If's Q3 Report

If P&C Insurance Third Quarter Report · Expense ratio down, claims ratio up · Imbalance between premiums and claims · Positive cash flow continues · Investment result YTD MSEK 144 (current value) Group result Q3 2001 Q3 2000 9 M 2001 9 M 2000 highlights Gross written 5 412 4 397 19 614 15 538 premiums Operating result -30 237 10 70 incl. normalised investments Operating result -1 168 22 -1 812 -357 Combined ratio 109.7% 106.1% 109.8% 109.9%* *Excluding one-time launching cost of MSEK 170. Comments from Bo Ingemarson, CEO of If "The third quarter has witnessed several terrible events. We have not suffered direct losses from the atrocities in the US but the event caused global turbulence, to which If is not immune. The equity markets were notably impacted during the third quarter which resulted in a weak investment return for If. We have made sizeable reallocations from equities into fixed-income investments during 2001 until August. The total investment return year to date was slightly positive. However, our equity investments produced a negative total return which to a large extent consisted of unrealised losses. This extreme effect is clearly the main driver behind our bottom line loss. The combined ratio is still at an unsatisfactory level. To correct the negative imbalance between premiums and claims, especially within business area Private, actions have already been initiated and further are planned, to reach our combined ratio target of 103%. Reinsurance will most likely become more expensive, resulting in an industry-wide necessity to increase direct insurance premiums further. Yet, there are positive news as well. Our operational cash flow at the end of third quarter was close to two billion. More customers choose If as their insurance company. We see improved profitability in the underlying business in most business areas and a reduced expense ratio. Also, the beginning of the fourth quarter has witnessed a rebound in equity markets globally." Group results 1) Premiums earned for the first nine months 2001 were MSEK 16 169 (MSEK 12 976). Claims incurred were MSEK -14 248 (MSEK -11 247) and expenses were MSEK - 3 510 (MSEK -3 180). The statutory operating result before tax was MSEK - 1 812. The claims ratio was 88.1 per cent (86.7) and the expense ratio was 21.7 per cent (23.22). The combined ratio was 109.8 per cent (109.92). Premiums earned for the third quarter 2001 were MSEK 5 684 (MSEK 4 499). Claims incurred were MSEK -5 076 (MSEK -3 799) and expenses were MSEK - 1 160 (MSEK -975). The statutory operating result before tax was MSEK -1 168. The claims ratio was 89.3 per cent (84.4) and the expense ratio was 20.4 per cent (21.7). The combined ratio was 109.7 per cent (106.1). Group result highlights Q3 Q3 2000 9 M FY (MSEK) 2001 2001 2000 Premiums earned 5 684 4 499 16 169 17 545 Claims incurred -5 076 -3 799 -14 -15 248 220 Operating expenses2 -1 160 -975 -3 510 -4 115 Underwriting result -552 -275 -1 589 -1 790 Normalised investment 625 545 1 840 2 145 result3 Operating result including -30 237 10 247 normalised investment result Investment result -513 330 18 1 079 Operating result -1 168 22 -1 812 -989 Claims ratio 89.3% 84.4% 88.1% 86.8% Expense ratio 20.4% 21.7% 21.7% 23.4%2 Combined ratio 109.7% 106.1% 109.8% 110.2% 2 Cyclicality Property and casualty insurance is subject to cyclical variations. When the economy is at its peak one often sees an increased frequency of claims and higher average cost of claims. If is thus subject to the business cycle in the countries in which it operates. In addition, spring and summer usually have a lower claims frequency than late autumn and winter. Furthermore, because equity investments are fully marked to market in the profit and loss account, short-term fluctuations in equity market returns affect the statutory operating result. Equity investments have historically outperformed fixed-income investments. Business area comments Private had net earned premiums in the third quarter 2001 of MSEK 2 854 (MSEK 2 167). The combined ratio was 112.4 per cent (108.5), with an expense ratio of 19.2 per cent (22.1). Significant premium increases have been achieved. Despite the premium increases over the last year, there is still an imbalance between premiums earned and claims incurred. The imbalance had an adverse impact on Private's combined ratio development, which deteriorated compared to the same period last year. As in the second quarter, water damages in Home insurance were at a very high level compared to previous years, in Norway in particular but also in Sweden. Industry statistics point to this being a common market phenomenon. Both Norway and Northern Sweden experienced flooding late summer. Furthermore, Motor in Sweden suffered mainly from increased claims frequency compared to last year but also the average claims size increased. Private continued to gain new customers in all its markets. The retention of customers was high. The expense ratio developed positively as the restructuring of distribution channels progressed satisfactorily, including manning reduction in distribution Norway. Private will sharpen its focus on profitability before market share even further. Several premium actions have already been initiated. Retention will be emphasised before new sales. The aim is to correct the imbalance between claims and premiums during 2002. Commercial had net premiums earned of MSEK 1 742 for the third quarter 2001 (MSEK 1 493). The combined ratio was 102.5 per cent (108.7), with an expense ratio of 21.8 per cent (20.8). Commercial continued its combined ratio improvement despite a higher level of large claims than normal, both on a nine month basis and in the third quarter isolated, within Property in particular. This effect was offset by a stable claims development in Motor and improved profitability in Workers' Compensation. As planned, the number of customers stabilised and sales through brokers and service centres in particular made the customer base increase at a desirable pace. Increases in premiums have been accepted by the market, however the WTC-atrocities will most likely have implications on reinsurance expenses in the future. This will eventually affect premiums as well. Industrial Risk Solutions, IRS, had net premiums earned of MSEK 680 for the third quarter 2001 (MSEK 509). The combined ratio was 112.9 per cent _______________________________ 3 In addition to the statutory results, If shows an operating result based on a normalised investment result as well as the statutory investment result. This approach is taken because as equity investments are fully marked to market in the profit and loss account, short-term fluctuations in equity market returns affect the statutory operating result. In calculating the normalised investment result for Q3 2001, a total return of 5.8% was used, based on If´s applicable investment mix, and assuming a bond yield of 5.2% and an equity risk premium of 3.5%. (80.6), with an expense ratio of 25.3 per cent (18.7). IRS continued to report a stable development of the combined ratio, ending at 111.8% for the nine months 2001. The reason behind the stabilised level was mainly the successful implementation of higher premiums and selective pruning in the portfolio. Despite higher premiums IRS has been able to gain market shares in a tough market due to the high level of risk solution competence. The claims ratio was stable and during the third quarter as well as for the nine months large claims were on a normalised level. IRS will be affected by the US terrorist attacks through changes within the reinsurance market. Most probably there will be reduced reinsurance capacity and higher premiums in the market, however it is too early to make any detailed predictions. Marine & Energy had net earned premiums in the third quarter 2001 of MSEK 411 (MSEK 331). The combined ratio was 98.3 per cent (116.6), with an expense ratio of 21.0 per cent (25.4). Marine continued to report improving combined ratio due to a higher quality of the Marine portfolio after one year of consolidation. Within Energy, large premium increases have been implemented. There are now clear signs of significant market hardening, within both Marine and Energy, giving a better balance between premiums and claims. Going forward, Energy will focus on upstream underwriting and will phase out pure downstream insurance and integrated packages. Investments The general insecurity in the global economic development lead to a fall in the equity markets world wide from May. The downturn was accentuated by the terrorist attacks and the outbreak of war in September. The investment result for the period was severely impacted. This was despite the fact that equity markets recuperated during the last week of September and despite the remix of If's investment portfolio towards lower share of equity during the summer. The statutory investment result for the first nine months was MSEK 18. The total return, (current value) including changes in unrealised gains/losses on fixed-income investments carried at amortised cost, was MSEK 144, corresponding to a return of 0.3 per cent. Total investment assets at the end of third quarter was SEK 41 billion. The total portfolio split excluding assets in the run-off operations as of the third quarter was 13 per cent equity and 87 per cent fixed- income. The Run-off investment portfolio is 100 per cent allocated to fixed-income investments. Exchange Rate Effects Translation of income and expenses in foreign currencies such as NOK and USD into SEK was performed at higher average exchange rates than for the first nine months of the year 2000. MSEK 248 higher operating expenses, MSEK 759 higher claims incurred and MSEK 898 higher net premiums earned were attributable to exchange rate effects. Changes in Net Asset Value The Net Asset Value decreased from MSEK 8 237 to MSEK 7 629. During the first nine months, If's shareholders have in total made capital contributions of MSEK 1 100. Interim result for If P&C Holding AB If P&C Holding AB is a pure holding company with no business activities. The pre-tax result for the first nine months 2001 was MSEK -69, mainly from currency hedging of equity capital in foreign group companies. This interim report has been compiled using the same accounting principles as in the Annual Report for 2000, except in relation to IT expenditures and deferred tax assets, as described in the appendix. Solna, Sweden, October 30, 2001 Bo Ingemarson President and CEO For questions please call: Bo Ingemarson, CEO tel: +46 8 788 45 77 Tom Rathke, CFO tel: +46 8 788 32 25 Investor relations: Nils Henriksson tel: +46 8 788 12 82, e-mail: nils.henriksson@if.se Susanna Halse tel: +46 8 788 24 28, e-mail: susanna.halse@if.se Press contacts: Helena Dyrssen tel: +46 8 788 23 35 A teleconference will be held on Tuesday 30 October, 13.30 Stockholm Time. The invitation is published under Press Service on If's IR website. www.if-insurance.com www.if.se APPENDICES All SEK figures are expressed in millions. The Volvia portfolio is included as from 2001. Comparative numbers for the same period previous year in parenthesis. 2 Excluding Q2 2000 one-time launching expenses 3 In addition to the statutory results, If shows an operating result based on a normalised investment result as well as the statutory investment result. This approach is taken because as equity investments are fully marked to market in the profit and loss account, short-term fluctuations in equity market returns affect the statutory operating result. In calculating the normalised investment result for Q3 2001, a total return of 5.8% was used, based on If´s applicable investment mix, and assuming a bond yield of 5.2% and an equity risk premium of 3.5%. ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2001/10/30/20011030BIT00660/bit0001.doc The full report http://www.waymaker.net/bitonline/2001/10/30/20011030BIT00660/bit0001.pdf The full report http://www.waymaker.net/bitonline/2001/10/30/20011030BIT00660/bit0001.xls Appendix