How To Improve The Performance Of Equity Redstar Insurance In The Uk

Transcription

1 NEWS RELEASE 2 JUNE 2010 IAG strengthens UK claim reserves and revises FY10 insurance margin guidance Insurance Australia Group (IAG) today announced that due to a significant deterioration in UK claim experience, in particular bodily injury claims, it had conducted a further independent actuarial review of its UK business. As a result, in FY10 the Group expects to recognise an associated one-off, pre-tax charge of approximately $365 million and to report a full year insurance margin of %, down from previous guidance of %. The Group has also announced FY11 insurance margin guidance of % reflecting confidence in the continued underlying improvement in its overall business. The anticipated $365 million charge in FY10 mainly relates to claim reserve strengthening, and includes an approximate $60 million net charge associated with a new reinsurance arrangement to limit exposure to further claims deterioration in the UK. In addition, the Group expects to recognise a writedown of goodwill and intangibles associated with the UK business of approximately $86 million. IAG Managing Director and CEO, Mr Michael Wilkins, said that the Group had previously highlighted an increase in the cost of bodily injury claims relating to the 2007 and prior underwriting years, however, the latest actuarial review has confirmed the scope of the issue is greater than originally anticipated. As we ve flagged for the past 12 months, the increase in bodily injury claims is a problem confronting the entire UK motor insurance industry. In light of this and a significant deterioration in claim payments in the opening months of calendar 2010, a further review of our UK claim reserves was undertaken. This has revealed that a significant revision to our reserves is required. The deterioration now extends to underwriting years since 2007 and impacts most classes of motor business. Our immediate priorities have been to ensure our UK business is appropriately reserved, our exposure to this issue is limited through reinsurance, and that we have an appropriate programme of remedial actions, Mr Wilkins said. Whilst this issue is isolated to our UK business and the market in which it operates, I m extremely disappointed this has occurred and that it s had an adverse 5% impact on our insurance margin for FY10. Encouragingly, all other businesses within the Group are performing at least to expectations. This is a challenging time for the UK motor insurance industry as a whole, however, we remain confident that Equity Red Star retains a strong niche position in UK motor classes and is capable of delivering attractive returns for IAG over the longer term. CEO of IAG s UK division, Mr Neil Utley, said: The UK insurance industry has seen a significant increase in the cost of bodily injury claims. This includes a notable rise in the number of injured parties per accident, primarily driven by the claim farming activities of accident lawyers. Recent industry reports indicate significant claims inflation in this area driven by increases in both frequency and severity. Economically-inspired claim activity is also growing in a tough environment. Based on the worsening claim payment experience in the opening months of calendar 2010, we ve revisited the actuarial assumptions held at 31 December Of the strengthening identified today, roughly half relates to the 2008 and 2009 underwriting years which had previously not been subject to reserve strengthening. In addition, in accordance with the liability adequacy test (LAT), a $30 million LAT failure has been recognised within today s charge. Page 1 of 3

2 Mr Utley said a range of actions are being undertaken to strengthen the UK business, including: Further rate increases of 10-20% across all classes of business; Exiting certain unprofitable broker relationships; Ceasing to write all external aggregator-sourced business of a non-bike nature; Strengthening of underwriting and actuarial resources; and Revising and enhancing underwriting and claim practices. Mr Wilkins said: In addition, we have entered into a reinsurance arrangement which provides protection against a further $200 million in claims deterioration. The reinsurance cover is in respect of underwriting years 2001 to 2009 inclusive, and is expected to result in a net cost to IAG of approximately $60 million, all of which will be recognised in FY10. FY10 trading update In revising its FY10 insurance margin guidance to a range of %, IAG has taken into account the following factors: A one-off charge of $365 million associated with the UK division (5% Group insurance margin impact); A strong performance from Australia Direct and New Zealand, and further progress in CGU; An anticipated natural peril claim cost of $485 million; and No impact from credit spreads in 2H10. Assumptions in respect of natural peril claim costs and credit spreads are in line with previous guidance. Outlook Following our strategic reset in July 2008 the underlying performance of our business has steadily improved and we remain confident this will continue into FY11, Mr Wilkins said. This is reflected in our insurance margin guidance for FY11 of %, which includes only a modest contribution from the UK business. Underlying gross written premium (GWP) growth is expected to be in the region of 3-5%. Guidance for FY11 assumes losses from natural perils are in line with budgeted allowances of $435 million, no material movement in foreign exchange rates or investment markets, and lower net reserve releases (excluding the UK) than FY10. ends Market briefing details are attached. About Insurance Australia Group Limited Insurance Australia Group Limited (IAG) is an international general insurance group, with operations in Australia, New Zealand, the United Kingdom and Asia. Its current businesses underwrite approximately $7.8 billion of premium per annum. It sells insurance under many leading brands including NRMA Insurance, CGU, SGIO, SGIC, Swann and The Buzz (Australia); NZI and State (NZ); Equity Red Star (UK); and NZI and Safety (Thailand). For further information please visit CORPORATE AFFAIRS Angus Trigg T M E angus.trigg@iag.com.au INVESTOR RELATIONS Simon Phibbs T M E simon.phibbs@iag.com.au Insurance Australia Group Limited ABN George Street Sydney NSW 2000 Australia T +61 (0) Page 2 of 3

3 Market briefing A market briefing on this announcement will be provided by teleconference today. The briefing will be hosted by IAG Managing Director and CEO, Mr Mike Wilkins, and CEO of IAG s UK division, Mr Neil Utley, who will discuss the presentation attached to this news release. Details of the briefing are as follows: Time: 9.30am (Sydney time) Date: Wednesday 2 June 2010 Dial in details: Australia: Canada: Hong Kong: Japan: New Zealand: Singapore: United Kingdom: USA: To call from elsewhere outside Australia: Conference ID: Please quote Page 3 of 3

4 Good morning and thank you for attending today s briefing at such short notice. The purpose of today s presentation is to provide an update on the outlook for IAG, with specific reference to the detailed review we have undertaken of our UK business in light of the deteriorating conditions in that market, notably in the area of bodily injury claims. I have with me today Neil Utley, the CEO of our UK business. After I ve provided a brief introduction, including the expected financial impact of the steps we are taking, Neil will then give you a more detailed explanation of the market conditions, highlighting the key drivers behind the deterioration being experienced and the revision of our reserving assumptions. He will then elaborate on the actions we are taking to restore profitability in the business, including the reinsurance cover we have put in place to limit our ongoing claims exposure. I will then conclude with comments on our revised outlook for FY10, inclusive of a brief update on the operating performance of the other major business units in IAG s portfolio, and the FY11 insurance margin guidance which we are providing for the first time today. We will then take any questions you may have. 1

5 2

6 3

7 The $365m charge we ve announced today is largely about the bodily injury claims issue affecting the UK motor market, which is one we have been flagging for the past 12 months. At the first half we identified a net reserve strengthening of $12m in the UK business which, at the time, we believed reflected an appropriate reserving position. In light of a deterioration in our claim payment experience in the opening months of calendar 2010 and a concern over the bodily injury issue generally, we have recently conducted a further rigorous review of our UK book and, as a result, revisited our actuarial assumptions. Of the strengthening identified today, roughly half relates to the 2008 and 2009 underwriting years which did not previously appear to be affected by this bodily injury issue. The strengthened reserving accounts for a substantial proportion of the expected one-off charge to our FY10 results of approximately $365m which we have announced today, with $60m attributable to the cost of reinsurance cover we have taken out to limit our exposure to claims across the underwriting years. The charge also includes $30m in respect of a LAT fail. We believe we have acted quickly and prudently to address this issue. In addition, and in light of the revised outlook for the UK, we anticipate writing down the intangibles associated with the UK business by approximately $86m. The charge we are taking in the UK will reduce our anticipated reported FY10 insurance margin by approximately 500 basis points. I m pleased to advise that all other aspects of the IAG Group are performing at least to expectations. In light of the above factors, we are revising our FY10 margin guidance to 6-7%, compared to previous guidance of 9.5%-11.0%. I ll Ill talk to both our FY10 and FY11 margin guidance, which we provided today for the first time, a little later. We remain committed to our businesses in the UK, and are confident that Equity Red Star s niche motor specialisation will deliver attractive returns over the longer term. I will now hand over to Neil to provide some more background on the UK market issues and our response. 4

8 Thank you Mike, and good morning everyone. Let me express my personal disappointment at this issue. We have, however, moved quickly to rectify its impact. 5

9 As we said at the half year results, the UK operating environment is a challenging one, and recent developments have reinforced that. The aggregators, which now account for nearly 60% of private motor new business, continue to create pressure on pricing, and the industry as a whole is having to cope with a drying up of reserve releases that have masked poor performance in the past. We do take some encouragement, however, from the recent hardening of market rates, although on the current evidence before us there is still more to do in this regard. Central to the current operating environment and outlook, however, is the escalation of bodily injury claims which, as Mike mentioned, is an issue which we have been highlighting as cause for concern over the past 12 months. It has affected all industry participants, and has been driven by a combination of factors. First, there has been rapid growth in claim farming activities, with no win, no fee services to claimants. This, combined with the sale of lists of potential claimants to lawyers and the cost of related car hire, has resulted in a significant increase in the cost of smaller third party claims as well as a notable rise in the number of injured parties per accident - despite the frequency of actual motor vehicle accidents declining in recent times. In addition, the situation has undoubtedly been exacerbated by an element of recessioninduced claims fraud. While early days, we have also seen Ministry of Justice reforms implemented at the end of April 2010 which have further changed claim payment patterns. These influences have led to inflated bodily injury cost per accident and cost inflation in this category in excess of 10% per annum. In fact a recent report on bodily injury claims estimated increases in frequency of 5-10% and severity of 5-8%. The Jackson Report, issued late last year, has recommended reforms which, in particular, would curtail claim farming activities, however we don t see this as a priority for the newlyformed government. If enacted, these reforms would lead to a reduction in claims and claim costs which would be to the benefit of both IAG, the industry and ultimately customers who are wearing the higher premiums. 6

10 In light of our ongoing concern over market trends and the post-december 2009 deterioration in claim payments, we commissioned a further detailed actuarial review of our reserving position in May It goes without saying that we were concerned by the significantly worse position that this review indicated, the results of which were finalised today. We have determined it prudent to reflect the conclusions of the review in our revised reserving position. The scale of the additional reserving is explained by a range of factors, but key amongst these are the adverse claim payment patterns experienced in the opening months of calendar 2010 and, as a result, our significant revision of the actuarial assumptions previously held at 31 December Compared to our previous position, it is now our expectation that the claims deterioration is no longer confined to 2007 and prior underwriting years, and applies to the majority of our motor book to varying degrees. We believe that the reserving position we have settled on is an appropriate one, while we concentrate on implementing a programme of remedial actions to contain the financial impact and allow the restoration of profitability within Equity Red Star. Meanwhile, other UK businesses, including Equity Direct Broking and Barnett & Barnett, are progressing according to plan. 7

11 We have acted quickly to implement a programme of detailed remedial actions which we expect to restore Equity Red Star s profitability and to contain our exposure to the claims deterioration identified. The steps we are taking include: -Further rate increases of between 10-20%, varying by class. While some loss of volume is expected to result, a significant improvement in the profitability of the ongoing book is anticipated. -A stronger focus on our key broker relationships, with the expectation that approximately 5% of brokers, by number, will be shed. -The exit from all external aggregator-sourced business of a non-bike nature removing any exposure to associated pricing pressures. Immediate pricing action we are taking should ensure we are not further exposed to business coming through this channel. -The recruitment of a number of experienced individuals to key roles within underwriting and actuarial, to strengthen our overall resources in these areas. -A review and strengthening of all our underwriting and claim practices. In addition, we have purchased a new reinsurance cover which protects us from any deterioration in claims reserving in respect of all underwriting years up to and including The specific details of this cover are: -Approximately $200m of gross cover in excess of the reserved position -A net charge to IAG of $60m in FY10 8

12 Thanks Neil. Now I ll provide an update on our earnings outlook for FY10, including the impact of the UK issue, as well as provide some initial guidance for FY11. 9

13 I d now like to provide a bit more colour around the performances of our individual business units, which I m pleased to report are continuing to demonstrate a collective improvement in underlying performance. The Direct business in Australia is performing well, as earned rate increases are realised and efficiencies extracted. We are confident we have the right strategy to further leverage Direct s strong market position. The turnaround in CGU continues to progress to plan, and we expect to record an underlying improvement in a rating environment that continues to be patchy. In New Zealand, we will report a strong rebound in profitability, which reflects the hard work performed in the areas of pricing, i underwriting discipline i and cost control. We do recognise, however, that this business has had the added benefit of benign weather conditions which, unlike Australia, have largely continued in the second half. In Asia, we remain on track for a hard launch of the Indian joint venture in the second half of calendar Other businesses continue to perform soundly, including Thailand, despite the recent political upheaval. And as Neil has already identified, the aspects of our UK business outside Equity Red Star have continued to perform to expectations. As you will be aware, since upgrading our insurance margin guidance in early February, we have had cause to lower it twice, owing to the respective Melbourne and Perth natural peril events. This left our insurance margin guidance at a range of %, and assumed: No credit spread impact in the second half And a natural peril claims cost of $485m for the full year, or $364m for the second half which is $180m higher than original allowances for that six months. These assumptions are retained in our updated guidance which, after absorbing an approximate 500 basis points impact from the one-off charge for the UK, now stands at 6-7%. 10

14 Now looking at our balance sheet. As I previously mentioned, we will be taking an expected write-down on the intangibles carried in respect of the UK business, of the order of $86m. As I m sure you are well aware, this will not, however, affect the strength of our regulatory capital position. Adjusting our MCR position at 31 December 2009 for today s announcement would produce a pro forma ratio of approximately 1.9 times. As we said at the half, we are comfortable being overweight capital in the short to medium term, a position perhaps reinforced by the renewed volatility experienced in investment markets in recent weeks. 11

15 While it is a little earlier than normal, we thought now would be an appropriate time to provide you with some guidance on our expectations for the FY11 financial year. We are confident that we can deliver a further improvement in underlying performance in the coming year, as the actions we ve taken over the past two years yield further results. Our current expectation is for an FY11 insurance margin in the range of %. This outlook includes only a modest contribution from the UK business, as we initiate our remedial actions. Other underlying assumptions include: -Natural perils in line with allowances, which for FY11 have increased to $435m from $350m in FY10. -No material movement in foreign exchange rates or investment markets. -No impact from credit spreads. In terms of underlying GWP, our expectation is for growth of 3-5%. 12

16 So, in summary. We are extremely disappointed to be revising down our FY10 insurance margin. We do believe, however, that this is an isolated issue peculiar to our UK business and the market in which it operates, and that we have acted quickly and appropriately to manage our exposure. Neil and his team have put in place a detailed programme of actions which are now being implemented and which, h combined with the reinsurance cover we have put in place, should limit any further exposure to this issue. We remain committed to our UK operation, and are confident its niche motor specialisation can deliver attractive returns over the longer term. However, we expect only a modest contribution from it in FY11. The underlying performance of the rest of the business continues to improve, as evidenced by our revised guidance for FY10 and that provided for FY11, and we are confident we have the right strategy for delivering further improvement in shareholder value. In addition, we retain a very strong balance sheet position ensuring that the Group is well capitalised for the future. 13

17 Thanks for your time again, and I would now like to turn it over to you for questions. 14