By Jenée Tibshraeny
New Zealand’s largest general insurer is popping more panadol to soothe its Canterbury earthquake hangover.
IAG New Zealand Limited has bought $900 million of expensive reinsurance, known as adverse development cover (ADC), to help pay for the 2010/11 Canterbury quakes.
The purchase has been revealed in the company’s annual results for the year ended June 30 2016, which were published on the New Zealand Companies Office website this week.
The fact IAG NZ has bought so much more reinsurance, so many years after the quakes is significant, as it shows the extent to which it expects the total cost of the quakes to increase.
ADC of $900 million is also a significant amount, relative to the $4.4 billion of regular reinsurance cover IAG Group Limited has exhausted for the February 2011 quake.
IAG sells insurance under brands including NZI, Lumley, State and AMI.
Uncertainty
The issue is, there’s a lot of uncertainly around how much the remaining quake claims will cost.
As at June, IAG had paid $5.7 billion towards settling 93% of its quake claims.
Yet with the outstanding claims being the complicated ones, settling the remaining 7% will be costly.
IAG NZ’s annual report notes: “the actuary has emphasised the level of uncertainty in the earthquake claims cost estimates, especially with regard to the appointment of claims costs between the multiple events.”
It also recognises there’s uncertainty around the fact over-cap claims are continuing to trickle in from the Earthquake Commissions and the “impact of future legislative reform and legal judgements arising out of the Canterbury earthquake events”.
The reinsurance web
Digging into the detail of the ADC, IAG NZ’s chief financial officer Alistair Smith told interest.co.nz the $900 million of cover bought by IAG NZ “is an internal cover between IAG NZ and IAG Re to indemnify IAG NZ”.
It's been bought in concurrence with IAG Group buying $600 million of ADC in the same period, as report in its annual results to the stock exchange in August.
Smith explains the $600 million of cover bought by the Group “is an external cover placed between IAG and Berkshire Hathaway to indemnify the IAG Group”.
Warren Buffett’s Berkshire Hathaway became involved in IAG’s affairs in July 2015, when a deal was struck for IAG to cede 20% of its gross written premium, in order to have Berkshire Hathaway recover 20% of its claims.
IAG NZ has also received reinsurance from Berkshire Hathaway further to this partnership.
The $900 million of ADC bought “internally” comes from the “captive reinsurance operation” set up by the Group.
IAG NZ in its results explains: “This operation acts as the reinsurer for the Group by being the main buyer of the Group’s outwards reinsurance programme.
“The reinsurance operation is intended to manage reinsurance and earnings volatility and the IAG Group’s exposure to catastrophe risk.
“The operation retains a portion of the intercompany business it assumes and retroceded (passes on) the remainder to external reinsurers.”
Singapore sling
The pinch with this arrangement is that the “captive reinsurance operation” is largely based out of Singapore.
This means the bulk of earthquake reinsurance passes through Singapore, where it’s taxed at a low rate, before being transferred to IAG NZ as capital.
Accordingly, IAG NZ does not pay tax on these funds in New Zealand.
With a bulk of the reinsurance being booked as capital, rather than revenue, it also puts a dent in IAG NZ’s profit, reducing its tax expense. For example, IAG NZ's deferred tax asset was $467 million in the year to June.
See this story for more on this reinsurance set-up with Singapore.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
Interest.co.nz has updated the story to clarify IAG NZ has bought $900 million of ADC in 'concurrence', not in 'addition', to the $600 million of ADC bought by the Group.
11 Comments
‘The fact IAG NZ has bought so much more reinsurance, so many years after the quakes is significant, as it shows the extent to which it expects the total cost of the quakes to increase’
Perhaps this could be put another way:
'……as it shows the extent to which IAG didn’t adequately reserve claims'
IAG’S declared claim resolution rate is similar to competitors but factoring in market share, its earthquake event total seems to have been lower than competitors since day one. That either means it settles claims more economically than others or this ADC purchase is playing retrospective catch up to address under reserving. But ADC is supposed to be for unexpected and genuine cost escalation above actuarial projections, so you can’t imagine an independent reinsurer walking into that one.
Event apportionment is cited as a key driver of under reserving but with over 90% resolved that would surely no longer be a significant influence. Unless they have just realised they got their event apportionment badly wrong. Brand new claims of $900m? IAGs share of the new claims data released yesterday tend not to support that. Unless all the top end house claims have been left by EQC to the very end.
Is this really the conventional ADC purchase it’s dressed up to be or is some other dynamic at play?
MIddleman you state: "over 90% resolved":
I think to answer your question you need to ask yourself some questions:
1) What exactly does the word 'resolved' actually mean?; and
2) 90% of what exactly? claims, properties, driveway claims, new homes?
There are three kinds of lies: lies, damned lies, and statistics
You are beating a tired old drum, there Stapleton. While in the past there was some tricky insurer footwork around the meaning of the word ’resolved’, they have used a standard definition when announcing progress, for some time now.
94% is for all claims. It's irrelevant anyway as most driveways etc would have been settled long ago so the remaining 6% will be almost all houses. It is relatively low number left to clean up. Majority of these will be well through the pipeline so there should not be massive surprises in terms of cost escalation.
New claims from EQC would account for only a modest ppn of the $900m.
So what's the explanation? A stuff up in event allocation would have to be a prime suspect. But hard to imagine a reinsurer offering ADC if that was so. More to the story, I suspect.
MIddleman, you don't seem to understand statistics.
If you create a large enough sample by counting all your little inexpensive claims together with your big expensive ones you end up with 'skew'.
The 94% is a skewed statistic for PR purposes using little claims.
And you my friend seem like a pretty smart fellow, but even you have fallen for it.
Let me list the Insurance Council's statements every quarter for the last few years:
30/12/2014 "93% of all over cap residential properties settled, resolved or in resolution"
30/03/2015 "94% of all over cap residential properties settled, resolved or in resolution"
30/06/2015 "94% of all over cap residential properties settled, resolved or in resolution"
30/09/2015 "95% of all over cap residential properties settled, resolved or in resolution"
30/12/2015 "95% of all over cap residential properties settled, resolved or in resolution"
30/03/2016 "96% of all over cap residential properties settled, resolved or in resolution"
30/06/2016 "96% of all over cap residential properties settled, resolved or in resolution"
30/09/2016 "96% of all over cap residential properties settled, resolved or in resolution"
It would almost be funny if it wasn't so sad :(
Wow, this is getting to be hard work. I'll have one more go :
My comment is not about the validity or otherwise of historically claimed resolution rates. That there have been inconsistencies in the way progress has been claimed by the industry, is old news and not disputed by me.
Data skew is well understood by most but your 101 lesson might be of interest to a few.
My point; simply: there is now a consistent measure used by insurers of what 'resolution' means. Apply the 6% to the total of all claims, assume every one of those remaining are houses (not driveways or the host of 'little claims' you illogically seem to believe are still sitting on insurers books) and that's what the industry has left i.e. not that many to go, in relative terms.
My point which appears to have been lost on you in your determination to highlight historic insurer data presentation flaws, is why is IAG needing another $900m given it is essentially on the home straight?
Yes your last sentence is the vital point. No use haggling over the myriad of distortions that various statistics have been used to manipulate PR in terms of progress, performance and results. That is all history now and you cannot change history although the insurance co's by dint of continually producing what is only spin talk would have you believe, that they can. But back to your point, the real questionyou quite rightly stress, is $950million reinsurance after 6 years of claims now needs to be cobbled together. Come on! Doesn't matter if it's 6% or 16% to go or 80% done there is no way that anything that the Insurance Council has claimed with any of their spin, that is credible if this sort of funding is suddenly having to be obtained. Forget the history that's just hidden the truth of the matter. This sort of development from IAG here in the present day, is what has revealed the truth, starkly!
Middleman - I am trying to help you understand my friend. You state "that's what the industry has left i.e. not that many to go, in relative terms" - relative to what?
Lets boil it down for you to make it really simple:
I'll use a simple example (figures are not real), lets say:
- IAG have 100,000 claims
- 92,000 of them were for driveways or minor inexpensive claims that cost them $10,000 each, and they have settled 100% of them.
- the other 8,000 were for expensive major house repairs/rebuilds that were 100 times more expensive at $1,000,000 each, but IAG have only settled 2,000 or 25% of them.
- If they add them together they have settled 94,000 claims or 94%.
Does that mean, as you say there are 'not that many to go, in relative terms' once you scratch below the surface?
(BTW the 25% in the example is more like 80% but I have heard the last 20% are very very expensive for IAG hence the reinsurance blow out this week)
Yesterday the Insurance Council stated 94% of claims had been settled. According to the 3rd para of the same article in the Press less than one thousand claims have not accepted offers.This announcement by IAG reveals the real truh which EQC & the insurance companies have been able to conceal for over six years which is that the latter never ever had enough reinsurance, not by a country mile, and therefore they and EQC have been co-operative and complicit in holding claims under the EQC cap, playing for time, beating down claims and claimants. All that suppression is now starting to burst through the hatch covers. IAG & Suncorp look large enough to weather this but looks nothing short of doomsday for the like of Tower.
One day we have the Insurance Council coming out and saying virtually all the EQ claims are settled or very nearly settled (do believe 94% is a good figure to support that) & the next day the largest and virtually dominant insurer comes out and says they need another $950mill?? How can everything then be possibly fine and dandy, done and dusted??!! This is six years on for heavens sake! Not six months.
six years on from what Foxglove? not six years since the last major quake (Dec 12 not including this year's Valentine's Day quake) not six years since people had any confidence that the ground had stopped shaking enough to start repairs. (Say Sep 13). Certainly not six years since EQC and insurers had any idea how much it was all going to cost. (Still not known). No one wants this over more than the insurance industry.
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