28 February The Manager Company Announcements ASX Limited Level 6 Exchange Centre 20 Bridge Street, SYDNEY NSW 2000.

Transcription

1 28 February 2011 QBE Insurance Group Limited ABN Head Office 82 Pitt Street SYDNEY NSW 2000 Australia Postal Address Box 82 GPO SYDNEY 2001 Telephone: +61 (2) Facsimile: +61 (2) DX 10171, Sydney Stock Exchange The Manager Company Announcements ASX Limited Level 6 Exchange Centre 20 Bridge Street, SYDNEY NSW 2000 Dear Sir/Madam, re: QBE Presentation on the 2010 Results Further to the Company s announcement to the market today on its results for the year ended 31 December 2010, please find attached a copy of the presentation to be delivered to the market this morning. Yours faithfully, Duncan Ramsay Company Secretary Encl.

2 QBE INSURANCE GROUP 2010 annual results announcement Presented by: Frank O Halloran, CEO QBE Insurance Group Ltd 28 February 2011

3 Presentation roadmap 1. Overview financial results 3. Significant items 4. Investments 5. Divisional results 6. Balance sheet and capital 7. Strategic initiatives 8. Outlook and closing remarks 9. Appendices 2

4 Overview Continued strong underwriting profit with premium growth ahead of target all divisions in good shape Lower investment yields affected the 2010 insurance margin Balance sheet strong and flexible with capacity for further growth Acquisitions announced during 2010 and to date expected to add over US$3.4Bn of GWP in a full year New comprehensive global reinsurance programs provide greater protection at lower cost, substantially locked in for Dividend maintained at 66.0 Australian cents per share franked at 10% Positive outlook supported by acquisitions, expected improved COR and increase in yield on cash and FI securities 3

5 2010 financial results For the year ended 31 December % change GWP US$M 13,629 11, NEP US$M 11,362 9, Underwriting profit US$M 1, COR % Insurance profit US$M 1,703 1,609 6 Insurance profit to NEP % Investment income (including FX gains) US$M 659 1,159 (43) Net profit after income tax US$M 1,278 1,532 (17) 4

6 2010 financial results scorecard 2010 FY Target (1) 2010 FY Actual GWP and NEP increase 20% in US$ 21% & 20% Reinsurance expense ratio (to GEP) Less than 13.5% 15.4% Combined commission & expense ratio Less than 30.0% 29.8% COR Less than 89% 89.7% Insurance profit margin 16% to 18% 15% Tax rate Around 20% 17% Gross investment yield policyholders funds Around 3% 3.4% Group capital adequacy multiple (2) More than 1.5x 1.6x (1) Revised forecast at 19 August 2010 (2) Includes underwriting of final 2010 dividend 5

7 Strong underwriting profit and premium growth ahead of target All divisions delivered an increased underwriting profit and return on allocated capital (ROE) above 15% Underwriting profit up 19% to US$1,168M COR of 89.7% sixth consecutive year below 90% outperformed large majority of peers Compound average gross premium income growth of 14% p.a. over the past 5 years GWP up 21% to US$13.6Bn growth ahead of target despite challenging market conditions Overall average premium rate increase on renewed business of 2.5% above market averages retention levels remain high QBE s diversified portfolios resulted in an improved net claims ratio of 59.9% (2009: 60.3%) Lower attritional claims ratio offset by higher than normal frequency of catastrophe claims, not experienced since

8 Insurance profit margin held back by lower investment yields and increased frequency of catastrophe claims Insurance profit up 6% to US$1,703M Insurance profit margin of 15% (2009: 17%) below guidance due to: Net investment yield on policyholders funds down from 4.4% to 3.3% and lower average period premium held adversely impacted insurance margin by 1.9% Change in risk-free interest rates 0.2% negative impact on the insurance margin Full utilisation of large individual risk and catastrophe claims allowance due to 2H extreme weather and earthquake activity; 9.5% of NEP (2009: 8.6% including 1.2% GFC claims) Increased premium taxes and Lloyd s levies increased expense ratio by 0.5% Insurance profit benefited from continuing positive prior accident year net release from central estimate of outstanding claims of US$49M or 0.4% of NEP (2009: US$61M or 0.7%) Risk margins also strengthened with PoA of outstanding claims of 89.8% (2009: 88.1%) 7

9 Net profit after tax down 17% to US$1,278M Significant items impacting reported profit before tax 2010 US$M 2009 US$M Net realised and unrealised equity (losses)/gains (48) 78 Lower cash and FI yields (1.3% on US$25Bn) (325) - Increase in large risk and catastrophe claims (381) - GFC credit related claims - (112) Savings on prior year central estimates Operational FX gains FX gains on cessation of capital hedging Profit on repurchase of QBE debt securities

10 2010 accident year central estimate claims ratio: lower attritional loss ratio Analysis of net central estimate claims ratio (accident year) (1) Net earned premium US$M 11,362 9,446 9,293 Attritional % Large and catastrophe % GFC claims % Claims settlement costs % Discount % (3.6) (3.1) (3.4) Net central estimate claims ratio (pre risk margins) % (1) Accident year claims are those incurred, including IBNR, with a date of loss in the calendar year 9

11 2010 accident year results: improving accident year combined operating ratio Net central estimate claims ratio (pre risk margins) % Commissions % Expenses % Central estimate COR % Accident year underwriting profit US$M 1,314 1, Accident year underwriting profit margin %

12 2010 insurance profit: overall positive but investment yield on policyholders funds down 1.9% US$M Ins. profit margin % US$M Ins. profit margin % US$M Ins. profit margin % Central estimate accident year underwriting profit 1, , Savings on prior year central estimates Release of discount and other from prior years net of movement in risk margins (195) (1.7) (140) (1.5) (125) (1.3) Reported underwriting profit 1, , Investment income on policyholders funds Reported insurance profit 1, , ,

13 Weighted average discount rates small negative impact on underwriting profit for 2010 Risk-free discount rates on outstanding claims % Currency Australian dollar US dollar Sterling Euro Group weighted average Estimated impact of discount movement: Profit and loss US$M (25) 160 (242) Risk margins (PoA impact) US$M (42) 56 (426) Total US$M (67) 216 (668) The impact of discount movements on profit & loss and risk margins is an estimate based on existing portfolios on a like for like basis The total actual discount movement in the profit and loss, including changes in portfolios and movements in payout patterns etc, was a positive US$95M for 2010 (refer note 8(c) in accounts) of which US$413M relates to the 2010 accident year and $318M reversal of the discount from prior year 12

14 Investment income lower yields and no major one-off benefits as in 2009 US$M 1,400 1,200 1, , , % Lower investment yields on FI and cash securities, particularly in US, UK and Euro markets Leveraged wider credit spreads on good quality credit corporate bonds over 50% of total FI and cash securities Equities reduced to 1.1% of total investment portfolio Gross investment income including FX gains reduced to US$700M (2009: US$948M) Net investment income Net yield - policyholders' funds Net yield - shareholders' funds 13

15 Comparison of cash rates with actual yields Average AAA cash rates % Currency mix of FI and cash investments % US dollar Australian dollar Sterling Euro Other Total weighted average yield Actual gross yield achieved Target yield for 2011, based on current portfolio is 3.3% to 3.5% 14

16 2010 2H insurance profit margin affected by lower investment yields and reduced period premium held 1H 30 Jun H 31 Dec Full Year 1H 30 Jun 2H 31 Dec Full Year COR % Underwriting margin % Yield on insurance funds % Period premium held yrs Yield to NEP % Insurance profit margin % Average period held lower in 2H 2010 due to NAU Country portfolio acquired 1 July 2010 Average period held at year end increased due to the acquisition of Secura on 2 November

17 Insurance margin guidance on strong growth of 22% 25% in net earned premium (1.0) Guidance based on: - Full utilisation of 9% catastrophe claims allowance - No savings allowed for commission and expense efficiencies - No FX gains No allowance for changes in riskfree rates 12.0 FY10 insurance margin No FX gains Increase in yields on policyholders funds Impact of Balboa transaction New global reinsurance programme Large risk and catastrophes 9% FY11 insurance margin guidance 16

18 the Americas: underwriting profit up 19% to US$309M and strong platform for growth in Gross written premium US$M 5,165 4,001 Gross earned premium US$M 5,117 3,939 Net earned premium US$M 3,009 2,527 Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % Insurance profit margin % Return on equity (1) % (1) ROE based on the management result before internal reinsurance using the capital allocated to the division. All other numbers and ratios are net of internal reinsurance. Average premium rate increases of slightly less than 1% on renewed business (Market Scout: -5%) GWP up 29% and NEP up 19% differential due to higher proportional reinsurance Growth benefited from acquisitions over 75% of business is now in specialised segments COR stable with lower insurance profit margin due to reduced investment yields Latin America division contributed strongly with 59% GWP growth to US$559M mainly from acquisitions 17

19 European operations: improved COR and claims ratio despite increase in catastrophe claims Gross written premium US$M 4,156 3,961 Gross earned premium US$M 4,008 3,892 Net earned premium US$M 2,593 2,534 Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % Insurance profit margin % Return on equity (1) % (1) ROE based on the management result before internal reinsurance using the capital allocated to the division. All other numbers and ratios are net of internal reinsurance. GWP up 5% in US$ and sterling NEP up only 2% with higher reinstatement premiums following catastrophe claims Average premium rate increases of 2% on renewed business Very pleasing retention rate on renewed business Improved claims ratio due to re-engineering of problem portfolios and lower GFC claims Expense ratio up due to change in business mix, cost of transformational IT projects and additional Lloyd s levies 18

20 Australia: strong performance despite higher frequency of weather-related catastrophes Gross written premium US$M 3,707 2,728 Gross earned premium US$M 3,720 2,588 Net earned premium US$M 3,033 2,138 Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % Insurance profit margin % Return on equity (1) % (1) ROE based on the management result before internal reinsurance using the capital allocated to the division. All other numbers and ratios are net of internal reinsurance. GWP up 36% (15% in A$) assisted by Elders acquisition, premium rate increases and new distribution channels Overall average premium rate increases on commercial lines of 5% on renewed business (JPM/Deloitte survey: -1%) Marginal increase in claims ratio despite increased catastrophe claims Solid COR Expenses up mainly due to additional premium levies Lower FX gains reduced investment yield 19

21 Asia Pacific: steady growth with improved COR and insurance profit margin Gross written premium US$M Gross earned premium US$M Net earned premium US$M Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % Insurance profit margin % Return on equity (1) % Growth in local currency in most countries with GWP up 9% and NEP up 13% Premium rates on renewed business flat across Asia Pacific region Claims ratio improved despite Christchurch and Vanuatu earthquakes and Thailand floods Insurance margin benefited from higher investment income Collaboration efforts with brokers and affinity partners improved growth (1) ROE based on the management result before internal reinsurance using the capital allocated to the division. All other numbers and ratios are net of internal reinsurance. 20

22 Equator Re: slightly higher underwriting profit despite increased catastrophe claims Gross written premium US$M 2,479 1,994 Gross earned premium US$M 2,363 1,918 Net earned premium US$M 2,307 1,875 Claims ratio % Commission ratio % Expense ratio % Combined operating ratio % Insurance profit margin % Equator is the Group s captive reinsurer providing protections to QBE s global operations GWP up 24% in line with overall growth for the Group Claims ratio up due to increased frequency and severity of weather-related events and earthquake losses COR up due to catastrophe claims and insurance margin affected by lower yields Maintain Standard & Poor s financial strength rating of A+ and net assets of around US$1.6Bn All pricing subject to external benchmarking 21

23 Capital adequacy: APRA MCR multiple exceeds our internal benchmark >1.5x Note: all dollar amounts are in US$M MCR multiple 2010 $4,332 $2,211 $ x Minimum capital requirement ("MCR") 2009 $3,674 $2, x APRA excess capital 2008 $3,244 $2, x Dividend underwriting Regulatory capital does not include any allowance for our US$1.7Bn intangible asset in owned agencies MCR multiple at 31 December 2010 is after including dividend reinvestment and underwriting of final dividend Excluding underwriting of final dividend of US$462M, 2010 MCR multiple is 1.5x 22

24 Balance sheet strong and flexible with capacity for further growth 12,000 Shareholders' funds - US$M 91.0 PoA on outstanding claims liabilities - % 10, ,000 6,000 4,000 2,000-7,834 9,164 10, Flexibility for funding future growth capacity for greater use of tier 2 debt securities Capacity to add US$1.0Bn GWP in addition to 2011 forecast GWP funded by retained profit and debt flexibility Debt/equity ratio - %

25 Comprehensive global reinsurance programs from 2011 to 2013 MER reduced to around 4.0%* of projected NEP (2010: 4.3%) New arrangement combines multiple products and programs with single layer for catastrophes and risk covers Price and cover for catastrophes, per risk and aggregate risk substantially locked in for three years Broader cover with extended global aggregate covers for frequency of large individual risk and catastrophe claims over US$5M New acquisitions in 2011 of more than US$250M GWP require approval by reinsurers Separate covers for crop insurance, syndicate 1036 and inwards reinsurance Overall reinsurance expense reduced by US$300M and an estimated 0.5% benefit to COR Also reduces large individual risk and catastrophe claims to around 9% of NEP for 2011 * Includes Balboa 24

26 2011 large individual risk and catastrophe claims to date well within allowances Preliminary estimated claims net of reinsurance: US$M Allowances for FY 2011 US$M Queensland storms 100 Allowance in COR target (9% of NEP) 1,300 Cyclone Yasi 100 Aggregate catastrophe and risk covers 350 US winter storms 10 Total 1,650 Christchurch earthquake (max.) 175 Total to date

27 Acquisition strategy: history of growth and profit GWP US$M NEP US$M COR % U/W profit US$M Ins. profit US$M EPS on ins. profit US cents 2005 FY 7,171 5, FY 11,239 9, , FY 13,629 11, ,168 1, Growth ( ) 90% 102% 90% 73% 28% Around 85% of GWP and underwriting growth in last five years from acquisitions CORs over this period maintained at lower than 90% 2009 and 2010 insurance profit impacted by lower interest yields A number of acquisitions being considered 48 acquisitions announced between 2005 and 2010 including: - Americas: Colombia, National Farmers Union, One-Beacon, Praetorian, Winterthur, Mexico, North Pointe, Sterling National, NAU Country, CNA Argentina, Seguros Colonial, Seattle Specialty, Renaissance Re - Europe: British Marine, Mini Bus Plus, Endurance, Secura NV - Australia: QBE LMI, Elders Two acquisitions in 2011: - Americas: Balboa - Australia: CUNA 26

28 Acquisitions: converted seven acquisitions in 2010 meeting criteria of EPS accretion in year one 2010 acquisitions Cost US$M Additional annualised GWP US$M NAU Country US multi peril crop insurer CNA Argentina workers compensation insurer Secura NV Belgian based specialist reinsurer Renaissance Re US multi peril crop insurer (1) Seguros Colonial (Ecuador), Seattle Specialty (US) & RGM Agency (Colombia & Ecuador) Sub total 1,434 1, acquisitions Balboa US lender-placed / voluntary insurance (1) ( 2) 700 1,500 CUNA Australian mutual insurer (1) Total 2,154 3,405 (1) Subject to regulatory approvals (2) Additional annualised GWP does not include GWP of US$900M from expected portfolio transfer in 2011 (2) 27

29 Balboa distribution and portfolio transfer agreement Initial 10 year distribution agreement with Bank of America announced to market on 4 February 2011 Lender-placed and voluntary homeowners insurance, contents, motor and related consumer lines (no LMI included) US$1.2Bn portfolio transfer of liabilities backed by liquid and high quality tangible assets US$700M consideration for distribution and portfolio transfer to be substantially amortised over three years Agreements subject to regulatory approvals, expect to be received by June 2011 Annualised GEP US$1.5Bn and NEP US$1.3Bn Estimated annualised insurance profit margin of 18% to 20% after accelerated amortisation of consideration and allowance for catastrophes Catastrophe deductible of US$200M included in 2011 Group MER of 4.0% 28

30 2011 financial performance targets: outlook for strong growth in premium income and profitability 2011 FY GEP growth 19% to 22% NEP growth 22% to 25% Reinsurance expense ratio (to GEP) Around 12% Combined commission & expense ratio* Around 31% COR 87% - 90% Insurance profit margin 15% - 18% Tax rate Around 23% Gross investment yield on policyholders funds 3.3% - 3.5% * Including amortisation of Balboa consideration 29

31 Projected 2011 insurance profit sensitivity: premium growth and insurance margin scenarios Insurance margin Insurance profit 15% 16% 17% 18% NEP growth 20% US$M 2,045 (1) 2,181 2,318 2,454 NEP growth 22% US$M 2,079 2,218 2,356 2,495 NEP growth 25% US$M 2,130 2,272 2,414 2,556 (2) Growth based on 2010 NEP of US$11,362M 2010 insurance profit was US$1,703M Scenarios demonstrate insurance profit growth range of 20% (1) to 50% (2) 30

32 QBE continues to outperform majority of peers in difficult market conditions Sample of underwriting results for global insurers who have reported to date: 31 December COR% 31 December COR% Allianz RSA AXA Suncorp * Chubb Swiss Re CNA Financial Transatlantic IAG * Travellers Liberty Mutual Tryg Vesta QBE Zurich RBS * Annualised reported results to 31 December

33 Outlook and closing remarks Expected 2% increase in overall average premium rates on renewed business and organic growth limited in soft insurance markets Synergies from expense and claims initiatives in Europe and Americas on track Forecast gross investment yield on policyholders funds of 3.3% to 3.5% supported by increased exposure to high quality corporate bonds Maintain focus on proven and successful strategy of growth by acquisitions which are EPS accretive in year one Continue disciplined underwriting approach with 15% minimum ROE on all products New global reinsurance programs which provide greater protection at lower cost, substantially locked in for Substantial allowances remain for large individual risk and catastrophe claims Insurance profit expected to substantially increase by at least forecast NEP growth of 22 25% Acquisitions and initiatives announced in 2010 and to date, expected to add (over the next three years) a further US$600M to annual net profit after tax 32

34 Disclaimer The information in this presentation provides an overview of the results for the year ended 31 December This presentation should be read in conjunction with all information which QBE has lodged with the Australian Securities Exchange ( ASX ). Copies of those lodgements are available from either the ASX website com.au or QBE s website Prior to making a decision in relation to QBE s securities, products or services, investors, potential investors and customers must undertake their own due diligence as to the merits and risks associated with that decision, which includes obtaining independent financial, legal and tax advice on their personal circumstances. This presentation may contain statements which constitute forward-looking statements for the purposes of the U.S. Private Securities Litigation Reform Act of We caution investors or potential investors that such forward-looking statements involve uncertainties, both general and specific, and risks exist that the forward looking statements will not be achieved. Any forward-looking statements assume large individual risk and catastrophe claims do not exceed the significant allowance in our business plans; no overall reduction in premium rates; no significant fall in equity markets and interest rates; no major movement in budgeted foreign exchange rates; no material change to key inflation and economic growth forecasts and subject to receipt of regulatory approvals for recent acquisitions. 33

35 QBE INSURANCE GROUP 34

36 Appendices 1. Dividend performance 2. PoA of total insurance liabilities 3. Claims ratios 1H:2H accident and financial year 4. Analysis of movement in risk margins 5. Historical COR by division 35

37 Dividend performance Payout A$M 1, , , , Interim Final Dividends per share 2010 final dividend 66.0 Australian cents, 10% franked: - Ex dividend date 4 March 2011, record date 10 March 2011, payment date 11 April Dividend reinvestment plans continue at 2.5% discount Dividend per share A$ cents 36

38 Probability of adequacy of total insurance liabilities at 95.5% 2010 US$M 2009 US$M 2008 US$M 2007 US$M Net outstanding claims 15,017 12,864 11,346 12,163 Unearned premium net of deferred insurance costs 4,785 4,374 3,608 3,521 Net total insurance liabilities 19,802 17,238 14,954 15,684 Risk margin outstanding claims (1,270) (1,017) (842) (1,395) Risk margin unearned premium (884) (887) (677) (756) Total risk margins (2,154) (1,904) (1,519) (2,151) Discounted central estimate 17,648 15,334 13,435 13,533 Risk margin in excess of 75% PoA using APRA s risk weighted capital adequacy model 1,353 1, ,383 PoA of outstanding claims % PoA of total insurance liabilities %

39 Claims ratios: accident year and financial year for 1H and 2H 1H 30 Jun H 31 Dec Full Year 1H 30 Jun 2H 31 Dec NEP US$M 5,240 6,122 11,362 4,379 5,067 9,446 Full Year Attritional % Large individual risk and catastrophes % GFC % Claims settlement costs % Discount % (2.9) (4.2) (3.6) (3.3) (2.9) (3.1) Accident year claims ratio % Savings on central estimate % (0.4) (0.4) (0.4) (0.6) (0.7) (0.7) Release of discount (& other) prior years % Increase (decrease) in risk margins % (1.7) (0.6) (1.1) 1.9 (1.1) 0.3 Financial year %

40 Analysis of movement in risk margins 2010 US$M 2009 US$M At 1 January 1, Foreign exchange movements and other impacts (9) 122 Acquisitions Margin releases and adverse movement in discount rates and other factors (122) 29 Risk margins at 31 December 1,270 1,017 Adverse movements in discount relates to our substantial portfolios in US dollars and Sterling 1% increase in risk-free discount rates increases risk margins by around US$229M and improves PoA by 5% 39

41 Historical combined operating ratio by division COR 2010 % 2009 % 2008 % 2007 % 2006 % 2005 % Australian operations Asia Pacific European operations the Americas Equator Re Group