Hanover Insurance Group Inc (THG) 2010 Q2 法說會逐字稿

Morning everybody and welcome to our half year results presentation. I'd like to start just by running through the agenda for today. I'll give a brief introduction and then we'll pass over to Ken who will go through the results in more detail, followed by Bruce who will give you the underwriting updates and at the end I'll just come back with a few comments about outlook.

So starting with the introduction, our profit before tax is at GBP7m which gives an annualized return on equity of 3.1%. The main drivers of that results being the underwriting loss of GBP16.4m offset with investment return of GBP17.7m, which is 1.4% return on average funds. Interim dividend, in line with instructions that we've given earlier, is 1.3p. And that's in line with the 4p minimum full year dividend that we had forecast.

Giving an update on non-execs, we have appointed Tim Carroll to the Chaucer Syndicates Limited Board and that announcement has been made. And there are additional appointments that are pending. And we would hope within the next month to announce two more appointments to CSL and also the CHP, the Chaucer Holdings plc Board.

We did mention and make public our plans to review the domicility of the company. And having carried out that review, we are announcing today that we have no immediate plans to re-domicile and Ken will comment on that a bit more in his part of the presentation.

So that's the half year summary. As regards the second half, Bruce will go into more details. But it's a promising start to the second half, particularly with the increases that we're seeing on the Motor account and, post-losses, the increases that we're seeing on the Energy account. But as I said, Bruce will go into that in more detail later.

So on that note I'll hand over now to Ken who will go through the financial performance.

Good morning. Our gross written premiums for the period are flat at GBP493.3m. In common with others in the sector, premiums would have decreased compared to last year but for reinstatement premiums in the Energy book following the Deepwater loss. Obviously this has been a difficult six months for the market which has seen more than the usual amount of what we term big and catastrophe losses. These included the earthquake in Haiti, hailstorms in Australia, the loss of the Aban Pearl rig, riots in Thailand, as well as the more publicized losses in Chile and Deepwater Horizon. Our share of these market losses has been within our expectations and our early estimates for losses on Deepwater and in Chile have proved robust.

We have delivered a small profit to the period, but the first half produced an underwriting loss that was offset by investment return. Pre-tax profit for the period was GBP7m. Our combined ratio is 105%. Within the combined ratio, big and catastrophe losses have been more than 10% ahead of our budget for the period. And Bruce will give further detail on our divisional performance and particularly where we see rates and opportunities through the back half of 2010 and going into 2011.

Although gross premiums were flat, net premium for the period is, at GBP285m, is 6% down on the corresponding period last year which is a function of the increased quota share on Syndicate 1084 and of the reinstatement premiums payable on our outward book following the losses that I've noted. Our tax rate remains near to the UK headline rate following our decision not to redomicile. I will give a little more of the rationale behind this decision later. We have declared an interim dividend of 1.3p per share, and reiterated our intention to pay a total annual dividend of 4p, absent unforeseen circumstances.

Our investment return is less than half of that for the corresponding period last year. Bonds were the best performing asset class delivering an annualized return of nearly 4%. The portfolio in total delivered 1.4%. We do still carry a high multiple of investments to shareholders funds. And were our first half performance to be repeated for the second half of 2010, our investment portfolio would deliver a post tax return on equity of 8%. As interest rates increase, this figure should increase by about 3% for each 1% rise in rates.

As signaled at our meeting in March, the last remaining large tranch of hedge funds redeemed in April, leaving only GBP9.3m. These are a mix of mainly fixed income hedge funds that we will not redeem in one go but are paying down monthly or quarterly as underlying assets are redeemed. Equities are GBP2.5m. The total portfolio is GBP1.4b. So between them the hedge funds and the equities are actually less than 1% of the whole.

Our bond duration remains short at about 1.6 years. So we are well positioned to gain from the interest rate rise that surely must come, if not this year then next. The bond portfolio running yield has decreased as credit spreads have narrowed to 2.3% from 3% which we were about this time last year. Cash yields remain low.

Other operating income is pretty similar to last year comprising GBP2.6m from management of third party syndicates, GBP1.6m from profit commission and fees on in-house syndicates. This is where -- this is what we receive from names and through quota share arrangements. The balance is rental income from the sublet of part of this floor, and brokerage and commissions earned by our Nottingham broker and our Copenhagen cover holder.

Our net tangible assets per share figure has decreased by 3p in the period reflecting the profit after tax of GBP4.8m less a dividend paid of GBP14m.

Technical reserves have increased as a result of the increased claims activity in the period. Within our reserves -- sorry. Within our result is a relatively small release from prior year reserves. We have increased our reserve risk loadings during the period reflecting the application of our prudent reserving policy in what has been a period of heightened uncertainty.

Our gearing has reduced from the year-end position. This is not because we have reduced our available facilities, but a result of collateralization of GBP35m, part of our GBP51m letter of credit facility.

Group funds over and above ECA have fallen slightly in the period from GBP79m to GBP71m. Our ECA calculation has fallen to 46% from 48% and this is mainly the result of the US exchange rate weakening. For a number of reasons I do expect our ICA calculation to increase next year. This includes taking on the international liability team, the continued low interest rate environment and regulatory pressure. However, at 46% we still operate well below the Lloyds average of 73%. And whilst that gap might close a bit, I expect to operate considerably below the Lloyds average for the foreseeable future. We also expect that capital requirements will increase with the inception of Solvency II.

For 2011 it is likely we will look to fund any increased capital requirements by a mixture of increased letter of credit facility and quota share support. We always remain mindful of the need to maintain a reasonable level of capital buffer over and above regulatory requirements, and will balance our sources of underwriting capital to maintain a balance between potential returns to shareholders and risk exposure to our balance sheet.

Lastly I wanted to add a bit of detail to our decision to remain domiciled in the UK for the present. The Board considered advice from legal advisors, tax advisors and our corporate brokers. The key factors considered are noted in the interim statement. Cash flow was the main driver. This includes the loss of equalization reserves, accelerated tax payments following a move, and reduced ability to recover past tax losses. The government's announcement that the UK corporation tax rate is to fall over the next four years also helps to close the gap slightly against overseas companies.

The cash flow differences are estimated at more than GBP5m per annum and more than GBP35m in total. However, this is not a closed door for us. We do not know how equalization reserves will be treated for tax post Solvency II. We do know that they would likely disappear for the company market, so there must be doubt about their survival in the Lloyds market. Knowing what we do today, I do not expect I'll have to revisit this conclusion into a post Solvency II implementation, but the Board do expect to it to be kept under review given the uncertainties in the economy and in the tax regime.

Bruce will now take you through the highlights of underwriting.

Good morning. Thank you Ken. I'm going to run through our underwriting performance and would like to start with some very positive news. Rate increases are being achieved at present on over 50% of our underwriting portfolio. This has led to an overall rate increase on the portfolio of 2.8% for the whole portfolio for 2010. Our gross written premiums, as Ken said, are relatively flat at GBP490m, and our underwriting loss is, as again was said by Ken, GBP16.4m, leading to a combined ratio of 105%.

Clearly the first half year has experienced major losses. The Chilean earthquake, Deepwater Horizon, two of the largest. They were major contributors to our combined ratio as was the result of our UK division reporting a combined ratio of 111%. Referring back to the comment that I made earlier in the year, I'm pleased to say nonetheless that our forecast combined ratio for 2010 incepting business within the Motor portfolio still stands at under 100%. And again on a positive note, we've had very good performances in the first half year from our Aviation, Specialist Lines and Nuclear Divisions.

Putting a bit of meat on the bone, firstly looking at Property, it was an exceptional period for catastrophes. But I'm pleased to say that the loss estimates that we gave earlier in the year for the Chile quake and windstorm Xynthia remain unchanged. However, we have made an underwriting loss in the Property division of GBP7.2m, delivering a combined ratio of 110%. International rates in certain territories are nonetheless rising. That's particularly the case in the affected territories of South America, and certainly earlier in the year some of the European portfolios.

Energy, given the severity of Deepwater Horizon and the fact there were one or two other large losses, presenting an underwriting loss of GBP100,000 and a combined ratio of 100% I think is a credible result for the first half of the year. Our Deepwater Horizon loss of $25m across both our Energy and Marine excessive loss portfolios remains unchanged and I think is again a credible figure given our market share for energy.

It is worth mentioning at this stage that this was a highly complex risk where we chose to take a lower line than we might normally take for a large risk. And also that our reinsurance has performed as per plan, leading to certainly a net loss below our market share. As a result of this, exploration production rates have risen sharply. Immediately pre-Deepwater Horizon we were seeing rate reductions in the order of 10% and subsequently now rate increases of 13%.

Clearly we're in the midst now of the Gulf of Mexico windstorm season. And as far as we're concerned, certainly to the Energy Division, I'm pretty ambivalent about the result in that area. We have a very modest exposure, $11m net. We are clearly energy leaders across all energy classes. And regardless of the outcome of the Gulf of Mexico wind season, I think we're very well positioned to take advantage of the rate hardening that now prevails. This is further enhanced through our expansion into our overseas producing offices.

UK Motor, we produced an underwriting loss of GBP8.5m against a premium income that was flat compared to 2009. Given the level of rate increases that we've seen during 2010, this clearly reflects strong underwriting during the period, lower retention ratio, and very clear strong underwriting tactics in pulling out of certain classes, reducing our exposure to third party only and third party bodily injury risks, and generally speaking holding the line with regard to our level of rate increases.

The combined ratio of 111% includes approximately 2% for the recently announced increase in VAT. Once announced and calculated, we were able to pass this straight on to rate increase immediately subsequent to the budget. Our 2010 portfolio rate increase forecast now stands at 16.8%, this clearly compound to the 6.4% that we delivered in 2009. Private car, for example, rate increases that we're achieving for 2010 stands at something in the order of 28% blended between our private car products, again on top of 10% that we saw last year.

The actions that we started during 2009 continue in 2010 both from the perspective of risk selection and rate increase. As I mentioned earlier, we remain on target to deliver a combined ratio below 100% for our 2010 incepting business. It's also important now to recognize that the market hardening will continue. Certainly with some recent announcements with other insurers reducing their involvement, panel exits, this will generate significant underwriting opportunities through the balance of 2010 and I'm sure into 2011.

I want to talk now about how we feel that we are differentiated from our peers, to give you some comfort about our results. Firstly, we have consistently outperformed the general market, over a seven year period something in the order of 10% on average. We feel that we took significant steps in 2009 to address the issues that more recently are surfacing with some of our competitors.

We significantly strengthened reserves in 2009. This was further affirmed in 2009 when we introduced sizeable rate increases in June as a result of recognizing the fact that both claims farming the subsequent effects of credit hire were causing a real increase in claim numbers. I believe that we not only recognized this early in 2009, and strengthened reserves as a result, but also that we increased rates at that point in time and that we were ahead of the market.

What I've shown here with our combined ratio history really goes to demonstrate that. Ordinarily our results have been significantly better than the market's combined ratios. But as we move into 2009 you'll see that compared to the motor market as a whole our combined ratio was higher. We did start this trend of being firm on reserves in late 2008. But the ramp of it was taken in 2009.

How else have we been proactive? How did this come about? Claims management. We introduced a specialist fraud team in January 2009. We have been working with SIRA from the perspective of data washing. This has led to us recognizing six major fraud rings. All claims within those rings have been repudiated. Voice stress analysis was introduced. That again has led to a 38% go-away rate on theft and malicious damage claims. We also then refer claims where appropriate to Hill Dickinson, a law firm that is now housed in our offices in Whitstable under a pay-or-decline scheme. 68 cases there have gone to trial and we have won 77% of them.

All of this very proactive and I believe in advance of a lot, a large part of the market. As is the second point, our specialist credit hire team was created in January 2008. There we've adopted a proactive approach to reduce both duration and cost of credit hire claims.

All of those have led through also to the information being fed through to underwriting which manifested itself in rate increases, as I said, quite sharply in June 2009. Albeit we were increasing rates significantly even earlier than that in 2009 and, as I said, they continued through into 2010. What's more the fraud data allows us to identify post codes. It allows us to identify assureds through a whole variety of records, for example named assureds, credit card details, addresses, email addresses etc.

More recently I commissioned EMB to review our MI to ensure that we were capturing everything that allowed us to properly recognize claims trends, quantum, and then that we do take that information and pass it through to the underwriting side to properly price for the risks. Clearly pricing is key at this juncture.

Looking at our 2010 portfolio as a whole, I'm pleased to say that over 50% of our portfolio is currently experiencing rate increases of over 1%. Not surprisingly two tranches showing significant rate increases, UK Motor at present 16.8% and Energy at plus 5%. Certainly, compared to our competitors, I would suggest that a large part of the Lloyds portfolio would otherwise fall into the red category here which is currently showing rate decreases of greater than 1%. The detail of all of the rate movements here is contained in our interim statement.

Finally, looking at business developments and how we're taking things forward, the Energy division as I mentioned earlier, our international network has been extended and now includes representation in Scandinavia, Canada and the United States. We are market leaders on energy. Distribution is key. Recognizing where our clients are and how we can reach them is extremely important to us and I think this allows us to do that in a very effective way in addition to our office in Singapore.

The Property division has quite recently opened up an office in Buenos Aires to access Latin American business. Clearly, as you will appreciate, this is quite timely given the more recent earthquake activity in the region and subsequent opportunities. And finally our new International Liability division will be commencing for 2011. GBP40m premium income, and I'm pleased to say that the underwriting team is now fully in place.

I'd now like to hand over to Bob.

Thank you very much Bruce. Right, I'd just like to finish with a couple of points as regards the outlook and just reemphasize some of those points that we made earlier.

So with our portfolio we're probably unique inasmuch as 50% of that portfolio has experienced rate increases and we've mentioned that both for the Energy and for the Motor division.

The other thing is that we do continue to develop access to high quality business. Bruce had already mentioned about the new International Liability division and I think the recruitment of the team there has gone very, very well, and we're very pleased with those results. And that's not just on the underwriting side. That's also on the claims. The office in Latin America shows an opportunity. International Direct and Facultative is a big part of our portfolio and there are now opportunities as companies, [seeding] companies in Latin are forced to buy more facultative reinsurance because of restrictions on some of their treaties.

So all those are good, continuing developments for us as a business. And that does put us in a good position for 2010 and 2011. We're in a good position to take advantage of those market opportunities in classes that we are market leader.