Hanover Insurance Group Inc (THG) 2009 Q2 法說會逐字稿

Good morning, and thank you for coming. I will give you a brief summary, before Ken Curtis deals with the numbers in more detail, and Bob Stuchbery follows with underwriting figures and prospects.

We're reporting GBP17 million pre-tax, but actually, after reversing the IFRS foreign exchange anomaly, this represents a GBP52.6 million profit, which is extremely solid. The annualized return on equity is 8.6%. If the IFRS foreign exchange is reversed out, this would produce an annualized return on equity of 23%.

The two main factors behind the profits are, a very decent underwriting performance, particularly in Energy and Property, and a half year investment return of 2.7%. As regards the investment return, we do point out that there's a considerable one-off element to this, and that lower returns are expected for the second half as our de-risking takes effect.

The interim dividend of 1.3p is exactly what you'd expect from our revised policy, and we reiterate our forecast of 4p for the year. We're making progress with the determination of the Board, and have announced this morning the return of Bob Deutsch as a non-executive director.

In the meantime, the day-to-day running of the business is in the extremely capable hands of Bob Stuchbery, and both our short and medium term underwriting strategy is driven by Bob and Bruce Bartell. We await the FSA decision on Pamplona, which when we know it, will give us much more certainty.

Finally, we have had a promising start to the second half, reasonable investment returns, low claims, and price rises holding. Indeed, future underwriting returns will be enhanced as the business written at good rates in the first half earns through to the P&L in the second half and 2010.

Of course, we need to make the usual caveat that we're not yet halfway through the hurricane season. And on that note, I will hand you over to Ken.

Good morning. As you will see as I take you through the detail, this has indeed been a solid performance for the half year. We will look at the profit and loss account first, and then consider the impact the half year has had on our balance sheet.

Gross written premium has grown to GBP491 million. Pre-tax profit is GBP17 million, and there are three material elements to this; firstly, a strong underwriting performance of more than GBP28 million. Underpinning this, and underlying, is a combined ratio of 91.3%, ignoring the noise of IFRS. Secondly, an investment yield of GBP34 million. Offsetting this is nearly GBP36 million arising from the IFRS treatment of non-monetary assets and liabilities. Earnings per share are 2.7p.

Moving on to the income statement, which expands upon these headlines, we can see that every number is better than the corresponding number for last year, except for the reduced dividend that was highlighted at the time of our fundraising in February. There are three numbers that I want to pick out of this page.

Gross written premium is GBP491 million. This is an increase of nearly 40% on last year, and a premium rate achieved to date of more than 6%, better than in 2008. This is a point Bob Stuchbery will expand upon later.

Net earned premiums at GBP330 million are an increase of 38% on last year. 70% of our net earned premium for the half year relates to business we wrote in 2008. The second half of 2009 will see a greater proportion of our 2009 business earn-out, and all other things being equal, our current year combined ratio should continue to benefit.

The other number I'd like to highlight on this slide is the pre-IFRS profit of GBP52.6 million. The difference between this and our GAAP reported profit of GBP17 million is a non-cash difference, and is important when it comes to looking at our balance sheet and the amount of capital we have available to support underwriting. I will explain this later when we come to look at the balance sheet.

Over the page here is a short slide setting out in a bit more detail the impact of the non-monetary treatment under IFRS. Of the gain last year of GBP33 million, some GBP28 million has reversed in this period. Additionally, we have booked losses of GBP7 million relating to new business put on the books in 2009. These are effective mismatches on our balance sheet, and will continue to unwind if exchange rates remain the same, and will largely be unwound by the end of the year.

Our investment yield is GBP34 million, or 2.7%. We have analyzed our investment return between those assets we have exited or have given notice on, and our ongoing portfolio. Those assets we are exiting have performed well in the first half of the year. As market liquidity improved, we have seen a rally in assets that were marked down at the end of 2008. In the current low interest rate environment, I do not expect to achieve such good -- such a good second half year return.

The next picture shows the material change in our portfolio since the year end. The absolute return bond funds have been sold, and the hedge fund redemptions have continued in accordance with the profile we set out in our year end accounts.

Six of the 12 funds have now been sold. This is about 55% by value, and brings the overall exposure to below 5% of our total portfolio. A further GBP20 million redeems in September, and we expect our residual holdings to be immaterial by this time next year.

Over the coming period, we will increase the proportion of our funds invested in the bond portfolio, thereby increasing our exposure to credit as the hedge funds continue to unwind.

The security of our bond portfolio currently is analyzed on this slide. Bonds below investment grade are an immaterial part of the whole, and as this portfolio changes, we do not intend to increase our exposure to below investment grade bonds.

Turning to other operating income, this represents fees for managing capacity on behalf of third parties and the sublet of part of the fourth floor here in Plantation Place. It's an exciting but steady income. The capital requirement and the marginal costs are very low for this part of the business. And for me, the interesting statistic here is that this pays for about 20% of our cost base here in the London office.

Moving on to the balance sheet, the key figures to note are our net tangible assets, technical provisions for claims, and the net unearned premium reserve. Net tangible assets at GBP270 million compared to the year end position of GBP193 million. Our fundraising provided the capital. It enabled us to meet solvency losses from 2008, and to support growth in our underwriting capacity from GBP520 million to GBP581 million.

Technical claims reserves increased at December 2008 following Hurricane Ike. These have decreased since the year end to GBP824 million, mainly as Ike claims have been settled. We continue to reserve consistently and prudently.

Within technical provisions, the proportion that is risk loadings, i.e., that over and above our best estimate, has increased since the year end. The result of this policy is reserve releases in this period of GBP22 million relating to prior periods. Bob Stuchbery will talk more about this as he analyzes the combined ratios in the underwriting presentation.

Our net unearned premium reserve is GBP360 million, and that is an increase of 21% on the year end position. And I would again draw your attention to the fact that this is predominantly 2009 business which has been written at rates 6% better than last year.

The last point I want to leave you with is on my final slide, and this picture shows the resources that we have available to meet underwriting capital requirements and to meet losses outside of our normal budget. This is why our pre-tax -- our reported profit of GBP52 million pre-IFRS is important.

Our ICA and ECA represent our total underwriting capital at Lloyds, and is GBP303 million, or 48% of our underwriting capacity. Over and above this, we have a half year solvency surplus of GBP58 million, and in addition, the Group has working capital and other cash balances of more than GBP24 million.

Our budget for the year includes catastrophe provisions based upon long term averages, and these are broadly equivalent to an Ike sized loss to us. So far, the year has been catastrophe free.

All of these factors mean that our balance sheet appears robust when I look at its ability to withstand catastrophe ability -- activity in the second half of the year, and to meet our underwriting plans for 2010, and this is what our solid half year result has delivered.

Bob Stuchbery will now take you through the underwriting results.

Good morning, everybody, and we've had a very strong underwriting performance. As Ken mentioned earlier, our gross written premiums were up 38.2%, and that on a constant currency basis is just over 18%. We've achieved healthy rate increases to date, and we're forecasting rate increases of 5.9% for the duration of 2009; underwriting profit of GBP28.6 million, helped by a benign claims activity in the first half of the year, particularly on risk losses. Our claims ratio part of the combined 56.7% and reserved releases have contributed 5.1% to that combined ratio.

If you look at that broken down in more detail, the 56.7% claims ratio compares to 62.1% at the same time last year, and the 6.7% release that I mentioned earlier has come from prior years best estimate.

The reported combined ratio of 91.3% compares to the current year estimate -- best estimate combined ratio of 96.1%, and that's referenced against the 102.8% we showed last year.

A period of continuing reserve releases; we're releasing GBP22.2 million in the half year. The full year release last year of GBP74.1 million was affected by the Syndicate 4000 release, and the change in reserving for cat claims, which contributed GBP24.5 million and GBP11.8 million respectively. So net of those one-off adjustments, the full year releases last year would have been GBP37.8 million, so that's a continuing trend of releases in the half year.

If you look at it from a rating activity point of view, the green bar here is what we were originally predicting the rating environment for 2009. That was revised, which is the middle bar, with our SPF that was submitted, resubmitted in February '09, and tied up with the information that we gave at the fundraising, and that's our forecast for the full year. In actual fact, to date we've achieved just over 6% increase, and that's front loaded somewhat with reinsurance business which has higher rates. So as I say, that will reduce back to around 5.9% for the year.

So we've seen increases in all of our major classes of business. The capacity increased to GBP634 million for Syndicate 1084, and that's assisted by the GBP50 million quota-share arrangement that we announced a couple of months ago. And overall within our numbers, we're taking account of some of the additional risks that come from a recession, and that's been added to our loadings.

This is the over time rate movement chart showing that 5.9% expected for 2009. Broken down, there's plus 6.4% for our Motor business, and plus 5.9% for the Lloyds-based commercial book. You can see that continuing trend puts us at a very good point in the underwriting cycle.

The next slide just shows the breakdown of our business and the increased 2009 estimate over 2008. It was based on capacity, and you'll see at the total level an increase from GBP436 million up to GBP570 million, a 31% increase. Varying degrees of increase; pointing out a couple, Property North America, although affected slightly by rate of exchange, in fact showing some underlying increase, and you'll see when we get into the individual divisions that's an area that we've seen good healthy rate increases. On the Aviation side, this is a prediction that we will be writing more income at the back end of this year, the main renewal season for the airline account, and again, I'll go into a little bit more detail when we get to the specific units, the first of which is the UK.

The UK, as you know, predominately the UK Motor business, but we now do have, and have had, the successful launch of a UK Commercial division, where we're trying to use the relationship that we've got with high street brokers around the UK to sell particularly PL and EL insurance, and we see that expanding into property some time next year.

So we've seen an improving UK market, and you can see from a combined ratio sitting at GBP107.6 million the current year ratio sits at GBP105.4 million.

The other bright spot in this market is the fact that we've seen increases in the fleet side, fleets been depressed relative to private car, but we are seeing the first signs of that now showing an uptick.

The underlying combined ratio, if you look at the 2009 income written -- earned on income written in 2009 is currently sitting around 100%, so that's a definite sign that we are at the bottom of the underwriting cycle for UK Motor, and with the increases that we're getting now in excess of claims inflation, we should see some healthy numbers develop.

On the Marine side, a combined ratio of 97.8%. A good rating environment for hull and liability, and we're taking advantage of that. The comparison of the 97.8% and the 74.7% is distorted somewhat because we did have quite large releases at the half year last year. If you look at it for a like-for-like on a current year basis, the current year combined ratio of 93.7% compares to 89.2% at the same time last year.

Moving on to Energy, and if you remember from my half year presentation last year, Energy was an area that we saw some increased claims activity and some reserves going, particularly on our oil account related to pipeline laying, and that was the combined ratio that we showed of 125.7%. The combined ratio now at 78.3% is actually helped by some of those reserves that we put up at the first half of last year now unwinding favorably.

Within this account, we've continued to reduce back our Gulf of Mexico and we would say that the de-risking of that portfolio is now complete. The other hot spot here for Energy is the fact that we've employed a new casualty team to work with our first party underwriters to give some diversification within this class.

On the Aviation, I mentioned that we're expecting an increase in income this year. We've had another good year here. The 86.1% compares favorably with 92.3%, and some of that's helped by back year releases, which is a consistent trend. We're seeing rates improve. We're expecting some improvement to come -- better improvement to come later in the year. We don't at the moment write major airline business. We've always felt that this is too competitive. Because of that, we haven't seen exposure to Air France Continental, etc., which is the -- which are the losses which are going to push rates up. But we have had plans, and do want to consider writing some airline business as those conditions do improve.

On the Property side, an excellent combined ratio, 83%, and you'll see there the rating environment quite healthy. Even on the international side, we're seeing rate increases now of just short of 6%, and on the Property side, driven a little bit by the Property reinsurance blending out at 9.8%. So a good underwriting performance, and we are continuing to try and diversify the book away from the US into more international territories.

Specialist Lines, which is our liability portfolio, a combined ratio of 88.2%. And as is the trend on our Specialist Lines area, this is made up of a strong reserving for the current year of accounts, which is assisted by releases from the past years; those old years continuing to develop well. The market is pretty mixed when you come to rating environment; the blended rate increase across this portfolio only 1.8%. But the financial institutions classes are seeing much better rate increases, but there are still some pockets of weakness, as we say here, in some of the other areas.

Nuclear; as always, there's not a lot to say about Nuclear. It's an excellent result. Income steady at 11.8%, and as we say here, there's just been a loss free period, which we're benefiting from with that combined ratio of 31.9%.

Turning now to the other part of our business, which is our Syndicate Participations, Syndicate 4242 had a profitable half year, and that's benefited from reduced US cat activity. Syndicate 1274 is developing well. That was an account that was set up for 2008. We've got an investment through their Bermudian-based holding company, and that business is developing and expected to grow into 2010.

This is still a part of the business that we're developing. We've got an expertise in managing third party syndicates, and we're looking to manage more. The model we've adjusted slightly on the basis that we now no longer look to commit capital to these participations, and just provide the management services.

Just an update now on Syndicate 4000. As you know, this was a major part of our presentation [at] 31/12. And you'll see here a breakdown between the outstanding losses, the earned IBNR and un-earned IBNR as at the half year, the balancing number to some degree here being the GBP7.9 million of claims paid in the first half. The trend has been that we've seen releases from the prior years, and those releases we've put back into reserves for the 2007 and 2008 year account, so you can see at the total reserve level, standing at GBP114.3 million.

And on that, I'll hand over to Ewen for the summary.

In summary, we've had a good half year in all aspects of the business, and have de-risked our investments, whilst at the same time, realizing healthy gains. We have also been able to increase the capacity of Syndicate 1084 to GBP634 million through our own resources, and through a GBP50 million capital reinsurance. Most important is the point that Ken made as regards our capital base, which has been strengthened by GBP50 million of pre-IFRS profits, which means that we are in good shape to take advantage of healthy rates for the second half of the year and into 2010.