2014 2013
In-force policies (thousands) 3,672 3,762 Gross written premium £1,342.0m £1,421.1m
Loss ratio 67.0% 65.1%
Commission ratio 3.2% 2.5%
Expense ratio 26.0% 25.6%
Combined operating ratio 96.2% 93.2%
Operating profit £297.1m £347.7m
Market
The UK economy continued expanding, while in the European Union area output grew modestly and domestic demand weakened. This may subdue UK growth in the future. Consumer price inflation has been lower than expected. This led to a delay in anticipated rises in base interest rates and continued the trend of low investment returns on debt securities. The total number of cars on the road increased to 32 million supported by car manufacturing, rising approximately 4% on the previous period, as economic confidence rose. Fuel prices were broadly stable for most of the year although did fall late in the year, while total distance travelled increased.
The motor insurance market was highly competitive with further premium deflation at the start of the year. As the year progressed premium rates flattened. PCWs continued to take a central role in the market as customers shopped around. The CMA introduced a ban on wide ‘most favoured nation’ clauses, which aims to increase competition further.
Performance
We continued enhancing our customer functionality through new tablet and smartphone-optimised websites. We also improved our customer propositions, including rolling out a self-install telematics proposition.
We continued making choices designed to optimise value and prioritise underwriting profit over volume growth. Furthermore, these results reflected previous actions to reduce risk and manage claims costs. These have helped us manage the business successfully through a dynamic and evolving regulatory landscape and competitive marketplace. Effect on premium income of changes in price and risk mix2
Q4 2014 Q3 2014 Q2 2014 Q1 2014 Change in price 1.7% − (2.3%) (5.1%) Change in risk mix (1.0%) (2.6%) (2.3%) (1.0%)
Gross written premium of £1,342.0 million reduced by 5.6% and in-force policies reduced by 2.4%, compared with 2013. Overall, prices increased marginally in the fourth quarter of 2014 compared with the same period last year, while risk mix reduced by 1.0%. Our prices were more competitive in a stable market, and the benefits from improvements in pricing capability continued.
Underwriting profit reduced by 49.2% to £49.8 million. This was mainly due to lower, albeit still significant, prior-year reserve releases and adverse volatility in large bodily injury claims in 2014. These factors increased the loss ratio by 1.9 percentage points. The expense ratio deteriorated by 0.4 percentage points as benefits from the Group’s cost saving plans were offset by a reduction in net earned premium. The commission ratio deteriorated by 0.7 percentage points as a result of an increase in profit commission payments due to partners.
Overall operating profit was £297.1 million, a reduction of 14.6% compared with 2013, as lower underwriting profit and lower other income was offset by better investment returns.
Outlook
A number of headwinds are facing the motor market as we enter 2015, in particular the return to a more normal long-term claims inflation versus evidence in the early part of the year of continued market competition. Against these headwinds, we end the year conservatively reserved, from which we continue to expect material reserve releases assuming current claims trends continue, and a programme of initiatives to deliver further capability improvements.
Notes:
1. See note 1 on page 7
2. Risk mix reflects the expected level of claims from the portfolio. It measures the estimated quarterly movement to the same quarter in the previous year based on risk models used in that period and is revised when risk models are updated.
Str
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Home
Highlights
• Retained position as one of Britain’s leading home insurers with a 16.7% share of in-force policies1
• Own brand customer retention improved on last year as we continued investing in pricing programmes
• Delivered claims customer experience improvements using smartphone technology for Home claims assessment • Operating profit increased by 7.3% due to an improved
attritional loss ratio performance and lower costs, partially offset by higher profit commissions due to partners. • COR improved by 1.1 percentage points to 92.7%
Performance highlights
2014 2013
In-force policies (thousands) 3,526 3,719 Gross written premium £898.6m £943.1m
Loss ratio 50.8% 53.9%
Commission ratio 21.7% 19.6%
Expense ratio 20.2% 20.3%
Combined operating ratio 92.7% 93.8%
Operating profit £113.9m £106.2m
Market
The economic downturn strongly affected new home building. However, this has now recovered and increased by 16% on the previous period. This led to the overall net supply of new house builds increasing by 10% on the previous year. Competition in the home insurance market increased and the market trend of new business premium deflation continued2. A number of trends contributed to the competition including growth in the use of PCWs, increased competitiveness from insurers via panels, in some cases supported by reinsurers, and motor insurance providers focusing on home insurance products. Changes in the regulatory environment continued to affect banks and building societies, and their branch sales of insurance were subdued.
The insurance industry continued working with the government and the Association of British Insurers on the set up of Flood Re and the associated levies, costs and processes. This aims to make home insurance more affordable for customers in the highest-risk flood areas.
Performance
We delivered another good result in 2014, as we continued investing in pricing programmes and claims transformation allowing us to compete in an increasingly competitive market. Own brands customer retention also improved on the previous year.
Gross written premium of £898.6 million reduced by 4.7% and in-force policies fell by 5.2% since last year. This was mainly due to lower new business volumes impacted by competitive market conditions, partially offset by an improvement in customer retention.
Underwriting profit increased by 13.0% to £63.5 million. The loss ratio improved by 3.1 percentage points reflecting a focus on enhancing risk selection and continued prior-year reserve releases. Claims costs from major weather events of £63 million were broadly in line with 2013 (£69 million). Adjusting for claims from major weather events the current-year attritional loss ratio of 49.2% was 1.9 percentage points lower than 2013. The commission ratio deteriorated by 2.1 percentage points due to a one-off adjustment to historic profit-share payments and increased profit-share payments as a result of higher profitability in 2014. The expense ratio improved by 0.1 of a percentage point as lower costs from improvements across the Group were partly offset by a reduction in net earned premium. Overall, operating profit improved by 7.3%.
Outlook
Following significant new business premium deflation in 2014, the home market has stabilised in the early part of 2015, but remains an area of uncertainty. For own brands, we will continue to use the benefits from our pricing and claims initiatives to enhance our competitive position, while working with our partners to optimise the value of their current market positions. One of our largest partners, Nationwide, is currently reviewing its home insurance provider as our contract approaches renewal. We will continue to work with key stakeholders to facilitate a successful implementation of Flood Re.
Notes:
1. See note 1 on page 7