance programme. Suncorp Group CEO Steve Johnston said the programme aims to achieve an optimal balance between costs, earnings and capital volatility, and appropriate returns.

“It is pleasing to see stability return to global re-insurance markets after three years of disruption. Re-insurance is a major input cost to the price of insurance products and this, along with broader economy-wide inflation, have driven up the cost of insurance premiums for customers in Australia and New Zealand,” said Johnston.

“With the completion of the bank sale scheduled for 31 July and the re-insurance programme successfully renewed, we will now be in a position to consider other re-insurance covers that may be appropriate.”

Suncorp maintains its maximum event retention of $350 million for a first large event and $250 million for a second large event. The main catastrophe programme covers the Home, Motor and Commercial property portfolios across Australia and New Zealand. The cover provides protection for losses between $350 million and $6.75 billion (FY 2024: $6.40 billion) and includes one full prepaid re-instatement.

In line with last year, Group drop-down covers were also purchased that reduce the second, third and fourth event retention to $250 million. The Australian drop-down programme continues to reduce retention for a third and fourth event in Australia to $150 million.

The cost of the FY 2025 catastrophe re-insurance programme is expected to be broadly in line with FY 2024, reflecting changes to the structure of the programme, including the removal of the Queensland quota share and increased exposure from growth in the portfolio, largely offset by improved re-insurance market conditions.

The natural hazard allowance for FY 2025 is expected to increase to $1.565 billion (FY 2024: $1.36 billion). This reflects unit growth, continued inflationary pressures across the insurance industry, and increased risk retention resulting from the changes to the structure of the re-insurance programme.

Suncorp said it continues to reflect input costs, including the costs of placing its re-insurance programme and the natural hazards allowance into the pricing of its insurance policies, with a view to maintaining its underlying insurance margin within a 10 per cent to 12 per cent range.

Suncorp also updated four financial matters:

  • The group’s natural hazard experience for FY 2024 is estimated to be approximately $1.23 billion against an allowance of $1.36 billion.
  • The group strengthened reserves on some H2 2024 events in H2 2024, primarily the large event in late December, with adverse development resulting from supply chain pressures and the timing of claims being lodged due to the holiday period. This not only impacted normal claims lodgement patterns but also the duration of claims.
  • In investment income, mark-to-market movements across asset classes were broadly in line with previously communicated sensitivities.
  • Suncorp continues to expect FY 2024 underlying margins to be around the middle of the 10 per cent to 12 per cent range.