Insurance Australia Group Ltd · ASX:IAG
Insurance Australia — Investor Day (October 2007)
118 slides from Insurance Australia's investor day presentation, Oct 29, 2007
Slide 1: Investor Briefing 2007
Investor Briefing 2007 29 October 2007
Slide 2: Important Information
IMPORTANT INFORMATION The information in this presentation is an overview and does not contain all information necessary to an investment decision. The information contained in this presentation and accompanying materials has been prepared in good faith by IAG. No representation or warranty, express
Slide 3: Agenda
AGENDA Introduction, Strategy and Outlook Mike Hawker 09.00-09.10 Direct Personal Insurance David Issa 09.10-09.30 Australian Commercial Lines Mario Pirone 09.30-09.50 Business Partnerships Jacki Johnson 09.50-10.10 Reserving Tony Coleman 10.10-10.30 -------------------------------------------------
Slide 4: High quality, diversified portfolio of assets with exposure to different market cycles
HIGH QUALITY, DIVERSIFIED PORTFOLIO OF ASSETS WITH EXPOSURE TO DIFFERENT MARKET CYCLES • Australian Personal Lines – Growing well with a very strong margin • Australian Commercial Lines – Actively managing the cycle • Business Partnerships – Strengthening partnerships to improve profitability • UK –
Slide 5: Strategy unchanged
STRATEGY UNCHANGED To be the best general insurer in every market we invest in Growing Growing market market Profitable Profitable Enter Enter and and grow grow leadership leadership in in niches niches in in select select in in high high growth growth core core markets markets mature mature markets
Slide 6: Geographically diversified business with strong brands
GEOGRAPHICALLY DIVERSIFIED BUSINESS WITH STRONG BRANDS PAGE 6
Slide 7: A more diversified portfolio
A MORE DIVERSIFIED PORTFOLIO FY02 portfolio - $3.56bn FY07 portfolio - $7.38bn GWP by geography NZ 11% Asia 3% NZ 13% UK 10% Australia 89% Australia 74% GWP by product Other Short-tail 3% Health 4% Workers Comp 3% Workers Comp 5% Liability 6% CTP 17% CTP 11% Motor Motor 37% 47% Short-tail Short-tail
Slide 8: A structure to support strategy
A STRUCTURE TO SUPPORT STRATEGY Michael Hawker Chief Executive Officer & Managing Director Justin Breheny CEO, Asia Mario Pirone CEO, CGU Michael Wilkins George Venardos Nick Hawkins Chief Operating Officer & Chief Financial Officer CEO, New Zealand Deputy Managing Director Jan van der Schalk CEO, A
Slide 9: FY08 Trading Outlook – Summary
FY08 TRADING OUTLOOK – SUMMARY • GWP growth of 7 – 9% • Insurance margin of 11 – 13% on NEP of c$7.5bn – Subject to no catastrophes or large losses outside our allowance nor any material movements in currency or credit spreads • Financial position – Consistent and conservative approach to reserving
Slide 10: Direct Personal Insurance
Direct Personal Insurance David Issa 29 October 2007
Slide 11: Direct Personal Insurance – A Growth Story
DIRECT PERSONAL INSURANCE – A GROWTH STORY • Market is highly competitive but rational • Returned business to growth • Maintaining a very competitive margin PAGE 11
Slide 12: Market remains highly competitive between major players
MARKET REMAINS HIGHLY COMPETITIVE BETWEEN MAJOR PLAYERS • Fight for market share continues through: - Price leadership messages and position – pricing remains rational but competitive - Advertising noise around product features and benefits to generate traffic and call volumes • Industry ownership i
Slide 13: Our business benefits from its large scale
OUR BUSINESS BENEFITS FROM ITS LARGE SCALE Target Retail customers – mass market, $3bn GWP Statistics for Market FY07 Brands 1 5m calls answered States NSW / ACT Vic Qld WA SA nationally Over 7.6m risks 32 190 4 3 Channels Branches Country Service Call Centres Internet sites in force policies Centre
Slide 14: June 2007 QBW storms demonstrated our help proposition
THE JUNE 2007 QBW STORMS DEMONSTRATED OUR HELP PROPOSITION AND THE BENEFITS OF SCALE • When Newcastle storms broke out over the Queen’s birthday weekend… • NRMA was the first on the ground and the first insurance company to reassure our customers that all claims would be paid • We are now actively s
Slide 15: Strategic priorities to strengthen sources of competitive advantage
OUR STRATEGIC PRIORITIES ARE TO STRENGTHEN OUR SOURCES OF COMPETITIVE ADVANTAGE IN THE MARKET TO GENERATE PROFITABLE GROWTH Four sources of Strategic priorities competitive advantage Trusted brands 1. Attract new customers Risk-based pricing combined with customer analytics to drive profitable growt
Slide 16: Stability and focus delivering growth
STABILITY AND FOCUS DELIVERING GROWTH • A stable management team has delivered the turnaround to growth through: – Competitive pricing – Focus on marketing – Back to basics – reduced change for front line staff PAGE 16
Slide 17: Strong 1H08 GWP momentum for short-tail
STRONG 1H08 GWP MOMENTUM FOR SHORT-TAIL • GWP is forecast to be up by 4% – 6% compared to same period last year • Strong conversion rates in our distribution network • Non-customer pre-disposition towards our brands remain strong, a lead indicator of GWP growth • Sales & Service Customer Satisfactio
Slide 18: NSW CTP expects market share of 38–39% for FY08
NSW CTP EXPECTS MARKET SHARE OF 38–39% FOR FY08 NSW Monthly Registrations 41% 40% 39% 38% 37% 36% 35% Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2005/2006 2006/2007 2007/2008 PAGE 18
Slide 19: CTP momentum continues
CTP MOMENTUM CONTINUES • Growing market share in NSW and Qld, particularly in low risk car segments, substantiates our price positioning in both States • GWP growth is ahead of our expectations in NSW and Qld • Our premiums increase by an average of 5.6% in NSW from 1 November and remain competitive
Slide 20: GWP growth, consistent margin to continue
GWP GROWTH, CONSISTENT MARGIN TO CONTINUE DIRECT PERSONAL FY06A FY07A FY08F INSURANCE GWP – Growth % vs SPLY Short-tail (1.6%) 1.9% 4 - 6% Long-tail (post LTC) (4.9%) (1.0%) 3 - 4% Total direct personal lines 2 - 4% (including LTC) Insurance margin Total PI (1) 17.0% 16.2% 17 - 20% Note: (1) Forecas
Slide 21: Direct Personal Insurance – A Growth Story
DIRECT PERSONAL INSURANCE – A GROWTH STORY • Market is highly competitive but rational • Returned business to growth • Maintaining a very competitive margin PAGE 21
Slide 22: CGU Insurance
CGU Insurance Mario Pirone 29 October 2007
Slide 23: Executive Summary
EXECUTIVE SUMMARY • State of the market – Soft market conditions likely to continue through to end calendar year 2009 • Competitive position – Diversified product mix with high retention rates – Strong distribution network with strong focus on SME/middle market segments • Strategy – Actively managin
Slide 24: State of the market
STATE OF THE MARKET Commercial Lines premiums remain soft Australian Commercial Lines Industry Premium Rate Change (%) 60.00% 50.00% Property (1) Workers' Compensation Management 40.00% Public & Product Liability view Premium 30.00% Professional Indemnity Rate Change 20.00% (%) 10.00% 0.00% -10.00%
Slide 25: Competitive position
COMPETITIVE POSITION The business is strongly diversified Highly engaged people Competitive business mix • Employee engagement up to 61% in 2007, • Focus is on SME and middle market segments placing CGU in the ‘Best Employers’ zone • Packaged business is 19% of commercial • Turnover below 15% where
Slide 26: Strategy – Market cycle
STRATEGY – MARKET CYCLE The business is actively managing the market cycle How we manage through the cycle • Lead indicators developed to monitor movement of prices within the market Lead Lead Indicators Indicators and the profitability of portfolio segments • Allow corrective action to be taken bef
Slide 27: Strategy – Growth
STRATEGY – GROWTH New initiatives being implemented in executing strategy • Use deep knowledge within highly specialised, technical products to gain market share in key areas Grow Grow Specialist Specialist Products Products • Key products include: Professional Risks, Workers’ Compensation, Engineer
Slide 28: Outlook – GWP and NEP
OUTLOOK – GWP and NEP CGU Insurance Gross Written Premium ($m) CGU Insurance Net Earned Premium ($m) Total Total 1,833 1,906 1,744 1,711 GWP: NEP: Guidance Guidance 326 Range: Range: 294 -3 to -1% 290 304 0 to 2% Guidance Guidance 1,539 1,580 Range: Range: -4 to -2% 1,454 1,407 0 to 2% FY2006 FY2007
Slide 29: Outlook – Insurance margin
OUTLOOK – INSURANCE MARGIN CGU Insurance Margin (%) Guidance Range: 14 to 17% 17.0% 18.1% Guidance Range: -9.2% -5 to -3% -15.4% FY2006 FY2007 FY2008F Broker/Agent Commercial Lines Personal Lines PAGE 29
Slide 30: Focus / Priorities
FOCUS / PRIORITIES • The key priorities for the business in FY08 – Continue to grow selective portfolios and BusinessPak book – Implement selective short-tail rate increases – Support retention rates – Roll out account management model – Refresh eCommerce platform – Purchase outstanding interest in
Slide 31: Business Partnerships
Business Partnerships Jacki Johnson 29 October 2007
Slide 32: Executive Summary
EXECUTIVE SUMMARY • Consumer behaviours are changing – purchasing on convenience – This trend increases the relevance of our Affinity channels • Positive earnings outlook for Business Partnerships based on: – Implementing rate increases across the home and motor insurance portfolios – Full employmen
Slide 33: Business unit size and composition
BUSINESS UNIT SIZE AND COMPOSITION Fee Business (RMS) Fee Income FY07 Affinity GWP by Channel FY07 Actual Actual Financial Institutions & Dealer Safety & Risk Services 1% Affinity 24% Self Insurance Services VIC Workers 2% 65% 37% Direct NSW Workers 11% 60% Commentary • Fee based income includes NSW
Slide 34: Affinity diversified by product and state
AFFINITY DIVERSIFIED BY PRODUCT AND STATE Affinity GWP ($694m) by Product FY07 Affinity GWP by State FY07 Actual Actual Credit Gap TAS Warranty Products 6.6% SA 1.9% VIC 3.8% 8.9% 19.9% 26.3% Landlords Motor 6.5% 36.1% WA 8.3% QLD 19.8% NSWACT Niche NT Home 23.4% 3.2% 0.3% 34.9% Commentary • Growth
Slide 35: Dynamic market conditions – creating opportunities and risks
DYNAMIC MARKET CONDITIONS – Creating opportunities and risks & Institutions & • Consolidation of medium and smaller sized financial institutions Financial Institutions Financial Affinity • Slower growth in new home loans with higher interest rates and slower house price growth1 Affinity • Financial
Slide 36: Rationale for our market presence
RATIONALE FOR OUR MARKET PRESENCE Customer behaviour is Partners driven to increase shifting e.g. convenience of non-core income e.g. due to purchase of insurance with CUSTOMER PARTNER decreased home loans or point of transaction or loan vehicle purchases and desire to provide broader customer value
Slide 37: Business Partnerships Strategy 2007-2010
BUSINESS PARTNERSHIPS STRATEGY 2007-2010 Competitive advantage through mutually beneficial partnerships Competitive advantage through mutually beneficial partnerships Our 3 year Building and strengthening partnerships to achieve sustainable profit growth Ambition 15% return on expenses (Risk Managem
Slide 38: Strong focus on strategy and improving profitability
STRONG FOCUS ON STRATEGY AND IMPROVING PROFITABILITY • Mapping and improving processes Productivity Productivity improvements • Development of technology strategies improvements • Achieve further reductions in people turnover • Focus on strategic, significant and profitable relationships for existin
Slide 39: Leveraging existing capability into domestic and international markets
LEVERAGING EXISTING CAPABILITY INTO DOMESTIC AND INTERNATIONAL MARKETS •Our Dealer business demonstrates innovation and rapid speed to market Products Products in its new product development: – Motorcycle warranty product - Increasing New products launched July 07 penetration in into existing existi
Slide 40: Outlook – Affinity Businesses GWP
OUTLOOK – AFFINITY BUSINESSES GWP FY06A FY07A FY08F GWP ($m) 663 694 4 - 6% Commentary • Despite increasing pressure from competitors in the FI&A channel, expect to grow GWP by 4 – 6% through a combination of price increases and initiatives PAGE 40
Slide 41: Outlook – Affinity Businesses Underwriting Result
OUTLOOK – AFFINITY BUSINESSES UNDERWRITING RESULT FY06A FY07A FY08F Insurance margin 1.3% 2.1% 6 - 8% Commentary • Motor portfolio has been experiencing anti-selection bias and has large proportion of older vehicles - increased average claims costs with greater write-offs • Motor issues addressed in
Slide 42: Outlook – Risk Management Services
OUTLOOK – RISK MANAGEMENT SERVICES Fee based businesses Implementation Implementation of of initiatives initiatives and and Improving Improving efficiency efficiency Securing Securing of of market market improved improved performance performance tracking/ tracking/ to to drive drive down down share
Slide 43: Executive Summary
EXECUTIVE SUMMARY • Consumer behaviours are changing – purchasing on convenience – This trend increases the relevance of our Affinity channels • Positive earnings outlook for Business Partnerships based on – Implementing rate increases across the home and motor insurance portfolios – Full employment
Slide 44: IAG Reserving Philosophy & Practice
IAG Reserving Philosophy & Practice Tony Coleman 29 October 2007
Slide 45: Executive Summary
EXECUTIVE SUMMARY • Robust reserving processes with a reliable history • Risk margins – understanding the critical issues • Conservative nature of IAG risk margins given capital employed • IAG UK – actuarial capability transfer PAGE 45
Slide 46: Key steps in the reserving process
KEY STEPS IN THE RESERVING PROCESS • Estimate claims frequency and severity from experience observed, primarily to establish central estimates • Determine suitable probability distributions based on experience to establish potential estimate uncertainty for risk margins • Establish measures of uncer
Slide 47: Robust and reliable central estimates
ROBUST AND RELIABLE CENTRAL ESTIMATES Development of Ultimate Net Claims Liability (Central Estimate) 2002-2006 4500 4000 3500 3000 2500 $000s 2000 1500 1000 500 0 1 2 3 4 5 6 Development Year 2002 2003 2004 2005 2006 • Trends are all downwards indicating a strong history of prudent reserving approa
Slide 48: Conservative reserving with risk margins included
CONSERVATIVE RESERVING WITH RISK MARGINS INCLUDED Development of Ultimate Net Claims Liability (Provision) 2002-2006 5000 4500 4000 3500 3000 $000s 2500 2000 1500 1000 500 0 1 2 3 4 5 6 Development Year 2002 2003 2004 2005 2006 • Trends are steeper downwards (than on the previous slide) as would be
Slide 49: Risk margins – key concepts
RISK MARGINS – KEY CONCEPTS • Outcomes of risks from individual policies are unknown when underwritten • However, when many similar risks are underwritten, expected results of total portfolio become more predictable • Claims are driven by: – Frequency (or probability) of a claim event occurring, and
Slide 50: Central estimate & risk margin of outstanding claims
CENTRAL ESTIMATE & RISK MARGIN OF OUTSTANDING CLAIMS Illustration Lognormal Distribution (CoV = 0.3) 0.00016 0.00014 Mean 0.00012 0.0001 75th Percentile 0.00008 Increasing Probability 0.00006 90th Percentile 0.00002 4000 9000 14000 19000 24000 29000 Range of Outcomes Central Estimate Risk Margin Pro
Slide 51: Central estimate & risk margin of outstanding claims
CENTRAL ESTIMATE & RISK MARGIN OF OUTSTANDING CLAIMS Illustration Lognormal Distributions 0.0003 Mean 0.00025 0.0002 0.00015 0.0001 90th Percentile CoV = 15% 0.00005 90th Percentile CoV = 30% 0 3000 8000 13000 18000 23000 28000 Both portfolios have the same mean, but Pink is riskier than Blue, so th
Slide 52: Quantifying risk margins
QUANTIFYING RISK MARGINS • Quantified by use of a risk measure, generally Coefficient of Variation (CoV) = Std. Dev. / Mean • Size of CoV indicates uncertainty of risk for same PoS • A higher CoV = a higher risk margin • Hierarchy of CoVs exists based on relative variability by class • Generally, th
Slide 53: Risk margins – reinsurance impact
RISK MARGINS – REINSURANCE IMPACT Projected asbestos cashflows (undiscounted) 58 40 61 64 25 28 31 34 37 43 46 49 52 55 16 19 22 07 10 13 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Financial payment year Net CE Jun07 Gross CE Jun07 PAGE 53
Slide 54: Risk margins – reinsurance impact
RISK MARGINS – REINSURANCE IMPACT Projected asbestos cashflows (undiscounted) $m 49 55 34 40 43 46 52 58 61 64 25 28 31 37 07 10 13 19 16 22 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Financial payment year Net CE Jun07 Net 90% Jun07 Gross CE Jun07 Gross 90% Jun07 PAGE 54
Slide 55: Reinsurance lowers risk margins
REINSURANCE LOWERS RISK MARGINS Derived from IAG data Risk margin % Gross 64% Net 32% Reinsurance arrangements can have a significant impact on the size of risk margins PAGE 55
Slide 56: Capital and risk – a simple illustration
CAPITAL AND RISK - A SIMPLE ILLUSTRATION Assume an insurer commits to pay claims based on the roll of a dice - 100 rolls representing the uncertain underwriting results for 100 “policies” : If 1 is result, insurer pays a claim of $1 If 2 is result, insurer pays a claim of $2 • etc. • If 5 is result,
Slide 57: What should the liability in the balance sheet be before the dice is rolled?
WHAT SHOULD THE LIABILITY IN THE BALANCE SHEET BE BEFORE THE DICE IS ROLLED? • Insurer’s maximum / minimum payout is $500 / Nil • Insurer’s expected payout is $250 • Assume the premium has been set at $3 per throw – does that impact the liability? • Assume for simplicity that there are no operationa
Slide 58: The cost of capital concept
THE “COST OF CAPITAL” CONCEPT • The insurer will also need at least $200 of capital (net assets) available for one year before receiving the $300 premium on day one, to avoid the risk of insolvency • Assume the risk free interest rate is 4% p.a. • If investors require a total return on equity of 10%
Slide 59: The pre-claim liability will be
THE PRE-CLAIM LIABILITY WILL BE • $300 if using unearned premium only • $240 (=$250 / 1.04) if using central estimate only • $252 (=$262 / 1.04) if using 75% PoA • $262 (=$272 / 1.04) if using 90% PoA • $260 if using the “Cost of Capital” concept PAGE 59
Slide 60: Profit of insurer
PROFIT OF INSURER • $50 “Expected” average profit over whole process, plus investment earnings on funds held over 1 year • $Nil on Day 1 under AASB 1023 using unearned premium • $48 on Day 1 for 75% PoA under IASB proposal • $38 on Day 1 for 90% PoA under IASB proposal • $40 on Day 1 if using the “C
Slide 61: What is the emerging IASB view?
WHAT IS THE EMERGING IASB VIEW? • Reported profitability should be based on outstanding claims liabilities that are based on – Realistic central estimates – Risk margins calibrated by real cost of capital employed to support liabilities rather than by PoA (so a target of, say, 90% PoA becomes less r
Slide 62: Linking PoA with IASB exit value
LINKING PoA WITH IASB “EXIT” VALUE • Compare for typical portfolios – Net present value (at cost of capital in excess of risk free rate) of requirement to hold funds in excess of the central estimate up to the 99.5th percentile of outstanding claims (assumed solvency level) – This will be equal to t
Slide 63: RMWG comparisons for non-life risk margin PoA equivalent to cost of capital
RMWG* COMPARISONS FOR NON-LIFE RISK MARGIN PoA EQUIVALENT TO COST OF CAPITAL Term Typical AA Rated Riskier AA Rated Short 62% 67% Medium 77% 82% Long 84% 88% • Results are very sensitive to – Balance between short vs. medium vs. long-tail exposure – True underlying risk levels * RMWG is the Risk Mar
Slide 64: Linking PoA with exit value – conclusions
LINKING PoA WITH EXIT VALUE – CONCLUSIONS • PoA equivalent to cost of capital varies significantly by duration of business (and CoV) – Around 60% - 70% for short-tail – Around 70% - 80% for medium-tail – Around 80% - 90% for long-tail • Average over a ‘balanced’ portfolio will be around 75% PoA • Fo
Slide 65: The cost of capital impact
THE “COST OF CAPITAL” IMPACT • Depending upon interpretation and using a 75% average PoA, IAG’s outstanding claim liabilities as at 30 June 2007 could change From $6,799m Undiversified Diversified To $6,504m $6,188m Change $295m to $611m PAGE 65
Slide 66: Actuarial capability transfer - IAG UK
ACTUARIAL CAPABILITY TRANSFER - IAG UK • Need for actuarial capability transfer identified at Due Diligence • Previously no in-house actuarial capability in either Hastings or EIG – complete reliance on external actuaries • Due diligence identified need to materially improve reserving processes • Re
Slide 67: New risk rating in Advantage
NEW RISK RATING IN ADVANTAGE Geographical and Demographic clusters 120 120.0% 100 110.0% 80 100.0% GWP 60 Loss 90.0% Ratio £m 40 80.0% 20 70.0% 0 60.0% GWP Incurred Loss ratio Prior Targeted 100% 0% Position Segments Retention Retention • Represents the impact on the portfolio if one small under-per
Slide 68: Executive Summary
EXECUTIVE SUMMARY • Robust reserving processes with a reliable history • Risk margins – understanding the critical issues • Conservative nature of IAG risk margins given capital employed • IAG UK – actuarial capability transfer PAGE 68
Slide 69: Appendix: CDT – Net central estimate basis
APPENDIX: CDT – NET CENTRAL ESTIMATE BASIS IAG Group - Net Central Estimate basis $m 2002 2003 2004 2005 2006 2007 Total Ultimate Net Claims Liability (1) At end of yr of occurrence 2,171 3,401 3,546 3,661 4,057 5,264 One year later 2,130 3,224 3,383 3,607 3,975 Two years later 2,071 3,149 3,407 3,5
Slide 70: Appendix: CDT – Net central estimate basis
APPENDIX: CDT – NET CENTRAL ESTIMATE BASIS 2002 2003 2004 2005 2006 2007 Ultimate Net Claims Liability (1) At end of yr of occurrence One year later -2% -5% -5% -1% -2% Two years later -3% -2% 1% -1% Three years later -1% -1% 0% Four years later 0% -2% Five years later -1% Overall change -7% -10% -4
Slide 71: Appendix: CDT – Net provision basis
APPENDIX: CDT –NET PROVISION BASIS $m 2002 2003 2004 2005 2006 2007 Total Ultimate Net Claims Liability (1) At end of yr of occurrence 2,359 3,733 3,927 4,071 4,438 5,767 One year later 2,263 3,415 3,572 3,794 4,147 Two years later 2,184 3,303 3,546 3,715 Three years later 2,133 3,214 3,480 Four yea
Slide 72: Appendix: CDT – Net provision basis
APPENDIX: CDT – NET PROVISION BASIS 2002 2003 2004 2005 2006 2007 Ultimate Net Claims Liability (1) At end of yr of occurrence One year later -4% -9% -9% -7% -7% Two years later -3% -3% -1% -2% Three years later -2% -3% -2% Four years later -2% -3% Five years later -2% Overall change -13% -17% -11%
Slide 73: Morning Tea
Morning Tea Webcast will resume shortly PAGE 73
Slide 74: UK
UK Neil Utley 29 October 2007 OIAG ice Australia Group
Slide 75: Executive Summary
EXECUTIVE SUMMARY • Quality assets well positioned in a large market • Market soft but improving • Integration of UK businesses to drive efficiencies • Positioning business for market upturn PAGE 75
Slide 76: IAG UK assets acquired in FY07
IAG UK ASSETS ACQUIRED IN FY07 Equity Insurance Group Hastings Direct and Advantage Third party Equity Direct Third party brokers Broker & brokers Hastings Direct Branch Network Broking Third party Third party Equity Red Star Underwriting insurers insurers Lloyd’s Advantage Syndicate 218 Corporate N
Slide 77: IAG UK – moving to an integrated platform
IAG UK – MOVING TO AN INTEGRATED PLATFORM IAG UK IAG UK Broking Third Party Brokers Direct Internet Branch Network Broking Underwriting IAG UK Underwriting Third Party Equity Red Star Insurers Advantage Lloyd’s Syndicate 218 PAGE 77
Slide 78: UK motor market bottoming out
UK MOTOR MARKET BOTTOMING OUT Motor market: split of business • £13bn motor GWP in 2006 • Motor market is 72% private car 1% 10% • CY06 overall COR of 111%, before prior 17% year releases of 10% • Second quarter rate rises ahead of claims by 1% • Specialist market segments performing stronger than t
Slide 79: Shifting dynamics of distribution present opportunities
SHIFTING DYNAMICS OF DISTRIBUTION PRESENT OPPORTUNITIES Motor market: distribution channels • Consolidation continues • Internet share of the private car market is 22% from 4% in 2003 • IAG estimate that the aggregator share 22% 8% of this online business could be up to 50% 4% • Aggregator model dif
Slide 80: Operating ratios for IAG vs. the market
OPERATING RATIOS FOR IAG vs. THE MARKET 2004 - 2006 combined shows Equity with a market leading Combined Ratio Market average = 95.7% 30 RBS 25 Market Share % 20 15 Aviva R&SA Zurich 10 Allianz 5 Liv Vic Fortis AXA NFU HBOS Highway Groupama HSBC MMA Brit Provident 0 130 120 110 100 90 80 70 2004-200
Slide 81: Claims environment
CLAIMS ENVIRONMENT • The claims environment has been relatively benign in the UK market except for two key factors – Higher claims inflation for bodily injury due to the increasing litigious society and the advent of ‘claims farmers’ – Increasing speed of claims payment driven by legislative changes
Slide 82: Rating environment
RATING ENVIRONMENT Private Car – Increases starting to outpace inflation • The AA Index cites a 1.4% increase in rates in Q3 2007, with an annual increase of 8% on last year • IAG analysis indicates a calendar year to date market increase of 11% • Lack of household insurance profit eliminates cross-
Slide 83: IAG UK underwriting
IAG UK UNDERWRITING Focus on specialist segments and owned distribution channels ERS £500m GWP (CY06) Advantage £113m GWP (CY06) 22% 19% 3% 4% 3% 4% 2% 24% 96% 13% 10% Private Car Motorcycle Household Private Car Motorcycle Classic Car Roadside Rescue PA Fleet Special Risks Farm • ERS has a diversif
Slide 84: IAG UK – Broking
IAG UK - BROKING Equity Insurance Brokers £200m GWP (CY06) Hastings £200m GWP (CY06) 14% 30% 13% 12% 61% 70% Branch Netw ork Direct Affinity Book Transfers / Insourcing Call Centre Internet • 4th largest personal lines broker in the UK • UK’s 3rd largest branch network and the largest broker in Nort
Slide 85: Hastings & Advantage – performance below expectations
HASTINGS & ADVANTAGE - PERFORMANCE BELOW EXPECTATIONS • Businesses purchased in October 2006 • Number of issues have come to light since April – Market factors – Underwriting PAGE 85
Slide 86: Hastings and Advantage – market factors
HASTINGS AND ADVANTAGE - PERFORMANCE BELOW EXPECTATIONS Market factors • Soft market took longer to turn than expected • Reduced effectiveness of marketing spend • Increasing presence of the internet and rise of aggregators – Low conversion rates – Lower cross-sell of ancillary products • Overall ma
Slide 87: Hastings and Advantage – underwriting
HASTINGS AND ADVANTAGE - PERFORMANCE BELOW EXPECTATIONS Underwriting • Writing large volumes of low risk business but severely underpriced during 2006 – Enabled Hastings to grow rapidly – Negative impact on Advantage COR (deteriorated from high 90%s in 2005 to 118% in 2006) * • Loss of third party c
Slide 88: Hastings – actively responding to rapidly changing market
HASTINGS - ACTIVELY RESPONDING TO RAPIDLY CHANGING MARKET • Business strengths: – 500,000 owned customers – Brand with high recall – Improved website • Utilising strengths in active response to rapidly evolving market • Moving brand away from low cost to value • Capitalisation on internet opportunit
Slide 89: Advantage - pricing for profit
ADVANTAGE - PRICING FOR PROFIT • Senior management changes • Focus on own distribution, particularly branches • Actuarial review quick wins of £3m – £5m per annum identified – Leveraging off IAG actuarial capability to better segment and calibrate technical prices – Eliminating poor segments of busi
Slide 90: IAG UK - Equity Red Star outperformance
IAG UK - EQUITY RED STAR OUTPERFORMANCE % outperformance by Equity against motor market (COR) Median = 15% over 26 years 30 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 2007* Outperformance due to • Expertise of people and their length of service • Each class underwriter has specialist knowledge an
Slide 91: IAG UK underwriting strategy
IAG UK UNDERWRITING STRATEGY Equity Red Star – Strengthening our segments • Largest motor syndicate at Lloyd’s • Focus on distribution through third party brokers • Private car rate rises average 12% calendar year to date • Grow bespoke and specialist motor business organically – Development of unde
Slide 92: IAG UK broking strategy
IAG UK BROKING STRATEGY Branch Network – Controlling distribution in profitable areas • 81 branches (13 acquisitions this calendar year to date) • Growing branch network through acquisitions to: – Control distribution in profitable underwriting areas – Higher retention and cross sell – Lower cost an
Slide 93: IAG UK strategy summary
IAG UK STRATEGY SUMMARY ERS – Strengthening our Advantage – Pricing for profit segments • Focus on owned channels • Focus on specialist segments • Increasing lifetime value • Key broker relationships • Underwriting for profit • New SME classes • Eliminating unprofitable • Regional underwriting centr
Slide 94: Unleashing the potential
UNLEASHING THE POTENTIAL Split of benefit delivery • Programme to – Integrate Equity and Hastings – Align with IAG – Increase operational excellence 25% – Increase revenues 35% • Project team of 17 project managers and a project office of 4 • 34 individual projects 40% • In delivery mode with annual
Slide 95: IAG UK outlook
IAG UK OUTLOOK • FY08 GWP for Equity at £500m (£320m our share) flat on prior year • Mix improved as drop in private car volume is made up by gains in bespoke business • Advantage flat in 1H08 with growth of 30% in 2H08 due to household licence and business received from Equity broking • Hastings in
Slide 96: Executive Summary
EXECUTIVE SUMMARY • Quality assets well positioned in a large market • Market soft but improving • Integration of UK businesses to drive efficiencies • Positioning business for market upturn PAGE 96
Slide 97: IAG New Zealand
IAG New Zealand Nick Hawkins 29 October 2007
Slide 98: Executive Summary
EXECUTIVE SUMMARY • Mature, rational market impacted by a large event in July 2007 • Our intermediated business is growing market share in this stable environment • Focused on leveraging the advantages of our scale – Leading rate changes in commercial lines – Reductions in our cost base improving CO
Slide 99: Stable, mature and rational market
STABLE, MATURE AND RATIONAL MARKET • Broker Market (c. NZ$1.4bn*; 46%): – Remains dominant channel for commercial/corporate business – Hardening of rates expected across SME and mid-sized risks next 6-18 months – Ongoing consolidation activity signalling a potential shift in dynamic towards fewer, h
Slide 100: IAG NZ holds a leading market share at 36%
IAG NZ HOLDS A LEADING MARKET SHARE AT 36% IAG NZ Product Mix Products Private Motor Vechile • Predominantly short-tail insurance Home Contents 5% 3% Home Owner • Business mix consistent with market 12% 27% Other Personal Material Damage/ Business Interruption 19% Commercial Motor Vehicle 15% Distri
Slide 101: New Zealand's insurer of choice
NEW ZEALAND’S INSURER OF CHOICE IAG IAG NZ NZ ““Customer Customer Centric Centric”” ““Leadership Leadership Position Position”” in in products, products, prices, prices, services services technology technology and and processes processes and distribution and distribution through through scale and ef
Slide 102: Significant progress on execution
SIGNIFICANT PROGRESS ON EXECUTION •• Offering Offering aa complete complete suite suite of of commercial commercial products products with with the the launch launch of of Professional Liability, Marine and SME Direct products Professional Liability, Marine and SME Direct products Customer •• Re-ali
Slide 103: Growth in GWP and increased market share
GROWTH IN GWP AND INCREASED MARKET SHARE IAG NZ GWP IAG Market Share (ICNZ) 38.0% $600 $500 37.0% Signs of $400 turnaround NZ$ millions 36.0% $300 $200 35.0% $100 34.0% $0 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 1H 2H FY04 FY05 FY06 FY07 IAG NZ vs. Market COR Last 12 months have seen signs of a 100% turn
Slide 104: Outlook
OUTLOOK • NZ$ GWP growth for FY08 expected to be 3-5% – Exceeding market and CPI • Insurance result outlook hit by July storms – Expect 4 – 6% margin for FY08 PAGE 104
Slide 105: Executive Summary
EXECUTIVE SUMMARY • Mature, rational market impacted by a large event in July 2007 • Our intermediated business is growing market share in this stable environment • Focused on leveraging the advantages of our scale – Leading rate changes in commercial lines – Reductions in our cost base improving CO
Slide 106: IAG Asia
IAG Asia Investor Briefing Justin Breheny 29 October 2007
Slide 107: Executive Summary
EXECUTIVE SUMMARY • State of the markets – Challenging but growing markets – Competition is increasing • Organic growth – IAG Thailand year-on-year GWP growth around 5-6% despite a drop in consumer confidence – Malaysia (AmAssurance) year-on-year GWP growth around 20% despite soft new car sales • Ac
Slide 108: Challenging market conditions
CHALLENGING MARKET CONDITIONS Thailand Malaysia Consumer Confident Index New Car Sales - Malaysia 115.0 105.0 2006 2007 60,000 95.0 50,000 85.0 75.0 40,000 65.0 30,000 55.0 20,000 45.0 10,000 35.0 0 O 2 Au 3 7 Ap 9 Se 0 01 Ja 3 Ap 4 Se 5 D 1 M 2 06 D 6 04 N 4 Fe 5 M 6 Ju 9 N 9 Fe 0 M 1 -0 -0 -0 -0 r
Slide 109: Market position - strong base from which to expand
MARKET POSITION - STRONG BASE FROM WHICH TO EXPAND Thailand Malaysia Malaysian Market Share - As at 30 Sept 2006 Thailand Market Shares As at 30 June 2007 Viriyah, 14.2% Kurnia, 11.2% MNI, 6.0% Dhipaya, 7.4% Allianz, 5.2% AmAssurance Bangkok, 6.9% Other, 48.8% 4.6% Mitsui Other (>50), Synmunkong, Su
Slide 110: Strategy to grow through disciplined acquisitions in four key markets
STRATEGY TO GROW THROUGH DISCIPLINED ACQUISITIONS IN FOUR KEY MARKETS South East & East Asia We have assessed 14 markets on the following criteria: Macro indicators Insurance industry Key players North Korea • Economy/size/growth • GWP size, growth • Competition Japan South • Country risk • Profitab
Slide 111: Progress on execution – capability transfer
PROGRESS ON EXECUTION Continued strong progress on capability transfer Thailand Malaysia Distribution/Operations Distribution/Operations • Telemarketing centre established • Banking systems review with AmBank has identified • Distribution of new car Extended Warranty product opportunities for improv
Slide 112: Progress on execution – M&A
PROGRESS ON EXECUTION Active and disciplined approach to M&A OVERALL • Our strategic focus remains – Entry into China and India – Acquire and integrate other insurers in Thailand and Malaysia as the market consolidates • Disciplined in our approach - many opportunities rejected as did not align with
Slide 113: Financial outlook
FINANCIAL OUTLOOK Thailand (Safety and NZI) Malaysia (IAG 30% share) Key metrics FY08F Key Metrics (A$) FY08F (Thai Baht/AGAAP) GWP (billions) 5.1 – 5.2 Share of profit $3.5 – 4.5m Insurance margin 2.0 – 4.0% Financial outlook Financial outlook • Stable and consistent performance • Stable and consis
Slide 114: Executive Summary
EXECUTIVE SUMMARY • STATE OF THE MARKET – Fast growing markets – Difficult market conditions in Thailand due to political unrest – Competition is increasing and more insurers looking to enter the markets, thus acquisitions are difficult and prices paid by others are not always rational • STRATEGY –
Slide 115: Summary
Summary Mike Hawker 29 October 2007
Slide 116: FY08 Insurance operations outlook
FY08 INSURANCE OPERATIONS OUTLOOK BUSINESS GWP GWP Insurance Insurance ($m) growth margin margin FY07A FY08 outlook FY07A FY08 outlook Direct Personal Lines 2,889 2 - 4% 16.2% 17 - 20% (GWP: S/T 4-6% & L/T 3-4%) Affinity Personal Lines 694 4 - 6% 2.1% 6 - 8% Australian Commercial Lines 1,580 (4) - (
Slide 117: FY08 Trading Outlook – Summary
FY08 TRADING OUTLOOK – SUMMARY • GWP growth of 7 – 9% • Insurance margin of 11 – 13% on NEP of c$7.5bn – Subject to no catastrophes or large losses outside our allowance nor any material movements in currency or credit spreads • Financial position – Consistent and conservative approach to reserving
Slide 118: Questions
QUESTIONS OIAG Insurance Australia Group
Insurance Australia Group — Investor Day (October 2007) on 6ix