In key news on Australian stocks, Insurance Australia Group Limited (AU:IAG) signed two reinsurance deals with a unit of Berkshire Hathaway (NYSE:BRK.A) and Canada Life to gain financial stability. These deals provide volatility protection in case of natural disasters over the next five years and are expected to provide a capital benefit of approximately $350 million. IAG shares rallied by over 7% as of writing.
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IAG is the largest general insurance company in Australia and New Zealand. The company sells insurance under multiple brands, like NRMA Insurance, CGU, WFI, AMI, and NZI.
IAG’s Reinsurance Strategy
IAG’s five-year agreements with National Indemnity Company, a subsidiary of Berkshire Hathaway and Canada Life, will be effective from July 1. The deals offer up to $680 million of extra protection per year, amounting to $2.8 billion over the five years. This will limit IAG’s natural perils costs to $1.28 billion in FY25.
Reinsurance for natural perils events offers substantial protection against future earnings volatility, greatly reducing the financial impact of extreme weather events.
The company further announced an ADC (adverse development cover) with Cavello Bay Reinsurance Limited, a subsidiary of Enstar Group (NASDAQ:ESGR). This offers $650 million in protection for IAG’s long-tail reserves, which were approximately $2.5 billion as of January 1, 2024. Long-tail insurance reserves are set aside for claims that may take a significant amount of time to settle, often well after the policy period has ended.
Additionally, the company maintained its FY24 guidance and remains on course to meet reported insurance profit and margin at the higher end of its forecasted ranges.
IAG is scheduled to announce its FY24 results on August 21, along with the FY25 guidance.
Is IAG a Good Stock to Buy?
According to TipRanks’ rating consensus, IAG stock has received a Hold rating based on five Holds and one Buy recommendation. The IAG share price target is AU$6.33, which is 11% below the current price level.
