Australian primary insurer Suncorp has revealed that around half of its aggregate reinsurance protection has been used up thanks to heavy losses from bush fires, hail and storms in recent weeks.
The start of 2020 saw Suncorp adding an expected $155 million of net losses just in January alone, resulting in an expectation that its aggregate reinsurance would pay out to cover those claims.
As a result, the insurer says that it currently believes it will have between $150 million and $170 million of its natural hazards aggregate reinsurance program left after January 31st.
The natural hazards aggregate reinsurance provides Suncorp around $300 million of protection, which is where it believes the costs of January’s events will be capped, suggesting the totals for these events could rise higher.
Previously, Suncorp said that an “unprecedented” start to the season for catastrophe losses would drive reinsurance recoveries, with losses having the potential to eat into a range of areas of its program.
That’s not factoring in any losses in February and as we reported yesterday a major rainfall and flooding event struck eastern regions of the country in recent days and looks to have the potential to create further pressure on Suncorp’s aggregate protection.
Suncorp Group CEO, Steve Johnston commented on “significant natural disasters, including storms and bushfires” in delivering the insurers results this morning, saying, “We remain confident in the resilience of the Group and we will continue to take a strategic approach to protect the consistency of our earnings by strengthening our core businesses, supported by appropriate risk selection, and significantly strengthened reinsurance arrangements. ”
Johnston said that the investment made in reinsurance saw his company well-positioned for the rest of its financial year, with good protection against additional natural hazard loss events.
Natural hazard loss costs rose $109 million above budget for the first half of the financial year, which is the six months to December 31st 2019.
Already another $155 million of losses have been registered, net, from January.
“The East Coast of Australia is currently being impacted by a significant weather event. While it is still relatively early to quantify the gross costs of these subsequent events, we expect the net retained cost for them to be capped at $300m,” CEO Johnston said referring to January’s events and the flooding of recent days in February.
The costs of these events looks set to rise, given their recency, suggesting more of Suncorp’s aggregate tower will be exhausted, reducing its reinsurance provisions for the rest of the financial year.
Suncorp also enters its reinsurance renewals soon and is already preparing for them.
Speaking to analysts this morning, Johnston was particularly careful in commenting on reinsurance, with his firm’s renewal approaching.
After the recent loss activity and with claims flowing to reinsurers through quota shares and also main catastrophe programs, there is a growing expectation that pricing may rise for Australian insurers.
Suncorp has decided to retain around $300 million of cash generated from a sale of two units, which analysts and shareholders had hoped would be returned in the form of a dividend.
But Suncorp is now holding onto this cash, with media in Australia reporting that the company sees this as necessary for its reinsurance renewal, as it can use the cash as a kind of leverage in its negotiations with reinsurers.
Having this cash on hand may mean Suncorp can negotiate down its reinsurance costs, by offering higher retention as a lever against reinsurers price ambitions perhaps.
“We continue to seek ways of reducing earnings volatility, especially through the use of reinsurance. I expect our purchase of additional cover this year will serve us well, and moving though the renewal we will continue to explore alternative means of protecting our balance sheet and reducing P&L volatility,” Johnston said.
“I know the outlook for reinsurance rates has been a topic of keen interest off the back of recent events. But I make the following points: capacity is still there, our program is well supported, and this region remains attractive to reinsurers from a diversification perspective.”
And commenting on the retention of the $300 million of cash, he continued, “It also makes sense for us to retain maximum capital flexibility as we negotiate our FY21 reinsurance renewal.”
Reducing volatility continues to be a focus, which Suncorp has already achieved with its aggregate reinsurance and stop loss, but Johnston suggested there may be more to do here.
He also insinuated that the company has been looking to reinsurance alternatives, as it seeks to identify the best program for its fiscal year 2021.
Saying, “We’ve had a good long look at the options that sit there for us. There’s a range of options that we can in terms of the traditional and the emerging reinsurance markets, how we might do that. But we’re about to embark on our renewals, so I’ll just be a little bit cautious there about being too precise about how we’re going to go and approach it.”