Preliminary results year ended 31 December 2008
05 March 2009
6. Analysis of general insurance and health
| Net written premiums | Underwriting result | Longer-term investment return |
Operating profit | |||||
|---|---|---|---|---|---|---|---|---|
| 2008 £m |
Restated 2007 £m |
2008 £m |
Restated 2007 £m |
2008 £m |
Restated 2007 £m |
2008 £m |
Restated 2007 £m |
|
| General insurance | ||||||||
| United Kingdom1 | 5,024 | 5,490 | 63 | (221) | 579 | 642 | 642 | 421 |
| France | 678 | 574 | 28 | 7 | 53 | 47 | 81 | 54 |
| Ireland | 494 | 474 | (4) | 101 | 67 | 61 | 63 | 162 |
| Netherlands | 1,028 | 788 | 54 | 120 | 92 | 73 | 146 | 193 |
| Other | 417 | 308 | – | 10 | 45 | 31 | 45 | 41 |
| Europe | 2,617 | 2,144 | 78 | 238 | 257 | 212 | 335 | 450 |
| North America | 1,601 | 1,412 | 21 | 18 | 124 | 136 | 145 | 154 |
| Asia Pacific | 6 | 5 | (5) | – | 1 | – | (4) | – |
| 9,248 | 9,051 | 157 | 35 | 961 | 990 | 1,118 | 1,025 | |
| Health insurance | ||||||||
| United Kingdom | 389 | 407 | 8 | (5) | 6 | 5 | 14 | – |
| France | 204 | 159 | 11 | 4 | 15 | 12 | 26 | 16 |
| Ireland | 19 | – | 4 | – | 1 | – | 5 | – |
| Netherlands | 1,250 | 929 | (11) | (45) | 42 | 21 | 31 | (24) |
| Europe | 1,473 | 1,088 | 4 | (41) | 58 | 33 | 62 | (8) |
| Asia Pacific | 27 | 23 | 4 | 3 | – | 1 | 4 | 4 |
| 1,889 | 1,518 | 16 | (43) | 64 | 39 | 80 | (4) | |
| Total | 11,137 | 10,569 | 173 | (8) | 1,025 | 1,029 | 1,198 | 1,021 |
- United Kingdom includes Aviva Re and agencies in run-off.
The group’s net written premiums from its worldwide general insurance and health businesses increased by 5% to £11,137 million for the year (2007 restated: £10,569 million).
Group operating profit from general insurance and health businesses increased by 17% to £1,198 million (2007 restated: £1,021 million). The general insurance and health underwriting result increased to £173 million (2007 restated: £8 million loss) reflecting the absence of adverse weather costs of £475 million in the UK partly offset by lower prior year releases across the group of £840 million (2007: £969 million) and the impact of competitive markets in Ireland and the Netherlands. The worldwide general insurance combined operating ratio (COR) improved to 98% (2007 restated: 100%) in line with the group’s ‘meet or beat’ target.
The worldwide GI expense ratio has decreased to 13.4% (2007 restated: 13.9%), primarily driven by cost savings achieved by the UK, France and the Netherlands.
The longer-term investment return (LTIR) on general insurance and health business assets was slightly lower at £1,025 million (2007 restated: £1,029 million) resulting from 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 partly offset by higher expected rates of return.
United Kingdom
General insurance and health
The results for the United Kingdom include our general insurer Norwich Union Insurance, our healthcare business, our group captive reinsurer Aviva Re and agencies in run-off. Combined general insurance and health net written premiums reduced by 8% to £5,413 million (2007 restated: £5,897 million). General insurance net written premiums have decreased to £5,024 million (2007 restated: £5,490 million) and to £389 million (2007: £407 million) for health. Operating profit of £642 million (2007 restated: £421 million) includes contributions of £97 million (2007: £53 million) from Aviva Re, which benefited from a one-off commutation of £30 million in the year.
Norwich Union Insurance
Norwich Union insurance continues to be the leading provider of general insurance in the United Kingdom. We provide a range of insurance products focused on personal and small business customers, together with roadside assistance through the RAC.
The continuing tough market conditions and our focus on sustainable profitability rather than volumes are reflected in our financial performance in 2008. We have seen net written premiums fall 8% to £4,981 million in 2008 (2007: £5,440 million). While all business lines have been affected the decline was most notable in creditor, where volumes have fallen by around 30% reflecting distributor response to the issues with payment protection insurance and the decline in lending.
In personal lines we have achieved motor rating increases of 5% (2007: 6%). Following our initiatives to improve the price competitiveness of our direct channel, we have focussed on better quality risks resulting in a reduction in our average premium levels. Homeowner rates have increased by 9% (2007: 7%). While overall rating in personal lines has been marginally better than headline claims inflation, the impact of claims farming and an increase in bodily injury claims have adversely impacted profitability.
The commercial market has remained particularly price competitive. Against this backdrop we have reversed the trend of declining rates seen in the past four years, achieving an overall rate increase in 2008 of 3% (a 5% improvement on the 2% reduction in 2007). Our stance on commercial pricing is underlined by the implementation of the second phase of rating action in the final quarter of the year. While this represents a significant improvement on recent trends, the rating achieved in the year remained below the level of claims inflation and has also contributed to a reduction in volumes.
Operating profit for the year rose to £566 million (2007 restated: £368 million) with an improved combined operating ratio of 99% (2007 restated: 106%). The principal factor in the improved profitability for the general insurance business was that weather related claims were in line with normal expectations compared with a £475 million adverse impact in 2007. This benefit was partly offset by a reduction in the savings on prior year claims development to £285 million (2007 restated: £430 million, including £215 million of a non-recurring nature), the impact of difficult market conditions and a reduction in long-term investment returns to £549 million (2007: £613 million). These factors have outweighed the earned benefits we have derived from our initiatives to deliver cost savings and control claims inflation.
Total prior year releases in 2008 were £285 million. This is down on the £430 million released last year and we would expect future contributions from prior year releases to decline further.
2008 saw a step change in our operational efficiency. Our expense ratio improved from 13.9% in 2007 to 12.1%, despite an overall reduction in business volumes. This has been achieved by £265 million of cost savings in the year, including £200 million from the first phase of our programme announced in October 2007. In June 2008 we announced details of the second phase of the programme to transform our business. This phase will improve service and drive growth and involves the redesign of the operations function, simplification of processes, improvements in customer services and the consolidation of expertise into seven modern insurance centres of excellence in the UK. 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 by 2010.
The actions taken to reduce distribution costs and the impact of claims ratio improvements arising from rating and risk selection will result in real improvements in the current year profitability. All this gives us confidence in delivering a UK general insurance COR in 2009 in line with our worldwide “meet or beat” target of 98%, without the benefit of historical levels of prior year support.
Health
Total health insurance operating profit increased to £14 million (2007: £nil) resulting from pricing decisions throughout the year to improve margins, tighter expense controls and exiting unprofitable international markets.
Europe
Aviva Europe’s net written premiums increased by 27% to £4,090 million (2007: £3,232 million). Against a backdrop of increasing price competition across a number of countries operating profit decreased to £397 million (2007: £442 million). This result has been favourably impacted the development of new distribution channels, product launches in the year across a number of our businesses and the strengthening of the euro, offset by the current competitive nature of the insurance markets particularly in Ireland and the Netherlands.
In France we recorded net written premiums of £882 million (2007: £733 million) and an operating profit of £107 million (2007: £70 million). An increase in the general insurance underwriting result to £28 million (2007: £7 million) reflected favourable claims experience due to better than expected weather claims and an increase in premiums. The general insurance COR improved to 96% (2007: 99%).
General insurance operating profit in Ireland decreased to £63 million (2007: £162 million) driven by storms in July and August, intensive competitive pressure in the market and the Irish economy slipping into recession. The combined operating ratio worsened to 103% (2007: 80%) reflecting increased claims frequency, some large claims and adverse weather experience, which resulted in an underwriting result of £4 million loss (2007: £101 million profit). Net written premiums were £494 million (2007: £474 million). The health business recorded net written premiums for the first time of £19 million following the acquisition of VIVAS Health, now rebranded to Hibernian Aviva Health. Since acquisition the number of lives insured by Hibernian Aviva Health has grown in excess of 30%, making it the fastest growing health insurer in Ireland.
In the Netherlands, our general insurance and health business recorded an operating profit of £177 million (2007: £169 million). Net written premiums increased to £2,278 million (2007: £1,717 million) driven by the strength of the euro and competitively priced health products.
The general insurance business in the Netherlands recorded an operating profit of £146 million (2007: £193 million) and the COR worsened to 94% (2007: 85%) reflecting pressure on premium rates and deterioration in claims, particularly motor. The motor portfolio has seen strong price competition in 2008 although rates are now showing signs of recovery pressures on premium rates. The health business reported an operating profit of £31 million (2007: £24 million loss) reflecting rating improvements and favourable prior year run-off. The Dutch health business has been shown as held for sale at 31 December 2008 as we have previously announced the sale of this business to OWM CZ Groep Zorgverkeraar (CZ). This transaction completed on 1 January 2009. During 2008 Delta Lloyd commenced selling its products to CZ’s existing customer base.
Our other general insurance operations in Italy, Turkey and Poland contributed operating profit of £45 million (2007: £41 million) and net written premiums of £417 million (2007: £308 million) with particularly strong growth in Italy reflecting the new bancassurance agreement with Banco Popolare.
North America
Net written premiums of our Canadian business increased by 13% to £1,601 million (2007: £1,412 million) with growth across all lines and the acquisition of National Home Warranty in July 2008. On a constant currency basis, net written premiums increased by 4%.
The underwriting result was higher at £21 million (2007: £18 million) with a COR of 99% (2007: 98%). Favourable prior year development was offset by tough market conditions in the insurance cycle, weather related costs and restructuring and strategic spend.
Operating profit of £145 million (2007: £154 million) was impacted 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 increase in net written premiums to £33 million (2007: £28 million) predominantly driven by the contribution of the Malaysian general insurance business which commenced operations in the latter half of 2007. Operating profit of £4 million (2007: £4 million) from the health business has been offset by a £4 million loss (2007: £nil) in the general insurance business due to costs incurred in closing the Malaysian motor portfolio.
(a) Combined operating profit ratios – general insurance business only
| Claims ratio | Expense ratio | Combined operating ratio | ||||
|---|---|---|---|---|---|---|
| 2008 % |
Restated 2007 % |
2008 % |
Restated 2007 % |
2008 % |
Restated 2007 % |
|
| United Kingdom1 | 62.0% | 65.9% | 12.1% | 13.9% | 99% | 106% |
| France | 68.2% | 72.7% | 9.7% | 10.2% | 96% | 99% |
| Ireland | 74.3% | 54.2% | 16.9% | 14.3% | 103% | 80% |
| Netherlands | 57.2% | 45.1% | 18.2% | 18.8% | 94% | 85% |
| Canada | 64.4% | 65.9% | 15.0% | 13.6% | 99% | 98% |
| Total | 62.6% | 63.7% | 13.4% | 13.9% | 98% | 100% |
- United Kingdom excluding Aviva Re and agencies in run-off.
Ratios are measured in local currency. The total Group ratios are based on average exchange rates applying to the respective periods.
Definitions:
Claims ratio – Incurred claims expressed as a percentage of net earned premiums.
Expense ratio – Written expenses excluding commissions expressed as a percentage of net written premiums.
Commission ratio – Written commissions expressed as a percentage of net written premiums.
Combined operating ratio – Aggregate of claims ratio, expense ratio and commission ratio.
(b) Combined operating profit ratio analysis – class of business analysis
(i) United Kingdom (excluding group reinsurance and agencies in run-off)
| Net written premium | Underwriting result | Combined operating ratio | ||||
|---|---|---|---|---|---|---|
| 2008 £m |
Restated 2007 £m |
2008 £m |
Restated 2007 £m |
2008 % |
Restated 2007 % |
|
| Personal | ||||||
| Motor | 1,329 | 1,431 | (37) | (25) | 103% | 102% |
| Homeowner | 1,188 | 1,223 | (57) | (296) | 104% | 124% |
| Other | 602 | 797 | 4 | 10 | 103% | 100% |
| 3,119 | 3,451 | (90) | (311) | 103% | 110% | |
| Commercial | ||||||
| Motor | 577 | 636 | 28 | 61 | 95% | 91% |
| Property | 774 | 807 | (6) | (175) | 100% | 124% |
| Other | 511 | 546 | 85 | 180 | 85% | 68% |
| 1,862 | 1,989 | 107 | 66 | 94% | 98% | |
| Total | 4,981 | 5,440 | 17 | (245) | 99% | 106% |
During the year to 31 December 2008, annualised rating increases were as follows: personal motor 5%; homeowner 9%; commercial motor 3%; commercial property 3%; and, commercial liability 2%.
(ii) France
| Net written premium | Underwriting result | Combined operating ratio | ||||
|---|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
2008 % |
2007 % |
|
| Motor | 290M | 254 | – | (2) | 100% | 101% |
| Property and other | 388 | 320 | 28 | 9 | 93% | 97% |
| Total | 678 | 574 | 28 | 7 | 96% | 99% |
(iii) Ireland
| Net written premium | Underwriting result | Combined operating ratio | ||||
|---|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
2008 % |
2007 % |
|
| Motor | 243 | 232 | 9 | 51 | 99% | 81% |
| Property and other | 251 | 242 | (13) | 50 | 107% | 80% |
| Total | 494 | 474 | (4) | 101 | 103% | 80% |
(iv) Netherlands
| Net written premium | Underwriting result | Combined operating ratio | ||||
|---|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
2008 % |
2007 % |
|
| Motor | 323 | 267 | 8 | 42 | 98% | 84% |
| Property | 343 | 249 | (2) | 19 | 98% | 93% |
| Liability | 78 | 61 | 14 | 13 | 81% | 79% |
| Other | 284 | 211 | 34 | 46 | 87% | 77% |
| Total | 1,028 | 788 | 54 | 120 | 94% | 85% |
(v) Canada
| Net written premium | Underwriting result | Combined operating ratio | ||||
|---|---|---|---|---|---|---|
| 2008 £m |
2007 £m |
2008 £m |
2007 £m |
2008 % |
2007 % |
|
| Motor | 880 | 795 | 47 | 7 | 95% | 99% |
| Property | 512 | 450 | (50) | 10 | 110% | 96% |
| Liability | 166 | 143 | 15 | (5) | 90% | 103% |
| Other | 43 | 24 | 9 | 6 | 73% | 68% |
| Total | 1,601 | 1,412 | 21 | 18 | 99% | 98% |
(c) Economic assumption changes
The discount rate that has been applied to latent claims reserves is based on the swap rate in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims which span over 35 years, with the average duration being between 9 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected below operating profit as an economic assumption change. The sharp decline in interest rates in the second half of 2008 has resulted in an increase in the net discounted provision of £94 million.
(d) Exceptional strengthening of latent claims provisions
Separately and in addition to the decision to discount latent claims, our estimation of latent claims reserves in 2008 has been revised to reflect increasing market trends observed in mesothelioma claims. The majority of the Group’s latent claims reserves relate to mesothelioma based risks in the UK.
The Institute of Actuaries’ Asbestos Working Party report in 2008 contributed to our view that experience variances, which we had previously perceived as normal short-term volatility, reflected a real worsening of expected ultimate claims experience. The market trend in mesothelioma claims has been fully reflected as a significant one-off strengthening of gross latent claims reserves in 2008 of £356 million, with a corresponding increase of £52 million in reinsurance recoverable. The net increase of £304 million comprises £668 million on an undiscounted basis and discounting of £364 million. Due to its size and the fact that this related to discontinued business, this one-off strengthening has been reported as an exceptional item below operating profit.
Whilst this is a significant step change, it should be noted that this reflects the long-term impact of the settlement of latent claims currently running at £30 million per annum, of which £25 million related to mesothelioma. The number of claims is currently predicted to rise slightly in the period to 2015 and then diminish slowly over the next 30 years to 2045.