Australian & New Zealand Operations business review

Premium rate increases, tightened terms and conditions, enhanced underwriting discipline and claims management initiatives contributed to an improved performance, including a 2.5% 1 reduction in our attritional claims ratio.

Pat Regan
Former Chief Executive Officer   •   Australian & New Zealand Operations

Gross written
premium (US$M)

4,024

2% from 2016 2
Net earned
premium (US$M)

3,480

2% from 2016 3
Underwriting
result (US$M)

283

13% from 2016
Insurance
profit (US$M)

438

5% from 2016
Combined
operating ratio 4

92.0%

2016 92.4%
Insurance
profit margin

12.6%

2016 12.3%
  1. Excluding lenders’ mortgage insurance (LMI).
  2. Down 1% on a constant currency basis; however, up 1% excluding the impact of regulatory changes to NSW CTP and the Emergency Services Levy.
  3. Down 1% on a constant currency basis.
  4. Combined operating ratio adjusted to exclude the impact of changes in risk-free rates used to discount net outstanding claims.

2017 Overview

We took decisive action in the second half of 2016 and throughout 2017 to address deterioration in performance and implemented a comprehensive remediation plan covering specific actions for each of our 50 business “cells”. A strong governance framework has supported the execution of our plan with each cell regularly reviewed to ensure the remediation actions are being implemented and are generating the desired outcome.

Remediation progress has been encouraging. Pricing initiatives have delivered an average premium rate increase (excluding CTP) of 6.1% across our portfolio compared with 0.2% in the prior year, with higher rate increases achieved across our short-tail personal, commercial lines and workers’ compensation portfolios. Underwriting discipline has been reinforced through the continued tightening of policy terms and conditions (for example increased policy deductibles for clients with poor claims history) and improved risk selection. We have also started to observe benefits from our claims management initiatives including greater use of preferred suppliers and an increased focus on salvage and subrogation.

Strong distribution partnerships have enabled us to lead the market in remediation initiatives. Despite double digit rate increases across numerous portfolios, premium retention has remained broadly stable at around 82% and is a testament to the strength of our franchise. We have decisively reduced exposure to those risks for which we have limited appetite in selected lines such as commercial property.

There is ongoing interest in affordability and reform across all levels of Government. In NSW, the new Government has revisited reforms to CTP and the Emergency Services Levy, the ACCC is reviewing affordability of insurance in Northern Australia and the Federal Government has commenced a Royal Commission into financial services.

Operating and financial performance

Underwriting performance

Australian & New Zealand Operations reported a combined operating ratio of 91.9%, down from 92.7% in the prior year.

Excluding the impact of changes in risk-free rates used to discount net outstanding claims, the combined ratio improved to 92.0% from 92.4% in the prior year, reflecting an improvement in the attritional claims ratio partially offset by an increase in the expense ratio largely due to a reduction in managed fund fee income.

The underwriting result benefited from $158 million of positive prior accident year claims development equating to 4.5% of net earned premium, broadly in line with the favourable claims development reported in 2016.

Our Australian business experienced a high level of weather-related catastrophe claims from Cyclone Debbie and significant storm frequency, albeit that the net cost of large individual risk and catastrophe claims was in-line with expectations due to divisional aggregate reinsurance recoveries.

Our lenders’ mortgage insurance (LMI) business reported a combined operating ratio of 50.7%, up from 34.9% in the prior year, largely reflecting an increase in the net claims ratio to 33.0% from 21.2% previously. The net claims ratio deteriorated due to a moderate increase in arrears rates, primarily related to properties located in mining towns in Western Australia and Queensland, coupled with an increase in the propensity for claims in arrears to generate claims (a reduced “cure” rate) and an increase in average claims severity. The commission ratio increased to 4.5% from 1.8% in the prior year, reflecting a lower exchange commission following the non-renewal of our external quota share reinsurance treaty.


Gross written premium and net earned premium (US$M)
Gross written premium and net earned premium

Combined operating ratio (COR) and insurance (loss) profit margin (IPM) (%)

 

 

Combined operating ratio

Underwriting result

FOR THE YEAR ENDED
31 DECEMBER
2017 2016 2015 2014
2013
Gross written premium US$M 4,024 3,933 3,787 4,392 4,805
Gross earned premium US$M 4,135 3,924 3,753 4,386 4,626
Net earned premium US$M 3,480 3,410 3,282 3,834 4,028
Net incurred claims US$M 2,168 2,172 2,054 2,242 2,347
Net commission US$M 525 511 481 532 572
Expenses US$M 504 477 461 562 623
Underwriting result US$M 283 250 286 498 486
Net claims ratio % 62.3 63.7 62.6 58.4 58.2
Net commission ratio % 15.1 15.0 14.7 13.9 14.2
Expense ratio % 14.5 14.0 14.0 14.7 15.5
Combined operating ratio % 91.9 92.7 91.3 87.0 87.9
Adjusted combined operating ratio 1 % 92.0 92.4 91.1 85.4
Insurance (loss) profit margin % 12.6 12.3 14.2 17.7 17.2
  1. Combined operating ratio adjusted to exclude the impact of changes in risk-free rates used to discount net outstanding claims. Management-basis results were not reported in 2013.

Premium income

Gross written premium increased 2% to $4,024 million from $3,933 million in the prior year.

Gross written premium decreased 1% on a constant currency basis. Healthy premium rate increases across the majority of the portfolio were more than offset by the impact of regulatory changes to the NSW CTP scheme (which led to material premium rate reductions) and the Emergency Services Levy coupled with remediation activity in our workers’ compensation and commercial property portfolios.

Pricing initiatives resulted in an average premium rate increase (excluding CTP) of 6.1% for business renewed in 2017 compared with an average rate increase of only 0.2% last year. Higher rate increases have been achieved in many of our short-tail lines of business with a 9.7% rate increase in commercial property, 8.1% in workers’ compensation and 8.4% in commercial motor. Importantly and despite our focus on portfolio remediation, premium retention levels remained steady throughout the year at around 82%.

Although retention was relatively stable, new business volumes were 18% below 2016 levels, particularly in short-tail personal, commercial lines and workers’ compensation, reflecting our unwavering commitment to underwriting discipline and premium rates which more accurately reflect the level of risk.

Net earned premium fell 1% relative to the prior year on a constant currency basis due to the purchase of additional reinsurance from the Group’s captive reinsurer, Equator Re.


Gross earned premium by class of business
Gross written premium

Claims expense

Australian & New Zealand Operations’ net claims ratio decreased to 62.3% from 63.7% in the prior year, primarily due to a further material improvement in the attritional claims ratio.

The attritional claims ratio improved to 58.4% from 60.2% in the prior year, driven by NSW CTP, trade credit and a broad-based improvement in the profitability of most of our short-tail personal and commercial lines which was partially offset by a cyclical deterioration in LMI. Excluding LMI, the attritional claims ratio improved by 2.5% compared with the prior year.

Although lower than the prior year, gross catastrophe claims were higher than expected due to Cyclone Debbie, the February storms in NSW and storm activity in Victoria and NSW in December. The gross cost of large individual risk claims improved relative to the prior year reflecting the benefit of remediation activities, most notably with respect to commercial property. The net cost of large individual risk and catastrophe claims improved to 4.1% of net earned premium compared with 4.4% in the prior year, reflecting enhanced divisional aggregate reinsurance protection.

The underwriting result benefited from positive prior accident year claims development of $158 million or 4.5% of net earned premium, broadly in line with $147 million or 4.3% in 2016. Continued positive claims development reflects currently lower inflation and frequency experience than is factored into the reserving assumptions for our long-tail products including NSW CTP, workers’ compensation, liability and professional indemnity coupled with benefits from our claims management initiatives.

Risk-free rates used to discount net outstanding claims liabilities increased slightly over the year resulting in a $2 million claims benefit compared with a $9 million charge in the prior year.

Commission and expenses

Australian & New Zealand Operations’ commission ratio increased slightly to 15.1% from 15.0% in the prior year, reflecting minor movements in product mix.

The expense ratio increased to 14.5% from 14.0% in the prior year. On a constant currency basis, underwriting expenses were $13 million higher than the prior year driven by an investment in claims and underwriting initiatives coupled with reduced workers’ compensation managed fund fee income following the non-renewal of our Victorian WorkSafe contract and changes to our NSW managed fund contract.

Outlook

The insurance market will remain competitive; however, the premium rate cycle is hardening as our competitors respond to higher claims costs and continuing low investment returns. We anticipate premium rate increases at least in line with claims inflation and in some products at levels above inflation.

We anticipate a further improvement in our attritional claims ratio during 2018 through increasingly targeted rate increases and portfolio remediation actions, including benefits emerging from our investment in pricing capability and the utilisation of improved rate adequacy tools and monitoring across the business.

We will maintain our focus on expense management and have established an operational excellence program to improve the end-to-end efficiency of our core processes and automate and digitise activities where feasible.