Operating Review
US Operating Review
2005 has been a productive year with the continued reduction in exposure and infrastructure.
| £m | 2005 | 2004 |
|---|---|---|
| General business | ||
| Underwriting result | (145) | (462) |
| Insurance result | (29) | (372) |
During 2005, we continued our stabilisation and restructuring programme, moving significantly forward with plans to simplify our operations. Highlights included the sale of Nonstandard Auto (NSA), the strengthening of our Risk Based Capital (RBC) ratio, the reduction in regulated insurance entities and domiciliary states and the reduction in losses.
We continue to reduce our exposure and actively explore options to accelerate coming off risk.
Overview of major strategies
Our major focus during 2005 was structural simplification, building on the successful implementation of our stabilisation plan. The overarching goal of our restructuring is to safeguard assets appropriately and minimise the risk of volatility in the overall operating result of the Group. Derisking the business and eliminating operational uncertainties also allows for greater flexibility in pursuing options for bringing certainty and finality to the US business.
To this end, we have sold our last ongoing business and our net written premiums have decreased by 98% since September 2003. We cut our insurance result loss to £29m for 2005, down from £372m in 2004 and delivered a £3m profit in the fourth quarter.
Business progress against strategies
Achieving our stabilisation and restructuring strategy continues to be driven by the six critical drivers introduced in late 2003.
Claims management
Our efforts to accelerate the reduction in our claim inventory resulted in a 61% decrease in open claims since December 2003 and liabilities have reduced by $1.2bn in the year to $3.4bn at year end. Cost control initiatives included the introduction of a national litigation management strategy designed to control claim litigation costs, and an early resolution initiative that targets claims, where possible, for immediate settlement and resolution.
Expense management
In 2005 we reduced our expense base by $115m to $225m in line with our operational size. We also reduced headcount by 1,299 to 860 at the year end.
Transition of resources and assets
We are consolidating the operations whilst ensuring we have a stable, cost effective structure to support our continuing obligations. With the sale of NSA, the remaining US ongoing business is primarily personal insurance. Accordingly, we have filed personal insurance withdrawal plans in several states, with approvals received from four states by the end of February 2006.
Legal
Through strong management we are focused on the resolution of claims and corporate litigation. Our proactive approach is successfully mitigating risk and positions us for the best possible litigation results.
Investment management
We generated a strong investment result. This can be attributed to duration extensions, interest rate rises and additional income earned from higher coupons on the floating rate portfolio.
Reinsurance recoverables
We aim to maximise the cash available to our operations through aggressive reinsurance collections and cash management. In addition, we are focused on managing and improving our statutory capital position. We collected $1.3bn in reinsurance balances during 2005, bringing our total collections to almost $4bn since the beginning of 2003.
TopSale of Nonstandard Auto
On 1 November 2005, we sold our remaining ongoing business to Sentry Insurance a Mutual Company. The sale included the transition of more than 600 NSA dedicated employees to Sentry. For the first 10 months of the year, NSA reported an operating profit of $37m and a COR of 88.8%.
The transaction provided a post tax gain under IFRS of £71m. It also strengthened our Risk Based Capital. At 31 December 2005, the US operation had an RBC ratio of 2.2.
The NSA sale also allowed for continued simplification of our regulatory structure in the US. The operation reduced the number of domiciliary states to two and insurance entities to four, down from 11 and 25 respectively, at the beginning of 2004. This restructuring streamlined the regulatory process, eliminated the costs associated with maintaining numerous legal entities and enhanced our ability to maximise investment return by reducing the number of separate, individual company portfolios.
Governance continued to be a top priority as evidenced by the process controls implemented across the operation, robust risk assessment and performance management initiatives. Our success in this area was substantiated by internal audits conducted during 2005.
We have continued to closely monitor regulatory and legislative matters in the US, especially the asbestos litigation reform process at the federal level. In February, debate by the senate resulted in Bill 852, the trust fund legislation, being sent back to the committee. As it stands today, it is possible that the focus could shift to a medical bill or another version of asbestos reform. We will continue to monitor developments.
Outlook
During 2006, we will continue the work to identify a solution to the challenges we face in the US. We will maintain our focus on stabilising and restructuring the US organisation in a cost effective and efficient manner, while maintaining an appropriate control environment.
We appointed Edward Muhl to the US Board in January 2006. He brings with him nearly 40 years of insurance industry experience, having served in a regulatory capacity as Superintendent of Insurance, State of New York; Commissioner of Insurance, State of Maryland and President of the NAIC (National Association of Insurance Commissioners).
Achieving stabilisation has not been easy and we still face uncertainty associated with long tail reserves and litigation. On a business as usual basis, we anticipate broadly breaking even at the insurance level in 2006. We continue to focus on driving down claims and expenses and actively explore opportunities to accelerate coming off risk. Our objective is to bring certainty and finality to the US exposure. Execution of this is complex, will take time and will not be a totally smooth ride.
