Business and financial review
- Highlights
- Investment in the future
- Challenging the cost base
- Customer and membership focus
- Partnership arrangements
- Good with people
- Cost of investments
- Banking / Results statement
- Significant items
- General Insurance
- Results summary
- Long-Term business
- Outlook
This report brings together financial information covering both the insurance and banking businesses within CFS. Full details of the basis of preparation and accounting policies adopted by Co-operative Insurance and the Bank are set out in the respective Financial Statements prepared for those businesses.
Profits derived from the CFS Banking and General Insurance businesses accrue for the benefit of the shareholder, The Co-operative Group and its members. In 2007, CFS has paid a 2007 interim dividend of £12m and will pay a final dividend of £25.9m, subject to approval at the Annual General Meeting, to its parent, The Co-operative Group.
In addition, in 2007 a distribution of profit has been made to individual members of The Co-operative Group based on their account holdings with the Bank (£1.3m) and their General Insurance business with Co-operative Insurance (£0.7m).
Balance sheet growth was achieved in both lending and deposit balances, particularly in the corporate sector.
The Long-Term business of The Co-operative Insurance, covering life insurance, pensions and unit trusts, is transacted on a mutual basis, which means that all profits are retained for the benefit of policyholders.
The information in sub-sections 'Consolidated income statement', 'Consolidated balance sheet', and 'Statement of recognised income and expenses', (within the section 'Report & statements') under the heading 'other shareholder' includes the investment returns on shareholder capital in excess of that required to support the General Insurance business and other, more minor, sources of income and expenditure.
Highlights
The Corporate Banking sector has delivered strong growth in 2007 and while there are still significant challenges ahead, new business performance in the Retail Banking and General Insurance businesses is starting to turn around. Life and Savings new business has been adversely impacted by a reduction in the number of financial advisers. The Wholesale business had a difficult year, driven mainly by external market factors. As explained below in 'Investment in the future', 2007 saw CFS commit to significant investment in its future through the implementation of initiatives to improve our operational performance and efficiency. The 2007 financials are only partially impacted by progress delivered to date and further benefits are expected going forward.
Total shareholder profit before tax, short term investment fluctuations, significant items and membership dividends was £155.4m compared to £146.2m in the previous year. The increase was principally due to significantly improved performance and one-off claims benefits in the General Insurance business despite exceptional weather related claims of around £38m. The Bank profitability was impacted by structured investment write downs of £31.8m from the 'credit crunch' as experienced across the banking industry.
The Banking business recorded an improved profit of £82.2m before structured investment write downs, tax and significant items compared to £76.3m in 2006 and balance sheet growth was achieved in both lending and deposit balances particularly in the corporate sector. Bad debt levels have reduced in 2007 and costs have been controlled to offset inflation and achieve a 0.4% improvement in the Cost/Income ratio.
| 2007 £m |
2006 £m |
Change £m |
|
|---|---|---|---|
| Banking operating result | 50.4 | 76.3 | (25.9) |
| General Insurance operating result | 67.1 | 37.0* | 30.1 |
| Other shareholder activities (excluding STIF) | 37.9 | 32.9* | 5.0 |
| Result pre-investment fluctuations | 155.4 | 146.2 | 9.2 |
| Membership dividend | (2.0) | (2.0) | - |
| STIF | (3.9) | (11.5) | 7.6 |
| Profit before significant items | 149.5 | 132.7 | 16.8 |
STIF Short term investment fluctuations
*Restated to include internal interest on capital
The General Insurance result has improved from a profit of £37.0m in 2006 to £67.1m, reflecting ongoing and one-off benefits from improved claims handling processes offset by exceptional weather-related claims of around £38m.
The Long-Term business, run in the interests of policyholders, has seen further savings in operating expenses, although sales of new policies have declined as a result of a reduction in the number of financial advisers.
The long term business significantly reduced its levels of longevity risk as Co-operative Insurance signed a major reinsurance transaction with Swiss Re. Approximately £1.8bn of deferred annuity business (Option 32) and annuity in payment business was reinsured.
Investment in the future
On 20 July, CFS announced plans to improve its operational business performance for the benefit of its six million customers. This next stage of development will see investment of £250m being made in the business to support planned growth across the business. The investment plans include enhanced relationship products, improvements
to product, pricing and underwriting capability in General Insurance, new technology for CFS financial advisers, a doubling in the number of Corporate Banking Centres, significant new Partnership arrangements, people development, and further investment in our brand, which will be a key priority. Our proposed 2008 campaign will bring 'good with money' to life at the heart of our brand. Progress made in 2007 as part of this programme is set out below.
Challenging the cost base
In order to improve the return on this investment and to ensure it serves customers in the most cost-effective way, CFS announced in July 2007 its plans to reduce annualised operational costs by £100m by the end of June 2008 and to reduce the workforce
by approximately 1,000 during 2007. We have worked constructively with our trade unions to manage this change without impacting business performance and achieved the targeted reduction in roles through a combination of voluntary and compulsory redundancies, as well as the removal of a number of vacancies throughout the organisation.
People in our customer-facing roles, specifically those who service or sell to our customers by telephone, financial advisers and customer-facing advisers within Bank branches, have been unaffected by these changes. The benefits of the reduced cost base will be shared between CFS' operating entities.
A programme was launched in January 2007 to focus on reducing CFS' cost base and to work with the business to embed new processes and capabilities. In addition to reducing costs, the principal objectives of the programme were to increase cost awareness, create a cost consciousness culture across CFS and deliver £"25m as part of the cost reductions referred to above - but delivered in excess of £30m through 62 initiatives. The transformation of our purchasing activity has been a major area of focus, which alone has delivered £8.8m in cost savings.
Customer and membership focus
Across our customer contact and customer support centres, which all remain UK based, we are constantly seeking ways to improve the customer experience. Customer Services is investing in new technology to improve our outbound correspondence quality, and also in image and scanning capability to transform the way in which we will action inbound customer correspondence. A Direct Proposition function has been created to pull together the contact centres, back office support areas and direct sales areas as a single team. Within the Claims Operation a key focus for 2007 has been on improving the quality of service provided to our customers. New features have been introduced into our Claims Centres including enhanced telephone performance and we are investing in new technology to improve the customer experience. The improved service levels were maintained despite the significant increase in call volumes caused by the floods and storms in the first half of the year. We are continuing to support our customers to ensure their claims are resolved as quickly and efficiently as possible.
During 2007, we have been working to maximise the opportunities created by membership, brand and the Co-operative difference to increase the depth of relationship with our customers, to realise value and to create cross-sale opportunities. A number of significant developments have improved our understanding of customers this year. After undertaking extensive research, we have developed a number of benefit-led propositions for our target customer group, the 'Conscience Consumer', designed to improve cross-sales and acquisitions by finding prospects more likely to respond to CFS' ethical agenda.
A key area of focus in 2007 has been our membership strategy. During 2007, we have increased the number of members with CFS products by over 60%, and have completed a number of pilots to convert existing members to CFS customers and improve retention.
Market leading Customer Satisfaction is one of our key business measures. As at December 2007, 62.5% of our customers claimed to be either 'Extremely' or 'Very Satisfied' with the products and service that we provide, from an industry wide survey carried out by NOP - against a target of 60.5% set for the business in 2007. Research has confirmed that CFS continues to maintain the highest proportion of satisfied customers compared to other key financial service providers within our peer group.
Partnership arrangements
In October 2007, CFS entered into a new partnership agreement for the administration of its Life and Savings business. This new partnership with Capita will, over time, bring a step-change in the service provided to our Life and Savings customers and is backed by major investment in our Life and Savings operations. Over the course of the contract, the proposal will also enable CFS to deliver a modern set of products over an agreed timeframe. The first major delivery will be a new range of protection products targeted for 2009.
As part of the agreement, over 800 CFS colleagues have transferred employment to Capita under TUPE legislation. The joint plans between CFS and Capita will ultimately lead to the creation of a new Life and Savings Administration Operation in the city centre of Manchester in the first half of 2008.
Following an extended period of supplier selection, a new outsourcing relationship was agreed in March with Xansa to create a unified Information System design and development service across CFS. The new fit for purpose contract represents a broadening of the partnership to encompass the insurance side of the business in addition to the previous banking relationship. It also means that we have a unified CFS-wide service that can carry out fast track transformation and meet the demands of the CFS change agenda.
Creating this unified CFS-wide transformation service has enabled us to respond to regulatory pressures in a cost effective and timely manner. In addition it will allow us to improve speed to market and thereby respond quickly to competitive challenges.
As part of this new service, 223 colleagues transferred employment to Xansa. In line with our normal practice the proposals for the transfer and the terms and conditions with the new partner were the subject of a full agreement process with the trade unions. Following their transfer, the colleagues involved will have the benefits of a market leading employment package and excellent opportunities for career progression with a specialist IS service provider.
As part of a programme of change covering our customer processes, a five year partnership deal with Communisis was signed on 24 December. This agreement means that our print, mail and fulfilment operations and colleagues, currently based in Salford, transferred to Communisis on 31 December 2007. The contract with Communisis will, over time, bring
a step-change in the service we provide to our customers through improved capability and process efficiencies. It will also prove more cost effective for CFS, saving the business £1.3m each year.
Good with people
The personal development of our colleagues is central to our ability to achieve our vision. One of the key change programmes delivered in 2007 was the People Programme, including the Leadership Challenge and the university for all. The Leadership Challenge was launched to improve leadership skills for approximately 1,000 leaders by May 2008 to deliver a high performance culture to underpin investment plans. The university for all is being developed as a comprehensive and interactive resource to support personal learning and development
across CFS.
Cost of investment
The extensive restructuring and modernisation of the business has continued to necessitate substantial investment resulting in total significant items of £105.1m in 2007 following the £25.4m charged in 2006. The 2007 costs include £21.9m in relation to costs for job losses. Significant items include the following below.
| Significant items | Non-recurring restructuring costs 2007 |
Non-recurring restructuring costs 2006 |
Gain on implementation of PACE pension scheme 2006 |
Total 2006 |
|---|---|---|---|---|
| General Insurance | (29.5) | (13.0) | 4.0 | (9.0) |
| Banking | (38.0) | - | 109.2 | 109.2 |
| Other shareholder | - | (0.5) | - | (0.5) |
| Total shareholder | (67.5) | (13.5) | 113.2 | 99.7 |
| Long-term business |
(37.6) | (11.9) | 3.6 | (8.3) |
| Total |
(105.1) | (25.4) | 116.8 | 91.4 |
The 2006 significant items also include gains from April 2006, on implementation of the new Co-operative Group Pension (Average Career Earnings) scheme, as the CFS Group has adopted defined contribution accounting for pensions. The pension assets and liabilities have been transferred from the CFS balance sheets, with income statement charges based solely on contributions made. As at 5 April 2006, the CFS Group had total scheme deficits of £116.8m which were transferred to The Co-operative Group for no consideration and the resultant gain has been recognised in the income statement in accordance with IAS 19.
Banking
| Results Summary | 2007 £m |
2006 £m |
Change £m |
Change % |
|---|---|---|---|---|
| Net interest income | 334.8 | 320.3 | 14.5 | 4.5% |
| Non-interest income | 188.7 | 201.2 | (12.5) | (6.2%) |
| Operating costs | (339.3) | (339.9) | 0.6 | 0.2% |
| Impairment losses | (102.0) | (105.3) | 3.3 | 3.1% |
| Operating profit before tax, significant items and investment write downs |
82.2 | 76.3 | 5.9 | 7.7% |
| Structured investment write downs |
(31.8) | - | (31.8) | - |
| Operating profit before tax and significant items |
50.4 | 76.3 | (25.9) | (33.9%) |
| Profit based payments to members of The Co-operative Group |
(1.3) | (1.2) | (0.1) | (8.3%) |
| Profit before tax and significant items | 49.1 | 75.1 | (26.0) | (34.6%) |
| Significant items |
(38.0) | 109.2 | (147.2) | (134.8%) |
| Profit before tax | 11.1 | 184.3 | (173.2) | (94.0%) |
| Operating profit before tax and significant items is analysed by segment: |
||||
| Retail | 47.1 | 34.2 | 12.9 | 37.7% |
| Corporate | 57.5 | 55.1 | 2.4 | 4.4% |
| Wholesale | (43.1) | 3.9 | (47.0) | (1,205.1%) |
| Central costs | (11.1) | (16.9) | 5.8 | 34.3% |
| 50.4 | 76.3 | (25.9) | (33.9%) | |
| Cost/Income ratio before significant items | 64.8% | 65.2% | (0.4%) |
The Banking business recorded a reduced operating profit before tax and significant items of £50.4m compared to £76.3m in 2006 due to £31.8m of investment write downs. Profit before investment write downs improved by £5.9m (7.7%) and reflects higher net interest income, lower costs and bad debts offset by lower non-interest income. Balance sheet growth was achieved in both lending and deposit balances particularly in the Corporate sector.
Net interest income growth of £14.5m arose principally from balance sheet growth as net interest margins were stable. Non-interest income declined by £12.5m primarily due to industry-wide pressures on Payment Protection Insurance (PPI) and bank overdraft fee refunds as a result of publicity generated by the Office of Fair Trading's (OFT) market study.
In 2007, Retail sector profitability has improved by £12.9m despite lower non-interest income as interest income increased, bad debts were reduced and costs were lowered.
Corporate sector operating contribution increased by £2.4m due to significantly higher interest from balance sheet growth being offset by a specific bad debt.
Wholesale sector operating contribution declined by £47.0m. Wholesale margins have been impacted by the increased pressure in the interest rate environment, further compounded by the effects of the credit crisis. The Structured Investment book has suffered from the volatility in the credit market, resulting in investment write downs of £31.8m. The Bank exposure to these types of higher risk investments is now limited to £31m of Structured Investments which together with £50m of Credit Trading Fund Investments comprises a small part
of the Bank's Wholesale portfolio, the rest of which is prime quality.
November 1 saw the launch of our new think credit card. The think card offers consumers who shop with their conscience a lower rate of interest for designated ethical purchases and a package of other benefits, while at the same time also helping to save the rainforest, enabling customers to choose to do the right thing.
We are also planning to increase significantly our lending commitment to the renewable energy sector where we will be focusing both on large scale project finance transactions and also smaller community based schemes. The Bank also remains recognised as one of the UK market leaders in provision of finance for NHS Local Investment Trusts.
The Bank is also increasing its support for Microfinance initiatives through a special $50m fund. This money will be used to support the development of small businesses in some of the world's poorest countries.
We have opened four new Corporate Banking Centres (Bristol, Oxford, Derby and Preston) as part of a programme to double our representation by mid-2009.
The Bank has maintained tight cost control in the period, which has resulted in business as usual operating costs reducing by £0.6m.
We've focused on improving products, including a new home insurance product which gives customers greater flexibility in choosing the sum insured to suit their needs..
The impairment charge in the retail sector has seen a reduction from the levels reported last year as a direct result of a programme of focused activities particularly in the unsecured retail portfolios. These actions have continued through into 2008 as the backdrop of personal insolvency and high consumer indebtedness has combined with a weaker economic environment. The secured mortgage book continues to have extremely low levels of default and subsequent impairment, which reflects the relatively low average loan to value ratio and the affordability tests applied within our credit assessments.
The Corporate impairment charge tends to be more volatile due to the nature and timing of one-off charges. In the last year we have continued to address issues arising from the higher risk sectors, such as football, and the increase in the charge compared to last year reflects these actions.
The Bank and smile have seen continued recognition for the quality of service provided to our customers, including the 'Best Direct Mortgage Lender 2006/2007', 'Best Online Banking Provider' and 'Best Student Account' awarded by Your Money and 'Highly Commended Direct Mortgage Lender 2007/2008' by Your Mortgage Magazine. smile has also been awarded 'Best of the Best' by Which? for its current account products and also continues to be recognised as a desirable brand as it was named one of the UK's Top 100 'Cool Brands' for 2006/07.
The Bank has continued its improvement in customer satisfaction with a December 2007 score of 79.4% - the 11th monthly improvement since January 2007. In a recent survey on BBC's Watchdog programme, we were rated number one on the high street for customer satisfaction.
The Bank came out on top in the 'Best 100% Mortgage Provider' category at the Moneyfacts Awards. Moneyfacts also highly commended the Bank in the category for 'Best Credit Card Provider - Standard Rate' for its Clear credit card.
A number of new partnerships have been launched allowing us to sell products to the customers of third party companies. These include the sale of mortgages
through Places for People.
The Bank has maintained a strong balance sheet with consistently robust liquidity and capital ratios. The Basel I risk asset ratio was 13.5% with a Tier 1 ratio of 8.8%, substantially higher than the regulatory requirements laid down under Basel I by the Financial Services Authority (FSA). The Basel II solvency ratio was 143.0%. The Bank has a very strong retail deposit base with customer deposits higher than customer lending such that its reliance on wholesale funding is lower than most other banks.
The Bank's Basel Programme has culminated in the FSA's approval of its waiver application to operate under the Internal Ratings Based approach with effect from January 2008. This successful development means for our retail book we are operating at the most
advanced level while the corporate and wholesale assets will be risk assessed at the Foundation level initially, with the intention of moving to Advanced in the near future.
Significant elements of achieving this objective have included the implementation of a revised governance structure, new modelling approaches and processes for Credit Risk Management, improved data quality and data governance and enhanced management information.
The Bank also completed its first Internal Capital Adequacy Assessment Process (ICAAP), which was subject to the FSA's Supervisory Review Evaluation Process (SREP) during December.
The Bank has also successfully introduced the OFT new 'customer promise', which gives customers more clarity about the cheque clearing process and allows them to benefit from a more efficient service.
General Insurance
The performance of the general business in 2007 was significantly better than in the previous year, despite the considerable costs arising from exceptional weather events during the first half and has resulted in the first underwriting profit for General Insurance since 1994. The main driver for the improvement is claims management activities, including improved and faster claims settlements. In addition, considerable activity has taken place over the last two years designed to improve our underwriting and pricing. New rating engines and more modern products have been launched, coupled with improved payment systems resulting in lower levels of default. Claims performance has also been improved through stricter underwriting and the deliberate withdrawal from writing motor 'Any Driver' business.
General Insurance is operating in a competitive marketplace, with aggregator sites taking a growing share of the market demonstrating consumers' increasing propensity to purchase insurance products over the web. During the year we have focused on developing a distribution strategy which enhances our ability to meet and react to these changes in customer buying habits and we have delivered an increase in sales through our direct channels.
| Results summary | 2007 £m |
2006 £m |
Change £m |
|---|---|---|---|
| Technical profit before exceptional weather events |
105.0 | 37.0 | 68.0 |
| Exceptional weather events |
(37.9) | - | (37.9) |
| Operating result |
67.1 | 37.0 | 30.1 |
| 2007 £m |
2006 £m |
Change £m |
|
| Gross written premiums | 412.8 | 471.3 | (58.5) |
| Earned premiums |
419.5 | 487.8* | (68.3)* |
| Claims ratio |
64.3% | 73.6%* | (9.3%)* |
| Commission and expense ratio (excluding non-recurring expenses) |
33.3% | 33.8%* | (0.5%)* |
| Combined ratio (excluding non-recurring expenses) | 97.6% | 107.4%* | (9.8%)* |
*Restated for classification changes
This included launching the ecoinsurance motor product on price comparison websites and our home insurance product on confused.com which increases our presence in the fast growing aggregator market.
We launched a new system for customers using our Internet site to obtain a quote for a home or motor insurance policy. The new streamlined online form provides customers with a 'quick quote', which enables CFS to compete better with other market leading insurers.
The new system will help to decrease the number of customers dropping out during the quote process and will ultimately lead to an increase in sales as more customers will have an opportunity to purchase. With the new 'quick quote' system in place, customers will experience a much-improved Internet service if they choose to take out CFS policies via the Internet.
General Insurance premiums earned in the period (net of reinsurance) fell to £419.5m, compared with £487.8m for 2006. This reduction in business volumes is reflective of our changing distribution strategy, with a major shift towards our new direct channels, which we are continuing to grow coupled with a planned exit from higher risk and loss
making segments of the portfolio, such as 'Any Driver' policies. The CFS-wide investment programme mentioned earlier includes far-reaching development of our General Insurance capabilities in areas such as web technology and pricing flexibility.
We have also focused on improved product propositions including a new home insurance product, which gives customers greater flexibility when choosing the level of cover to suit their needs.
During 2006, we modernised our entire claims handling process, which has resulted in a significant improvement in the motor claims ratio in 2007. The improvements also enabled us to continue providing excellent service and assistance to customers when the processes were severely tested in 2007 with storms in January and exceptional flooding in June and July. The additional claims cost of £37.9m from the weather events was more than offset by the reduction in claims experience generated from the modernisation process and underwriting improvements.
Our commitment to providing excellent customer service and improving service levels has been demonstrated by our reaction to the recent floods and storms. We are committed to providing support to our customers and this included providing cash advances for urgent requirements and assisting those customers displaced by the floods in finding alternative accommodation until they could return to their own homes. We established a dedicated team of professional claims handlers to deal with all flood claims until they were settled, to expedite the settlement of claims as quickly as possible. We also utilised our extensive supply chain network to proactively manage claims and ensure they were settled as efficiently as possible. While every effort was taken to settle as many claims as possible, unfortunately, due to the extent of damage caused to their homes, some 500 households were still in alternative accommodation over the Christmas period. As a consequence, Co-operative Insurance looked to bring a little Christmas cheer to those worst affected and made a payment of £100 to each household who were still in alternative accommodation.
The performance of the claims area was recognised as Co-operative Insurance was named 'Customer Claims Champions for 2007' for motor claims. Our new Claims Fraud Management Strategy has begun to deliver real benefits, realising savings of more than £20m during 2007.
The General Insurance claims ratio, despite the severe weather events, was 64.3%, a significant improvement of 9.3% compared to 2006 as the claims transformation initiatives continue to improve efficiency and customer service.
Further modernisation initiatives have targeted savings in operating costs, including commission charges and the expense ratio of 33.3% has decreased compared with 33.8% in 2006.
General Insurance customer satisfaction for December 2007 stands at 75.4%, an increase of 4.2% compared to December 2006 (71.2%).
Long-Term business
Present value of New Business Premium for the 2007 financial year ended 12 January 2008 was £466.3m, a reduction of 6% on 2006, reflecting a decline in the numbers of financial advisers authorised to advise on Life and Savings products.
Gross earned insurance premiums for life and pensions business in 2007 was £534.2m compared to £548.4m for last year. The fall in gross premium income is due to a reduction in regular premium from endowments as they reach maturity, partly offset by an increase in single premium accumulating with-profits business.
In November, Co-operative Insurance signed a major reinsurance transaction with Swiss Re to reinsure approximately £1.8bn of deferred annuity business (Option 32) and annuity in payment business. The deal is a significant step forward in the management of longevity risk.
Following intermediary demand for our Unit Trusts and unique responsible investment expertise, CFS launched its three most popular UK funds (CIS Sustainable Leaders Trust, CIS UK Income with Growth, and CIS UK Growth) on the Co-funds IFA fund platform, enabling improved access for intermediaries in the wider investment market for the first time.
We also added our funds to Fidelity's funds network, which means that our award-winning funds are available to more intermediaries and therefore more customers.
Co-operative Investments has won the Best Ethical Investment Provider Category of the Investment Life and Pensions Moneyfacts Awards 2007. The Co-operative Investments won the award for their distinctive responsible investment approach, which integrates consideration of financial and ESG (environmental, social and governance) issues throughout the investment process.
Co-operative Insurance's Unit-Linked Bond, which is provided by Norwich Union, continues to be a highly successful new product offering, taking more than £80m in 2007. Co-operative Insurance's Funeral Bond product has been particularly successful in 2007 with £65m of sales.
The UK Growth and Income with Growth Trusts performed strongly, ranking in the first quartile of their peer groups during the fourth quarter and in the second quartile for 2007 as a whole. Sustainable
Leaders Trust experienced a difficult fourth quarter and underperformed the peer group for both the quarter and the year. This reflected strong performance by the Oil and Gas and Mining sectors which the Trust does not invest in because of their environmental impact. All three UK equity trusts have performed strongly over three years with the Sustainable Leaders Trust and the Income with Growth Trust being top quartile and the UK Growth Trust ranking upper second quartile.
During 2007, Mike Fox, fund manager of Sustainable Leaders, was awarded UK Growth Fund Manager of the Year and a 'AAA' Citywire rating. This rating is only held by the top 5% of UK fund managers.
All surpluses arising on the business are applied for the sole benefit of policyholders by transfer from the income statement to the unallocated divisible surplus (UDS). During the period, realistic liabilities, net of reinsurance, decreased by approximately £2.4bn, largely as a result of the reinsurance transaction of annuity business, and £110m was transferred from UDS. This compares with a transfer of £305m to UDS in 2006.
The amount of money managed on behalf of long-term business customers is approximately £19bn.
At 12 January 2008 the realistic working capital within the Co-operative Insurance Long-Term Business Fund, being the excess of the realistic value of assets over the realistic value of liabilities, stood at £1,009m compared to £1,130m at the start of the financial year. This figure represents a cover ratio of 11.7 times the risk capital margin (RCM) of £86m which is the minimum capital requirement applicable to the Long-Term Business Fund under the FSA's realistic solvency regime.
Co-operative Investments has won the Best Ethical Investment Provider Category of the Investment Life and Pensions Moneyfacts Awards 2007.
In addition to the realistic working capital within the fund, a further £200m of Co-operative Insurance shareholder capital is allocated to support the solvency of the Long-Term business.
At the end of this financial year, CIS had over two million with-profits policies in force. CIS continues to add value for its with-profits policyholders and to ensure that a competitive return is achieved on their savings. With-profits policyholders continue to benefit from the smoothing of investment returns and from holding valuable guarantees and cost-effective
life cover.
In determining bonuses that are payable on with-profits policies, Directors follow the Principles and Practices of Financial Management (PPFM). The latest version of the PPFM can be found on our website.
Highlights of the 1 April 2008 bonus declaration are as follows:
- Investment returns credited to policies within the Long-Term Business Fund during the financial year ranged from 2.0% to 2.8%
- Bonuses estimated at £378m will be added to with-profits policies during 2008
- There are expected to be no shortfalls on maturity for the majority of mortgage endowment policies maturing during 2008
- Annual bonus rates have remained unchanged on all with-profits policies
- Payouts remain in the second quartile for the benchmark 25 year mortgage endowment policy.
Outlook
CFS profit before taxation, significant items and investment fluctuations was £155.4m, higher than 2006 by £9.2m principally arising from significantly improved General Insurance performance offset by structured investment write downs in line with industry experience.
2007 has seen the early impact on our performance of the change programme, including more web sales, more direct insurance sales, enhanced ATM service availability and better targeted marketing. In 2007, CFS showed its determination to tackle its cost base. The underlying outcome of what was a year of change and market upheaval is that our business is now showing clear signs of progress towards our vision of becoming the UK's most admired financial services business.
