Australia’s second-largest insurer IAG said it is experiencing “modest upwards pressure on reinsurance rates” as the firm published its FY results to June 2018.

IAG comments come after the firm renewed its A$8bn cat program while also buying significantly more quota share coverage which  significantly reduced its 2018 regulatory capital requirements.

The insurer - which is led by former Aon UK CEO Peter Harmer - also said yesterday that while further “modest” rate increases may occur, “market conditions across all classes of business should remain relatively favourable for purchasers of reinsurance”.

Gross-cat-reinsuranc-stack

The carrier increased its reinsurance spend to A$2.24bn in the first six months of 2018, an increase of 44 percent on the same period last year.

That was the equivalent of 39 percent of the group’s gross earned premiums for the first half of 2018. In the first six months of last year reinsurance spend was 27.5 percent of premiums.

Over IAG’s full financial year, which runs from the beginning of July to the end of June it spent A$3.85bn on reinsurance, up 23.4 percent on the previous 12-month period.

At the beginning of January, IAG increases a whole account quota share that now protects 32.5 percent of its entire book.

The cover is made up of a 20 percent quota share with Berkshire Hathaway that came into force on 1 July 2015 as well as a new deal with Munich Re, Swiss Re and Hannover Re that covers another 12.5 percent of losses and incepted at the beginning of this year.

“The individual agreements deliver similar benefits and financial effects, on a pro rata basis,” IAG said.

“These include reduced earnings volatility, as insurance risk is effectively exchanged for a more stable fee income stream, a lower requirement for catastrophe reinsurance and reduced exposure to volatility in associated premium rates, and a reduction in IAG’s regulatory capital needs.”

Atop of the quota share arrangement sits IAG’s main catastrophe programme, which incepts at A$250mn and covers all losses up to A$8bn for a first and second event. Third and fourth events are covered by a more modest A$250mn xs A$500mn excess of loss programme.

It also has a sideways aggregate cover that limits the impact of a second event to A84mn after the quota share and a third event to just A17mn.

IAG’s full year insurance profits 10.8 percent to A$1.41bn as gross written premiums inched up by 1.8 percent to A$11.65bn.

Net profits slimmed by 60 basis points to A$923mn for the year.

Despite announcing a special dividend, shares in the company fell 8.5 percent to A$7.77.

Cover Gross Net of quota share (67.5%) 
Main cover  $7.75bn xs $250m  $5.23bn xs $169m 
Aggregate cover  $475m xs $325m  $321m xs $219m 
Aggregate cover qualifying events  $225m xs $25m  $152m xs $17m 
Retentions  Gross  Net of quota share (67.5%) 
First event  $250m  $169m 
Second event  $125m  $84m 
Subsequent event  $25m  $17m