Protection from catastrophic loss
Given the number and extent of natural peril events in the last few years, reinsurance has been increasingly important in protecting us from catastrophic loss.
We renewed our catastrophe reinsurance cover on 1 January 2012 and achieved a programme that provides comprehensive capital protection for the Group, with some multi-year protection, as well as increased coverage. Our reinsurance programme is described in more detail on pages 53–54 of our 2012 annual report.
By protecting the Group from catastrophic loss, reinsurance contributes to our capital strength, which is central to the responsibility we have to fulfil the promise we make to our customers.
Capital management
Determining the optimum form of capital for the Group involves us working with a range of stakeholders, such as investors, our local regulator, APRA, and rating agencies.
This year, we completed two capital raisings, to provide funds for general corporate purposes and to retire an existing instrument. In December 2011, we finalised a NZ$325 million unsecured subordinated bond offer in New Zealand, and in April 2012 we completed an Australian offer of Convertible Preference Shares, raising $377 million which we used to refinance our $350 million Reset Preference Share issue when it matured in June 2012.
Using capital to create value
Our capital position has enabled us to fund a number of acquisitions that will create value for shareholders over the medium term – AMI in New Zealand, a 20% stake in Bohai Property Insurance in China and a 30% interest in AAA Assurance in Vietnam – without affecting the financial strength of the organisation.
Regulatory changes
This year has been particularly interesting for capital management, with regulators reviewing capital requirements for insurers in Australia and New Zealand.
APRA’s review of Life and General Insurance Capital (LAGIC) standards requires us to adopt a new method of calculating regulatory capital from January 2013, with a prescribed capital amount (PCA) replacing the current minimum capital requirement (MCR). We will also be required to hold a minimum 60% of our capital in what is now termed Common Equity Tier 1 (CET1).
We have worked closely with APRA as it developed the new requirements, and the overall net impact on the Group is modest. While the Group’s risk appetite remains the same, we have revised our benchmarks to reflect the new standards. Our benchmarks are now to hold total capital of between 1.4 to 1.6 times the PCA, and CET1 capital of 0.9 to 1.1 times the PCA.
The Reserve Bank of New Zealand has revised its Solvency Standard so that, from 31 December 2012, insurers must have earthquake reinsurance for a 1:500 year return period. This will progressively increase to a 1:1,000 year return period requirement by July 2017. Our capital strength and reinsurance programme mean that we already comply with the 2017 requirement.
Our active approach to capital management over the year has ensured our regulatory capital position remains robust, and above our long term benchmark. We are comfortably capitalised under the LAGIC proposals; we have a comprehensive reinsurance programme in place; and our investment portfolio remains conservatively positioned.
