IAG highlights “significant reinsurance recoveries” with more to come

Australian primary insurance group IAG has highlighted “significant reinsurance recoveries” made under its program in 2019, including around $280 million from its aggregate tower, with more to come as costs from the recent heavy rain event looks set to be capped by its reinsurance as well.

IAG had already revealed that it expected to claim on its aggregate reinsurance arrangements for the recent bushfire disaster in Australia and now the extent of recoveries made has become clear in IAG’s results this morning.

The company noted that it has been severely impacted by these bushfire events, explaining that the significant reinsurance recoveries made included around $280 million recovered from its calendar year 2019 aggregate tower.

That will be on top of quota share reinsurance that IAG has in place, as reinsurance giant Berkshire Hathaway takes 20% of its claims through one quota-share reinsurance arrangement, while Munich Re, Swiss Re and Hannover Re all share in another 12.5% through a second arrangement.

But reinsurance recoveries have not stopped there, as the unprecedented catastrophe season in Australia has continued.

IAG had also already signalled recently that the a severe hail storm that struck southeastern Australia on January 19th and 20th would cause it to make a claim under its calendar year 2020 main per-occurrence catastrophe reinsurance program.

After that, IAG had lowered its outlook with margin guidance adjusted down to 14.5 – 16.5% taking into account the bushfires and the hail event in Melbourne, Canberra and Sydney.

But the heavy rainfall and flooding event that struck southeast Australia just in recent days are also seen as a catastrophe level event, with the potential to drive further reinsurance claims in 2020 as well.

That rainfall and flood event was registered as a catastrophe by the Insurance Council of Australia in recent days, with claims reaching $45 million. Claims have now reached $100 million, according to the ICA.

But IAG, as a carrier exposed to the regions affected, has a clearer picture of its exposure to that storm, the rainfall and resulting flooding, saying that it expects its claims costs will be capped at $135 million by its reinsurance.

The insurer has revised down its margin guidance to 12.5‑14.5% as a result, in what it says is a response to the “exceptionally harsh perils season.”

“We expect the cost of this event will be capped at $135 million, in line with our second maximum event retention under our calendar 2020 reinsurance program,” IAG further explained.

So that suggests another potential hit to the IAG reinsurance tower from this storm, which of course will again be after the companies quota share reinsurance partners all take their share.

Given the impacts of this additional catastrophe event, IAG has already revised up its fiscal year 2020 net natural peril claim costs to $850 million, up from the $715 million advised after the hail in January.

IAG is running $100 million above allowance from losses in the first half of its 2020 fiscal year, which began mid-way through 2019.

Having made $280 million of reinsurance recoveries from its aggregate tower in that period, further aggregate recoveries may now be possible, as IAG has now eroded its aggregate deductible, meaning it has a maximum event retention of $50 million from now.

For the full fiscal year, IAG revealed that it has suffered net natural peril costs of $645 million until the end of January 2020, including the mid‑January hailstorm event, to which the $135 million net for the rainfall event needs to be added.

With a projection of another $100 million net catastrophe losses after quota share reinsurance to come, IAG seems to be predicting that it will erode its aggregate stop loss reinsurance layer as well, which provides post‑quota share protection of $101 million in excess of $675 million.

The costly period continues to see Australian primary insurers calling on reinsurance partners.

Suncorp said yesterday that it around half of its aggregate reinsurance protection has been used up thanks to heavy losses from bush fires, hail and storms in recent weeks.

How this impacts the renewals for these insurers remains to be seen, but it’s almost certain they will face some demand for higher rates, or stricter terms from their reinsurance partners when contracts come to be negotiated again.