Overview
Group CEO's Review
Andy Haste Group CEO
We have maintained our track record of consistently delivering on our objectives.
| £m | 2005 |
2004 |
|---|---|---|
| General business | ||
| Net written premiums | 5,400 | 5,082 |
| Underwriting result | 118 | (277) |
| Operating result | 698 | 258 |
| Combined operating ratio (COR) | 94.1% | 96.1% |
| Core Group underlying return on equity | 21.6% | 17.7% |
2005 was a very good year for the Group. The impact of three years of management actions and the continued delivery against our strategic objectives has resulted in a greatly improved financial performance. This improvement has been achieved against the backdrop of a high number of natural disasters - and is a clear demonstration of the strength of the business and its capability of delivering continued sustainable earnings in 2006 and beyond.
2005 saw an extreme range of weather events with floods in the UK and India, hurricanes Emily, Katrina and Wilma, and storms in Scandinavia and Canada. While the human impact has been tragic, the financial effect on the Group was relatively limited, largely due to the actions we've taken to reduce our exposure in high risk areas and improve our underwriting selection.
We delivered a strong improvement in financial performance with a £440m increase in the operating result to £698m. The Core operating regions of the UK, International and Scandinavia again achieved sub 100 combined operating ratios (CORs) and all improved on last year. These achievements are a direct result of the actions we have taken to restructure the business and to focus on excellence in underwriting, claims and expense management.
Our profit after tax was £605m, up from a loss of £80m in 2004. This includes the net benefit of £285m from the changes we've made to the UK pension schemes as discussed in the Chairman's statement, as well as the disposal of non core assets.
TopStrong Core Group
Before discussing our performance you will notice that there are some differences in the way we present our 2005 results. This is due to the change from UK GAAP (Generally Accepted Accounting Principles) to IFRS (International Financial Reporting Standards). The impact of these changes is discussed in depth in the Financial Review. You will also note changes to how we classify our operations. We have previously reported on the 'Total Group' result and that of our 'Ongoing Business'. Going forward these distinctions are no longer relevant as our successful sale of Nonstandard Auto has closed our US operation to its last remaining ongoing business. In future we will report the Core Group (UK, International and Scandinavia) alongside the result for our discontinued US business.
Our 2005 results show the strength of the Core Group. We have a good balance of premiums by geography and business line and exposure to both mature and emerging markets. Approximately 50% of our premiums are from the UK, with 25% each from International and Scandinavia. In the UK, we're the second largest commercial insurer and third largest personal motor and household insurer. In Scandinavia, we're the third largest insurer in both Denmark and Sweden, and we have leading positions in the fast growing Baltic economies of Latvia and Lithuania.
Within International we have a strong balance across developed and emerging markets. In our developed markets we have good businesses in Canada and Italy and we're a leading household insurer in Ireland. We are also building our presence in the emerging regions of the Middle East and Latin America and in the long term markets of India and China.
Delivery against strategic objectives
At the beginning of 2005, I set out five key priorities: to stabilise and restructure the US; target profitable growth; sustain strong results; deliver our operational improvement programme; and embed a performance culture. We have delivered against each of these.
Stabilisation and restructure of the US
Our objective in the US is to bring certainty and finality to our exposure. We have been consistent with our strategy to achieve this - we continue to reduce exposure, while at the same time, actively exploring alternative solutions to accelerate coming off risk.
In 2005 we improved the insurance loss from £372m to a loss of £29m. We have reduced open claims by 37%, claims reserves by $1.2bn to $3.4bn and collected over $1.3bn of reinsurance debtors. We cut expenses by 28% and headcount is down from 6,000 in 2003 to 860.
The sale of Nonstandard Auto provided additional capital support to the discontinued operation. We also made significant progress in simplifying our business from a regulatory standpoint by reducing our regulatory structure to two domiciliary states and four insurance entities, from 11 states and 25 entities in 2004.
Since the year end we have announced the appointment of Edward Muhl to the US Board. He has served in a number of senior regulatory roles including President of the NAIC (National Association of Insurance Commissioners). His extensive experience will be a strong asset as we continue with the restructuring.
While risks and uncertainties remain in the US, and it will not be a totally smooth ride, we continue to make good progress and remain focused on our objective.
Targeting profitable growth
In 2005 we delivered net written premium growth of 6%, driven by the recapture of the Munich Re quota share and targeted growth in each of our core markets with premiums up by 3% in the UK, 8% in Scandinavia and 13% in International. We have also been successful in building a pipeline for the future.
Our growth strategies are tailored to each market but there are consistent themes: building distribution; targeting specific trades and segments; expanding our footprint in key emerging markets; making selective bolt on acquisitions; and focusing on customer management and retention.
In Canada we expanded distribution by signing 147 new brokers and in Scandinavia we transferred our successful Danish bancassurance model to Sweden, signing a major agreement with FöreningsSparbanken (Swedbank). We also continued to improve our web offering with 50% of UK motor sales now online. In India we signed partnerships with Standard Chartered, Citibank, GE and Maruti Suzuki and in China we signed four corporate partnership deals.
We are using clear segmentation and unique propositions to achieve growth in specific customer groups. In Canada, our direct business Johnsons achieved a 26% increase in premiums driven by our focus on the 50 plus age group and preferred occupations including teachers and nurses. In the UK, we increased customers in Marine, Risk Solutions and the growing SME market.
We continue to strengthen our position through selective acquisitions. In Canada we acquired the ING marine portfolio securing our leading marine position, while the acquisition of Morgex doubled our market share in Alberta, a province with GDP growth over 40% above the national average. In Scandinavia our acquisition of TopDanmark's marine portfolio consolidated our number one position in Danish Marine.
We have expanded our footprint in emerging markets. Our acquisition of Cruz del Sur made us Chile's number one player and significantly widened our reach in Argentina.
We have also focused on improved customer management which has driven growth in retention across the Group with increases of three points in UK and Danish Commercial and four points in Swedish Commercial.
Sustainable strong results
We continued to deliver against our strategic objective of achieving sustainable profitable performance and we've been consistent with our position of not chasing volume at the expense of profit. We've now achieved eight consecutive quarters for the Core Group of combineds in the 90s. In 2005 the combined ratio for our Core Group was two points better at 94.1% and we increased our underwriting result by 42% to £263m.
In the UK we delivered a three point improvement in the combined to 93.1%. This was driven by an excellent performance from Commercial with a combined of under 92% and a 60% increase in the underwriting profit to £115m. Personal achieved a nearly two point improvement in the combined to 95.6% and a 70% increase in underwriting profit. MORE TH>N® maintained its strong performance with a combined of 92.4%, 11% premium growth and an improved expense ratio of 24.1%.
International had another good year despite the impact of weather events. We improved the combined by almost two points to 94.7% and the underwriting result by 40% to £63m. Canada performed strongly with a combined of 94.8%, a 37% increase in underwriting profit to £26m and premium growth of 19% driven by a continued excellent performance from Johnsons, and our focus on retention as well as a favourable exchange rate movement. In Latin America we continued to achieve profitable double digit growth in Brazil, Chile and Argentina. However, the result was impacted by last year's weather events and the combined for the region of just over 101% includes over seven points of storm related costs.
Asia and the Middle East had another good year with a combined of 89.5%. We grew premiums by 15% in the Middle East and in our longer term plays in Asia our Indian business delivered profitable premium growth of 40%.
In Scandinavia we improved the combined to 94.4% with a 20% improvement in the underwriting profit to £65m. Again the result was driven by an outstanding performance from Scandinavian Commercial which delivered a combined of under 86% reflecting the benefits of our portfolio review and operational improvement programme.
Operational excellence
Operational excellence is key to our sustained financial performance. This is not a one off programme - it's about continuous operational improvement. Its scope covers investment in our technical skills, underwriting, pricing, claims, and expense management, and improving customer service. To date we've achieved £240m of annualised expense savings of our targeted £270m.
Improvement is evident across the Group. We've halved claims leakage in Ireland, and in Canada, we integrated our Western Assurance and Ontario Claims centres, increasing productivity by 10%. In the UK we have continued to invest in our claims supply chain management. We're market leaders in this area and given the strength of our capability, we have won contracts with Lloyds TSB and Co-operative Insurance Society to use our supply chain infrastructure.
We are also harnessing technology to improve transparency and deliver better service to our customers. In Scandinavia we have implemented a web system allowing customers to track progress of their claim and receive automatic updates.
Alongside our operational improvement programme we've continued to focus on getting the right controls, procedures and accountability. We've defined the Group risk appetite and enforce a strict programme of underwriting licences and delegated authorities. We back this up with regular detailed reviews by our independent Group risk and actuarial functions, all of which we have continued to strengthen in the last year.
Accountability is not just about rules, it's also about embedding a culture of responsibility. We have a clear set of Group business principles built around performance, responsibility and integrity with clear commitments to our key stakeholders. It's incumbent on every member of staff to act upon these and they are enforced by global risk policies.
Leadership and performance culture
Throughout the year I continued to strengthen my leadership team and in November Bridget McIntyre joined the Board as UK Chief Executive. In the last three years we have significantly strengthened the 'top 100' management team, bringing on 12 of our own high performers and making 43 external appointments.
A key part of the new culture is differentiated reward at all levels throughout the organisation. Over 80% of employees now have a significant proportion of their pay linked to their performance, up from just 15% in April 2003. Our target is 90% by the end of 2006.
We continue to embed our performance culture. This is about accountability and responsibility - but it's also about investing in the development of our people. We want R&SA to be a place where people can fulfil their career aspirations.
Looking ahead
It has been a productive year during which we've delivered against our strategic objectives and built an excellent foundation for the Group:
- We continued to reduce risk and volatility - we have made good progress in the US, we disposed of non core assets and significantly reduced our pension deficit,
- We have strengthened our capital position, with good margins against all key regulatory measures and sufficient capital to deliver our current plans,
- We have continued to embed discipline in underwriting, pricing and claims,
- We have built a balanced portfolio of Core businesses with good market positions. Each is delivering a strong financial performance and each is capable of sustaining it.
As mentioned earlier, going forward we will be reporting on the Core Group rather than the Ongoing Business. This means that our previous financial target for our Ongoing Business of a combined ratio of 100% on average across the cycle is no longer relevant. Our objective is to deliver sustainable profitable performance and this remains unchanged. My current expectation is that the Core Group will deliver a combined ratio of around 95% in 2006.
Our achievements in 2005 build on the excellent job that everyone throughout the organisation has done to work through our issues and rebuild the franchise and I'd like to thank all staff for their continuing hard work and commitment.
We have an excellent team with a track record of delivery, and the drive, energy and ambition to take this business forward. We will continue to leverage our strengths and move the business on, whether this is through delivering further operational improvements, improving segmentation, increasing retention or expanding distribution.
We have a strong franchise and a focus on great execution. I'm confident that we'll continue to deliver sustainable profitable performance.
