General Insurance Survey: half year to 31 December 2007
General Insurance Survey: half year to 31 December 2007 13 March 2008
f i n a n c i a l se r v i ce s
Executive summary The events and market conditions in the last six months leading up to the December 2007 reporting season have proved challenging for a number of Australia’s domestic general insurers. There is now even more imperative for general insurers to re-examine their pricing models in light of the recent experience. The six months to December 2007 have been characterised by: • further severe weather events; • a downturn in investment markets arising from the ‘credit crunch’; and • continued rate pressure, particularly in commercial lines. Adding to this challenging list of issues is the prospect of further capital required to meet APRA’s proposed more stringent assessment of investments in property and equities and reinsurance recoveries. The weather events in particular raise some challenging issues.
A summary of the results of the four largest general insurers in Australia (on pages 6 - 7) shows that there has been a significant reduction in some of the insurers’ profitability in the half year. However, Gross Written Premium has increased as compared to the prior comparative period, as has Net Earned Premium. Profitability for two of the four insurers, IAG and Suncorp, has primarily been negatively impacted by lower investment returns and higher claims expenses. Overall, the profit after tax for the four insurers combined decreased by 26.8 percent to $1,448 million when compared to the same period in 2006. The individual company performances were markedly impacted by the extent to which they have domestic rather than international businesses, the classes of business underwritten, their catastrophe reinsurance retentions and the quantum of prior year reserve releases. Both Allianz and QBE reported results that show consistent or increased profits whereas IAG and Suncorp have delivered results that are significantly below both of the previous two six month periods.
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
The outlook for the second half of 2008 remains mixed and is subject to the impact of any further severe weather events, the extent of available reserve releases and the performance of the investment markets. Looking further ahead, the results for 2009 and beyond will be heavily dependent on when there is a turnaround in the current soft market conditions. Insurers and market observers will be watching the June 2008 renewal season closely. If reasonable premium rate increases at June 2008 are not achieved then this will flow on to impact results in the remainder of 2008 and 2009.
Storms, floods and hail The impact of severe weather events has been significant in the last two half years. Whilst the financial performance in the half year to 30 June 2007 was heavily influenced by one significant event, the Queen’s Birthday Weekend storms, the half year to 31 December 2007 has seen a number of severe weather events in Australia and New Zealand culminating in the Western Sydney hail storm of December 2007. The industry wide costs of these recent events are summarised in the following table:
Event
Date
NZ North Island storms
July 2007
54
Lismore storms
October 2007
130
NZ Gisborne earthquake
December 2007
31
Western Sydney hail storm
December 2007
400
Total
“
Estimated Industry Cost (AU$m)
615
Source: Insurance Council of Australia (post October 2007 events) / Australian General Insurance Historical Catastrophe Data List 1967-2007 (pre October 2007 events) / Insurance Council of New Zealand / KPMG estimates
The six months to December 2007 have been characterised by:
”
• further severe weather events;
• a downturn in investment markets arising from the ‘credit crunch’; and •
continued rate pressure, particularly in commercial lines.
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
Subsequent to 31 December 2007 there has been further storms and flooding in Queensland and Northern NSW which are estimated to have cost the insurance industry a further $190 million (source: Insurance Council of Australia). The implications of these recent events are many fold. Firstly, are we seeing a step change in both the frequency and severity of severe weather events as a result of changing weather patterns, including the effects of climate change? Secondly, and as a consequential impact, does this mean that that there will need to be a substantial increase in the cost of insurance covering the effects of these types of events or a change in the way in which the insurance industry and governments respond to these types of losses, in particular, flood (an issue that the Garnaut Climate Change Review: Issues Paper 2: Financial Services for Managing Risk: Climate Change and Carbon Trading raised). Thirdly, will we see a change in how the major direct insurers manage their retentions and the level at which they purchase reinsurance in order to reduce volatility in their results.
The 31 December 2007 results releases provide at least some answers to the above questions. IAG has noted that it expects an increase in the frequency and severity of certain weather events as a result of climate change. Suncorp and QBE also referred to the increased frequency of large claims and catastrophes in Australia. Further, the generally wetter weather conditions currently being experienced in NSW and Queensland have resulted in, and are expected to continue to result in, greater levels of attritional losses as well as inflationary pressures on repair costs. This has been noted as significantly increasing loss ratios compared to the more benign weather conditions in 2005/06. In terms of the knock-on effect on pricing, IAG noted that “some segments, such as personal lines, will experience price increases in line with rising claims costs following increased frequency and severity of weather events”. Suncorp stated that they expect premiums will rise following the increases to claim severity and frequency arising from both severe events and generally wetter conditions. This appears likely
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
to impact the personal lines market in the first instance. It remains to be seen whether the recent experience will lead to a fundamental change in the cost of insurance covering losses from severe weather. However it further reinforces the imperative for insurers to re-examine their pricing models to assess whether they are making sufficient allowance for these losses. The commercial lines market has been the subject of intense rate competition over the last four years resulting in certain classes of business including General Liability and Commercial Property now being at or below the rates achieved back in 2001 (Source: Swiss Re estimates). QBE state in their 2008 outlook that their Australian premium rates (across all classes combined) are likely to decrease by around three percent. Whilst many industry participants are voicing an intention to increase premium rates, past experience has shown that insurers are not prepared to give up hard won market share to competitors based on price alone. The June 2008 renewal season will provide the next major litmus test and the outcome will be awaited with much interest. With regard to reinsurance retentions, the major listed companies have indicated reductions in their retentions compared to the prior periods position, reflecting perhaps both a desire to reduce volatility and a further recognition of the likelihood or expectation of more severe weather events in the coming year. The perceived (there are still sceptics out there) change in weather patterns as a result of climate change could have a major impact on the pricing of insurance in Australia. There is already a significant amount of research being undertaken on the impact of changing weather patterns, however in this highly competitive environment a key question is how soon will we start to see significant changes in pricing and who will lead the way? Sub-prime crisis and the credit crunch The various causes and immediate outcomes of the sub-prime crisis and associated credit crunch have been well documented. Australian General Insurers’ results for the half year to 31 December 2007 have been impacted by the sub-prime crisis and resulting credit crunch but it predominantly
appears to be as a result of the overall fall in investment markets and widening credit spreads rather than due to direct exposure to the sub-prime debt markets. One area that may further develop for insurers is claims arising from Directors and Officers and Errors and Omissions (D&O and E&O) covers that have been written through Professional Indemnity divisions. These claims typically take a number of years to fully develop and accordingly, the extent to which they have been recognised in the half year results is difficult to determine. Global industry estimates are at US$3.6 billion for the eventual cost of these type of claims (Source: IQ Insider Quarterly, Spring 2008 edition), however it would appear unlikely that much of this loss will find its way to Australian General Insurers. The credit crunch will continue to effect results in the period to June 2008 and beyond, to the extent that global markets remain volatile. Market outlook A consistent theme coming through several of the major ASX listed insurers media releases and investor presentations has been the need to maintain pricing disciplines in commercial insurance lines. Whilst the benefits of tort reform are continuing to be evidenced through ongoing, albeit diminishing, prior year reserve releases and softening rates for commercial liability business, it is clear that rates on short-tail commercial business are seen to be unsustainably low. Notwithstanding this, whilst some positive sentiment on rates exists we are unlikely to see a rapid hardening of the market in the next twelve months unless there is a significant change in the environment. From a personal lines perspective, CTP rates are showing some reductions, particularly in Queensland, whereas home and motor portfolios appear to be experiencing reasonable levels of growth. Share price performance The graph on page 5 shows the share price performance of the major listed Australian General Insurers together with that of the ASX 300. It is clear from the graph that certain insurance stocks have recently been out of favour relative to the index. This is partly because of the effect on the index of the major materials
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
and energy companies who have had strong performances over the period, but is also perhaps reflective of negative sentiment around the underlying performance, including rates and growth prospects, and the strategic outlook for insurers. Even where record results have been announced (such as QBE) share prices have fallen sharply perhaps reflecting concern around some of the underlying growth and margin prospects of the industry but also underpinned by general market negativity. This is in sharp contrast to the position in 2004/05 where Insurance stocks outperformed the index and is perhaps mostly reflective of the perceived stage of the commercial insurance cycle, a drying up of reserve releases from long-tail business that has benefited from tort reforms and concern around both investment markets and the impact of severe weather events. Proposed regulatory changes The proposed APRA General Insurance regulatory refinements have received a significant amount of industry
attention since the APRA response was released on 19 December 2007. Considerable industry concern remains over the proposals to increase capital charges on reinsurance recoverables from non-APRA authorised reinsurers, the impact of removing intra-group reinsurance capital relief and the proposed increase in capital charges on equities and direct property holdings. Industry submissions on the revised proposals were due on 22 February 2008 with APRA expected to provide further comment or revisions by the end of March 2008. An overriding point to note is that neither APRA, nor other commentators, are stating concerns that the industry is undercapitalised, rather these refinements to the framework are addressing perceived inconsistencies or specific concerns. That said, isolated changes without considering all aspects of insurers capital requirements are seen in some quarters to be potentially detrimental to the level of capital that individual insurers are required to hold and may reduce the extent of competitiveness of the Australian industry, both domestically and globally.
Share price movement
Insurance companies’ share price performance since May 2003
Date
Source: Bloomberg
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
Premium revenue
Gross written premium $m
Gross earned premium $m
Reinsurance expense $m
Net earned premium $m
Gross claims incurred $m
Reinsurance and other recoveries income $m
Half year to 31 December 2007
1,302
1,214
190
1,024
924
211
713
275
36
Half year to 30 June 2007
1,219
1,211
200
1,011
951
256
695
250
66
Half year to 31 December 2006
1,259
1,219
224
995
802
126
676
256
63
Half year to 31 December 2007
3,851
3,923
214
3,709
2,806
162
2,644
1,072
(7)
Half year to 30 June 2007
4,057
3,838
250
3,588
3,114
673
2,441
984
163
Half year to 31 December 2006
3,324
3,369
214
3,155
2,231
198
2,033
878
244
Half year to 31 December 2007
5,886
6,610
1,149
5,461
3,490
586
2,904
1,772
785
Half year to 30 June 2007
6,520
5,751
1,002
4,749
3,161
512
2,649
1,447
653
Half year to 31 December 2006
4,716
5,137
977
4,160
2,560
342
2,218
1,224
718
Half year to 31 December 2007
3,156
3,141
196
2,945
2,619
442
2,177
805
(37)
Half year to 30 June 2007
3,163
3,071
208
2,863
2,598
738
1,860
814
189
Half year to 31 December 2006
3,083
3,062
202
2,860
2,147
358
1,789
782
289
Insurance operations (alphabetical) 1,2,3
Allianz
Insurance Australia Group
QBE
Suncorp Insurance Group 7
Technical account
Period
Net claims incurred $m
Underwriting expenses 4 $m
Underwriting surplus / (deficit) 5 $m
Total
Half year to 31 December 2007
14,195
14,888
1,749
13,139
9,839
1,401
8,438
3,924
777
Total
Half year to 30 June 2007
14,959
13,871
1,660
12,211
9,824
2,179
7,645
3,495
1,071
Total
Half year to 31 December 2006
12,382
12,787
1,617
11,170
7,740
1,024
6,716
3,140
1,314
Footnotes 1 Information was extracted from published annual and half year reports (at a consolidated level, where applicable) and disclosure statements or obtained directly from the insurers. This survey only includes the four largest general insurers in Australia. Where half year figures have not been seperately published they have been derived as the difference between full year and relevant half year results. 2
Only figures relating to general insurance operations have been included. Where a figure is not disclosed publicly it is represented as ‘ND’.
3
Premium revenue reflects worldwide figures for Australian based entities, and Australian figures for entities with overseas holding companies.
4
Underwriting expenses include net commission, acquisition and other underwriting expenses (including deferred acquisition cost write downs)
5
Underwriting surplus is net earned premiums less net claims incurred and underwriting expenses.
6
Profit after tax is before adjustment for outside equity interests.
7
Suncorp Insurance Group results include the combined results of the Suncorp Group general insurers and the former Promina Group general insurers for all periods in this survey. The tax expense for the combined Suncorp Insurance Group has been estimated based on an effective rate of 28%, as the actual figure is not publicly available.
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
Operating result
Total investment revenue $m
Total other revenue/ (expense) $m
Profit before Tax $M
Tax expense $m
194
39
269
90
27
189
Strength/ soundness measures
Insurance provisions
Profit after tax 6 $m
Unearned premium provision $m
Gross outstanding claims provision $m
Net assets $m
Loss ratio 8 %
Expense ratio 9 %
Combined ratio 10 %
Capital adequacy multiple 11, 12
POS 13 %
81
188
1,299
4,374
1,698
69.6%
26.9%
96.5%
1.67
75.00
183
55
128
1,211
4,319
1,504
68.7%
24.7%
93.5%
1.38
75.00
26
278
84
194
1,216
4,173
1,646
67.9%
25.7%
93.7%
1.38
75.00
328
(116)
205
78
127
4,105
8,228
4,920
71.3%
28.9%
100.2%
1.87
90.00
355
(138)
380
133
247
4,213
8,562
4,832
68.0%
27.4%
95.5%
1.67
90.00
369
(85)
528
146
382
3,361
7,043
4,517
64.4%
27.8%
92.3%
2.39
90.00
713
(161)
1,337
328
1,009
5,698
18,231
8,543
53.2%
32.4%
85.6%
2.40
94.00
671
(112)
1,212
287
925
6,842
18,426
7,786
55.8%
30.5%
86.3%
2.30
95.80
583
(98)
1,203
305
898
4,642
15,269
6,349
53.3%
29.4%
82.7%
2.40
94.60
216
(7)
172
48
124
3,184
7,272
3,814
73.9%
27.3%
101.3%
1.51/2.59
94.00
351
(16)
524
147
377
3,204
7,150
3,991
65.0%
28.4%
93.4%
1.66/2.72
94.00
403
7
699
196
503
3,121
7,036
4,120
62.6%
27.3%
89.9%
ND
94.00
1,451
(245)
1,983
535
1,448
14,286
38,105
18,975
64.2%
29.9%
94.1%
1,467
(239)
2,299
622
1,677
15,470
38,457
18,113
62.6%
28.6%
91.2%
1,544
(150)
2,708
731
1,977
12,340
33,521
16,632
60.1%
28.1%
88.2%
8
Loss ratio measures net claims incurred as a percentage of net earned premium.
9
Expense ratio measures underwriting expenses (including commissions) as a percentage of net earned premium.
10 Combined ratio measures net claims incurred plus underwriting expenses as a percentage of net earned premium.
11 The Capital adequacy multiple is calculated under APRA’s General Prudential Standards. For those groups which have a non-operating holding company the multiple is an estimation as APRA has not issued a requirement to calculate capital adequacy for such companies.
13 The probability of sufficiency (‘POS’) measures the likelihood that an amount set aside within the outstanding claims provision will be adequate to meet the actual out-turn of claims experience.
12 The Capital adequacy multiple for Suncorp Insurance Group is shown for Suncorp Insurance (excluding Promina) and for Vero Insurance (Australia only).
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
kpmg.com.au
For more information contact Brian Greig Insurance Segment Leader [email protected] +61 2 9335 7611
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2008 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Australia. KPMG and the KPMG logo are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. March 2008. NSWN00833FS.
f i n a n c i a l se r v i ce s
Executive summary The events and market conditions in the last six months leading up to the December 2007 reporting season have proved challenging for a number of Australia’s domestic general insurers. There is now even more imperative for general insurers to re-examine their pricing models in light of the recent experience. The six months to December 2007 have been characterised by: • further severe weather events; • a downturn in investment markets arising from the ‘credit crunch’; and • continued rate pressure, particularly in commercial lines. Adding to this challenging list of issues is the prospect of further capital required to meet APRA’s proposed more stringent assessment of investments in property and equities and reinsurance recoveries. The weather events in particular raise some challenging issues.
A summary of the results of the four largest general insurers in Australia (on pages 6 - 7) shows that there has been a significant reduction in some of the insurers’ profitability in the half year. However, Gross Written Premium has increased as compared to the prior comparative period, as has Net Earned Premium. Profitability for two of the four insurers, IAG and Suncorp, has primarily been negatively impacted by lower investment returns and higher claims expenses. Overall, the profit after tax for the four insurers combined decreased by 26.8 percent to $1,448 million when compared to the same period in 2006. The individual company performances were markedly impacted by the extent to which they have domestic rather than international businesses, the classes of business underwritten, their catastrophe reinsurance retentions and the quantum of prior year reserve releases. Both Allianz and QBE reported results that show consistent or increased profits whereas IAG and Suncorp have delivered results that are significantly below both of the previous two six month periods.
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
The outlook for the second half of 2008 remains mixed and is subject to the impact of any further severe weather events, the extent of available reserve releases and the performance of the investment markets. Looking further ahead, the results for 2009 and beyond will be heavily dependent on when there is a turnaround in the current soft market conditions. Insurers and market observers will be watching the June 2008 renewal season closely. If reasonable premium rate increases at June 2008 are not achieved then this will flow on to impact results in the remainder of 2008 and 2009.
Storms, floods and hail The impact of severe weather events has been significant in the last two half years. Whilst the financial performance in the half year to 30 June 2007 was heavily influenced by one significant event, the Queen’s Birthday Weekend storms, the half year to 31 December 2007 has seen a number of severe weather events in Australia and New Zealand culminating in the Western Sydney hail storm of December 2007. The industry wide costs of these recent events are summarised in the following table:
Event
Date
NZ North Island storms
July 2007
54
Lismore storms
October 2007
130
NZ Gisborne earthquake
December 2007
31
Western Sydney hail storm
December 2007
400
Total
“
Estimated Industry Cost (AU$m)
615
Source: Insurance Council of Australia (post October 2007 events) / Australian General Insurance Historical Catastrophe Data List 1967-2007 (pre October 2007 events) / Insurance Council of New Zealand / KPMG estimates
The six months to December 2007 have been characterised by:
”
• further severe weather events;
• a downturn in investment markets arising from the ‘credit crunch’; and •
continued rate pressure, particularly in commercial lines.
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
Subsequent to 31 December 2007 there has been further storms and flooding in Queensland and Northern NSW which are estimated to have cost the insurance industry a further $190 million (source: Insurance Council of Australia). The implications of these recent events are many fold. Firstly, are we seeing a step change in both the frequency and severity of severe weather events as a result of changing weather patterns, including the effects of climate change? Secondly, and as a consequential impact, does this mean that that there will need to be a substantial increase in the cost of insurance covering the effects of these types of events or a change in the way in which the insurance industry and governments respond to these types of losses, in particular, flood (an issue that the Garnaut Climate Change Review: Issues Paper 2: Financial Services for Managing Risk: Climate Change and Carbon Trading raised). Thirdly, will we see a change in how the major direct insurers manage their retentions and the level at which they purchase reinsurance in order to reduce volatility in their results.
The 31 December 2007 results releases provide at least some answers to the above questions. IAG has noted that it expects an increase in the frequency and severity of certain weather events as a result of climate change. Suncorp and QBE also referred to the increased frequency of large claims and catastrophes in Australia. Further, the generally wetter weather conditions currently being experienced in NSW and Queensland have resulted in, and are expected to continue to result in, greater levels of attritional losses as well as inflationary pressures on repair costs. This has been noted as significantly increasing loss ratios compared to the more benign weather conditions in 2005/06. In terms of the knock-on effect on pricing, IAG noted that “some segments, such as personal lines, will experience price increases in line with rising claims costs following increased frequency and severity of weather events”. Suncorp stated that they expect premiums will rise following the increases to claim severity and frequency arising from both severe events and generally wetter conditions. This appears likely
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
to impact the personal lines market in the first instance. It remains to be seen whether the recent experience will lead to a fundamental change in the cost of insurance covering losses from severe weather. However it further reinforces the imperative for insurers to re-examine their pricing models to assess whether they are making sufficient allowance for these losses. The commercial lines market has been the subject of intense rate competition over the last four years resulting in certain classes of business including General Liability and Commercial Property now being at or below the rates achieved back in 2001 (Source: Swiss Re estimates). QBE state in their 2008 outlook that their Australian premium rates (across all classes combined) are likely to decrease by around three percent. Whilst many industry participants are voicing an intention to increase premium rates, past experience has shown that insurers are not prepared to give up hard won market share to competitors based on price alone. The June 2008 renewal season will provide the next major litmus test and the outcome will be awaited with much interest. With regard to reinsurance retentions, the major listed companies have indicated reductions in their retentions compared to the prior periods position, reflecting perhaps both a desire to reduce volatility and a further recognition of the likelihood or expectation of more severe weather events in the coming year. The perceived (there are still sceptics out there) change in weather patterns as a result of climate change could have a major impact on the pricing of insurance in Australia. There is already a significant amount of research being undertaken on the impact of changing weather patterns, however in this highly competitive environment a key question is how soon will we start to see significant changes in pricing and who will lead the way? Sub-prime crisis and the credit crunch The various causes and immediate outcomes of the sub-prime crisis and associated credit crunch have been well documented. Australian General Insurers’ results for the half year to 31 December 2007 have been impacted by the sub-prime crisis and resulting credit crunch but it predominantly
appears to be as a result of the overall fall in investment markets and widening credit spreads rather than due to direct exposure to the sub-prime debt markets. One area that may further develop for insurers is claims arising from Directors and Officers and Errors and Omissions (D&O and E&O) covers that have been written through Professional Indemnity divisions. These claims typically take a number of years to fully develop and accordingly, the extent to which they have been recognised in the half year results is difficult to determine. Global industry estimates are at US$3.6 billion for the eventual cost of these type of claims (Source: IQ Insider Quarterly, Spring 2008 edition), however it would appear unlikely that much of this loss will find its way to Australian General Insurers. The credit crunch will continue to effect results in the period to June 2008 and beyond, to the extent that global markets remain volatile. Market outlook A consistent theme coming through several of the major ASX listed insurers media releases and investor presentations has been the need to maintain pricing disciplines in commercial insurance lines. Whilst the benefits of tort reform are continuing to be evidenced through ongoing, albeit diminishing, prior year reserve releases and softening rates for commercial liability business, it is clear that rates on short-tail commercial business are seen to be unsustainably low. Notwithstanding this, whilst some positive sentiment on rates exists we are unlikely to see a rapid hardening of the market in the next twelve months unless there is a significant change in the environment. From a personal lines perspective, CTP rates are showing some reductions, particularly in Queensland, whereas home and motor portfolios appear to be experiencing reasonable levels of growth. Share price performance The graph on page 5 shows the share price performance of the major listed Australian General Insurers together with that of the ASX 300. It is clear from the graph that certain insurance stocks have recently been out of favour relative to the index. This is partly because of the effect on the index of the major materials
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
and energy companies who have had strong performances over the period, but is also perhaps reflective of negative sentiment around the underlying performance, including rates and growth prospects, and the strategic outlook for insurers. Even where record results have been announced (such as QBE) share prices have fallen sharply perhaps reflecting concern around some of the underlying growth and margin prospects of the industry but also underpinned by general market negativity. This is in sharp contrast to the position in 2004/05 where Insurance stocks outperformed the index and is perhaps mostly reflective of the perceived stage of the commercial insurance cycle, a drying up of reserve releases from long-tail business that has benefited from tort reforms and concern around both investment markets and the impact of severe weather events. Proposed regulatory changes The proposed APRA General Insurance regulatory refinements have received a significant amount of industry
attention since the APRA response was released on 19 December 2007. Considerable industry concern remains over the proposals to increase capital charges on reinsurance recoverables from non-APRA authorised reinsurers, the impact of removing intra-group reinsurance capital relief and the proposed increase in capital charges on equities and direct property holdings. Industry submissions on the revised proposals were due on 22 February 2008 with APRA expected to provide further comment or revisions by the end of March 2008. An overriding point to note is that neither APRA, nor other commentators, are stating concerns that the industry is undercapitalised, rather these refinements to the framework are addressing perceived inconsistencies or specific concerns. That said, isolated changes without considering all aspects of insurers capital requirements are seen in some quarters to be potentially detrimental to the level of capital that individual insurers are required to hold and may reduce the extent of competitiveness of the Australian industry, both domestically and globally.
Share price movement
Insurance companies’ share price performance since May 2003
Date
Source: Bloomberg
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
Premium revenue
Gross written premium $m
Gross earned premium $m
Reinsurance expense $m
Net earned premium $m
Gross claims incurred $m
Reinsurance and other recoveries income $m
Half year to 31 December 2007
1,302
1,214
190
1,024
924
211
713
275
36
Half year to 30 June 2007
1,219
1,211
200
1,011
951
256
695
250
66
Half year to 31 December 2006
1,259
1,219
224
995
802
126
676
256
63
Half year to 31 December 2007
3,851
3,923
214
3,709
2,806
162
2,644
1,072
(7)
Half year to 30 June 2007
4,057
3,838
250
3,588
3,114
673
2,441
984
163
Half year to 31 December 2006
3,324
3,369
214
3,155
2,231
198
2,033
878
244
Half year to 31 December 2007
5,886
6,610
1,149
5,461
3,490
586
2,904
1,772
785
Half year to 30 June 2007
6,520
5,751
1,002
4,749
3,161
512
2,649
1,447
653
Half year to 31 December 2006
4,716
5,137
977
4,160
2,560
342
2,218
1,224
718
Half year to 31 December 2007
3,156
3,141
196
2,945
2,619
442
2,177
805
(37)
Half year to 30 June 2007
3,163
3,071
208
2,863
2,598
738
1,860
814
189
Half year to 31 December 2006
3,083
3,062
202
2,860
2,147
358
1,789
782
289
Insurance operations (alphabetical) 1,2,3
Allianz
Insurance Australia Group
QBE
Suncorp Insurance Group 7
Technical account
Period
Net claims incurred $m
Underwriting expenses 4 $m
Underwriting surplus / (deficit) 5 $m
Total
Half year to 31 December 2007
14,195
14,888
1,749
13,139
9,839
1,401
8,438
3,924
777
Total
Half year to 30 June 2007
14,959
13,871
1,660
12,211
9,824
2,179
7,645
3,495
1,071
Total
Half year to 31 December 2006
12,382
12,787
1,617
11,170
7,740
1,024
6,716
3,140
1,314
Footnotes 1 Information was extracted from published annual and half year reports (at a consolidated level, where applicable) and disclosure statements or obtained directly from the insurers. This survey only includes the four largest general insurers in Australia. Where half year figures have not been seperately published they have been derived as the difference between full year and relevant half year results. 2
Only figures relating to general insurance operations have been included. Where a figure is not disclosed publicly it is represented as ‘ND’.
3
Premium revenue reflects worldwide figures for Australian based entities, and Australian figures for entities with overseas holding companies.
4
Underwriting expenses include net commission, acquisition and other underwriting expenses (including deferred acquisition cost write downs)
5
Underwriting surplus is net earned premiums less net claims incurred and underwriting expenses.
6
Profit after tax is before adjustment for outside equity interests.
7
Suncorp Insurance Group results include the combined results of the Suncorp Group general insurers and the former Promina Group general insurers for all periods in this survey. The tax expense for the combined Suncorp Insurance Group has been estimated based on an effective rate of 28%, as the actual figure is not publicly available.
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
General Insurance Survey: half year to 31 December 2007
Operating result
Total investment revenue $m
Total other revenue/ (expense) $m
Profit before Tax $M
Tax expense $m
194
39
269
90
27
189
Strength/ soundness measures
Insurance provisions
Profit after tax 6 $m
Unearned premium provision $m
Gross outstanding claims provision $m
Net assets $m
Loss ratio 8 %
Expense ratio 9 %
Combined ratio 10 %
Capital adequacy multiple 11, 12
POS 13 %
81
188
1,299
4,374
1,698
69.6%
26.9%
96.5%
1.67
75.00
183
55
128
1,211
4,319
1,504
68.7%
24.7%
93.5%
1.38
75.00
26
278
84
194
1,216
4,173
1,646
67.9%
25.7%
93.7%
1.38
75.00
328
(116)
205
78
127
4,105
8,228
4,920
71.3%
28.9%
100.2%
1.87
90.00
355
(138)
380
133
247
4,213
8,562
4,832
68.0%
27.4%
95.5%
1.67
90.00
369
(85)
528
146
382
3,361
7,043
4,517
64.4%
27.8%
92.3%
2.39
90.00
713
(161)
1,337
328
1,009
5,698
18,231
8,543
53.2%
32.4%
85.6%
2.40
94.00
671
(112)
1,212
287
925
6,842
18,426
7,786
55.8%
30.5%
86.3%
2.30
95.80
583
(98)
1,203
305
898
4,642
15,269
6,349
53.3%
29.4%
82.7%
2.40
94.60
216
(7)
172
48
124
3,184
7,272
3,814
73.9%
27.3%
101.3%
1.51/2.59
94.00
351
(16)
524
147
377
3,204
7,150
3,991
65.0%
28.4%
93.4%
1.66/2.72
94.00
403
7
699
196
503
3,121
7,036
4,120
62.6%
27.3%
89.9%
ND
94.00
1,451
(245)
1,983
535
1,448
14,286
38,105
18,975
64.2%
29.9%
94.1%
1,467
(239)
2,299
622
1,677
15,470
38,457
18,113
62.6%
28.6%
91.2%
1,544
(150)
2,708
731
1,977
12,340
33,521
16,632
60.1%
28.1%
88.2%
8
Loss ratio measures net claims incurred as a percentage of net earned premium.
9
Expense ratio measures underwriting expenses (including commissions) as a percentage of net earned premium.
10 Combined ratio measures net claims incurred plus underwriting expenses as a percentage of net earned premium.
11 The Capital adequacy multiple is calculated under APRA’s General Prudential Standards. For those groups which have a non-operating holding company the multiple is an estimation as APRA has not issued a requirement to calculate capital adequacy for such companies.
13 The probability of sufficiency (‘POS’) measures the likelihood that an amount set aside within the outstanding claims provision will be adequate to meet the actual out-turn of claims experience.
12 The Capital adequacy multiple for Suncorp Insurance Group is shown for Suncorp Insurance (excluding Promina) and for Vero Insurance (Australia only).
© 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation.
kpmg.com.au
For more information contact Brian Greig Insurance Segment Leader [email protected] +61 2 9335 7611
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2008 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Australia. KPMG and the KPMG logo are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. March 2008. NSWN00833FS.
