Insurance Australia Group Ltd. entered into separate quota share agreements with Munich Re, Hannover Re and Swiss Re AG for a combined 12.5% of its consolidated business in Australia, New Zealand and Thailand, effective Jan. 1, 2018.
Under the agreements, the European reinsurers will receive a combined 12.5% of IAG's consolidated gross earned premium and pay 12.5% of claims and expenses. The whole-of-account basis agreements have an average initial period of more than five years.
IAG will receive an exchange commission under the agreements. The majority of the commission will be in the form a fixed fee with an additional element in the form of a profit share arrangement, which depends on the insurer's future profitability.
The Australian insurer said the agreements are expected to reduce its regulatory capital requirement by about A$435 million over a three-year period, lower its requirements for natural-disaster reinsurance and reduce its exposure to volatility in associated premium rates. IAG's earnings volatility will also be reduced after sharing 12.5% of its insurance risk.
Meanwhile, the agreements are expected to enhance IAG's reported insurance margin by about 250 basis points per year. Accordingly, the insurer increased its margin guidance for the 2017-2018 financial year to between 13.75% and 15.75%. Further, the insurer reduced its guidance for natural-disasters allowance to A$627 million from A$680 million.
The insurer said the agreements will have no effect on the insurer's results for the six-month period ending Dec. 31.
IAG signed the new agreements after striking a 10-year, 20% quota share deal with Berkshire Hathaway Inc. in June 2015.