IAG lifts quake bill by $1.36b - report

IAG lifts quake bill by over a billion. Photo / Bloomberg

Christchurch's February earthquake could cost New Zealand's largest insurer $1.3 billion more than initially estimated, a global publication has claimed.

The Insurance Insider, a London and New York-based business, said Insurance Australia Group (IAG) had upscaled the amount it estimated the earthquake would cost, following initial estimates made in May.

IAG had increased its loss notification for February's damage from A$1.9 billion to A$2.9 billion, it said, carrying an article this week headlined "IAG adds A$1b to New Zealand II reinsurance claim".

"The restatement of the loss validates the widespread view that IAG would be forced to inflate the claims number that it disclosed to reinsurers in May, as the figures reported by other cedants worsened," Insider reported.

An IAG spokesperson said yesterday the business could not comment on notifications to its reinsurers, reinsurance negotiations or speculation in media stories.

"IAG has always been upfront about the fact there will be upward pressure on costs in light of the increase in natural perils. There's been no change to IAG's net exposure from earthquakes disclosed previously."

On Friday, IAG said it wanted to buy Christchurch-headquartered AMI Insurance for $380 million in a deal expected to settle in February, subject to regulatory approvals.

Yesterday, the Commerce Commission said it was considering the application to transfer AMI's business, excluding its Canterbury earthquake liabilities, to a newly created company, AMI Newco.

"IAG will acquire 100 per cent of the shares in this new company. AMI's Canterbury earthquake liabilities will be taken over by the Government," the commission said.

"In considering the application, the commission's role is to determine whether the acquisition would harm competition in the market, to the extent that there would be a substantial lessening of competition," it said.

But IAG's application denied its move was anti-competitive because it would remain restrained by existing rivals and it listed 11 other big businesses. It also revealed how reinsurance rises could hurt customers.

"In IAG's experience, there is no shortage of capacity in the market for reinsurance in New Zealand. However, the cost for underwriters of securing reinsurance has increased across the entire market in the last 12 months as insurers renew their reinsurance programmes after the Canterbury earthquake, and is likely to continue to rise in the short term.

"The effect of the Canterbury earthquakes has been to increase reinsurance costs which ultimately must be passed through to retail customers," IAG said.

The commission is due to deliver its decision on IAG's move on AMI by January 25.

Jacki Johnson, IAG (New Zealand) chief executive, said last week the AMI deal would result in the business having "nearly a million customers".

IAG (NZ) made A$17 million in the second half of 2009, A$68 million in the first half of last year, A$63 million in the second half of last year but A$90 million in the first half of this year.

In October, Insurance Insider said IAG had continued to stand by the A$1.9 billion loss estimate it made in May, "despite widespread evidence of loss creep elsewhere".

INSURANCE MARKET

IAG: Owns State and NZI, wants to buy AMI.
AMI: Locally owned, founded in Christchurch in 1926.
Vero: Owned by Suncorp, previously Royal & SunAlliance.
Tower: Originally Government Life Insurance.
Lumley: Owned by ASX-listed Wesfarmers.
FMG: Rural, homeowner insurance mainly.
Allianz: Subsidiary of global business.
AA Insurance: Suncorp Metway/NZ Automobile Association.
ASB: Has Sovereign, New Zealand's leading life insurer.
ANZ/National: New Zealand's largest bank, OnePath owner.
BNZ: 1 million+ customers, owned by National Australia Bank.
Westpac: 1.2 million New Zealand customers, 11.8 million globally.

Source: IAG's Commerce Commission application to buy AMI, competition analysis