Interim results for 6 months ended 30 June 2006
Operating and financial review
General insurance and health operating profit
The Group’s net written premiums from its worldwide general insurance and health businesses increased by 7% to £5.7 billion, driven by an increase in the UK of 6% to £3.1 billion and 22% growth to £1.0 billion in the Netherlands.
Group operating profit from general insurance and health businesses increased by 23% to £866 million (2005: £694 million). The worldwide general insurance combined operating ratio (COR) improved to 92% (2005: 95%), comfortably meeting our stated commitment to meet or beat a worldwide COR of 98% for the foreseeable future. While our scale advantages, focused underwriting, claims management and efficiencies continue to provide us with ongoing benefits, we are actively seeking to maximise these through knowledge sharing across our businesses.
The general insurance and health underwriting profit improved to £346 million (2005: £182 million) including better than expected weather claims experience in the UK of £125 million (2005: neutral). The underlying improvement was driven by our disciplined approach to underwriting, claims management and lower claims frequency across most of our major businesses. The worldwide expense ratio was 11.6% (2005: 11.2%), reflecting the change in distribution mix towards the direct channel and strategic investment in the business to gain competitive advantage.
The longer-term investment return (LTIR) on general insurance and health business assets was £520 million (2005: £512 million). The higher start-of-year asset base and positive cash inflows were offset by the application of lower LTIR rates in 2006.
The reserves in the Group are set conservatively with the aim to protect against adverse future claims experience and development. Our business is predominantly short tail in nature and loss development experience is generally stable. As a result of the prudence applied in setting the reserves, there are some releases in 2006 relating to the 2005 and prior accident years. The releases mainly arise in the UK and this favourable development benefits the UK underwriting result by £140 million, of which £50 million is weather-related. We have increased our confidence levels in our reserves over the past few years and have maintained our reserves at very strong levels.
| Net
written premiums |
Underwriting result* |
Operating profit* |
||||||
|---|---|---|---|---|---|---|---|---|
| 6 months 2006 £m |
6 months 2005 £m |
6 months 2006 £m |
6 months 2005 £m |
6 months 2006 £m |
6 months 2005 £m |
|||
| United Kingdom | 3,073 | 2,891 | 225 | 104 | 555 | 431 | ||
| Continental Europe | 1,783 | 1,605 | 99 | 57 | 214 | 174 | ||
| Rest of the World | 794 | 708 | 22 | 21 | 97 | 89 | ||
| International | 2,577 | 2,313 | 121 | 78 | 311 | 263 | ||
| Continuing operations | 5,650 | 5,204 | 346 | 182 | 866 | 694 | ||
* Excludes the Financial Services Compensation Scheme credit of £6 million (2005: nil).
UK
Norwich Union Insurance (NUI) has delivered an excellent result in the first half of the year, with a general insurance operating profit of £561 million (2005: £431 million) and COR of 92% (2005: 96%). The result includes a benefit of £125 million from better than expected weather (2005: neutral) and includes a contribution of £66 million from the RAC (2005: £6 million).
Competition is increasing in the personal motor market. However, we have increased our rates by between 2% and 5% across the different segments of our book (2005: 5% overall) and we are committed to applying the necessary increases to maintain the profitability of this account. Homeowner rates have increased by 6% (2005: 6%). Commercial rates have fallen by around 3% (2005: no change), but our disciplined approach to risk selection and underwriting has maintained the level of profitability.
General insurance net written premiums have increased by 6% to £2,898 million (2005: £2,736 million) over the first half of 2005. Premiums in our direct operation grew by 5% and this includes net written premiums of £57 million from RAC Direct Insurance, where we have launched new motor and homeowner products and an internet ‘Quote and Buy’ facility for travel insurance. Over 40% of our direct business is now written online.
We are investing substantially in our brand presence and technology in order to secure our future profitability. We aim to provide better service to brokers, by streamlining back-office processing and improving our trading capability. In addition, we are developing our personal lines systems, which will enable customer transactions to be performed online, in one place, and provide seamless links into the systems used by our trading partners.
The level of our strategic investment, and the inclusion of RAC for the entirety of the period, has increased our expense ratio to 11.9% (2005: 10.8%). Importantly, however, the total cost of distributing our products (expenses and commission combined) is in line with the 2005 full year position at 34%.
During the first half of 2006 we have secured a new deal with the Post Office to provide motor and homeowner products. We also successfully renewed our contracts with Abbey and Saga to provide homeowner insurance, and our contract with Lloyds TSB to provide creditor insurance.
The RAC integration is complete and we are on track to deliver our external commitments for 2006 and beyond. Specifically, we have delivered £43 million cost savings in the period and we are on course to deliver the targeted cost savings of £100 million in 2006. Our acquisition of RAC is firmly on track to deliver an overall run rate return on investment of 18.8%.
RAC has signed a new deal with Lex Vehicle Leasing to provide roadside assistance and glass replacement for six years, and a UK roadside contract with AssetCo for two years. RAC has successfully renewed its contracts with Porsche, Volvo and Budget.
NU Healthcare provides private medical insurance (PMI), protection and occupational health services for over 800,000 customers. In 2006, the PMI business continued to grow with net written premiums up 13% to £175 million (2005: £155 million) and the result was a loss of £6 million (2005: break even) reflecting continuing investment in the business.
Continental Europe
In Continental Europe, our general insurance and health businesses recorded an operating profit of £214 million (2005: £174 million).
In France, our general insurance and health business achieved an operating profit of £27 million (2005: £17 million) with an underwriting loss of £1 million (2005: loss of £12 million). Net written premiums increased to £435 million (2005: £424 million) reflecting selective rate increases in a competitive market, notably in commercial lines. The general insurance COR improved to 98% (2005: 100%) reflecting these higher premium rates together with expense improvements including cost savings due to our head office relocation.
In Ireland, our general insurance business achieved an underwriting profit of £63 million (2005: £53 million) and a COR of 74% (2005: 80%). This strong performance reflected continuing favourable weather claims experience of £5 million (2005: £3 million) and reduced frequency of bodily injury claims. As a result of increased competition for market share and selective underwriting, net written premiums decreased to £251 million (2005: £262 million).
In the Netherlands, the operating profits from general insurance and health operations increased to £80 million (2005: £55 million) reflecting an improvement in the underwriting profit to £34 million (2005: £14 million). The general insurance COR was 82% (2005: 94%) due to the exceptionally low incidence of large claims, in particular bodily injury and property damage claims. Net written premiums increased significantly to £955 million (2005: £790 million) largely driven by the increase in health premiums to £544 million (2005: £361 million) following the introduction of new healthcare arrangements which merged public and private health care provision at the start of 2006. Market changes in the Netherlands have intensified healthcare competition as providers bid to sign up customers, with an adverse impact on profitability as the COR of our healthcare business increased to 103% (2005: 100%).
In response, we intend to merge our health operations with those of Agis Zorgverzekeringen, and Menzis Zorg and Inkomen to create a new organisation with four million customers representing a quarter of the market, in which Delta Lloyd would hold a minimum 25% share. This organisation would have the scale, expertise and distribution required to achieve success in the new environment. Subject to regulatory approval and due diligence, the three parties will start the integration process in October 2006 and complete the transaction during 2007. As a consequence the relevant assets and liabilities of our health business have been classified as held for sale in the consolidated balance sheet.
Other general insurance operations are based in Italy, Poland and Turkey and achieved a total operating profit of £19 million (2005: £19 million).
Rest of the World
Operating profit in our general insurance and health businesses in the Rest of the World improved to £97 million (2005: £89 million).
In Canada, net written premiums have increased by 1% to £724 million (2005: £627 million). Within this, the benefit of strengthening rates on personal motor and homeowner and premiums from our corporate partnership with Loblaws were offset by the continued softening of the commercial lines market although all lines remain profitable.
The COR for our Canadian business has improved to 96% (2005: 98%) and operating profit to £85 million (2005: £67 million) as a result of careful management of underwriting and costs, together with a lower level of weather-related claims which benefited the result by £6 million (2005: £5 million). This strong performance is also due to our continued investment in improving risk selection, operational efficiency and the customer’s experience.
The operating profit from our other Rest of the World businesses, including the Group’s captive reinsurer, amounted to £12 million (2005: £22 million including pre-disposal profits from our general insurance operations in Asia). Our Asian health business and our recently acquired general insurance business in Sri Lanka as part of the acquisition of Eagle Insurance recorded an operating profit of £1 million.
