Insurance Australia Group Ltd · ASX:IAG
Insurance Australia — Investor Day (October 2007)
119 slides from Insurance Australia's investor day presentation, Oct 29, 2007
Slide 1: ASX cover letter: Investor Briefing
For personal use only 29 October 2007 Manager, Company Announcements Office ASX Limited Level 4, Exchange Centre 20 Bridge Street SYDNEY NSW 2000 Dear Sir/Madam, Insurance Australia Group Limited (“IAG”) Investor Briefing IAG is holding an open briefing for investors this morning. The slides to be u
Slide 2: Investor Briefing 2007
For personal use only Investor Briefing 2007 29 October 2007
Slide 3: Important Information
IMPORTANT INFORMATION The information in this presentation is an overview and does not contain all information necessary to an For personal use only investment decision. The information contained in this presentation and accompanying materials has been prepared in good faith by IAG. No representatio
Slide 4: Agenda
AGENDA For personal use only 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 5: High quality, diversified portfolio of assets with exposure to different market cycles
HIGH QUALITY, DIVERSIFIED PORTFOLIO OF ASSETS WITH For personal use only 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 improv
Slide 6: Strategy unchanged
STRATEGY UNCHANGED For personal use only 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
Slide 7: Geographically diversified business with strong brands
GEOGRAPHICALLY DIVERSIFIED BUSINESS WITH STRONG For personal use only BRANDS PAGE 6
Slide 8: A more diversified portfolio
A MORE DIVERSIFIED PORTFOLIO For personal use only 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%
Slide 9: A structure to support strategy
A STRUCTURE TO SUPPORT STRATEGY For personal use only 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
Slide 10: FY08 trading outlook – summary
FY08 TRADING OUTLOOK – SUMMARY For personal use only • 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
Slide 11: Direct Personal Insurance
For personal use only Direct Personal Insurance David Issa 29 October 2007
Slide 12: Direct personal insurance – a growth story
DIRECT PERSONAL INSURANCE – A GROWTH STORY For personal use only • Market is highly competitive but rational • Returned business to growth • Maintaining a very competitive margin PAGE 11
Slide 13: Market remains highly competitive between major players
MARKET REMAINS HIGHLY COMPETITIVE For personal use only 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
Slide 14: Our business benefits from its large scale
OUR BUSINESS BENEFITS FROM ITS LARGE SCALE For personal use only 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
Slide 15: June 2007 QBW storms demonstrated our help proposition
THE JUNE 2007 QBW STORMS DEMONSTRATED OUR HELP For personal use only 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 •
Slide 16: 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 For personal use only Four sources of Strategic priorities competitive advantage Trusted brands 1. Attract new customers Risk-based pricing combined with customer analytics to
Slide 17: Stability and focus delivering growth
STABILITY AND FOCUS DELIVERING GROWTH For personal use only • 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 18: Strong 1H08 GWP momentum for short-tail
STRONG 1H08 GWP MOMENTUM FOR SHORT-TAIL For personal use only • 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 & Servic
Slide 19: NSW CTP expects market share of 38–39% for FY08
NSW CTP EXPECTS MARKET SHARE OF 38–39% FOR FY08 For personal use only 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 20: CTP momentum continues
CTP MOMENTUM CONTINUES For personal use only • 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
Slide 21: GWP growth, consistent margin to continue
GWP GROWTH, CONSISTENT MARGIN TO CONTINUE For personal use only 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 -
Slide 22: Direct personal insurance – a growth story
DIRECT PERSONAL INSURANCE – A GROWTH STORY For personal use only • Market is highly competitive but rational • Returned business to growth • Maintaining a very competitive margin PAGE 21
Slide 23: CGU Insurance
For personal use only CGU Insurance Mario Pirone 29 October 2007
Slide 24: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 • Strat
Slide 25: State of the market
STATE OF THE MARKET Commercial Lines premiums remain soft For personal use only 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% (%)
Slide 26: Competitive position
COMPETITIVE POSITION The business is strongly diversified For personal use only 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 • Tur
Slide 27: Strategy – market cycle
STRATEGY – MARKET CYCLE The business is actively managing the market cycle For personal use only 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
Slide 28: Strategy – growth
STRATEGY – GROWTH New initiatives being implemented in executing strategy For personal use only • 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’
Slide 29: Outlook – GWP and NEP
OUTLOOK – GWP and NEP For personal use only 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
Slide 30: Outlook – insurance margin
OUTLOOK – INSURANCE MARGIN For personal use only 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 31: Focus / priorities
FOCUS / PRIORITIES For personal use only • 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 ou
Slide 32: Business Partnerships
For personal use only Business Partnerships Jacki Johnson 29 October 2007
Slide 33: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 portf
Slide 34: Business unit size and composition
BUSINESS UNIT SIZE AND COMPOSITION For personal use only 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 bas
Slide 35: Affinity diversified by product and state
AFFINITY DIVERSIFIED BY PRODUCT AND STATE For personal use only 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
Slide 36: Dynamic market conditions – creating opportunities and risks
DYNAMIC MARKET CONDITIONS – Creating opportunities and risks only & 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 • Finan
Slide 37: Rationale for our market presence
RATIONALE FOR OUR MARKET PRESENCE For personal use only 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
Slide 38: Business Partnerships strategy 2007-2010
BUSINESS PARTNERSHIPS STRATEGY 2007-2010 Competitive advantage through mutually beneficial partnerships For personal use only Competitive advantage through mutually beneficial partnerships Our 3 year Building and strengthening partnerships to achieve sustainable profit growth Ambition 15% return on
Slide 39: Strong focus on strategy and improving profitability
STRONG FOCUS ON STRATEGY AND IMPROVING PROFITABILITY • Mapping and improving processes For personal use only Productivity Productivity improvements • Development of technology strategies improvements • Achieve further reductions in people turnover • Focus on strategic, significant and profitable rel
Slide 40: Leveraging existing capability into domestic and international markets
LEVERAGING EXISTING CAPABILITY INTO DOMESTIC AND INTERNATIONAL MARKETS For personal use only •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 i
Slide 41: Outlook – Affinity businesses GWP
OUTLOOK – AFFINITY BUSINESSES GWP For personal use only 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 42: Outlook – Affinity businesses underwriting result
OUTLOOK – AFFINITY BUSINESSES UNDERWRITING RESULT For personal use only 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 • Mot
Slide 43: Outlook – Risk Management Services
OUTLOOK – RISK MANAGEMENT SERVICES For personal use only 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
Slide 44: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 portfo
Slide 45: IAG Reserving Philosophy & Practice
For personal use only IAG Reserving Philosophy & Practice Tony Coleman 29 October 2007
Slide 46: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 47: Key steps in the reserving process
KEY STEPS IN THE RESERVING PROCESS For personal use only • 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 • Estab
Slide 48: Robust and reliable central estimates
ROBUST AND RELIABLE CENTRAL ESTIMATES For personal use only 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 pr
Slide 49: Conservative reserving with risk margins included
CONSERVATIVE RESERVING WITH RISK MARGINS INCLUDED For personal use only 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 previo
Slide 50: Risk margins – key concepts
RISK MARGINS – KEY CONCEPTS For personal use only • 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 clai
Slide 51: Central estimate & risk margin of outstanding claims
CENTRAL ESTIMATE & RISK MARGIN OF OUTSTANDING CLAIMS For personal use only 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 Es
Slide 52: Central estimate & risk margin of outstanding claims
CENTRAL ESTIMATE & RISK MARGIN OF OUTSTANDING CLAIMS Illustration For personal use only 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 ri
Slide 53: Quantifying risk margins
QUANTIFYING RISK MARGINS For personal use only • 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
Slide 54: Risk margins – reinsurance impact
RISK MARGINS – REINSURANCE IMPACT For personal use only Projected asbestos cashflows (undiscounted) 58 40 61 64 43 46 49 52 55 22 25 28 31 34 37 13 16 19 07 10 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 55: Risk margins – reinsurance impact
RISK MARGINS – REINSURANCE IMPACT For personal use only Projected asbestos cashflows (undiscounted) $m 55 34 40 43 49 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% Ju
Slide 56: Reinsurance lowers risk margins
REINSURANCE LOWERS RISK MARGINS For personal use only 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 57: Capital and risk – a simple illustration
CAPITAL AND RISK - A SIMPLE ILLUSTRATION For personal use only 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 •
Slide 58: What should the liability in the balance sheet be before the dice is rolled?
WHAT SHOULD THE LIABILITY IN THE BALANCE SHEET BE For personal use only 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 t
Slide 59: The cost of capital concept
THE “COST OF CAPITAL” CONCEPT For personal use only • 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 r
Slide 60: The pre-claim liability will be
THE PRE-CLAIM LIABILITY WILL BE For personal use only • $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 61: Profit of insurer
PROFIT OF INSURER For personal use only • $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
Slide 62: What is the emerging IASB view?
WHAT IS THE EMERGING IASB VIEW? For personal use only • 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,
Slide 63: Linking PoA with IASB exit value
LINKING PoA WITH IASB “EXIT” VALUE For personal use only • 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) – T
Slide 64: RMWG comparisons for non-life risk margin PoA equivalent to cost of capital
RMWG* COMPARISONS FOR NON-LIFE RISK MARGIN PoA For personal use only 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
Slide 65: Linking PoA with exit value – conclusions
LINKING PoA WITH EXIT VALUE – CONCLUSIONS For personal use only • 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
Slide 66: The cost of capital impact
THE “COST OF CAPITAL” IMPACT For personal use only • 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 67: Actuarial capability transfer – IAG UK
ACTUARIAL CAPABILITY TRANSFER - IAG UK For personal use only • 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 re
Slide 68: New risk rating in Advantage
NEW RISK RATING IN ADVANTAGE Geographical and Demographic clusters For personal use only 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
Slide 69: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 70: Appendix: CDT – net central estimate basis
APPENDIX: CDT – NET CENTRAL ESTIMATE BASIS For personal use only 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
Slide 71: Appendix: CDT – net central estimate basis
APPENDIX: CDT – NET CENTRAL ESTIMATE BASIS For personal use only 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% Over
Slide 72: Appendix: CDT – net provision basis
APPENDIX: CDT –NET PROVISION BASIS For personal use only $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 2,13
Slide 73: Appendix: CDT – net provision basis
APPENDIX: CDT – NET PROVISION BASIS For personal use only 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
Slide 74: Morning Tea
For personal use only Morning Tea Webcast will resume shortly PAGE 73
Slide 75: UK
For personal use only UK Neil Utley 29 October 2007
Slide 76: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 77: IAG UK assets acquired in FY07
IAG UK ASSETS ACQUIRED IN FY07 Equity Insurance Group Hastings Direct and Advantage For personal use only 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 Syn
Slide 78: IAG UK – moving to an integrated platform
IAG UK – MOVING TO AN INTEGRATED PLATFORM For personal use only 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 79: UK motor market bottoming out
UK MOTOR MARKET BOTTOMING OUT For personal use only 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 perf
Slide 80: Shifting dynamics of distribution present opportunities
SHIFTING DYNAMICS OF DISTRIBUTION PRESENT OPPORTUNITIES For personal use only 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%
Slide 81: Operating ratios for IAG vs. the market
OPERATING RATIOS FOR IAG vs. THE MARKET For personal use only 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
Slide 82: Claims environment
CLAIMS ENVIRONMENT For personal use only • 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
Slide 83: Rating environment
RATING ENVIRONMENT For personal use only 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 pr
Slide 84: IAG UK underwriting
IAG UK UNDERWRITING For personal use only 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 Far
Slide 85: IAG UK – broking
IAG UK - BROKING For personal use only 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
Slide 86: Hastings & Advantage – performance below expectations
HASTINGS & ADVANTAGE - PERFORMANCE BELOW For personal use only EXPECTATIONS • Businesses purchased in October 2006 • Number of issues have come to light since April – Market factors – Underwriting PAGE 85
Slide 87: Hastings and Advantage – market factors
HASTINGS AND ADVANTAGE - PERFORMANCE BELOW For personal use only 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
Slide 88: Hastings and Advantage – underwriting
HASTINGS AND ADVANTAGE - PERFORMANCE BELOW EXPECTATIONS For personal use only 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) * •
Slide 89: Hastings – actively responding to rapidly changing market
HASTINGS - ACTIVELY RESPONDING TO RAPIDLY For personal use only 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
Slide 90: Advantage – pricing for profit
ADVANTAGE - PRICING FOR PROFIT For personal use only • 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
Slide 91: IAG UK – Equity Red Star outperformance
IAG UK - EQUITY RED STAR OUTPERFORMANCE For personal use only % 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 s
Slide 92: IAG UK underwriting strategy
IAG UK UNDERWRITING STRATEGY For personal use only 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
Slide 93: IAG UK broking strategy
IAG UK BROKING STRATEGY Branch Network – Controlling distribution in profitable areas For personal use only • 81 branches (13 acquisitions this calendar year to date) • Growing branch network through acquisitions to: – Control distribution in profitable underwriting areas – Higher retention and cros
Slide 94: IAG UK strategy summary
IAG UK STRATEGY SUMMARY For personal use only 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 • Regio
Slide 95: Unleashing the potential
UNLEASHING THE POTENTIAL For personal use only 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 del
Slide 96: IAG UK outlook
IAG UK OUTLOOK For personal use only • 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
Slide 97: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 98: IAG New Zealand
For personal use only IAG New Zealand Nick Hawkins 29 October 2007
Slide 99: Executive summary
EXECUTIVE SUMMARY For personal use only • 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
Slide 100: Stable, mature and rational market
STABLE, MATURE AND RATIONAL MARKET For personal use only • 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 dy
Slide 101: IAG NZ holds a leading market share at 36%
IAG NZ HOLDS A LEADING MARKET SHARE AT 36% IAG NZ Product Mix For personal use only 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 Mo
Slide 102: New Zealand's insurer of choice
NEW ZEALAND’S INSURER OF CHOICE For personal use only 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 throug
Slide 103: Significant progress on execution
SIGNIFICANT PROGRESS ON EXECUTION For personal use only •• 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 produ
Slide 104: Growth in GWP and increased market share
GROWTH IN GWP AND INCREASED MARKET SHARE For personal use only 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% $0 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 1H 2H FY04 FY05 FY06 FY07 IAG NZ vs. Market COR Last 12 months have see
Slide 105: Outlook
OUTLOOK For personal use only • NZ$ 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 106: Executive summary
EXECUTIVE SUMMARY For personal use only • 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
Slide 107: IAG Asia
For personal use only IAG Asia Investor Briefing Justin Breheny 29 October 2007
Slide 108: Executive summary
EXECUTIVE SUMMARY For personal use only • 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 s
Slide 109: Challenging market conditions
CHALLENGING MARKET CONDITIONS For personal use only 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 Ap 4 Se 5 D 1 M 2 Ja 3 06 D 6 N 4 Fe 5 M 6 Ju 9 N 9 Fe
Slide 110: Market position – strong base from which to expand
MARKET POSITION - STRONG BASE FROM WHICH TO For personal use only 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
Slide 111: Strategy to grow through disciplined acquisitions in four key markets
STRATEGY TO GROW THROUGH DISCIPLINED ACQUISITIONS IN FOUR KEY MARKETS For personal use only 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 • C
Slide 112: Progress on execution
PROGRESS ON EXECUTION Continued strong progress on capability transfer For personal use only Thailand Malaysia Distribution/Operations Distribution/Operations • Telemarketing centre established • Banking systems review with AmBank has identified • Distribution of new car Extended Warranty product op
Slide 113: Progress on execution – M&A
PROGRESS ON EXECUTION For personal use only 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
Slide 114: Financial outlook
FINANCIAL OUTLOOK For personal use only 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 $3.5 – 4.5m Insurance margin 2.0 – 4.0% Financial outlook Financial outlook • Stable and consistent performan
Slide 115: Executive summary
EXECUTIVE SUMMARY For personal use only • STATE OF THE MARKET – Fast growing markets – Difficult market conditions in Thailand due to political unrest – Competition is increasing and more insurers looking to enter the markets, thus acquisitions are difficult and prices paid by others are not always
Slide 116: Summary
For personal use only Summary Mike Hawker 29 October 2007
Slide 117: FY08 insurance operations outlook
FY08 INSURANCE OPERATIONS OUTLOOK For personal use only BUSINESS GWP GWP Insurance Insurance ($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 Commerci
Slide 118: FY08 trading outlook – summary
FY08 TRADING OUTLOOK – SUMMARY For personal use only • 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
Slide 119: Questions
For personal use only QUESTIONS
Insurance Australia Group — Investor Day (October 2007) on 6ix