Suncorp Terminates Reinsurance Deal with Berkshire Hathaway

Highlights:

• Suncorp Group (ASX: SUN) terminates long-standing reinsurance partnership with Berkshire Hathaway, opting for enhanced risk management strategies and federal cyclone protection programs.
• The decision aims to improve risk selection and pricing while maintaining target underlying margins of 10% to 12% for the fiscal year ending June 30.
• Suncorp reports natural hazard costs below budgeted allowances at $1.23 billion, attributing higher-than-expected claims costs to supply chain pressures and holiday period disruptions.

Suncorp Group Limited (ASX: SUN) has ended its reinsurance agreement with Warren Buffett's Berkshire Hathaway, a partnership that had previously mitigated the insurer's exposure to severe weather events in Queensland. The Brisbane-based company, known for brands like AAMI and GIO, detailed this strategic shift on Friday, citing better risk management and the introduction of a federal cyclone program as replacements for the deal.

Improved Risk Management and Cyclone Program

Suncorp's CEO, Steve Johnston, explained that the decision to terminate the deal was driven by the company's enhanced risk selection and pricing strategies. Additionally, the federal reinsurance pool for cyclone protection, which was introduced recently, played a significant role in this decision. Despite this, the company renewed other parts of its overall reinsurance coverage for the financial year, maintaining similar protections as last year.

Financial Impact and Market Response

Suncorp's commitment to maintaining underlying margins between 10% and 12% for the fiscal year ending June 30 remains steadfast. However, the company reported a slight drop in shares, closing at $16.80 on Friday. The insurer has budgeted $1.565 billion for disaster-related expenses this financial year, up from $1.36 billion, reflecting increased customer numbers and sector inflation.

Natural Disaster Costs and Industry Trends

For the year ending June 30, Suncorp estimated natural hazard costs at $1.23 billion, below its budgeted $1.36 billion. This aligns with trends seen in the industry, such as IAG's reports of better-than-expected conditions in New Zealand. However, Suncorp noted higher costs for claims from the first half of the financial year, particularly due to December cyclones and storms in Queensland, exacerbated by supply chain issues and holiday period delays.

Suncorp’s move away from the Berkshire Hathaway deal underscores its confidence in current risk management strategies and highlights the evolving landscape of reinsurance in response to natural disasters.

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