One of Australia’s biggest insurers, Insurance Australia Group (IAG), will take an A$1.15bn ($891m) hit to earnings before tax in its half-year (1 July to 31 December 2020) results, as it prepares for a potential flood of pandemic-related business interruption claims, according to a statement released by the company.
The hit, which was foreshadowed in November, will be recorded as a “corporate expense” in the insurer’s half-year accounts, and held in reserve. If IAG avoids a flood of legitimate business interruption claims, as it is aiming to do, much of the money could be released from reserves at a later time.
Modest increase in reinsurance rates
At the same time, IAG says that it has finalised its catastrophe reinsurance programme for the 2021 calendar year, maintaining its gross reinsurance protection cover at up to A$10bn, the same level as in 2020. IAG adds that it experienced a modest increase in reinsurance rates during the renewal process, with the overall expense outcome in line with expectations.
The catastrophe reinsurance programme has been placed to the extent of 67.5% to reflect IAG’s cumulative whole-of-account quota share arrangements. The main features, before consideration of quota share impacts, are:
A main catastrophe cover for losses up to A$10bn, including one prepaid reinstatement;
IAG retaining the first A$250m (2020: A$250m) of each loss;
Three prepaid reinstatements secured for the lower layer (A$250m excess of A$250m) of the main programme (2020: three); and
An aggregate sideways cover for the 12-month period to 30 June 2021. This provides A$350m of protection in excess of A$400m. With effect from 1 January 2021, qualifying events are capped at A$200m excess of A$50m per event.
Around 65% of the gross main catastrophe programme for calendar 2021 is protected by multi-year coverage, providing certainty of future reinsurance cover. The overall credit quality of the 2021 programme is strong, with approximately 90% continuing to be placed with entities rated A+ or higher.
After allowance for the cumulative quota share arrangements, the combination of all catastrophe covers at 1 January 2021 results in IAG having the following maximum event retentions:
First event of A$169m for Australia (NZ$169m for New Zealand);
Second event of A$169m (NZ$169m); and
Third event of A$34m (NZ$34m).
IAG also has stop-loss protection for retained natural perils which continues to align with the financial year. This provides protection of $100m in excess of $1.1bn (A$68 million in excess of A$743m, post-quota share) for the 12 months to 30 June 2021. The attachment point compares to the FY21 natural perils allowance of A$975m (A$658m post-quota share).
IAG will report its 1H21 results on 10 February 2021.