2010 half year results announcement

Transcription

1 QBE INSURANCE GROUP 2010 half year results announcement Presented by: Frank O Halloran, CEO QBE Insurance Group Ltd 19 August 2010

2 Presentation roadmap 1. Group financial results - key messages 2. QBE growth strategy 3. Insurance results 4. Investments 5. Divisional results 6. Capital and borrowings 7. Outlook and closing remarks 8. Appendices 2 1H 2010 results presentation

3 Financial results 2010 FY Target H Actual Insurance profit margin 16 to Combined operating ratio Less than GWP and NEP increase 20 in US$ 20 Reinsurance expense ratio (to GEP) Less than Combined commission & expense ratio Less than Tax rate Around Gross investment yield policyholders funds Around Group capital adequacy multiple More than 1.5x 1.6x 3 1H 2010 results presentation

4 Key messages: strong premium growth and technical result Change to US$ presentation currency Despite competitive markets, premium rates on renewed business up 3 on average GWP up 20 to US$6,861M and strong premium growth in local currencies - Australia up 26 to A$2,046M - Asia Pacific up 15 to US$295M - Americas up 13 to US$2,342M - Europe up 6 to 1,574M COR 89.7 and less than 90 for the last five and a half years 4 1H 2010 results presentation

5 Key messages: strong balance sheet and continuing growth from acquisition activity Operating cash flow continues to be strong at US$647M (2009: US$564M) Capital adequacy at regulated entity and Group level strong Group MCR multiple of 1.6x PoA of total insurance liabilities 94.6 (2009 2H: 95.5) Acquisition strategy has been positive and pipeline strong Four acquisitions announced to date expected to add GWP of US$800M in 2010 Interim dividend maintained at 62 Australian cents per share franked at 15 (previously 20) 5 1H 2010 results presentation

6 Key messages: insurance profit impacted by lower investment yields and risk-free discount rates Insurance profit up 8 to US$822M Insurance profit margin 15.7 (2009: 17.5) impacted by: - investment yields on policyholders funds down by risk-free interest rates on claims provisions lower by acceleration of transformational IT projects in Europe and Americas increasing expenses by 0.5 Central estimate of large risk and catastrophe claims higher than normal at 9.3 of NEP (2009: 7.2) No GFC claims in current period (2009: 2.3) Prior accident year release from central estimate claims provision of US$24M or 0.4 of NEP (2009: 0.6) Continued improvement in accident year central estimate COR to 87.5 from lower attritional claims experience (2009 1H: 88.0 and 2009 FY: 88.8) 6 1H 2010 results presentation

7 Reported profit adversely impacted by a number of significant items Net profit after tax down 39 to US$440M entirely due to difficult equity and fixed interest markets and no one-off gains as in 2009 Reported net profit before tax H H 893 Significant items (pre tax) include: Net realised and unrealised equity losses Lower cash and fixed interest yields (1.7 on US$20.8BN) (Lower)/higher discount rate Operational FX gains FX gains on cessation of capital hedging Profit on repurchase of QBE debt securities Total significant items (adverse)/positive impact on profit (228) (177) (67) (371) (102) H 2010 results presentation

8 QBE continues to outperform majority of peers in difficult market conditions Sample of 20 major global insurers who have reported to date: Company ACE Allianz AG Allstate Aviva AXA Berkshire Hathaway Catlin Chubb Generali Hannover Re Liberty Mutual 30 Jun 2010 COR Dec 2009 COR Company Munich Re Partner Re Progressive QBE Royal Sun Alliance Swiss Re Travellers Tryg Vesta XL Zurich Average of 32 of top 50 reported to date 30 Jun 2010 COR Dec 2009 COR H 2010 results presentation

9 Successful growth strategy has built product and geographic diversification and increased profitability 2005 FY 2009 FY 2010 FY consensus (1) Growth ( ) GWP 7,171 11,239 13, NEP 5,630 9,446 11, COR Insurance profit ,605 1, Over 90 of growth in last five years from acquisitions CORs over this period maintained at lower than 90 EPS on ins. profit US cents 2009 and 2010 insurance profit impacted by lower interest yields Strong acquisition pipeline with over US$6BN of opportunities ex Australia presented since 30 June acquisitions between 2005 and 2009 including: - Americas: Colombia, National Farmers Union, One-Beacon, Praetorian, Winterthur, Mexico, North Pointe, ZC Sterling - Europe: British Marine, Mini Bus Plus, Endurance - Australia: QBE LMI, Elders Four acquisitions in 2010: - Americas: NAU, CNA Argentina, Seguros Colonial - Europe: Secura NV (1) Average analysts forecasts for 2010 as at 13 August H 2010 results presentation

10 Acquisitions and profit enhancing initiatives to date in 2010 NAU Country Insurance Company US multi peril crop insurer CNA Argentina workers compensation insurer Seguros Colonial (1) largest non-life insurer in Ecuador Secura NV (1) Belgian based specialist reinsurer Refinancing of borrowings at lower cost Cumulative annualised 2011 benefits (2) 992 1, Expense initiatives in Europe on existing business Synergies from acquisitions Cumulative annualised 2012 benefits (2) 1, New distribution opportunities Expense initiatives in Americas on existing business - 70 Cumulative annualised 2013 benefits (2) 2, (1) Completion expected during the third quarter subject to necessary regulatory approvals (2) As provided in the market release 26 July 2010 Cost GWP NPAT H 2010 results presentation

11 2010 1H accident year central estimate claims ratio: lower attritional claims ratio Analysis of net central estimate claims ratio H H 2009 FY 2008 FY (accident year) (1) Net earned premium 5,240 4,379 9,446 9,293 Attritional (2) Large and catastrophe (3) GFC claims (4) Claims settlement costs Discount (2.9) (3.3) (3.1) (3.4) Net central estimate claims ratio (pre risk margins) (1) Accident year means claims incurred, including IBNR, with a date of loss in the calendar year (2) Attritional ratio improved due to Sterling National and QBE LMI businesses which have lower claims ratios and the actions taken on a number of portfolios (3) Large individual risk and catastrophe claims are up on last year mainly due to the Chilean earthquake and Melbourne / Perth storms (4) Previous year credit-related claims only 11 1H 2010 results presentation

12 2010 1H accident year results: continued improvement in central estimate COR H H 2009 FY 2008 FY Net central estimate claims ratio (pre risk margins) Commissions Expenses Central estimate COR Contribution to insurance profit , Underwriting profit margin Combined commission and expense ratio increased from 28.5 to 29.8 due to lower net external agency income (0.7) acceleration of IT spend in UK and US (0.5) and change in mix of business from acquisitions Reduction in commission rates and corresponding increase in expense ratio due to more QBE owned agency business written internally and change in mix of business 12 1H 2010 results presentation

13 2010 1H financial year results: insurance profit impacted by lower risk-free discount rates H Ins. Profit Margin H Ins. Profit Margin 2009 FY Ins. Profit Margin Central estimate accident year underwriting profit , Savings on prior year central estimates Release of discount and other from prior years (226) (4.3) - - (111) (1.2) Decrease/(increase) in risk margins (80) (1.9) (29) (0.3) Reported underwriting profit Investment income on policyholders funds Reported insurance profit , H 2010 results presentation

14 Volatile risk-free interest rates impact COR, insurance margin and PoA Risk-free rate variations Sensitivity (3) H 16 June Apr 2010 (2) 31 Dec 2009 Weighted average risk-free rates Impact on key half year ratios (1) : - COR Insurance profit margin Probability of adequacy (1) Impact of restating the 30 June 2010 result and PoA for the effect of interest rates at 15 April, 16 June and 31 December 2009 (2) 15 April 2010 was indicative of market peak (3) Sensitivity based on an underlying 1 increase in the discount rate (assuming no increase in inflation or other factors) weighted according to the portfolios and payout patterns 14 1H 2010 results presentation

15 Volatile investment markets during half year impacted net profit Sensitivities Movement in equities and discount affecting profit before tax H 15 April June 2010 Realised and unrealised gain/(loss) on equities (228) 68 (100) Risk-free rates used to discount claims (67) 15 (39) Total (295) 83 (139) Profit before tax adversely impacted by: - US$378M between 15 April 2010 and 30 June US$156M between 16 June 2010 and 30 June H 2010 results presentation

16 High quality and low risk investment portfolio Equities 7 Total investments and cash US$22.3BN (2009: US$22.5BN) Cash 11 Fixed interest securities 49 Over 80 of cash and fixed interest investments rated Aa3 or better Around 99 of investments are highly liquid Average duration of cash and fixed interest portfolios around 0.5 years No permanent impairment of any of our fixed interest securities Short term money of cash and fixed interest investments in high grade corporate paper 9 of cash and fixed interest portfolio is held in short-dated sovereign, semi government and supranational bonds 16 1H 2010 results presentation

17 Low risk, short duration investment strategy considered appropriate given global economic conditions QBE s strategy to manage interest rate volatility at P&L and balance sheet level: - Low risk strategy in relation to credit - Short duration policy Major short term risk is credit spread volatility yield is sacrificed for certainty With over 70 of insurance profits derived in currencies other than A$, we lock in insurance profits when foreign exchange rates are favourable compared with our budget rates Focus on enhancing yield on policyholders funds - Take advantage of current wide spreads on quality corporate paper - Considering consolidation of portfolios using appropriate mechanisms Equities are held for the long term to back shareholders funds Reviewing equity strategy in light of proposed substantial increase in capital charge by APRA and Standard & Poor s Unlike the majority of our global peers, Australian accounting standards require mark to market for investments held to back policyholders and shareholders funds 17 1H 2010 results presentation

18 Lower investment yields due to fall in equity markets and credit spread volatility Equity income (1) Income fixed interest securities, ST money and cash Operational foreign exchange gains Property and other income Gross investment income Other foreign exchange gains Realised gains on repurchase of QBE debt securities Other expenses Net investment income Gross yield Net yield H (206) (34) H (1) Equities underperformed indices benchmarks due to losses on closing of hedges in January 2010 and strategic investments (81) (25) H 2010 results presentation

19 Lower US$ and sterling yields and credit spread volatility limiting overall yields on cash and fixed interest portfolios Current AAA cash rate weighted average yield as at: 30 Jun Dec 2009 Currency mix market value of total investments and cash (2) 30 Jun Dec 2009 Australian dollar A$ US dollar US$ Sterling Sterling Other Other Weighted average yield Actual yield (1) Average 0.5 years duration (2009: 0.6 years) Credit spreads much lower in 2010 versus 2009 (1) Actual yield of QBE s cash and fixed interest portfolio (2) Currency mix of assets required to match mix of insurance and other liabilities 19 1H 2010 results presentation

20 the Americas: continues to significantly outperform market despite increase in catastrophes Gross written premium Gross earned premium Net earned premium Claims ratio Commission ratio Expense ratio Combined operating ratio Insurance profit margin Return on equity (1) H 2,342 2,073 1, H 2,065 1,901 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. Premium rate increases on renewal business just over 1 Customer retention ratio strong and in excess of 85 GWP up 13 and NEP up 6 - differential mainly due to higher proportional reinsurance costs on Sterling National business COR and insurance profit margin deteriorated by 4.4 and 5.1 respectively, mainly due to catastrophe claims and reduced external agency income (2009 FY COR: 89.7) Claims ratio improved slightly despite catastrophes due to Sterling National business running at a lower claims ratio Commission and expense ratio up 4.9 due to change in mix of business (mainly Sterling National), lower external agency commission income and IT costs 20 1H 2010 results presentation

21 European operations: improved technical results despite challenging market conditions Gross written premium Gross earned premium Net earned premium Claims ratio Commission ratio Expense ratio Combined operating ratio Insurance profit margin Return on equity (1) M M M H H GWP up 6 from casualty portfolio initiatives and favourable crosscurrency 1,574 1,490 rates 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 slightly above 2 Customer retention ratio in excess of 80 in a competitive market NEP flat due to higher cost of reinsurance mainly reinstatement premiums Claims ratio improved by 4.5 primarily from turnaround in property, aviation and trade credit portfolios and benefit of reinsurance protections Higher expense ratio reflects costs of transformational IT consolidation projects and one-off benefits in 2009 Pleasing insurance profit margin despite catastrophes and lower investment yields 21 1H 2010 results presentation

22 Australia: strong COR and insurance profit margin well above peers Gross written premium Gross earned premium Net earned premium Claims ratio Commission ratio Expense ratio Combined operating ratio Insurance profit margin Return on equity (1) A$M A$M A$M H H GWP growth of 26 assisted by Elders acquisitions in 2H ,046 2,053 1, ,630 1,542 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 6 Customer retention ratio strong in the mid 80 range Solid insurance profit margin of 16.1 despite catastrophes and lower investment yields Claims ratio up by 4.7 due to Melbourne and Perth storms, Cyclone Ului, Kalgoorlie earthquake and east coast storms Claims wage inflation increased from 3.5 to 4.0 Lower risk-free discount rates on outstanding claims added 2.2 to net claims ratio 22 1H 2010 results presentation

23 Asia Pacific: strong insurance profit margin in competitive market Gross written premium Gross earned premium Net earned premium Claims ratio Commission ratio Expense ratio Combined operating ratio Insurance profit margin Return on equity (1) H H (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 15 mainly reflecting changes in FX rates and good growth in most countries Flat overall premium rate movements on renewal business due to soft market conditions Customer retention ratios remain high due to agency and broker service model Claims incurred ratio up by 1.1 due to several large risk claims Strong insurance margin assisted by FX hedging gains Expense ratio higher mainly due to FX impact 23 1H 2010 results presentation

24 Equator Re: claims ratio benefits from lower large risk claims Gross written premium H 1, H 1,216 Equator Re assists in managing Group retentions and optimising regulatory capital Gross earned premium Net earned premium Claims ratio Commission ratio Expense ratio Combined operating ratio 1,032 1, Premium growth due to increased internal excess of loss and quota share participations Net claims ratio down 4.7 reflecting benefit of reinsurance protections and small release of prior year claims provisions despite higher than normal catastrophe claims 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. 24 1H 2010 results presentation

25 Capital adequacy: significant excess capital over MCR Applying APRA s risk based criteria: MCR multiple 30 Jun 2010 US$3,869M US$2,272M 1.6x 31 Dec 2009 US$3,754M US$2,247M 1.6x Minimum capital requirement ("MCR") Excess capital 31 Dec 2008 US$3,244M US$2,317M 1.7x APRA s recent statements on supervision of conglomerates and capital standards for general and life insurers stated intention not to increase the capital requirement of general insurers APRA expects general insurers to maintain a buffer of at least 20 over the MCR QBE s benchmark of 50 buffer more than adequate 25 1H 2010 results presentation

26 Capital adequacy: tier 2 debt remains low QBE s regulatory capital includes allowance for tier 1 and tier 2 debt securities of: Tier 1 Tier 2 Total 30 June December December Tier 2 headroom of $US4,605M (allowance up to 100 of tier 1 capital) Debt to equity ratio is targeted to be less than 45 which indicates actual headroom of around US$800M 26 1H 2010 results presentation

27 Lower borrowing costs due to refinancing debt/equity ratio 36 at 19 August 2010 Repayment profile assuming settled at first call date Less than 1 year 30 Jun Dec New issues in the half year to refinance borrowings and assist growth: 1 5 years More than 5 years Total Debt/equity ratio Average borrowing rate 1,538 1,091 3, ,375 2, US$850M hybrid convertibles US$500M lower tier 2 subordinated debt Eurobonds (lower tier 2 securities) repaid in early August 2010 reduced debt to equity ratio to 36 Low debt to equity ratio provides QBE flexibility for funding future growth and acquisitions 27 1H 2010 results presentation

28 2010 premium outlook Revised GWP local currency BN (1) Revised GWP US$BN Forecast NEP US$BN Australia A$ Asia Pacific US$ Europe The Americas US$ Equator Re (2) (1) Subject to FX movements, revised GWP in local currency expected to be written within a range of +/- 2 (2) Internal transactions GWP will be eliminated on consolidation 28 1H 2010 results presentation

29 2010 financial performance targets 2010 FY Insurance profit margin Combined operating ratio GWP and NEP increase Reinsurance expense ratio (to GEP) Combined commission & expense ratio Tax rate Gross investment yield on policyholders funds including FX gains Group capital adequacy multiple 16 to 18 Less than and 20 Less than 14 Around 29.0 Around 18 Over 3 Greater than 1.5x 29 1H 2010 results presentation

30 Outlook and closing remarks Initiatives announced to date expected to produce additional US$2.3BN GWP and annual profit after tax of US$400M by 2013 Capacity in tier 2 debt to fund an additional US$1.2BN of GWP through growth or acquisition Benefits of global initiatives to improve reinsurance costs, claims and expense ratios details to be announced by year end Initiatives underway to enhance investment yield subject to our strict low risk criteria Further slight increase expected in overall premium rates on renewed business Underwriting results and businesses are in great shape and poised to take advantage of an increase in interest rates Successful growth strategy continues with many opportunities for further acquisitions Minimum 15 ROE target for each product remains despite lower investment yields 30 1H 2010 results presentation

31 Disclaimer The information in this presentation provides an overview of the results for the half year ended 30 June 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; and no material change to key inflation and economic growth forecasts. 31 1H 2010 results presentation

32 QBE INSURANCE GROUP H 2010 results presentation

33 Appendices 1. Dividend performance 2. Risk-free interest rate impacts on COR, insurance margin and risk margins 3. PoA of total insurance liabilities 4. Analysis of movement in risk margins 5. Asset/liability matching example 6. Top 10 P&C insurers: competitor performance 33 1H 2010 results presentation

34 Dividend performance Payout A$M interim dividend 62.0 Australian cents, 15 franked Ex div date 24 August 2010 Record date 30 August 2010 Payment date 22 September H 23/06/ /06/ /06/ /06/ /06/ /06/ /06/ /06/1905 1/07/1905 2/07/1905 Interim Final Dividends per share (A$cents) , , , Dividend per share (A$cents) 34 1H 2010 results presentation

35 Volatile risk-free interest rates impacted COR, insurance profit and risk margins Movement on average sovereign bond yields matched to maturity of outstanding claims AUD USD GBP 31 December Weighted Average April June June Movement 31 Dec to 15 April (0.05) 0.20 Movement 31 Dec to 16 June (0.05) (0.35) (0.35) (0.01) Movement 31 Dec to 30 June (0.35) (0.55) (0.50) (0.45) Since 31 December, around US$60M reduction in discount reduced the PoA from 87.5 to 86.0 Since 31 December, around US$67M (or 1.3 of NEP) directly impacted the P&L From 16 June 2010 to 30 June 2010, risk-free rates fell significantly, adversely impacting COR and insurance profit margin by 0.5 or US$28M 35 1H 2010 results presentation

36 Probability of adequacy of total insurance liabilities at H 2009 FY 2008 FY 2007 FY Net outstanding claims 12,671 12,864 11,346 12,163 Unearned premium net of deferred insurance costs 4,320 4,374 3,608 3,521 Net total insurance liabilities 16,991 17,238 14,954 15,684 Risk margin outstanding claims (891) (1,017) (842) (1,395) Risk margin unearned premium (865) (887) (677) (756) Total risk margins (1,756) (1,904) (1,519) (2,151) Discounted central estimate 15,235 15,334 13,435 13,533 Risk margin in excess of 75 PoA using APRA s risk weighted capital adequacy model 1,064 1, ,383 PoA of outstanding claims PoA of total insurance liabilities Risk margins at 30 June 2010 in outstanding claims are down compared with 31 December 2009 due to lower risk-free discount rates and the stronger US$ 36 1H 2010 results presentation

37 Analysis of movement in risk margins At 1 January Foreign exchange movement Acquisitions Margin releases Movement in discount Risk margins at 30 June / 31 December H 1,017 (49) 12 (29) (60) FY (47) 76 1,017 1 increase in risk-free interest rates reduces central estimate by around US$190M and improves probability of adequacy by H 2010 results presentation

38 Asset liability matching example Assets Liabilities P&L effect Base 1,000 1, Cash flow match assets and liabilities a) Interest and inflation rates rise by , b) Cash flow match and spreads increase by , Assets in cash QBE a) Interest and inflation rates rise by 1 1,000 1,000 0 b) Cash flow match and spreads increase by 0.5 1,000 1,000 0 (a) (b) (c) This example is based on QBE s payout patterns of an average 2.9 years Sensitivity 1 shows that cash flow matching exposes insurers to naked inflation risk Sensitivity 2 shows that matching for real interest rates (i.e. interest rates less inflation rates) produces less P&L volatility 38 1H 2010 results presentation

39 Top 10 P&C insurers: competitor performance Average combined operating ratio Combined operating ratio Fy Fy Fy Fy Fy Hy Weighted Rank Company average 1 QBE Tryg Vesta Chubb ACE Berkshire Hathaway Progressive Sampo Travellers Partner Re W R Berkley Average return on equity Return on equity Fy Fy Fy Fy Fy Hy Weighted Rank Company average 1 QBE Tryg Vesta Sampo Progressive (1.5) Zurich Chubb W R Berkley ACE Aviva Royal Sun Alliance 21.6 (2.0) Top 50 Average Top 50 Average Notes: 1. Tables reflect the top 10 performers of 32 of the worlds top 50 P & C insurers that have reported to date 2. Information sourced from published accounts and company websites for insurance and reinsurance business 3. The CORs include all identifiable expenses related to insurance activities and the COR is expressed as a of NEP 4. The ROEs are as reported or where not reported are based on average shareholders equity of general insurance and reinsurance assets 5. The weighted average CORs are the sum of the five years net earned premiums divided by total claims, commissions and expenses for the 5 years 6. The weighted average ROEs are the sum of the five ears NPAT divided by the sum of the net assets for the 5 years 7. The industry averages are the total of all the top 50 P & C insurers that have reported to date 8. FM Global who appeared at the top of the COR table at 31 December 2009 have not been included as being a mutual they only report annually 39 1H 2010 results presentation