Interim results - 6 months ended 30 June 2007
Operating and financial review
General insurance and health operating profit
The Group's net written premiums from its worldwide general insurance and health businesses decreased by 4% to £5.5 billion, reflecting increasing price competition across most regions.
Group operating profit from general insurance and health businesses decreased by 34% to £560 million (2006: £866 million). The worldwide general insurance combined operating ratio (COR) worsened to 97% (2006: 92%) mainly as a result of adverse weather in the UK and increased competitive pressures in this business segment across most regions.
The general insurance and health underwriting profit decreased to £49 million (2006: £346 million) following worse than expected weather claims experience in the UK of £235 million (2006: £125 million benefit). The worldwide GI expense ratio was 12.9% (2006: 11.6%), reflecting reduced premiums and ongoing investment made to secure the future profitability of the business.
The longer-term investment return (LTIR) on general insurance and health business assets was £511 million (2006: £520 million) as the impact of higher start-of-year asset base and higher LTIR rates in 2007 were offset by the effect of lower cash flows due to lower premiums.
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 releases of £330 million in 2007 which reflect releases from the 2006 accident year and prior. We continue to apply our reserving policy consistently and our reserves remain at very strong levels.
| Net written premiums | Underwriting result* | Operating profit* | ||||
|---|---|---|---|---|---|---|
| 6 months 2007 £m | 6 months 2006 £m | 6 months 2007 £m | 6 months 2006 £m | 6 months 2007 £m | 6 months 2006 £m | |
| United Kingdom | 2,950 | 3,132 | (46) | 222 | 284 | 566 |
| Europe | 1,869 | 1,783 | 88 | 99 | 203 | 214 |
| North America | 665 | 724 | 5 | 24 | 70 | 85 |
| Asia Pacific | 14 | 11 | 2 | 1 | 3 | 1 |
| Continuing operations | 5,498 | 5,650 | 49 | 346 | 560 | 866 |
* 2006 excludes the Financial Services Compensation Scheme credit of £6 million (2007 was nil).
United Kingdom
Our UK operations comprise our main general insurance business, Norwich Union Insurance (NUI), a small health operation and the Group's captive reinsurance business. The combined UK performance was £284 million (2006: £566 million).
NUI has generated operating profits of £269 million (2006: £561 million) and a combined operating ratio of 102% (2006: 92%). The result includes an adverse weather impact of £235 million (2006: £125 million benefit), with an estimated £175 million arising from the June floods and £60 million relating to the storms of 18 January. This impact has been mitigated by a benefit of £245 million (2006: £140 million) releases from the 2006 accident year and prior. We continue to apply our reserving policy consistently and our reserves remain at very strong levels. The result includes a contribution of £75 million from the RAC (2006: £46 million).
The result has been achieved against a backdrop of challenging conditions across our core insurance markets. In personal motor we have achieved rate increases of 8% (2006: between 2% and 5% increase) and our focus on writing profitable business is reflected in a combined operating ratio of 103%, 2% better than the same period in 2006. Homeowner rates have increased by 5% (2006: 6% increase). Overall commercial rates have fallen by around 3% (2006: 3% decrease), although we are seeing increased market stability in commercial motor rates. Market conditions continue to impact our net written premium levels, which have decreased by 7% to £2,699 million (2006: £2,898 million).
During the first half of 2007, our position as a partner of choice to the UK's top brands has been reflected in a number of major deals across the organisation. In February, the RAC successfully renewed its contract with Motability until 2014 and has also agreed a new three year contract with Barclays to provide roadside assistance to their advance value account customers that commenced in June. In May we announced plans for the creation of a new joint venture with HSBC. Operating under the name of HSBC Insurance, the venture will underwrite and distribute general insurance products to HSBC's 10 million UK customers when it launches later in the year.
We are continually looking to improve our products and customer service levels. Following the launch of a dedicated retention centre in Norwich Union Direct in November 2006 our customer ownership initiative is now live for all motor claims and provides a single point of contact for customers who experience a claim. Additionally, we are also working to develop closer ties with large commercial brokers. The success of such initiatives is reflected in very strong retention rates across all classes of business and improving customer satisfaction scores.
Our focus on cost control is reflected in the reduction in expense ratio from the 2006 full year figure of 13.9% to 13.6%, with our cost and efficiency programme, which is on track to deliver its anticipated benefits of £125 million from 2008, contributing to this improvement. The increase compared to the same period in 2006 reflects a combination of our investment in the business and pressure on volumes. We have seen an increase in our commission ratio to 24.3% (2006: 21.9%) driven by lower volumes of commission-free direct business and the impact of consolidators in our intermediary business.
Europe
In Europe, our general insurance and health businesses recorded an operating profit of £203 million (2006: £214 million).
In France, our general insurance and health business achieved an operating profit of £31 million (2006: £27 million) with a break-even underwriting result (2006: loss of £1 million) and net written premiums of £421 million (2006: £435 million). Although pressure on premium rates has intensified in the market, Aviva has continued to experience a low level of large and adverse weather related losses. The general insurance COR improved marginally to 97% (2006: 98%) reflecting a stable claims ratio and cost savings.
In Ireland, our general insurance business achieved an operating profit of £80 million (2006: £88 million) and a COR of 78% (2006: 74%). This result reflects the intense competitive pressures within the market leading to falling premiums and higher claims frequency, partly offset by favourable development of prior year claims. Despite our policy count increasing compared with 2006, the difficult market conditions led to a slight reduction in net written premiums to £245 million (2006: £251 million).
In the Netherlands, operating profit from general insurance and health operations was £70 million (2006: £80 million) reflecting a deterioration in the health underwriting result. The general insurance only COR improved to 76% (2006: 82%) reflecting premium rating which remains strong in certain lines and favourable development of prior year claims. The health operating result deteriorated to a loss of £16 million (2006: £6 million profit) as a result of a higher than expected level of late reported claims from 2006, which has also affected ultimate loss ratios in the current year. Net written premiums increased significantly to £1,055 million (2006: £955 million) largely driven by an increase in the size of the health portfolio combined with £17 million of general insurance premiums from Erasmus since its acquisition on 26 March 2007. On 16 July 2007, we announced the sale of our health operations to O.W.M. CZ Groep Zorgverkeraar U.A. (CZ) in a transaction that gives Delta Lloyd the opportunity to sell life, pensions and general insurance products to CZ's existing customer base.
Other general insurance operations are based in Italy, Poland and Turkey and achieved a total operating profit of £22 million (2006: £19 million).
North America
In Canada, operating profit was £70 million (2006: £85 million), an underlying decrease of 10% in local currency terms. This result reflects a reduction in the underwriting result to £5 million (2006: £24 million) primarily as a result of a deterioration in the claims ratio due to a combination of claims inflation and persistent snowfalls in the first four months of the year which led to higher claims frequency. The COR was 99% (2006: 96%).
Net written premiums were £665 million (2006: £724 million). This represents an underlying 1% increase in local currency driven by growth in warranty business in personal lines and in commercial lines volumes. This growth was offset by reductions in private and commercial motor premium rates resulting from increased competition as several competitors adopted aggressive pricing strategies in this profitable segment. In the face of this, Aviva Canada continues to take an industry leading stance through maintaining its policy of underwriting integrity and pricing for profit.
Asia Pacific
The operating profit from our health insurance business in Singapore and general insurance business in Sri Lanka amounted to £3 million (2006: £1 million).
