SYDNEY (Reuters) - Insurance Australia Group Ltd (IAG.AX) said on Friday it will share 12.5 percent of its premiums and costs with Munich Re (MUVGn.DE), Swiss Re (SRENH.S) and Hannover Re (HNRGn.DE), in a series of deals that will release capital for Australia’s biggest general insurer.
The arrangement, common in the reinsurance industry, increases the portion of business IAG sells on to offshore companies attracted by the traditionally higher margins available in Australia, to 32.5 percent, with Warren Buffett’s Berkshire Hathaway Inc (BRKa.N) holding a pre-existing 20 percent quota.
IAG Chief Executive Peter Harmer said in a statement on Friday the deal removed downside earnings risk from a portion of the business while retaining significant exposure to earnings upside.
Harmer said on a subsequent briefing call on Friday that the insurer would “not sit on excess capital”, backing analyst expectations the company is likely to launch a share buy-back to return capital to investors.
Under the new agreements, the three reinsurers will receive a combined 12.5 percent of the company’s consolidated gross earned premium and take 12.5 percent of claims and expenses from Jan. 1, 2018, IAG said in a statement. In exchange, IAG would receive an undisclosed flat fee.
“It’s a pretty good move,” Bell Potter analyst TS Lim said.
“This sets them off for the future and there is more capital efficiency coming through.”
The agreements would cover business in Australia, New Zealand and Thailand, and cut its regulatory capital requirement by about A$435 million ($326.73 million) over three years.
Shares in the company were up almost 1 percent in early afternoon trading, just ahead of the broader market.
Harmer said the arrangements gave the European reinsurers access to the attractive Australian market which would suit their business models given their global diversification.
“This works for the reinsurers and it certainty works for us,” said Harmer. “They are getting their margin on the business... and they do have a lower cost of capital.”
A spokeswoman for Munich Re said the transaction added “to the economic value to Munich Re shareholders providing an additional revenue stream from Australian Insurance risk.”
Regional representatives from Hannover Re and Swiss Re did not respond to calls for comment.
Berkshire Hathaway and Munich Re also struck similar deals with Australian insurer AMP Ltd (AMP.AX) earlier this year.
Fitch ratings said earlier this month it expected reinsurance rates would increase as a result of the significant catastrophe events in 2017 including Hurricanes Harvey, Irma and Maria, as well as earthquakes in Mexico and wildfires in California.
Reporting by Paulina Durant in SYDNEY; Additional reporting by Ambar Warrick; Editing by Stephen Coates and Christopher Cushing