We continue to improve our financial performance, despite the backdrop of a competitive market and subdued investment returns

Transcription

1 Operating review Group performance We continue to improve our financial performance, despite the backdrop of a competitive market and subdued investment returns Operating profit for ongoing business improved by 9.3% to million (2011: million). This followed substantial management action to improve risk selection and claims management. Combined with the successful implementation of our 2012 capital plan, including returning 1 billion in dividends (2011: nil) to RBS Group and raising 500 million (2011: nil) of long-term subordinated debt, the Group has achieved, on a pro forma basis, a RoTE for ongoing business of 13.4%. The Group s COR for ongoing business was 99.2% (2011: 101.8%), leading to a profitable underwriting result despite above average claims arising from major weather events and the impact of parallel running costs prior to the separation from RBS Group. Summary income statement ongoing operations For the year ended 31 December Gross written premium 3, ,124.9 Net earned premium 3, ,890.9 Underwriting profit / (loss) 28.2 (72.3) Instalment and other operating income Investment return Operating profit Adjusted earnings per share (pence) Return on tangible equity (%) Pro forma return on tangible equity (%) 13.4 n/a The following table analyses ongoing operating profit / (loss) by division: Divisional ongoing operating profit For the year ended 31 December Motor Home Rescue and other personal lines Commercial 2.2 (12.4) International Total On the following pages 31 to 35, the contribution of each division to the Group s operating performance is discussed in more detail. 30 Direct Line Group Annual Report & Accounts 2012

2 Personal lines The UK Personal Lines business has maintained its focus on value within an increasingly competitive market. We are continuing to invest in pricing and claims excellence and are focused on delivering value for our customers. Tom Woolgrove, Managing Director of Personal Lines Motor Retained position as the UK s leading motor insurer by in-force policies, stabilising the policy count after substantial de-risking in 2010 and 2011 Operating profit up 2.7% despite significant reduction in other operating income Significant improvement in the COR, from 105.6% to 101.6% Continued to enhance our pricing and claims capability, contributing to a reduction of 7.1 percentage points in the loss ratio Extended our distribution reach through launching on comparethemarket.com with the Churchill, Privilege and Sainsbury s Bank brands In-force policies (thousands) 4,050 4,107 Gross written premium 1,623.5m 1,734.8m Loss ratio 74.6% 81.7% Commission ratio 2.0% 1.5% Expense ratio 25.0% 22.4% Combined operating ratio 101.6% 105.6% Operating profit 261.8m 254.8m Following the significant increases in premium rates experienced in 2010 and 2011, the UK private motor insurance market has been broadly flat during Small bodily injury claims in particular have received considerable political and regulatory attention, with the prospect of a balanced package of reforms including: Banning solicitors referral fees Reducing fixed legal costs for bodily injury claims to below 10,000 Removing recoverability of conditional fee agreements offset by a 10% uplift to general damages In addition, consultations regarding increasing the bodily injury small claims limit from 1,000 to 5,000 and reforming medical evidence for whiplash claims have begun. We have continued to invest in our customer offerings, and have focused in particular on sharpening our multi-car proposition and pricing. We completed the roll-out of our new claims system to all brands, and are delivering improved claims performance, particularly in bodily injury cases. In July, we launched on comparethemarket.com, with the Churchill, Privilege and Sainsbury s Bank brands. Gross written premium of 1,623.5 million fell 6.4% compared with 2011, due to the full-year effect of de-risking the portfolio in 2011 and a continued focus on disciplined underwriting. The in-force policy count stabilised at 4.1 million. The underwriting loss in 2012 of 26.3 million improved by 72.3 million compared with 2011, and the COR fell from 105.6% to 101.6%. This was the result of continued improvements to claims performance arising from improved pricing, the ongoing effect of de-risking and the benefits arising from the transformation of the claims operation. These trends were reflected in both an improved current-year loss ratio and increased releases from prior years. Operating profit of million in 2012 increased from million in The UK motor market is expected to remain particularly competitive during The full effects of the move to gender neutral pricing, the package of upcoming legal reforms and the referral of the UK motor insurance market to the Competition Commission are still to be felt. We support the direction of the overall package of the legal reforms and continue to engage proactively with key stakeholders. Overall, we believe that, taken together, the effect of the package of civil justice reforms should be at least net neutral for the Group in the medium term. However, there remains considerable uncertainty about the details and timing of the reforms. We will continue to prepare for a range of outcomes. Business review: review Direct Line Group Annual Report & Accounts

3 Operating review continued Home Operating profit of 93.3 million, 16.6% lower than 2011 primarily due to adverse weather in 2012 In-force policies broadly stable, reflecting competitive market conditions for new business hip extended with Sainsbury s Bank, signing an arm s length distribution agreement with RBS Group and renewal and extension of Nationwide Building Society partnership In-force policies (thousands) 4,239 4,308 Gross written premium 989.0m 1,031.3m Loss ratio 58.4% 57.4% Commission ratio 16.2% 17.5% Expense ratio 22.0% 20.2% Combined operating ratio 96.6% 95.1% Operating profit 93.3m 111.9m The size of the UK home insurance market has been relatively stable in recent years with limited growth in the housing stock and competitive pressure through the growth of the PCW distribution channel. These constraints have remained in 2012, with little observed new business premium inflation from major market players. This competitive environment is expected to continue. We continue to focus on improving our product options to meet customer needs and increase customer value. New product ranges were launched in 2012 for our Sainsbury s Bank and Nationwide Building Society partnerships. During 2012, we implemented a new rating capability for Home. This allowed us to make a step change in our ability to set renewal prices more accurately and, at the end of 2012, resulted in a material improvement to our peril level risk pricing. In addition, our new claims system and operating model, launched for Churchill in 2011, has been extended to our remaining own brands, with the roll-out plan for our partner brands continuing into In December 2012, we launched home insurance on comparethemarket.com, with our Churchill, Privilege and selected partner brands. Total gross written premium was million, 4.1% lower than 2011, with a COR of 96.6% and an operating profit of 93.3 million. Rainfall figures for 2012 were among the highest on record, with claims from weather events totalling 105 million, 25 million above the expected level for a normal year. In-force polices reduced by 1.6% from 2011, due mainly to pressure on new business sales. This was partly offset by our ongoing retention initiatives as we continued to focus on a balanced approach of ensuring existing customers were retained, whilst investing in rating capability and insight to maintain our competitiveness in the market. The Home division continues to enhance its pricing and claims capabilities with a focus on deploying these in key customer segments. With a balanced distribution footprint, we believe the Home division is well positioned to maintain its position in a competitive market. 32 Direct Line Group Annual Report & Accounts 2012

4 Rescue and other personal lines Operating profit up 33.3% to 84.4 million Increase in in-force policies relating to growth in packaged bank accounts Increased Green Flag branded presence at roadside and new marketing campaign In-force policies (thousands) 9,431 9,151 Gross written premium 389.8m 350.2m Loss ratio 50.9% 44.4% Commission ratio 6.0% 22.5% Expense ratio 25.8% 19.4% Combined operating ratio 82.7% 86.3% Operating profit 84.4m 63.3m The UK breakdown market is well established with three major providers; AA, RAC and Green Flag. The market has historically displayed strong returns, although the total market premium has been impacted in recent years by lower car ownership, due to the economic climate. The pet and travel markets continue to be competitive, with the growth in PCWs acting to diversify distribution. Customer numbers are expected to remain broadly stable. The division has delivered gross written premium of million which is 11.3% higher than This was driven by the growth in travel partnership accounts and premium inflation in the pet market. In-force policies increased by 3.1% during Gross written premium for the rescue business reduced by 3.6% compared with 2011, with growth in the Green Flag direct business offset by lower linked sales as the Motor business de-risked. Underwriting profit of 66.2 million was 23.1% higher than 2011, the increase being largely attributable to one-off releases and adjustments relating to the run-off of our creditor business. Overall operating profit increased by 33.3% compared with A distribution agreement has been signed with RBS Group for the provision of rescue and travel insurance through packaged bank accounts, strengthening our partnership relationship as we separate from RBS Group. A new strategic service partner agreement with external recovery agents, embedded in 2012, has created an increased Green Flag branded presence at the roadside and we have launched a new marketing campaign for the brand. In 2013 we expect to enhance our customer propositions through refreshed marketing initiatives and improved distribution capabilities. The positive results in 2012 from the run-off of our creditor business are not expected to be repeated in Business review: review Direct Line Group Annual Report & Accounts

5 Operating review continued Commercial Thanks to a strong focus on pricing and disciplined underwriting we are back in profit. We have established a momentum over the last two years which gives us confidence in delivering our targets. Jonathan Greenwood, Managing Director of Commercial Return to operating profit in 2012 Significant improvement in COR to 108.2% Action taken to improve expense ratio Roll-out of etrading platform commenced In-force policies (thousands) Gross written premium 435.6m 438.6m Loss ratio 63.1% 65.4% Commission ratio 21.6% 21.0% Expense ratio 23.5% 25.9% Combined operating ratio 108.2% 112.3% Operating profit / (loss) 2.2m ( 12.4m) This year was another challenging year for the UK commercial market as overall premium rates remained under pressure. Motor experienced increasing rates in response to bodily injury claims, whereas liability rates struggled to keep up with underlying claims inflation. This, together with depressed investment returns, has been countered by a number of cost reduction initiatives across the market. Gross written premium of million was broadly unchanged as growth in DL4B was offset by the exit of unprofitable business. The loss ratio improved by 2.3 percentage points reflecting improvements in underlying business, particularly from the motor account, and continued releases from prior year reserves. This was despite a number of larger than normal fire claims in the first half of 2012, as well as weather events. The expense ratio improved by 2.4 percentage points reflecting improved cost management. We have set a target to deliver a COR below 100% in 2014 and expect to make progress towards this target in Through 2013 we aim to rationalise our regional and head office operating model, to complete the roll-out of the new Commercial etrading platform in the broker channel and to continue the development of our brands. 34 Direct Line Group Annual Report & Accounts 2012

6 International The International business has continued to strengthen its position in the two markets in which we operate. We have delivered a substantial increase in profits, contributing to the improvement in the Group result. Jamie Brown, Managing Director of International Significant improvement in operating profit to 19.5 million 3.9% increase in gross written premium in local currency terms 5.4% increase of in-force policies to around 1.5 million In-force policies (thousands) 1,462 1,387 Gross written premium 552.7m 570.0m Loss ratio 78.1% 81.4% Commission ratio 12.1% 7.9% Expense ratio 13.1% 18.3% Combined operating ratio 103.3% 107.6% Operating profit 19.5m 4.3m In Italy the economic environment deteriorated further in 2012 with depressed GDP growth. The downturn put pressure on the insurance market which contracted by 1%. The pricing cycle remained positive with market rates increasing by 2.5%. However, there was a decrease in the number of insured vehicles of 1.5% year on year. Despite adverse conditions the direct market increased by 10% in comparison with In Germany, economic growth slowed in the second half of the year but remains largely positive compared with the rest of Europe. The motor insurance industry reached 22 billion gross written premium with growth of 5.1% above 2011 levels mainly driven by a positive pricing cycle. Despite a challenging year within the Eurozone, our International business performed strongly in Both the Italian and German businesses have generated strong profits in 2012, making operating profits of 14.0 million and 5.5 million respectively. In-force policies increased by 5.4% to around 1.5 million and gross written premium increased 3.9% in local currency terms. Due to adverse exchange rates, reported gross written premium reduced by 3.0% to million compared with The COR improved from 107.6% to 103.3% as the business focused on operating efficiencies following strong growth in The outlook for Direct Line Italy is mixed. The Italian economy continues to experience lower new car sales and the volume of cars in Italy is expected to shrink in Offsetting this, fewer miles driven is resulting in lower claims frequency. The Italian government has announced a number of initiatives to liberalise the market and although these have yet to be finalised we consider this may provide an opportunity for Direct Line Italy. The German environment has remained positive for direct market growth and has seen premium rates increase in 2012 and a benign economic backdrop. Direct Line Germany experienced strong growth in year end business which we expect will help it build further scale in Business review: review Direct Line Group Annual Report & Accounts