CFO Forum. Finity Boardroom - Thursday, 10 March Finity Consulting Pty Limited

Transcription

1 CFO Forum Finity Boardroom - Thursday, 10 March Finity Consulting Pty Limited

2 Agenda Welcome General Insurance market update David Wilheim, Finity Consulting The Economic Outlook Dr Don Stammer, Independent Commentator Why some general insurers are getting into private health Jamie Reid, Finity Consulting Wrap-up 2

3 General Insurance market update CFO Forum Presented by David Wilheim 10 March Finity Consulting Pty Limited

4 What are we talking about today? Recent industry performance Listed insurers reported results Key themes for the future

5 Year in review: headline figures Direct Insurers Change GWP ($b) (growth) 1% 4% +3% Gross Claims ($b) Gross Net Loss Ratio 63% 69% +6% Insurance Trading Result 17% 11% -6% NPAT ($b) Return on Equity 16% 10% -7% 5 Source: APRA

6 Direct insurers' GWP ($ billion) % growth on previous year Premium growth rebounds to average % 8% 7% 6% 5% 4% 3% 2% 1% Calendar Year Source: APRA 0%

7 GWP Growth Direct business 12% 10% 8% 6% 4% 2% 0% -2% 7-4% Direct business Personal Lines Commercial Lines (Short tail) Source: APRA Long tail Other

8 GWP Growth Direct business, class by class 12% 10% 8% 6% 4% 2% 0% -2% 8-4% Direct business Personal Lines Commercial Lines (Short tail) Source: APRA Long tail Other

9 Gross Net Loss Ratio Higher industry claim costs in % 90% 80% 70% 60% 50% 40% 30% 20% 10% 9 0% Direct business Short tail Long tail Series1 Series2 Source: APRA

10 Gross Net Loss Ratio So what caused the increased costs? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 10 0% Direct business Short tail Long tail Series2 Series1 Source: APRA

11 Gross Net Loss Ratio Underlying losses 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 11 0% Direct business Short tail Long tail GNLR - Underlying GNLR - Reported Source: APRA, ICA

12 Expenses ($b) Expenses as % of GEP Expense rate stable but should reduce 12 30% 10 25% 8 20% 6 15% 4 10% 2 5% % 12 Source: APRA Total expenses (LHS) Underwriting Expense Rate Operating Expense Rate Total Expense Rate

13 Insurance margin subdued in % 20% 10% 0% -10% Source: Pendulum, APRA

14 Net Profit Before Tax ($ billions) Profit almost halves in $5.7b ($0.2b) Lower premium ($2.8b) Higher reinsurance recoveries Lower discount rate impact $0.8b Higher reserve releases $0.6b ($0.1b) Higher total expenses (UW, Op ) ($1.8b) NPBT 2014 Natural perils events ($1.7b) Higher attritional claims $2.9b COMPONENTS OF THE DECREASE Lower investment income $3.2b NPBT Source: ICA, APRA

15 Net Profit After Tax ($ billion) % Return on Equity Return on equity falls below hurdle rate 5 25% 4 20% 3 15% 2 10% 1 5% % 15 Source: APRA Net Profit After Tax % Return on Equity 15% Hurdle

16 Listed insurers results for CY % GWP Growth 30% Expense Ratio 15% 10% 28% 5% 26% 0% -5% -10% IAG Suncorp QBE 24% 22% -15% -20% 20% IAG Suncorp QBE 100% Combined Operating Ratio 20% Insurance Margin 95% 15% 90% 10% 85% 80% 5% 75% IAG Suncorp QBE 0% IAG Suncorp QBE 16 Source: IAG, SUN, QBE, various analyst reports

17 Key themes for the future Technology Operational efficiencies Sharing economy Data & analytics Consumer behaviour 17

18 Questions & Discussion

19 Distribution & use This presentation is to members and guests of Finity s CFO Forum on 10 March No other distribution of this presentation is permitted without our prior written consent. Third parties, whether authorised or not to receive this presentation, should recognise that the furnishing of this presentation is not a substitute for their own due diligence and should place no reliance on this presentation or the data contained herein which would result in the creation of any duty or liability by Finity to the third party. Reliances & limitations We have relied on the accuracy and completeness of all data and other information (qualitative, quantitative, written and verbal) provided to us for the purpose of this presentation. We have not independently verified or audited the data but we have reviewed it for general reasonableness and consistency. It should be noted that if any data or other information is inaccurate or incomplete, we should be advised so that our advice can be revised, if warranted.

20 Contact David Wilheim Consultant Tel: david.wilheim@finity.com.au 20

21 The Economic Outlook CFO Forum - 10 March 2016 Dr Don Stammer Independent Commentator 2016 Finity Consulting Pty Limited

22 Disclaimer The information included in this presentation is extremely general in nature and does not take account of the specific needs of individual businesses or investors.

23 Our economy and investment markets: the key influences China: has huge effects on our exports, commodity prices, confidence and GDP China and US: both influence the $A US: gives strong leads to our shares and longdated bonds Local influences: mainly influence our cash rate and house prices

24 Eight years on from the GFC (RBA) Global growth is still moderate and patchy Widespread, though somewhat varied, progress in balance sheet repair Generally improved financial markets but periodic bouts of nervousness Global debt levels remain high Interest rates down to extremely low levels

25 When considering the outlook for business and investments Don t simply extrapolate ahead recent experience Allow for cycles Recognise the many shades of grey

26 Theme There s a lot of gloom around... it s been dominating investment markets But the business outlook in US, China and Australia isn t quite as bad as generally feared

27 Many worries in the outlook; often exaggerated It s secular stagnation!! China: a hard landing? US: recovery losing steam? Europe: low growth, too bureaucratic, refugees? Japan: sluggish economy despite stimulus? EM economies: have lost their way? Global monetary policy: has lost its impact? No future for commodities? Geo-political stress

28 GLOBAL GROWTH % change, 12 months ended

29 Is anything going right (#1)? China: no hard evidence yet of economy-wide recession; manufacturing is slowing; but consumption and services are doing better; trend growth will be lower but still significant US: good gains in jobs; consumer spending seems to be picking up; pain in energy sector; overall growth of 2/2.5%?

30 Is anything going right (#2)? Europe: modest growth (1/1.5%) While low oil prices hurt producers, consumers and other businesses benefit (with lags) Globally, monetary policy is accommodative Mostly, banks have stronger balance sheets

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32 Australia Mining construction boom has collapsed; commodity prices are low - mainly because of excess global supplies Overall growth in GDP of 3% Jobs growth has been surprisingly strong Sources of growth: infrastructure, housing, consumption, weaker A$ Household saving is up; household debts still high; structural budget deficit; banks sound

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36 Our economy in the next year or two GDP +2.5% in 2016, then picking up, from infrastructure (especially in NSW); A$ recent and prospective?; consumption Growth will be mainly in services sectors FTAs: will deliver gains over medium term Little risk of recession in next year or two Main uncertainty: China

37 Recession in Australia in 2016 or 2017? Many predictions of recession in 2016 or 2017 more so for incomes than GDP Worries: China; global over-supply of commodities; confidence; house prices Recession in 2016, 2017 is possible but unlikely. Instead: soft economy; modest fall in unemployment; fairly low inflation for a while

38 Interest rates US likely to increase its cash rate gradually but market expectations will swing US bond yields to rise as inflation reappears Our cash rate: left unchanged in 2016??? Bond yields seem unsustainably low and assume negligible inflation for a decade Lock in low rates on debt; use realistic discount rates in NPV calculations

39 The $A Big move down in $A/$US since 2011 Reasons: generally strong $US; fears of hard landing in China; commodity prices (global oversupply); past cuts in our cash rate My guess for $A: downside still against $US but less further drop than many people hope for

40 Shares Our shares mostly follow direction of US lead Global gloom and volatility in early 2016 Average P/E is about normal; average EY and DY attractive relative to interest rates 2015 H2 results uneven; on average, a little better than feared; Banks are in better shape than market sentiment currently suggests

41 Insurance The insurance cycle lives on: one or both of investment returns and/or margins Investment returns choppy and mostly low Margins some recovery but competitive Under-insurance is widespread in Australia

42 The best business opportunities Services such as tourism; education; health Exports of services and goods under FTAs?? Infrastructure, especially in NSW House construction: plateau; some over-supply Manufacturing: small market, high costs Motor vehicles: towards all imported; choice Businesses that handle IR issues best Businesses making good use of cheap debt

43 Longer-term thoughts Need for a shake-up in productivity; tax reform; update to the federation Inflation cycle will turn The best time to grow a business or invest is usually during times of gloom not boom Don t extrapolate ahead a recent experience and call it a trend; the cycle lives on; recognise the many shades of grey

44 Why some general insurers are getting into private health CFO Forum Presented by Jamie Reid 10 March Finity Consulting Pty Limited

45 In summary Strong revenue growth Solid return on capital Highly regulated, so difficult to better existing products 45

46 Suggested Agenda Market participants High level drivers Policy and regulation Some favourite slides 46

47 Market participants

48 Market share (hospital cover) Market snapshot 30% 25% 20% 15% 10% 5% 0% Over 30 insurers Top 6 have almost 85% market share Premium revenue $21 billion in year to Dec Around half the population are insured

49 49 6 months to Dec 15 MPL 6 months to Dec 14 Change Policyholders (000s) Total 1,823 1, % Sales 4.40% 5.20% -0.80% Lapse 5.70% 5.00% 0.70% Financials ($m) Premium 3,080 2,943 5% Claims -2,571-2,569 0% Risk Equalisation % Expenses % Underwriting result % Gross Margin 17.20% 13.90% 3.30% Expense Ratio 8.40% 8.10% 0.30% Net Margin 8.80% 5.80% 3.00% Notes Policyholder numbers refer to Australian residents only. Financials includes temporary residents, such as students and migrant workers 31 December results: Too few members and too much profit? Lapse mainly in top cover Product management initiatives Claim management initiatives include Hospital contracting / auditing Payment integrity program for extras Primary care

50 Policyholders (000s) 50 6 months to Dec 15 nib 6 months to Dec 14 Change Total % Sales?????? Lapse 5.30% 5.50% -0.20% Financials ($m) Premium % Claims % Risk Equalisation % Expenses % Underwriting result % Gross Margin 15.10% 13.80% 1.30% Expense Ratio 8.20% 7.60% 0.60% Net Margin 6.90% 6.20% 0.70% Notes Policyholder numbers refer to Australian residents only. Financials includes temporary residents, such as students and migrant workers 31 December results: policyholders increasing and margins expanding Multi-channel growth strategy: direct, retail brokers, white label Claim management initiatives include: better combatting adverse selection Helping customers make better decisions (whitecoat) Diversification outside Australian PHI (NZ, travel, options)

51 High Level Drivers

52 Health costs per person ($ per year) Health costs at % of GDP Health costs are increasing faster than GDP 7,000 6,000 5,000 4,000 3,000 2,000 1, Health costs per person Percentage of GDP 52 Source: AIHW

53 Government taking the strain 53 Chart shows total Australian health expenditure by source of funds at constant prices (source: AIHW) Real terms increase in government and individual contributions Scope for insurers to assist individuals and government

54 Policy and Regulation

55 Possible Discussion Topics Policies and Practices Community Rating Risk Equalisation Annual Pricing Process Government Support Hospital Contracting Prudential Regulation Minimum Capital Requirement Solvency Requirement Capital Management Policy Appointed Actuary The move to APRA Other Topical Issues Affordability Sovereign Risk Government policy settings Consolidation Competition 55

56 Some of my favourite slides

57 $ millions Subsi dy Community Rating Requires Risk Equalisation 1,400 1,200 1, Premiums Age Claims (Before Risk Eq) 57 Source: Finity analysis of PHIAC data, year ending June 2012

58 $ millions Cost Differences By Age Largely Eliminated 1,400 1,200 1, Premiums Age Claims (After Risk Eq) 58 Source: Finity analysis of PHIAC data, year ending June 2012

59 Annual Premium ($) Basic Products Components of Premium (recap) The figure below shows annual premiums for Medibank s four on-sale hospital products We estimate how the premium breaks down into: 2,000 Claim costs: Both paid to members, and risk equalisation transfers beyond the fund s control Management expenses and net margin 1,800 1,600 1,400 1,200 1, Accident only Basic hospital Standard hospital Top hospital Risk eq (calculated deficit) Claims paid to member (net of risk eq recoveries) Management expenses Net margin 59 Premiums at March 2015, NSW, single, hospital only, before rebate, no LHC loading

60 Factors Increasing Competition Stocktake: How competitive is PHI? Changing customer behaviour (less loyalty, more shopping) Affordability Choice (lots of products available) No significant barriers to entry (new funds join purchasing groups) Increasing marketing/advertising spend Funds sell similar products (although can be hard to compare in practice) Portability Difficult to significantly undercut competitors (due to risk equalisation, narrow profit margins, similar hospital contracts, etc) Government price control Community rating Regulated product design hard to innovate Members choice of provider (second tier hospital rates) Factors Limiting Competition 60

61 Contact Jamie Reid Tel:

62 Wrap-up Key points from today Topics for CFO/CRO Forum on 21 June Questions

63 Distribution & use Reliances & limitations All presentations produced by Finity and other presenters are provided for general information purposes only to the CFO Forum. It is not intended, nor necessarily suitable, for any other purpose. No other distribution of this presentation is permitted without our prior written consent. We have relied on the accuracy and completeness of all data and other information (qualitative, quantitative, written and verbal) provided to us for the purpose of this presentation. We have not independently verified or audited the data but we have reviewed it for general reasonableness and consistency. It should be noted that if any data or other information is inaccurate or incomplete, we should be advised so that our advice can be revised, if warranted. Third parties, whether authorised or not to receive this presentation, should recognise that the furnishing of this presentation is not a substitute for their own due diligence and should place no reliance on this presentation or the data contained herein which would result in the creation of any duty or liability by Finity to the third party.

64 Contact Jacob Mamutil Tel: Mobile: