Norwich Union - Mayer explains broker strategy

Although Aviva fared poorly overall at its latest results announcement , Norwich Union's UK general insurance - including its health book - performed robustly with 2008 profits of £644m compared to £438m in 2007, the year when the floods took their toll.

Mayer said that the £285m of reserve release is at the top end of what they would expect, although he qualified "we don't know what is usual or unusual" and conceded that "there will be less to come going forward". Despite the group posting an after-tax loss of £885m, Mayer is confident in Aviva's balance sheet. He believed that the shares, which are currently yo-yoing and fell dramatically at the results announcement, are being misread by the market, and argued that the insurer is on track to double its earnings for each share and that "most insurers are seeing ratings downgrades and everybody is worth less than a year ago."

Mayer is keen to champion the reduction of the distribution ratio, which includes expenses and commissions from 40% to 37%, although much of the commission drop was as a result of pulling out of much of its creditor business, such as unemployment cover - a high commission and high expense area. The expense ratio has reduced as a result of the implementation of several strategic restructures that have included job losses and rationalising its office base. Mayer is confident that there will be no more job cuts this year following a "gut-wrenching period". He said: "We are full steam ahead to create seven centres of excellence."

Severed ties

NU has cut some key partnerships with brokers and managing general agents while fostering closer relations with smaller brokers through the 110 Club and the Broker Independence Group. Already, underwriting deals with Fusion, Giles' MGA Ink Underwriting and Saga have been cut (at least until replacement insurers can be found). With Mayer saying all these decisions were made at the end of last year, expect more.

Mayer is relaxed about the potential loss in premium. For example, the Saga account that includes white-labelled home and pet cover is worth over £300m of premium. Mayer added that the Saga brand did not fit in with its "moments of truth" strategy and said NU would concentrate on banks and mortgage providers for home insurance. Intriguingly, Giles has reacted by saying that he wants to expand Ink significantly and will find other partners. Saga is still on the hunt for new insurers, although First Assist took over its travel book in October last year.

Heritage

Mayer commented on the MGA model: "What benefit do we take by paying a higher premium? It is often the same business (we could win anyway) and they are not helping us manage our costs. Our energy is coming from listening to our branches and underwriters and we want to level the playing field." He added: "It is a myth if you pay an MGA that magically an insurer can cut tens of percent off our costs. We have 300 years of underwriting heritage; why would you want to outsource it?"

Mayer stressed that each MGA deal is considered on a standalone basis: "I have my favourite MGA in Canada - Elliott Special Risks - which deals in environmental liability; that is the litmus test as far as I'm concerned. We have worked with them for 25 years and we have given them delegated authority."

So why target smaller brokers, many of which already place large slices of business with NU? Mayer is not after everything: he wants to ensure that brokers' portfolios are not concentrated and that they have a "satisfactory" level of partners. He sees opportunities in schemes and wants to be the backbone of the SME market, which is closest to clients with brokers rewarded with a share of the profits. According to its website, the Broker Independence Group - which is targeting 2,500 brokers and has recruited Jo Thoy as head of sales from the Broker Network - offers "more rewards, products, support, advice and dedicated account managers".

Although some consolidators and MGAs will be hurting following the arrival of Mayer, many admire his bold approach and only time will tell if the UK's largest insurer will be rewarded by such a strategy.

Latest insurers' results 2008

AIG UK AIG UK reported a pre-tax profit of £324m and a £2.28bn GWP in 2008, an underwriting profit of £84m and investment and other income of £240m. Its 2008 combined operating ratio was 91.9% (2007: 89.2%) and its loss ratio 65.5%. AIG UK will form part of a new general insurer - AIU Holdings - with a Standard & Poors rating of 'A'. Allianz Operating profit increase of 38.6% to £193.6m. COR improved in commercial from 99% to 95.2% and COR deteriorated in personal from 102.5% to 109.6%. While premiums were broadly flat, chief executive Andrew Torrance said that the insurer was able to release around £100m of reserves following the "exceptionally favourable return of run-off releases". Brit At Brit UK, there was premium growth of 28% with £350.6m gross written premium in 2008 and an improvement in its combined operating ratio from 109.3% in 2007 to 100%.

Overall, it reported a pre-tax profit of £89.2m (2007: £191.2m) on GWP of £1.4bn (2007: £1.23bn). Ecclesiastical Ecclesiastical has reported a pre-tax loss of £22.5m, compared to a £35.6m profit in 2007. The insurer also revealed a net investment return loss of £52.6m comapred to a £69.4m gain in 2007. The insurer's overall COR improved to 100.8% (102.9% in 2007) Lloyd's Profit halved to £1.9bn and the volatility in world financial markets reduced Lloyd's investment returns by 52% to £957m. Lloyd's chairman Lord Levene said: "Amid the unprecedented slump in the world economy, Lloyd's remains in good shape." Norwich Union NU had net written premiums of £4.98bn (2007: £5.44bn) with a COR of 99% (2007:106%). Its expense ratio was 12.1% (2007:13.9%) and operating profit - including Aviva Re in runoff - £644m. Its underwriting result stood at £63m while there was also a reserve release of £285m.