Insurance & Investment
Strategy
Our strategy is to be the UK’s leading insurance and investment group. We have ambitions to grow our market share in all sectors in which we operate, but our emphasis is on profitable growth. Our strategy is based off the core strengths of our existing multi-channel, multi-brand operating model, leveraging the strength of the Group’s brands and our access to the significant HBOS customer base, but also further extending our presence in 3rd party channels.
Key objectives in support of this strategy include:
Growing our market share of personal lines insurance
Leveraging our market-leading position in mortgages, we are targeting growth in Household Insurance, through the development of our product propositions and brand offerings. There are significant growth opportunities through the Group’s Retail network but also through intermediaries and we will leverage the Group’s strengths and expertise in both channels with the objective of profitably growing our existing 7% market share. We will utilise the strength of the esure and Sheilas’ Wheels brands to grow our Motor Insurance business when the pricing cycle turns. We will maintain a leading position in the repayment insurance market, continuing to enhance our customer offering to support growth in both 1st and 3rd party channels.
Delivering value generating growth in Life, Pensions and Investments (‘LP&I’) market
We will continue to develop our market-leading Bancassurance business, offering our customers simple, value for money products, while investing in adviser recruitment, branch space and technology to drive further capacity and productivity improvements. In the Intermediary channel, where returns are less strong, our focus is on optimising the value generated by selecting the product areas and intermediary segments which offer the most attractive returns. SJP will continue to target growth through its unique business model in the growing wealth management market, with a dual focus on improving productivity and on recruiting top quality partners.
Driving customer satisfaction and retention through the delivery of service excellence
Service excellence will continue to be critical to our business model. We are investing in technology to maximise process efficiency, with an increasing emphasis on straight through electronic processing to reduce rework and errors. We will continue our focus on the recruitment, training and retention of quality colleagues who will provide service excellence and drive advocacy of our products.
Maintaining rigorous cost control disciplines
Cost efficient growth is at the heart of our strategy. We will seek to maximise efficiency in our new business processing, existing business administration, claims handling and customer service, whilst investing in growing the business with supporting technology and process improvements.
Our performance in 2006
Underlying profit before tax in Insurance & Investment increased by 19% to £581m (2005 £489m) with General Insurance profit increasing by 20% to £304m (2005 £254m) and Investment profit increasing by 18% to £277m (2005 £235m). Investment profit on the Full Embedded Value basis (described in the supplementary EV information on pages 20 to 24) increased by 30% to £539m (2005 £414m).
General Insurance sales, as measured by Gross Written Premium (‘GWP’), decreased by 4% to £1,894m (2005 £1,977m) reflecting a strong performance in Household Insurance (up 11%) offset by lower sales in Repayment Insurance (down 10%) and Motor Insurance (down 9%).
Investment sales, as measured by Annual Premium Equivalent (‘APE’), increased by 23% to £1,817m (2005 £1,473m) with strong growth in all three channels: Bancassurance up 12%, Intermediary up 28% and Wealth Management up 58%.
Our continued focus on cost efficiency resulted in underlying operating expenses increasing by only 2% whilst underlying non-interest income increased by 8%.
Financial Performance
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net interest income | (93) | (95) |
| Non-interest income | 10,773 | 12,948 |
| Fees and commission income | 119 | 153 |
| Fees and commission expense | (784) | (804) |
| Net earned premiums on insurance contracts | 5,161 | 4,467 |
| Change in value of in-forcelong term assurance business | 179 | 337 |
| Investment and other operating income | 6,098 | 8,795 |
| Net operating income | 10,680 | 12,853 |
| Operating expenses | (10,062) | (12,330) |
| Staff | (359) | (327) |
| Accommodation, repairs and maintenance | (20) | (18) |
| Technology | (34) | (34) |
| Marketing and communication | (39) | (34) |
| Depreciation: | ||
| Property and equipment and intangible assets | (51) | (47) |
| Other | (219) | (250) |
| Sub total | (722) | (710) |
| Recharges: | ||
| Technology | (45) | (45) |
| Accommodation | (35) | (31) |
| Other shared services | (18) | (16) |
| Underlying operating expenses | (820) | (802) |
| Change in investment contract liabilities | (2,898) | (5,198) |
| Net claims incurred on insurance contracts | (2,215) | (1,892) |
| Net change in insurance contract liabilities | (3,560) | (4,069) |
| Change in unallocated surplus | (569) | (369) |
| Operating profit | 618 | 523 |
| Share of losses of associates and jointly controlled entities | (37) | (34) |
| Underlying profit before tax | 581 | 489 |
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General Insurance Business
Financial Performance
In a highly competitive market, underlying profit before tax in General Insurance increased by 20% to £304m (2005 £254m) reflecting our continued focus on retention alongside strong underwriting performance. GWP fell by 4% to £1,894m (2005 £1,977m). Notwithstanding strong price competition, Household Insurance sales grew by 11% although Repayment Insurance was down 10%, reflecting reduced unsecured personal lending volumes. In Motor, sales were down 9% in a highly competitive market which has yet to see a sustained increase in prices that would warrant the pursuit of faster sales growth.
Underlying non-interest income increased by 14% to £450m (2005 £396m). Underlying operating expenses increased by 3% to £136m (2005 £132m).
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net interest income | 27 | 24 |
| Non-interest income | 848 | 795 |
| Fees and commission income | 16 | 30 |
| Fees and commission expense | (546) | (588) |
| Net earned premiums on insurance contracts | 1,315 | 1,226 |
| Change in value of in-forcelong term assurance business |
(5) | 54 |
| Investment and other operating income | 68 | 73 |
| Net operating income | 875 | 819 |
| Operating expenses | (534) | (531) |
| Underlying operating expenses | (136) | (132) |
| Net claims incurred on insurance contracts | (352) | (354) |
| Net change in insurance contract liabilities | (46) | (45) |
| Operating profit | 341 | 288 |
| Share of losses of associates and jointly controlled entities | (37) | (34) |
| Underlying profit before tax | 304 | 254 |
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Operational Performance
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Household | 618 | 557 |
| Repayment: | ||
| 1st party | 528 | 565 |
| 3rd party | 420 | 483 |
| Motor | 298 | 327 |
| Other | 30 | 45 |
| Total | 1,894 | 1,977 |
* 2005 GWP re-analysed to reflect a revised allocation of ‘other’ insurances to the Household caption.
Household Insurance
Notwithstanding strong price competition at this stage in the cycle, sales of Household Insurance increased by 11% to £618m GWP (2005 £557m). Policy numbers increased by 10% to 3.2m (2005 2.9m), 53% of new policy sales being generated from Group distribution channels and the balance through 3rd party distributors.
Going forward, we will further leverage the Group’s market leading mortgage position and distribution strengths to drive further profitable growth. Sales through the Retail branch network in 2006 increased by 9% to £139m (2005 £127m) and internet sales increased by 39% to £25m (2005 £18m). Following the sale of the Paymentshield intermediary business in November 2006, we terminated the underwriting agreement with Paymentshield. This agreement contributed £92m of GWP in 2006, and consequently we expect sales through 3rd party channels will reduce in 2007.
The quality of our Household Insurance products and service was reinforced by the recent confirmation of our 5 Star Defaqto rating for the fourth consecutive year.
Underwriting performance in Household Insurance has been good, underpinned by continuing benign weather conditions in 2006 but also reflecting our continued investment in claims management. This has contributed to an exceptionally good Household Insurance loss ratio of 45% (2005 49%).
