8 - General insurance and health operating profit
The group’s net written premiums from its worldwide general insurance and health businesses increased by 5% to £5,800 million for the six month period to 30 June 2008 (six months to 30 June 2007: £5,498 million).
Group operating profit from general insurance and health businesses decreased by 4% to £538 million (six months to 30 June 2007: £560 million). The worldwide general insurance combined operating ratio (COR) has remained stable at 97% (30 June 2007: 97%).
The general insurance and health underwriting result increased to £58 million (six months to 30 June 2007: £49 million). The worldwide GI expense ratio has decreased to 12.7% (30 June 2007: 12.9%), primarily driven by cost savings achieved by our UK general insurance business.
The longer-term investment return (LTIR) on general insurance and health business assets was lower at £480 million (six months to 30 June 2007: £511 million) resulting from the changes in asset mix due to equity de-risking that took place in the latter half of 2007 and lower levels of investments following payment of flood claims in the United Kingdom.
We continue to apply our reserving policy consistently and 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 conservatism applied in setting the reserves, there are releases of £230 million, net of reinsurance, in 2008 which reflect releases from the 2007 accident year and prior.
| Net written premiums | Underwriting result | Operating profit | ||||||
|---|---|---|---|---|---|---|---|---|
| 6 months 2008 £m |
6 months 2007 £m |
6 months 2008 £m |
6 months 2007 £m |
6 months 2008 £m |
6 months 2007 £m |
|||
| United Kingdom | 2,832 | 2,950 | 37 | (46) | 326 | 284 | ||
| Europe | 2,183 | 1,869 | 7 | 88 | 137 | 203 | ||
| North America | 771 | 665 | 15 | 5 | 76 | 70 | ||
| Asia Pacific | 14 | 14 | (1) | 2 | (1) | 3 | ||
| Continuing operations | 5,800 | 5,498 | 58 | 49 | 538 | 560 | ||
United Kingdom
Total operating profit of £326 million (six months to 30 June 2007: £284 million) includes contributions of £21 million from our captive reinsurance operations and health business. Our group captive reinsurer, Aviva Re, reported an operating profit of £19 million (six months to 30 June 2007: £17 million) and PMI health result was a profit of £2 million (six months to 30 June 2007: £2 million loss), reflecting higher underlying profitability and withdrawal from less profitable international business. The following commentary relates to Norwich Union Insurance, our UK general insurance business only.
Norwich Union Insurance is the leading general insurer in the United Kingdom. We provide a range of insurance products focused on personal and small business customers, together with a range of motoring solutions through the RAC and associated brands.
Net written premiums have decreased by 4% to £2,589 million (2007: £2,699 million). The reduction in premiums reflects lower levels of creditor business resulting from the ongoing uncertainty in the creditor market generally, coupled with our determination to write business for profit rather than volumes. In personal motor we have achieved rate increases of 5% (2007: 8%). Homeowner rates have increased by 10% (2007: 5%), reflecting the action initiated in August 2007 as a response to almost a decade of flat rates in that market. Rates in commercial lines have been steadily increasing and we have achieved an overall average annualised increase of 2% (2007: 3% decrease). However, this market remains extremely competitive and we have seen volumes decrease as a result.
For the six month period to 30 June 2008, general insurance profits increased to £305 million (2007: £269 million), despite a continuation of the challenging market conditions seen throughout 2007. Our combined operating ratio improved to 98% (2007: 102%) and is now in line with the Group target.
The principal factor in the improved profitability was that weather-related claims were in line with normal expectations compared with a £235 million adverse impact in the first half of 2007. The result includes savings on prior year claims development of £160 million (six months to 30 June 2007: £245 million). Performance in the first half of the year has also been impacted by the difficult market conditions and an increase in commission costs, driven by consolidation within the broker market. These factors have outweighed the benefits we have derived from our initiatives to deliver cost savings and control claims inflation.
Longer-term investment return (LTIR) is 13% lower on the prior period to £273 million (six months to 30 June 2007: £315 million) driven by the de-risking of the portfolio, which has seen higher yielding equities replaced by more secure fixed interest securities, and adverse cash flow in both 2007 and 2008 which has resulted in lower levels of investments held.
In October 2007 we announced a programme to leverage the investments we have made in recent years and deliver cost savings of £200 million in 2008 from the first phase of this programme. We are on track to deliver these savings and our expense ratio for the half year has improved to 12.8% (30 June 2007: 13.6%) and, notwithstanding the pressure on business volumes, we expect the full year ratio will be in line with the target of 12.4% presented at the analyst day in October 2007.
In June 2008 we announced details of the second phase of the programme to transform our business. This phase is designed to improve service and drive growth and will involve the redesign of the Operations function, simplification of processes, improvements in customer services and the consolidation of expertise into nine modern insurance centres of excellence. We expect this phase, together with additional actions being taken in other areas (most notably in the IT function), will deliver further cost savings of £150 million per annum and an expense ratio of less than 11% by 2010 (based on current volumes of business), giving us significant competitive advantage in the UK market.
Europe
Aviva Europe’s net written premiums increased by 17% to £2,183 million (six months to 30 June 2007: £1,869 million), reflecting the strength of the euro whilst the underlying trend is one of increasing price competition across a number of countries. Our general insurance and health businesses recorded operating profits of £137 million (six months to 30 June 2007: £203 million) reflecting the current competitive nature of the insurance markets particularly in Ireland and the Netherlands.
In France we recorded net written premiums of £485 million (six months to 30 June 2007: £421 million) and an operating profit of £30 million (six months to 30 June 2007: £31 million). A small underwriting profit of £1 million was achieved against a breakeven result in 2007 reflecting favourable claims experience and control of costs. An improved general insurance COR was achieved at 96% (30 June 2007: 97%).
Our market-leading Irish business has continued to experience intense competitive pressures within the market which have impacted the operating profit, down to £41 million for the period (six months to 30 June 2007: £80 million). The combined operating ratio worsened to 98% (30 June 2007: 78%) reflecting increased claims frequency and large claims during the first half of 2008, which impacted the underwriting result of £8 million (six months to 30 June 2007: £53 million). Net written premiums were £266 million for the period (six months to 30 June 2007: £245 million). We recently announced the acquisition of VIVAS Health, rebranded as Hibernian Health in June, which will enable us to compete strongly in the health market and add to our competitive strength.
In the Netherlands, our general insurance and health business recorded an operating profit of £44 million (six months to 30 June 2007: £70 million). Net written premiums increased to £1,233 million (six months to 30 June 2007: £1,055 million) driven by higher volumes and ratings increases and the acquisition of Erasmus in April 2007. The general insurance business recorded an operating profit of £57 million (six months to 30 June 2007: £86 million) and the COR worsened to 92% (30 June 2007: 76%) reflecting deterioration in claims experience, particularly motor, lower reserve releases in 2008 as well as pressure on premium rates. The health business reported an operating loss of £13 million (six months to 30 June 2007: £16 million loss) as rating improvements in late 2007 took effect. The health business has been shown as held for sale as at 30 June 2008 as we have previously announced the sale of this business to OWM CZ Groep Zorgverkeraar, which is expected to complete on 1 January 2009. In the meantime Delta Lloyd has commenced selling its products to CZ’s existing customer base. Delta Lloyd has recently launched a new online insurer, iZio, in the Netherlands, offering competitively priced general insurance products including home contents and car insurance.
Our other general insurance operations in Italy, Turkey and Poland contributed operating profit of £22 million (six months to 30 June 2007: £22 million) and net written premiums of £199 million (six months to 30 June 2007: £148 million).
North America
In the highly competitive Canadian market, we continue to achieve growth without compromising profitability. Net written premiums were £771 million (six months to 30 June 2007: £665 million). On a constant currency basis, this is an increase of 4%, reflecting growth in commercial lines.
The underwriting result was £15 million (six months to 30 June 2007: £5 million) with a favourable movement in COR to 98% (30 June 2007: 99%). Strong premium growth and favourable prior year claims development were partially offset by claims inflation, increases in claim frequency combined with losses from the record winter snowfall.
Operating profit was £76 million (six months to 30 June 2007: £70 million) with the positive movement in the underwriting result being partly offset by lower investment income following the equity de-risking that took place in the latter half of 2007.
Asia Pacific
The businesses in Asia Pacific reported an operating loss of £1 million (six month period to 30 June 2007: £3 million profit) due to higher claims from the health business in Singapore, fire related claims in Malaysia and flood related claims in Sri Lanka.
