Operating Review
International Operating Review
A portfolio of businesses in mature and emerging markets focused on delivering sustainable profitable growth.
| £m | 2005 | 2004 |
|---|---|---|
| General business | ||
| Net written premiums | 1,337 | 1,186 |
| Underwriting result | 63 | 45 |
| Insurance result | 207 | 173 |
| Combined operating ratio (COR) | 94.7% | 96.6% |
Our International businesses are a balanced portfolio of operations in the mature markets of Canada, Ireland and Italy and selected emerging markets in Latin America, Asia and the Middle East. International delivered excellent results in 2005 with an underwriting profit of £63m and a COR of 94.7%. This reflects our continued focus on maintaining underwriting discipline in a competitive pricing environment.
Overview of major strategies
We continue to focus on securing our position within our chosen countries, market segments and target trades in which we have a competitive advantage, rather than chase market share across all operations. Our approach is to maintain pricing discipline as we target sustainable profitable opportunities. We are continuously raising standards in underwriting and claims, improving our customer management and strengthening our risk and governance environment. We will balance organic growth with bolt on acquisitions in existing geographies where complementary opportunities are available.
Business progress against strategies
In 2005 there were floods in Canada and India and hurricanes Emily and Wilma. Despite the significant weather events we delivered a 20% increase in the insurance result, demonstrating the strength of the International portfolio.
Our business in Canada delivered a good financial result, driven by both the Johnson Corporation, our personal lines direct operation, and the intermediated business. Johnson's delivered 26% growth and in 2005 signed affinity deals with new sponsorship groups giving access to an additional 600,000 customers in our target professions of education and health. Penetration of these groups is developing strongly with a 25% increase in members insured over the last two years. In September Johnson acquired Morgex Insurance Group, doubling the size of our brokerage in Alberta, providing a platform for further profitable growth.
In the Canadian intermediated business, we continued to accelerate broker appointments, with 147 new brokers added compared with 110 in 2004. In Commercial we acquired the renewal rights to the ING marine portfolio. Overall retention rates in excess of 80% demonstrate our market leading expertise in this segment. Against a background of mandatory rate reductions in motor, the personal intermediated business has made good progress, with high retention levels and strengthening new business trends.
The performance of our business in Ireland was excellent. We are ranked fourth largest in the market and are a leading personal household insurer. In 2005, pricing pressure continued and the claims environment was relatively benign. Our focus was on disciplined underwriting and operational excellence. A project to streamline our processes and reduce inefficiencies generated significant cost benefits enabling us to improve our cost base going forward. As part of this project we are the first general insurer in Ireland to completely outsource our IT services.
Our Italian business continues to grow faster than the market with 25 new agents appointed in 2005. During the year, a new operating model was adopted with new appointments to strengthen the management team and to give an increased focus on risk management and control.
Latin America demonstrated strong levels of growth, both organic and inorganic. In Brazil, our marine portfolio grew in excess of 40% as we strengthened our brand awareness and customer profile in this segment. In recognition of this, our Brazilian operation won awards for 'Best Marine Product' and 'Best Marine Business Performance' in Cobertura, a monthly insurance industry magazine. We significantly increased our presence in the region with the acquisition of Cruz del Sur, the market leader in Chile and La Republica in Argentina.
Latin America has consistently delivered a sub 100 combined operating ratio for the last four years, but in 2005 the COR was 101.4%. This was after absorbing 7.6 points of weather costs which primarily reflect the impact of hurricanes Emily and Wilma. This impact was not significant in terms of the overall International result given the diversification benefits within our portfolio of businesses.
In our Asia and Middle East region we experienced strong growth in motor in UAE and India. We now have distribution agreements with 80 car dealerships through Maruti Suzuki, the largest car manufacturer in India. Through this partnership we have issued more than 100,000 policies. In the Middle East, we are a top five International insurer and see organic growth opportunities in the markets enjoying economic prosperity. We view India and China as longer term opportunities, with both markets expanding and maturing.
A balanced portfolio with strong positions in our chosen markets and segments.
TopMarket and economic conditions
Although geographically diverse, there are a number of common themes across International.
Declining rates were a feature of 2005, whether due to the competitive environment in markets such as Ireland or to mandatory changes in Canada. In 2006 we expect the rating environment, although varied across International, to remain stable. We remain committed to maintaining our pricing discipline and will, if necessary, sacrifice volume for profitability.
The insurance regulatory environment continues to evolve, with strengthened standards of regulation being applied in Italy, parts of the Middle East and Latin America. Having rolled out the Group's comprehensive standards, we are well positioned to respond to regulatory changes and reform.
Other initiatives
In line with the rest of the Group, we have introduced a new performance culture with variable pay elements to ensure our teams are motivated and objectives aligned throughout the operations. We have strengthened the management teams with external hires and are actively promoting internal talent. In Argentina we were voted best company to work for in a survey by Apertura magazine, a leading monthly business magazine. In Brazil our strengths in people management were recognised by Hay Group and ValorCarreira Magazine, an annual HR publication. In India we won the award for 'Most Innovative Recruiting & Staffing Programme' at the first Indian Recruiting and Staffing Best in Class Awards.
Sustainable expense management was a key priority for 2005. We are reaping the benefits of two major change programmes in Canada and Ireland designed to streamline processes. We have outsourced IT services in Ireland and Canada and launched procurement projects to take advantage of bulk buying efficiencies. In 2006 we will roll out key elements of these projects on a smaller scale within the other regions.
In Ireland, Brazil and India we have undertaken a full analysis of our client base to help us understand more fully the most profitable clients and the products they are interested in. This work has enabled us to develop retention and win back strategies aimed at our top tier clients, allowing us to differentiate and tailor our proposition to create extra value for our customers.
We have also worked closely with our intermediary brokers and agents to further strengthen our relationships. In Canada, we've continued the roll out of WebBusiness, which allows brokers to process new business and policy changes in their own office, allowing them to compete more effectively with the direct channel. Approximately 90% of processable transactions within the Canadian intermediated personal business are now completed online.
In UAE we won the Insurex Conference E-Business award for effective use of information and communications technology at the point of sale with the broker or client.
In Italy we have a structured training programme to assist agents and brokers in developing their businesses and in Ireland we launched a new key account management team.
These efforts have been vital in allowing us to improve our relationships with brokers and in some territories we have reduced commission rates in response to a falling rate environment.
The Group has leading positions in marine in the UK, Canada, Brazil and Denmark. We are leveraging our expertise to develop an International marine proposition. Our position as a leading marine insurer in Brazil demonstrates how this can be achieved. In 2005 the Brazilian marine portfolio grew more than 40%. The marine hull portfolio within the acquisition of Cruz del Sur has been transferred to the UK marine team to benefit from their expertise.
Acquisitions and disposals
In line with our strategic aim of building strong positions in selected markets to deliver sustainable profitable growth, we acquired Chile's leading general insurer Cruz del Sur and its Argentinean sister company La Republica for £68m in November. This combination creates a clear market leader within Chile with a 22% market share and we see the opportunity for significant value creation as we apply our underwriting model to Cruz del Sur's heavily reinsured portfolio. In Argentina the companies are geographically complementary, allowing us to expand outside Buenos Aires more rapidly.
In Canada, Johnson's acquisition of Morgex Insurance Group was the largest of Johnson's 16 broker acquisitions to date. Following the acquisition Johnson is a top five personal insurance provider in Alberta.
We completed the disposals of our Thai and Japanese operations in 2005, bringing to a close the restructuring programme of previous years.
Outlook
We will build upon our current platform by focusing on the markets and segments that offer the best potential for producing sustainable profitable growth. To complement our organic growth strategy we will consider acquisitions of portfolios or businesses in countries where there is a strategic fit with existing operations.
In moving towards a sustainable profitable growth agenda, we will look to balance our increased focus on sales and business development capabilities with continued rigour in our risk selection and control. Successfully combining these activities will ensure we remain a key contributor to the Group's overall performance.
