MS&AD Insurance Group Holdings, Inc. (8725) Earnings Call Transcript & Summary

Hello, I'm Andrew Carrier and I'm the Chief Executive Officer for MS Amlin's Lloyd's Business, MS Amlin Underwriting Limited. I'm delighted to be able to talk to you today about the improvements we have delivered and the exciting prospects for the future of our business. I want to tell you about the improvement in our business performance and explain the relationship between what we have done and how this is materializing in our key business metrics. I'll give you an insight into our underlying business strategy and how this supports, how we do business and informs our expectations for the future. The picture telling the story of our improvement is clear from the outset when we start to look at our business ratios, and a key metric is our net combined ratio, which as you can see is expected to drop considerably since last year to 85%. The ratio began to reduce in 2019, finally moving under a 100% in 2021. However, the changes really began to make a material impact over the last two years with the strategic changes we have introduced. It's important to remember these figures are on an underwriting year basis rather than a financial year basis, which might be something you're more familiar with, which is why the final bar on the right-hand side of the graph is in a different shade of green as the earlier years are more fully earned, whereas the 2023 year figures are more on an expected basis. This positive story continues in the metric that matters most, and that is the profit for our shareholder, which we anticipate will leap to over GBP 220 million this year. As you can see, we are looking at a very steep and material improvement compared to last year and an absolute reversal of fortune when we compare the position to just a few years ago. Once again, the final figure of over GBP 220 million of net profit is our forecast position for the 2023 underwriting year. Whilst we have delivered some significant initiatives this year, and I will cover some of that later, the biggest lever we can control in our business, and in fact any insurance business is the Attritional claims ratio. In other words, those non catastrophe, higher frequency claims that occur throughout the year and continue to take smaller bites out of our financial position. I see this metric as the primary indicator of the underlying health and quality of our portfolio. Historically, the unacceptable results of 2018 and 2019 were put down to higher than expected natural catastrophes. However, in one sense, I disagree. Our attritional loss ratio was very poor at the time, and the impact of catastrophes was amplified by this underlying weakness in the portfolio with greater control and stricter processes. We have returned this vitally important measure to a more satisfactory figure, and we will continue to apply pressure in this area to maintain the momentum. The London market was for many years accused of underpricing and arguably undervaluing the vital insurance and reinsurance cover it offers to business around the world in the face of pressure from brokers and clients. However, collective pressure from market participants and Lloyd's has seen a significant change in rates, and we continue to see rates harden across our product lines. This upward pressure on rates has been something we've been able to take advantage of, and this slide is adjusted to illustrate the rate movement we have achieved over recent years across our portfolio. Obviously, this upward improvement in rates has a commensurate impact on the improvement of our loss ratio, but more important than this, the hardening market with its dislocation has allowed us the opportunity to significantly and quickly reposition our portfolio to achieve a change in profitability. During the course of 2023, we have been focused on a number of key deliverables including the sale of our historic liabilities. This process saw the sale of over GBP 1 billion of prior year liabilities to a recognized leader in the so-called Legacy Market. The sale of these liabilities was the largest ever transaction of its kind in the Lloyd's market, and conveyed a powerful message about the breadth of our ambition and the fact that we are not afraid to make bold decisions that fundamentally change the nature of the game for MS Amlin and importantly for its future prospects. Although this legacy transaction cannot be repeated, the results I'm showing you are not simply a one-off. There is durability built into our strategy and plan and the outlook is really robust. As I mentioned, the control we have over our attritional claims and the associated loss ratio means we have stabilized the claims and financial foundation upon which the business operates, and we have every expectation that this will produce even stronger results in 2024. We continue to review and monitor our loss reserves and everything we are seeing shows us that the development of our actual claims versus our expected claims is trending favorably. We've had a relatively benign catastrophe season so far, but more importantly, we have planned, accounted for and modeled for events such as this, and by managing our risk selection carefully and reducing our exposure to higher frequency claims, we are in a very positive position. To summarize, all our key ratios illustrate my previous points. Our business is in great shape and the forecast actuals for Q3 are undeniable. We have improved our risk selection. We have improved our claims management. We have liberated ourselves from the financial drag of the historic underwriting decisions and liabilities of the past, and we expect to make a significant contribution to our parent company's profit position for 2023. In terms of business strategy, it is a question of evolution of what you will have heard about last year, and continuity is important to our shareholder, our people, and our business. Our strategy is focused on four key areas, underwriting, finance, and capital management, operating efficiency and people, and these remain valid. However, rather than viewing them as independent pillars, since becoming Chief Executive Officer, I have shifted the focus, so three of them are more aligned to supporting our underwriting and claims activities. Quite rightly, we have remediated our governance model to ensure we do not repeat the mistakes of the past, and these efforts have successfully dealt with the issues and are now embedded within the organization. While control remains essential, we must ensure decision-making focuses on action, not just process compliance. An appropriate balance is needed for successful outcomes, and under my leadership, our primary focus is on outcomes rather than processes. This subtle but important change of emphasis in our strategy is evident in the way our business operates to support our key market facing activities. Underwriting and claims teams now operate as a much closer and cohesive unit, recognizing and working to leverage the strengths of both parts of the complementary equation. They work as a team when dealing with business placement and respond as a team when managing both attritional losses and major claims. This change has been recognized by our brokers who we brought together earlier this year to launch our new claims proposition. The concept is neatly captured in the acronym Trust, alongside other changes we have made to our claim service, such as outsourcing repetitive manual tasks, utilizing technology and implementing robotic process automation to reduce response times and improve efficiency have all made a measurable impact on claims performance and a positive impact on broker engagement. If I unpack the strategy a little more, you begin to see how it is applied to key divisions and aspects of our business. I'm not going to talk you through every aspect of this slide, but what you're looking at is how our vision of the business underpins our purpose statement, continuity in an uncertain world, and sets out in simple terms what we are striving for. We want to be market leading in our market facing services, underwriting and claims. When it comes to finance and operations, we are delivering a right first time model because we do not need to be market leading in this area, adding more expense than is necessary to deliver a good service that lets our market facing teams maximize their skills for the benefit of our clients. It is more important that our processes are simple, quick, and robust, leaving time to unlock the value that comes from our highly capable people, allowing them to use their expertise to solve our client's problems and really add value. This leads us onto people and culture. We want people who are happy to use their skills to interpret data and information and apply their judgment in a highly competitive industry. As a participant in global specialty risks, we are inevitably exposed to some of the most significant events in the world, whether naturally occurring catastrophes or geopolitical in nature. In Ukraine, we were deliberate and careful in our selection of the types of risks we underwrote and the location of those risks. We concentrated on heavy industries and in critical infrastructure that even if it were under threat, would be unlikely to be destroyed by either side in a conflict. We avoided risks that were too close to perilous borders or regions that were clearly going to face the brunt of any military activity. This approach resulted in a relatively mild impact thus far, and although we have incurred loss advices in the region, these claims have emerged very manageably during the course of the year. The experience of Ukraine affirmed our position when it came to risks in other geopolitically unstable regions. Our underwriting approach is proving to be beneficial given recent events in Israel and Gaza where we have again chosen to support heavy industry in the northern areas of Israel and avoided risks closer to the border with the Gaza Strip. In terms of natural catastrophes, we took the very conscious decision to retain a measured portion in these types of exposures. However, we deliberately removed ourselves from the frequency volatility where the increase in natural catastrophes alongside our attachment in reinsurance programs was exposing us to too many claims too often. As well as this, we have stopped writing some of the tail end risks where the low premiums simply did not compensate adequately for the latent volatility of these remote catastrophe risks. As far As next year is concerned, there are a number of key measures which talk to a story of continued improvement and a positive return to our shareholder. However, rather than go through each one, I would like you to focus on two of them. Our 2024 business plan includes top line growth to take us back to being a Lloyd Syndicate that will underwrite over GBP 2 billion of premium representing growth of 15% when compared to 2022, putting us back into an elite group of syndicates with the ability to write GBP 2 billion or more. Significantly, Lloyd's approved our business plan quickly and without challenge. This is a huge symbolic change in our relationship with one of our key stakeholders. This shows we have regained Lloyd's trust and they believe in everything we have done to transform our business and our expectations for the future. But more importantly, built into that plan is a forecast of growth in our profit of 30%. The fact that our bottom line growth is double our top line growth should tell you everything you need to know about MS Amlin and where we are going. Looking further ahead into the future, our story will be one of continued improvement. We will look to target further expansion of our presence at Lloyd's with further top line growth beyond our 2024 figure of GBP 2 billion. But more importantly, margin and profit will continue to come first in our decision-making as we look to be the key driver of profit for our parent. We can do this because we are in a uniquely fortunate position in a unique market. Lloyd's is the global harbor for specialty risks, and we are at the center of that hub. Our ESG ambitions continue to grow as we deliver solutions to help our clients through the transition to net zero. Working alongside them and with our MS&AD colleagues we will ensure we are supporting and helping them navigate an increasingly complex set of societal and environmental issues and underwrite responsibly. With the goal of doing the right thing, acting as our ethical compass, we will make the difficult decisions to remain true to that goal. Whether that means targeting Russian oligarchs yachts or supporting LGBTQ rights in Uganda to name two recent examples of us taking decisive action to back up our ESG strategy. Finally, with a clear focus on return on equity, we will carefully manage our growing portfolio because our research has shown us that the single most important criteria to support long-term profitability is the correct and effective management of the insurance cycle. Thank you.

Good afternoon, ladies and gentlemen. Thank you very much for giving me your attention. I'm Robert Wiest, CEO of MS Amlin AG. As you may know, rebranded our trading name to MS Reinsurance in late 2022. As such, throughout the remainder of the presentation, I will refer to the company as such. Today, I will cover two main topics during today's presentation. Firstly, a financial update on how we have performed over the first half of the year and more importantly, the full year 2023 outlook on how we are tracking. Next, an update on our strategic actions, the current trajectory and the outlook for the coming years. I will start with our performance at Q2. Overall, a solid first half of the year. First, we are tracking ahead of plan on gross written premium with continued diversification through growth in non-cat segments, which is in line with the strategic goal we have laid out over the last 2 years. It was clear throughout the year that the MS Reinsurance brand and the support we have shown to our clients for difficult renewal period were well received. We have a variance of GBP 203 million, which is driven by increases on prior years of account improved rates and terms, inflation, increased lines and most importantly, the use of our Cat capacity to attract diversifying non-GAAP business. This is most prevalent in the European P&C segment, where we have been able to leverage our cat participations on certain clients to bring in additional non-cat business and have reshaped with that much of our book with a focus on multiline portfolios and on clients that bring us diversified profits. At the same time, our cat premium has reduced through the elimination of monoline business from the portfolio. When we look at the financial results, we can already see the impact this is having. Our share of the Turkish earthquake loss is slightly higher than the half year cat budget. Applying a similar size loss to the portfolio balance of the years called by would likely have been much more impactful to the result. What we now see is that the earnings power of a well-diversified portfolio can absorb this loss and we stay on track. Saying that, we are only beginning to feel the benefit of diversification as a non-cat business is, by its nature, slower to earn -- these earnings potential will become even more evident as the portfolio grows. Overall, the profit before tax is GBP 14 million lower than planned. This shortfall comes from our investment results. While under IFRS 17, gains and losses on the duration portfolio will be materially offset by the discounting impact on the reserves. The [ rise ] we see at Q2 comes from the non-duration portfolio. I'm happy to update that as the year has progressed, this component has improved. Moving on to the full year expectation for 2023. We have seen further although less material losses on the property side through the Hawaiian wildfires, the Morocco earthquake, Hurricane Otis and various European weather events. Again, we see so far that the portfolio can absorb these losses. The industry as a whole is facing a challenge, I believe, with the recent frequency of these so-called secondary perils and how they are modeled. We have been cautious in our business plan to add additional margin to cater for this risk. There is no indication that the catastrophe market will soften in the near term. And for 2024, there might still be pressure on terms in certain areas, most notably with the European business. Our reserves continue to be set cautiously. We took an early step to introduce a specific allowance for inflation in late 2021. We continue to hold this allowance. There are uncertain events for which we hold significant reserves. On COVID, we are well reserved and wait for the outcome of some complex business interruption cases. The invasion of Russia into Ukraine also created uncertainty. So far, we have seen no major claims but continue to be well reserved in our political violence book. We expect no material impact from the current situation in Israeli-Palestine. On business planning for 2024, which we are currently in the midst of, we said our loss ratios conservatively despite the consensus that the market across most lines is as good as we have seen for many years. We will wait for claims experience to materialize before taking any credit. This helps us to manage the cycle and to reduce the likelihood of significant reserve deteriorations impacting us in the future. So all in all, we are tracking along plan. Of course, with the business we are in, if over the coming weeks, there is a loss event, which impacts earnings industry-wide or trouble in the financial market we would be impacted along with our peers. But the underlying business is performing well, and the current expectation is for 2023 to be a good year for us. Now we turn to our strategy, which I first outlined at the Investor Relations meeting in July 2022. We have then developed a 5-year program compromising two phases. They fix it, solidify foundational phase, addressing all the elements, which we believe we must improve in order to come to something that I call a best-in-class reinsurer. Followed by the right to grow phase, which is really expanding our footprint in the market. The MS Reinsurance leadership team has been clear on the steps that were needed in 2022 and 2023. I would like to thank our shareholders for supporting this vision and believing in what we can achieve. Across the entire organization and despite the challenges that change in a timely brings, we have seen support and hard work on the various projects that underpin the transformation program. Most importantly, we can see the belief in optimism within our workforce, that the actions we are taking are the correct actions and then the company is on the right trajectory. The market conditions combined with a favorable reaction to our rebrand as MS Reinsurance has helped us to diversify the portfolio at the pace much faster than previously anticipated. In particular, as I mentioned earlier, with the scarcity of cat capacity, we were in a position to use our cat offering to attract clients who could provide access to profitable multiline portfolios. We expect that the premium volume at the end of '23 will already be in the range of what we have set out to achieve by 2027. We achieved this in a hard market without having to force the growth. Having accessed this business, it now puts us in a unique position to expand further while the market is still in a hard cycle. Reflecting now in more detail at progress during 2023. As I mentioned already, the underwriting actions we have taken have hastened the reshaping of the portfolio and moved us close to our target business model. Our commitment to clients during the difficult renewal period has shown us to be a reliable risk partner. With the feedback we have from the market, it is clear that the rebrand has highlighted our importance to the MS&AD Group and the commitment of our shareholder to Reinsurance. At the same time, there is significant progress on the transformation program. We have moved to cloud services which have enhanced our computing power. We have rolled out a new Oracle General Ledger system, which is facilitating the transition to IFRS 17 reporting. We have numerous system and data initiatives underway, which are scheduled to be implemented during 2024 and which will facilitate a best-in-class operating model that is capable of supporting further growth and achieving benefits for scale. Going a little deeper into the reshaping of the portfolio. Our ambition communicated last year was, by 2025 to have a mix of business with an approximate weighting of 40% specialty, which includes financial lines, cyber and crop, among others, and 30% each to property and casualty. We have now already achieved this blend. And from here, we aim for continued growth across all lines, while keeping the overall portfolio balance more or less as you see here. For comparison, our portfolio in 2021 was rated 44% property, 30% specialty and 26% casualty. In fact, catastrophe business now accounts for 7% of our portfolio. In 2019, it represented 21% of the business directly written by us. Of course, we grow only when the opportunity and terms are correct for us, along with the current lines of business, new lines and regions are being monitored. The new infrastructure platforms will allow us to add volume without stressing the operations. While doing this, we need to be conscious of the market cycle and ensure that we are growing at the right time. This, in conjunction with the conservative reserving and planning assumptions, I mentioned earlier, should facilitate us in delivering consistent returns in the future. Diversification has been achieved, and we monitor the correlations between the segments within the portfolio. In any given year, we might have some underperforming segments. But the benefit of a balanced portfolio is then that earnings from other segments will absorb any underperformance. Finally, we look at some updated targets for the future. We will become a key source of international profits for MS&AD, helping to bring a reliable element of diversification to the group. This target aligns with our rebrand, which emphasizes our place as the key global reinsurance company within the MS&AD group. Gross written premium target is now in the region of GBP 4 billion to GBP 5 billion by 2027 to 2028. We achieved this by optimizing our offerings to clients across a nimble global platform while building out the in-house tools and expertise to support this growth. We should be able to deliver a return on equity over the full reinsurance cycle of about 12% which means that in good years it can be significantly higher and in bad years it might drop to single digits. With this, I would like to close my presentation. Thank you for listening, and I'm more than happy to take any questions. [Foreign Language]