Insurance Australia Group Ltd · ASX:IAG
Insurance Australia — H1 2004 Earnings Presentation
31 slides from Insurance Australia's earnings presentation, Feb 26, 2004
Slide 1: Financial results: Half-year ended 31 December 2003
Financial results Half-year ended 31 December 2003 Michael Hawker, Chief Executive Officer George Venardos, Chief Financial Officer 26 February 2004 nies scio gaye can Bios. aa wa pueayaroane Good morning. Welcome to the Insurance Australia Group 1H04 results briefing. Copies of all the materials we
Slide 2: Agenda
Agenda 1. Operating environment Performance overview Capital & dividends Integration update Segmental analysis MCR multiple Conclusion & questions Michael Hawker Michael Hawker Michael Hawker George Venardos George Venardos George Venardos Michael Hawker & George Venardos © .
Slide 3: Our operating environment
Our operating environment ze + Economic conditions sound * Downward pressure on premiums ~— Competition intensifying ~ Tort law reform — Key statutory schemes stable ~ Claims inflation slowing ~— Property reinsurance rates softening * 1in 100 year storm in Victoria ~ Over 12,000 claims vs 1,800 for
Slide 4: Period of consolidation
Period of consolidation © 1G + Strategic focus on general insurance ~ CGU and NZI added $2.5bn to annual revenue; integration ahead of schedule and EPS positive six months early — Sale of health insurance operations and ClearView * Solid organic growth in pclicies/risks in force while customer reten
Slide 5: Performance overview
Performance overview © AG . Net profit after tax of $302m profit for shareholders ~ High equity market returns ($204m pre-tax} ~ Under-pinned by strong operating performance . Net earned premium up 6% {net of health sale) . Loss and Expense Ratios improved . Very strong capital position — Off-market
Slide 6: Financial results overview
Financial results overview 4 Half year Halfyear _ Haif year Financial results/ratios ended ended ended Dec-02 Jun-03 Bec-03 Net earned premium (A$m) co $2,837. $2,912 Underwriting profiti(loss) (A$m} $128 $277 Total investment income (A$m) $162. $271 Reported NPAT (A$m} $92 $302 Net cash flow from o
Slide 7: Operating performance on target
Operating performance on target © 1G . Consistent delivery of underwriting profit targets ~ Six consecutive half years of underwriting profits ~ Reflects quality, scale and diversification of the business, including CGU and NZI Combined operating ratio (‘COR’) of 90.5% ~ Increased discount rates red
Slide 8: Customer indicators
Customer indicators Customer satisfaction Claims satisfaction trends motor and home {direct channel} we 76 76 n me 3 #0 “ Sept0t — May02 Dee 02 May03 Dec d3 REAGRinclustry average =e Home f- Motor Average month comptaints and Policies in Force Retention rates {AG Girect retaif polices} it: ‘t- ‘e Po
Slide 9: Contributions to profit before tax
Contributions to profit before tax © 1G 600 Net profit before tax & amortisation 500 400 mUndenwriting result 300 Shareholders‘ fund returns 200 yu Technical reserve returns & 100 _ ; | 35) (16) 100) | 4 } (18) 200) 300) 400) + Equity markets delivered substantial positive performance for first time
Slide 10: Growth and diversification
Growth and diversification Gross Written Premium by business A$bn 42% Premium outside of NSW/ACT Business mix: ah 81% short-tail 19% fong-tail FY97 Free FYSo. FY00 FYot Fyo2 Fyos 1HO4 Annyalised mMotor GHome eIShorail Commercial OWorkers’ Comp mCTPiMotor liability mHealth CLiabilty mOther Shon-tait
Slide 11: COR components
y COR components > Expense ratio non Loss ratio Lacs {and commission rate for SHOS tos HO6) aie Hat 42 aN 2003 tM Combined ratio Insurance A ABN BO. This chart shows the ongoing improvements in the administration ratio and loss ratio which under-lie the improved combined ratio. However, because of t
Slide 12: Insurance margin in FY04 target range
insurance margin in FY04 target range © IAG Insurance margin (pre-tax) 7.8% 7.3% 8.0% 9.4% 16.1% 8.9% 11.8% 18.0% 16.0% 14.0% j Sustainable range of 9-12% : across the cycle 12.0% PT ee ee ee - 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% (2.0%) (4.9%) 8.3% (2.0%) THOT = 2HOt.- 1HOZ = 2HOZ-=— HOS 2HOS-tHOS mUnder
Slide 13: Market volatility of returns
Market volatility of returns Portfolio return (pre-tax) and incl. Derivatives 1H03 Technical reserves Shareholders’ funds Total investment income , 162 0 27h * Technical reserves returns impacted by bond market devaluation — income yield of 5.6% pa * Shareholders’ fund return of 16.8% annualised is
Slide 14: Improvement in return on equity
Improvement in return on equity © IAG Annualised return on equity 20.0% 15.0% _ = Target range 13-15% 10.0% g Exe 5.0% 2 {5.0%) FYO4 FYO2 FYOS 104 MROE (Actual) attributable to ordinary shareholders eROE (Normatised) attributabie to ordinary shareholders Note: 4. FYOI-FY03 normalised ROE uses 6% ret
Slide 15: Strategic asset allocation review
Strategic asset allocation review © 1A * Shareholders’ funds ~ Philosophy of equities focus unchanged ~ Introducing more diversity of assets and managers ~ Aggregate of c20% allocated to private equity, absolute return funds, hedge funds and Australian ‘small caps’ ~ Reduces volatility of total port
Slide 16: Capital
Capital + Group MCR multiple target updated to a benchmark of 1.60x ~ Updated for sale of ClearView and health insurance ~ Continue to target retention of ‘AA’ category rating + Group multiple at 1.90x at 31 December 2003 * Reinsurance programme updated ~ Earthquake cover increased to $3bn and all p
Slide 17: Buy-back of c$350m planned
Buy-back of c$350m planned . Intend to undertake an off-market buy-back in the order of $350m ~— Utilising surplus capital & franking credits . Expect to use a tender process . Terms and conditions to be announced on finalisation . Aim to complete by 30 June 2004 rm #4 saline, sazis aig cow & The Gr
Slide 18: Revised dividend policy
Revised dividend policy © nv * Reflects ~ Increased stability of core insurance earnings ~ Decreased exposure to equity market volatility relative to size of business ~ Large bank of distributable earnings (c$800m) and franking credits (c$500m) * Outcome ~ Will use actual insurance profit — Only sha
Slide 19: 1H04 dividend increased
1H04 dividend increased © vd . Applied new policy for current dividend . Interim dividend of 8.0c per ordinary share ~ Up 78% from 4.5c at 1HO3 (fully franked) Dividend reinvestment plan will continue to operate ~ Shares required will be sourced on market (no dilution) . — No discount ~ Pricing peri
Slide 20: Conclusion
Conclusion © 1G * Solid organic growth in policies in force and high retention rates + Expenses tightly managed * Strong cash flow + Earnings more predictable and stable going forward * Capital position exceeds target range + Intend to undertake buy-back + Raised dividend payout ee Gio we The six mo
Slide 21: Areas to be covered in more detail
Areas to be covered in more detail © 1G * Integration update + Segment analysis * MCR multiple ae ond 7 i case we Insurance Australia Group Limites niin sci gaye cat Boos. Ra wee HEN 62 080 720 929 2 21
Slide 22: Synergy realisation remains on target
Synergy realisation remains on target © 1G + Acquisition EPS positive at 31 December 2003 Synergy realisation schedule 2H03 1H04 4H04 Actual Target Actual ANY RSS Hie Pres Visiniisn Cumulative run-rate per anni : Personal tines 15 a 80 Commercial 14 rad ar IT, shared services & overheads 13 25.5 38
Slide 23: Domestic short-tail ratios
Domestic short-tail ratios tes Combined ratio Insurance margin (pre-tax) 108.0% toons 6.0% BLO ay aot tele? RHA THD AND RE WHOL 2M 1102 BHR Te HOS TPH. Step change from high 90s to 92 ~ 94% realised 1H04 includes 1% ‘hit’ from integration expenses a cn a ote. Gi wa *COR of 93.4% includes $20m (1%) o
Slide 24: Domestic short-tail performance
Domestic short-tail performance Half year Half year Domestic short-tail ended ended Bec-62 = June-03 AST NSH AS (252 2,163 2,084 Gross written premium ‘Gross earned premium Net premium revenue Underwriting profit Investment income on technical reserves nsurance profit Insurance ratios Loss ratio Exp
Slide 25: Domestic long-tail ratios
Domestic long-tail ratios Combined ratio insurance margin (before tax} . COR benefits by 17.0% from increased discount rate on claims reserves salen, ease ay cou oc. i wa * COR of 73.6% is abnormally low. + If the discount rates applied to claims reserves had not increased during 1H04, the COR would
Slide 26: Domestic long-tail performance
Domestic long-tail ~ performance Half year Half year Half year . " i Variance Domestic iong-tail ended ended ended ft Jun-03 Dec-02 June-03 Dec-03 FOP YUM 8 ‘Gross eared premium Net premium revenue Underwriting profit 149 investment income on technical reserves (82) Insurance profit Profit from fee
Slide 27: International performance
International performance Half Year Half Year International operations ended ended Dec-02 June-03 Gross earned premium Net premium revenue Underwriting profit/(loss) investment income on technical reserves Loss ratio Expense ratio (1) Administration ratio Cammission ratio Combined ratio insurance ma
Slide 28: MCR Multiple
MCR Multiple Insurance Austrailia Coverage of regulatory capital requirements, iAG Group Ltd Group IAG Group 30-Jun-03 Thar 4 capital Paid-up ordinary shares Hybrid equity Reserves Retained eamings v Excess tachnical provisions (net at tax) Less: dechzctions Thor 2 capital Term subordinated nites Ca
Slide 29: Outlook
Outlook © 1G * Short-term outlook — subject to major insured losses ~ Solid economic growth supporting growth in policies ~ Growth in average premiums may be lower ~ Insurance margin momentum strong & may exceed 12% + Longer term essentially unchanged — expect ~ To sustain an insurance margin in the
Slide 30: Five year strategy from 2002
Five year strategy from 2002 - Delivered Core operations Top quartile total s ‘holder return ROE 13-15% : : Double GWP b Build capability FY 2007 to $é.6on Maintain combined tatio < 100% i Maintain AA Emerging opportunities category rating salen, ease ay cou ex. Ci wa Due to the acquisition of CGU a
Slide 31: Questions
Questions i A pueayaroane ~ ear wa 31
Insurance Australia Group — H1 2004 Earnings Presentation on 6ix