IAG's NZ profit slumps as Berkshire deal more than doubles reinsurance costs

Insurance Australia Group's New Zealand division posted a 94% drop in first-half earnings as reinsurance costs more than doubled from an arrangement entered into with Warren Buffett's Berkshire Hathaway.

Sydney-based IAG's New Zealand business is the biggest general insurer in the country, with the Lumley Insurance, NZI, AMI and State brands on this side of the Tasman. The local division reported an insurance profit of $A11 million in the six months ended December 31, down from $A193 million a year earlier. Gross written premiums fell 4.1% to $A1.07 billion, while reinsurance expenses jumped to $A340 million from $A143 million a year earlier, due to the sharing arrangement with Berkshire Hathaway that kicked off on July 1 where the US firm takes 20% of IAG's premiums and pays 20% of its claims.

The New Zealand unit's insurance profit was also hit by a $NZ150 million increase to its risk margin from the February 2011 Canterbury earthquake event. The insurer had already gone beyond its $NZ4 billion reinsurance cover and today announced it has entered into a $NZ600 million adverse development cover deal in excess of $NZ4.4 billion with Berkshire, giving it an effective cover of up to $NZ5 billion on the February quake.

The extra cover also provides reinsurance protection on legacy liability and workers' compensation policies with exposure to asbestos risk written by CGU in the 1970s and 1980s, IAG said. The cost of the Berkshire cover will be recognised in the second half.

IAG joins local insurer Tower and Suncorp's Vero New Zealand in lifting its assessment of the cost of the Canterbury earthquakes, with more complex claims taking longer to sort out and as the repair and rebuild costs in Christchurch continue to mount.

The insurer has completed 85% of all claims by number, valued at $NZ5.3 billion, it said.

IAG said the New Zealand division's underlying profitability is expected to remain strong through the rest of the 2016 financial year.

The parent reported a 20% drop in first-half profit to A$466 million on a 1.1% decline in gross written premium to $A5.54 billion.

IAG's board declared a fully-franked interim dividend of 13Ac per share, unchanged from a year earlier, and a special dividend of 10c. Both are payable on March 30.

The Australian insurer said it expects gross written premiums to be flat in the full year and said insurance margins will likely be at the lower end of earlier guidance of between 14-16%.

The ASX-listed shares last traded at $A5.25, and have declined 5.6% this year.

(BusinessDesk)