A leading analyst has concluded that despite paying up to 60% more for its reinsurance for 2012/13 than in 2010/11, Suncorp’s latest reinsurance program would have left the company more exposed to 2011’s catastrophes than the reinsurance program it had in place at that time.

Merrill Lynch’s Andrew Kearnan says Suncorp’s latest reinsurance program is “more conservative and capital-efficient but also more expensive”, after the company finally provided the market with some clarity on its reinsurance position for the current financial year.

The group revealed in an announcement last week that it has dumped aggregate reinsurance cover for Australia from its 2012/13 property catastrophe reinsurance program in favour of additional drop-down levels of cover, with a maximum event retention of $250 million and additional covers purchased to reduce this retention to $200 million for a second Australian event and to $50 million for third and fourth events.

Additional multi-year cover has also been purchased to reduce the first event retention for New Zealand risks to $NZ50 million ($39 million) and the second and third event retentions to $NZ25 million ($19 million).

Suncorp also confirmed that it has entered into a quota-share arrangement with an undisclosed party – understood to be Berkshire Hathaway – for its Queensland home insurance portfolio.

The 30% multi-year proportional quota share arrangement allows Suncorp to reduce its exposure to the Queensland market, where it has a disproportionate market share. As a result the upper limit on Suncorp’s main catastrophe reinsurance program has dropped by $500 million – from $5.8 billion to $5.3 billion.

Suncorp Group CEO Patrick Snowball says that despite adopting a slightly different structure, the 2012/13 reinsurance program provides the company with “similar levels of protection” to the previous year’s program, noting a “moderate increase” in the program cost.

But he adds that Suncorp has been “including an appropriate adjustment for additional reinsurance costs in determining insurance premiums” since early this year in anticipation of higher reinsurance costs at this renewal.

In a note to clients, Mr Kearnan puts Suncorp’s reinsurance renewal at around 15% more expensive than the 2011/12 program – which in turn he says was 45% more expensive than the previous year.

After stress-testing this year’s program against the claims events experienced in 2011, Mr Kearnan concludes that the cover provided is broadly in line with the 2011/12 reinsurance program, but that both of its past two reinsurance arrangements would have left Suncorp more exposed to 2011’s catastrophes than the reinsurance program it had in place at that time.

Mr Kearnan says he is “dubious” as to whether Suncorp has achieved sufficient premium rate increases to cover the additional cost of this year’s reinsurance, and expresses further concerns over the quota-share decision, which will see Suncorp’s share of net earned premium from its Queensland home book cut by 30%.

Despite the revelations regarding its reinsurance deal, the share price outlook for Suncorp remains cloudy, and hinges on its results for the six months to June 30, and the full 2011/12 year which it will report on August 22.

Mr Kearnan says Suncorp’s half-year figures could be “messy”, with an expectation of cat losses above budget and bad news on the investment side of the business.

“Underlying trends no doubt will have improved but investors seem to have tired of such metric in light of the disconnect between reported and underlying trends,” he says, adding that Suncorp “needs to deliver a clean set of numbers and return capital as promised” to see its share price improve.