Lack of reserve strengthening and weather claims helped turnaround
RBS Insurance made an operating profit of £454m in 2011, compared with a loss of £295m in 2010.
The RBS-owned insurance group attributed the £749m turnaround to an absence of reserve hikes, a de-risking of its motor book, the exit of certain business segments and more benign weather in 2011.
RBSI had to add heavily to reserves in 2010 to combat rising motor bodily injury claims.
RBSI’s 2011 combined ratio was at the break-even mark of 100%, a 22 percentage point improvement over the 122% it posted in 2010.
The annual result also marks RBSI’s fourth profitable quarter in a row. The company made an operating profit in the fourth quarter alone of £125m, which added to the £329m profit the company made in the first nine months of 2011.
“We have turned around our financial performance and successfully completed the first phase of our transformation plan: to return to profit,” RBSI chief executive Paul Geddes said in a statement. “Tangible benefits are already being delivered from phase two – building competitive advantage – as we continue to invest in the future capability of the business.”
He added that the recent five-year contract RBSI won to provide the customers of Sainsbury’s Finance with car and home insurance, as well as expanding the Nationwide home insurance deal, were endorsements of the company’s offering.
RBSI announced earlier in the month that it was changing its name to Direct Line Insurance Group as part of its split from RBS. Under the terms of its 2008 bail-out, RBS has to sell a controlling stake in RBSI by the end of 2013, and its full interest in the insurer by the end of 2014.
“The process of separation is proceeding on plan, and we recently hit the important milestone of launching our new corporate identity,” Geddes said.
RBSI’s more selective underwriting during 2011 was reflected in the 5% reduction in gross written premium to £4.1bn (2010: £4.3bn). However, the commercial business, including NIG, enjoyed a 10% increase in gross written premium. See: NIG returns to profit in 2011.
The better combined ratio has come solely from lower loss levels rather than cost-cutting or paying brokers less. The loss ratio improved to 70% from 91%, but the commission and expense ratios remained static at 10% and 20% respectively.
However, RBSI has been working on cost cutting. It has reduced its number of offices by 15 during the year.