B.A.T intIST2---s GZOUP SnAncr R37M 1991
1. Introduction
1.1 It has been agr-!,ed previously that in order
to satisfy
shareholders, B.A.: Industries' primary objective
should be to
provide an above-iverage return on their
Lavest=ent in the
ccmpany's shares through dividends and capital
growth which can
be sustained o-jer the medium and long term
future.
1.2 The current straze.-7 is to achieve this by
concentrating on
pursuin; growth '-- Tobacco and FLaaacial
Services, building an
the Group's wor_'_,;-.;ide strengths and
establishing leadership
positions in prof!table growth markets within
these two
sectors.
1.3 The purpose of t:e strategy review is to
assess the Group's
curreat per.-or=a==e and prospects in relation to
the objectives
and to rec=men~i:-
(a) The priori--fes for the action required to
achieve a more
effective --plementarioa of existing strategies.
(b) Any new which it is believed should be taken
to improve :he chances of meeting the objectives
or to
resolve &=-. outstanding issues identified in the
review.
1.4 If the conclusic=s from this review are
accepted, they will be
reflected in Guilelines which will be presented
for approval at
the next Board zetting, outlining priorities for
action In
operating Groups and in Central teams or
departments responsible
for implementing specific recommendations.
1.5 The Guidelines s;-culd be reflected in the
Operating Group Plans
for 1992-1996. Mese plans will be discussed by the
CPC and
presented to the Board in the usual way in
Januar7/February.
1.6 Ahead of this, the Operating Groups will be
asked to produce
outlLae. plans far discussion by the CPC in
October, in order
that the scrategiles on which they are based can
be agreed.
1.7 A consolidation &=d review of these previews
will be presented
tathe Board in Sovember.
1.8 The sections of the current review are:-
- Summar7 amd-Coaclusions (pages 2-6)
- Economic Marke t Assuopcions (page 7)
- B.A.T Industries' Objectives and Strategies
(pages 8-9) U7
Key Strategic Is,!pues (pages 10-11) 4=
Tobacco/Other Conimercial Activities (pages 12-18)
C__
7 Fican cial 5e-_-vi
ces (pages 19-27) CD
.
- Associates
- Other Stra:agic Opt-'oas/Issues
BATCO CONFIDENTIAL - CATEG-CRY 1: MINNESOTA
TOBACCO LITIC;ATTON.
BATCo document for Province of BritiSh Columbia 26
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2. Sum=ar- and Conclusions
2.1 The purpose of this rritew is -: 7ecommend
priorities for action to
enable B.A.7 '-nduscries to 7-.ee: ~:s objective
to satisfy
shareholders :'-at irwest=z-7.: la the cocoany is
being managed
in the best -.;a, possl_-.~e.
B.A.7 Industries' Objectives
2.2 The primar-r o~ieccive for B.A.: :ndustries
has been expressed
previously as a requizameac r: -;-.ovide
shareholders with an
above-average returz in their -=,est=ent through
dividends and
capital gro.r~,*. In =_~er -.3 '-Z,;i the
capability to provide this,
the ai-a has !:eez to a:*-ieve s-.:-=-__=_4ned
growth in Earnings per Share
at 15Z p.a.
2.3 Taking into attounc :-a resul:- for 1990, It
is suggested that
there is aow att addi:--':)nal rec. to achieve a
rapid rec3very
In profits in 1991-1992 in or~_a: to maintain
coniidence. There
should also be an a-4= to avol.~ variations in
profits on the
scale experienced be:-.;een 1989 =_=4 1990.
1 : is also suggeste,4 that, =""riom to providing
above-average
returns, B.A.-. Indusz=ies must show that there
are no alzar-aacive
strategies -hizh would provide a better return for
shareholders.
Objectives Criteria used in the Rey----v
There is now some dou'oc as tz -.~'ether the 15%
p.a. EPS growth
target is still app-.-.priate. 7he reduced
prospects for US growth
in the market as a -hole may =ean that
above-average performance
can be achieved at i--wer rates of growth. In via.
of this, the
main criteria used i= this reiew have been
qualitative rather than
quantitative.
L.6 The underlying assumption is tzac B.A.T
Industries will be able to
provide a return whi:'h will sat-'sfy shareholders
through a strategy
based on maintaining a strong z--mpetitive
position in the glo'bal
Tobacco market and becoming established in
leadership positions in
selected Financial Ser-rices markets,
concentrating initially on the
U-K and North America but subse:---eurly expanding
into the rest of
Europe and the Far East.
2.7 Starting froo this base, the zz-4-terion that
has been used to
evaluate the Grouo's current --erformance and
strategies has been
the degree o: success likely be achieved in:-
(a) Establishing and maiatal:izzig the rea 'uired
leadership
positions in :obacco anz Financial Services.
(b) Being aile to achieve a zaoid recoverl in
profits in
199i-i992.
(c) excessive vulne:-abilit-, to factors outside
the Group
,Tnizh could `2-:e a siz:~~.:-_cant afrec: on
?rofits
able --: sno- thaz =ere are no alzer=ative
szratagJes
could _-:er -i ;iz7::.-.'can-_1v better recurn t.-
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TOBACCO LITIGATION.
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7 obaz=2
;, c=nc'us~on from the rerjew cf t~ie Group's
Tobacco
'_-usinesses is --'.-.a: the assumption t.nac the
market Is cauable of
3 fze:4=g ex=eUenc returns still re=a~-:ts valid.
There also
ao;ea; to be reasonable oucortunities for growth
through
.azraased penetration of the For=er monopoly
markets, Izitiall,"
zhriugh exDor:s bur-, in the locger :a=, through
investment in
,ithin the markets cortcerned. Strength in
:=ta7nat'_:na_ 3rands will be the ke, to
comoeritive capazilit-~
:.? -ie -1zoup is achieving significant suzzess in
expanding ex?or-_s
:o C*h_;ia an_~ else-here. However, 1: is stilL
losing =arker
shara in man-, of these wt-,,ort markets and there
are also
ad-;erse share trends in other key markecs and
carke:
se-Pencs .
Ot"'er charac :!!r4 s tics of :he current
Derfor--ance and ;.-ospec:s
are -,ida d_`spar*_'::-.eS in the profitatili:7 of
ditfferez: markets
an~ a ni;- ~agrae of sensitivity to :`e price
assu=n-_i.-=s for
:ae us do=e-s:i= market and to the forecasts for
China. Failuzes
In either of chase could have a very s-_'gnificant
effect on tne
resul:s for :*-e Group as a ~101e-
Bro,,u & Will-la=son
Current res.!:s for Brown Willia=son suggest that
both the
short-term and long-term forecasts for this
company may be az
ris,c and a priority for action will be to ensure
the best
ible
poss. results for the company.
Other TobLacco Strategies
Other priorities for action are the continuing
programmes to
build the competitive strength in International
Brands, to
improve incza-Group, co-operation in marketing and
product
sourcing and to invest for the medi-m term in new
markets.
There is also continuing emphasis on management
training and
de,~,elopmenc and on disposing of other commercial
activities in
o:-er to focus the Group's available financ4al and
za=agemeat
re;otxce an developing the Tobacco business.
Wh~_le no change is suggested to these priorities,
tnere could be
me riz in giving added emphasis to improving the
compecitive
position of International Brands by product and
process design.
I: is also suggested that more emphasis should be
given to
action to i=iprove the quality of caaagement
recrui`t=ent. A
specific opport-uni--y for expansion which is
suggesteci for
izz:eased e=phasis is Leaf Exports. CD
CD
A.cq~lsitlon Strategy
CD
X_
has not been excluded as a me_a,~s for bu_~_ding
on
c =eti:lve szzengch or .-3z accelerating gr-.vch.
Hciever, t.-.e
-r:zic strategy is to be prepared to raac:
pos~.t_-`.ely to any
ac:-.:;$~"ion 3,joorturnizy that may arise ratner
than -,ursuiag
C. 0quent ough this route. 7~~e7e is no evide=~ to
sugges:
4 S be C`aaged.
BATCO CO\FIDENTLAL - C.XTEGORY 1: NIINNE~OT.-~
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:r. view of tne vu_:.er3._-1i_'_i:_ to Doorer
-than expecced performance '-I
the US domestic =ar.,ac and exports generally, a
further main
prLo_-_-.,i for ac--j-3= ii= is reommended is to
study where there is
most le,ierage for _~=-.jrjving short-term and
loag---e= perfor-mancL
both within these actiitlles and more generally
(e.g. a
increase in Souza would! result in an St upgrade
in the profits
for Tobaczo overa-1 '1995'- This may result in
some change to
the relacive given to prof.Z improvement and
gro.r`
respec:ively --ne Tcbacz:~ sector.
?i=ancial Services
k first conc7uslon --,r :inanzial Ser,icas is tna:
the origina_*
assu=?cLons regar:::.:ii tne potentlal for rapid
profits growth -Itnin
t'-is sector may =eec to be _`owngraded- Ro,e~er,
with the possible
exception of UK _--nera: '-as--irance and Canada
Trust, there is no
evidence to suggesz. chat tne Group's businesses
do not still have
the capabil_`:7 tc abov e-ave rage, self-funded
pro::-ins glowth.
Foze=ciaL for Rxnawior C-verseas
e,4
--ere is also no 7tderice zo suggest that --here
is a ne or a
in the a3reed strategy to coacen:raza firs: on
ex-panding
te UK and North be-ore considering opportuni t or
as
f=:her expasion the re;c of Eurz;pe and the Far
East.
Zagle Star
Thera must be some concern about the fcrecascs for
Eagle Star and a
firs-- priori:7 must be to ensure that these
forecasts are achieved
both in the short and long-taro.
Canada Trust
2.19 The poor results 1990 must also be a cause
for concern In- Canada
Trust and, in the absence of a strategic ;!an,
there must be some
uzcerzaiaty about zhe forecasts for this activity.
This
umcertaiat7 should be resolved when Imasco forward
the CT Financial
plan which has beea promised for mid-1991.
Strategic Issues for Financial Ser7ices
Z:0 Key issues for c-e Group's ~'inancial Services
activities are the
ne--d:-
(a) To react pos':",rey and decisively to the
increased pressures
on profi:a-,L'_-_':v whic- is evident in all the
Crouo's markecs.
To reduce :7~.z degree of vulnerabiliz-F to
variations in
profits due to the UK insurance cycla and to
variations
- in
che scoc- market affecting che unrealised element
of
investment ~_:tcome.
Z 7o resol,ie :-e uncer--aiaties about :,e
at::ac:.-.,eness --c ---.a
,3 :-ouo of ::-.e '_-K Generai Insurance
broaden --e d-str-.burion -7or DunDar-
7,) deta=:.ne :'%a :i-o-u-j's businesses shoul~i
a-'- to be
North A=erilca and, -altimaze-'.
BATCO CONF1DFN'TTAL - CATECORY 1: MINNESOTA
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?ziorizies for Lctton
Re~-'Iec:ing these ~-ssues, i: 4-s sugges:ed that
--~,e Gu-,del--'zes for
:he Gzouu's Fl.-,~'-al Set-.-.ce~ aczi-.-'---'-es
should laclude the
foll zwing pr:.or--:-es for ac::'-on:-
-or Cz=-zarias;-
':abil;:-.-, concentraing on
o .;-;g:ade prof
under,riti=g anc~ expense ratios.
3 ;;.grade :he effac:ive=ess of !.:. systems.
(b) Allied :unoar:-
.3 a:;ooinc a rew Ch~-e-` --x e c u re
zr.. the 1oMger-:e= st:rategy for ex--ead~=g
d~z:r~~-utfoa-
(c) ---r Eaz'-e Star:-
'ro as:abl.-~s-n e--:fecz'-ve ~--nzrol and risk
=anag=ent.
compLece --he rarionalisation of the Overseas
cenazal busi=esses.
(d, "or 'Far--e:s:-
-i4tv.
To increase A2ency sales force producci . .
- To consolidate Life operations manage=enz.
- To agree plans for expazsion by acquisition.
Z.ZZ Priz:--'ties for action at the Centre are
to:-
(a) Agree plazs to develop further the Group's
distribution
capability for both Life and General Insurance in
the UK.
(b) Agree measures to minimise the impact of large
varlazions
La the renorted results of the UK General
Insurance
business and re-evaluate the attractiveness to the
Group
of this market.
(c' Identi!y the elements of long term straregies
for
Continental Eurape and the Far East and pursue
specific
opportun-':ies as they arise.
(-n
d, agree an(i implement an improved Grou?-wide
t:a~niz; and
managemen: development progra=me for Financial
Ser--ices
subsidiaries. CZ)
X.I.
!,s :~,e Tobacco businesses, it may be felt tna:
this
case of
r1 j
Ltem should be exzanded to c::rsider -,,la-,
add--':'-ora- acz:'-o7. (-N
sh:,'-' be raken to az:-act the best young
managers to tne CY,
13 ATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA
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A. problem in. Cne past has been -nac ::-.e Group'
s Assoc-,aced
companies have wisned to strategies involving
direc:-4ons
of diversificac-on d_4."erenc fr= thcse -'or the
rest of the
Group. In general, tnese have --anded to be
relatively
value to B.A.T tridustr4es
anci have di=in_s1hec the
o; the tavestmen: in tne Assoc-'.i:ed c=pany.
Dividend yields
have also been lower than 3.A.- Industries would
wis~i and the
degree of influence ,Inich c,)uld be e~ter-_ed on
this and on the
overall szrareg-, or the cor-par-, conce:'ned has
been limited.
:.:-t -its problem has been reso--.e--; the case
of Amam-11 and
Sk.aadinavisk by effac:~_vel:.- axc~ang-_':i; the
i=es=en-- in tne
company as a wnoLe far an 4---craased ;~
r:~)orzto% of its tobacco
business.
:7. v4ew of :he xa: -;:ospec-s for the non-Tabaczc
activities im :zasco az~ :7-., :-is oz::--'on may
be worth pursuing
in either or bo:.- cas,~s.
cozz-asions
k -rst genecal conc-us-'oa -a B.A.T industries'
strategy to concentrate the Gro-,;-j's resources
in pursuing growth
in Tobacco and Fizancial scil-2. appears to be
val-:!.
Ho.ever, to maintain the market's confidence, it
will be
necessary to ac-Jeve a rapid recover-? in profits
in 1991-1-992.
The current results from Brown i Will
_iamson and Eagle Star
suggest that this could be at :4-sk. In addition,
they also
raise concerns about the longer-term forecasts for
these two
coapanies -
Z.-_2 :t is suggested that the highes-. priority
for the Group must be
to ensure that :he perfor--aace of these companies
comes as close
as possible to rhe levels forecast in their plans.
At the same
time, however, ;rioriry also needs to be given to
identif7ing
those areas of the Group Im. which there is most
leverage for
improving profits to compensate for any shortfalls
both in
1991-1992 and longer term.
2-22 Amother issue, which it has not been.
possible to deal with fully
in the paper, is the extent to which B.A.T
I.dustries can have
confidence chat there are no al--arnative
strategies which could
offer a signlflcantly better re--ur-n to
shareholders.
2 The studies to establish where there is most
leverage for
improving profits may -ell suggest possible
options which are
outside the range o4 the current strategies being
pursued by
B.A.T Industries. However, it may s:4-11_be worth
setting up a
separate study ith specific terms of_rerecence to
consider the CD
Imulicarions of pursuing radicaLly di:ferent
strategies designed CD
to aximise sha:-2holder vaue. Even a negative
outcome
'i1 be al
this project -jouLd s:- useful in providing
addition
vallda:_,on far ::ie sz:ate-: .es :-ar-e:::!-.-
being pLLrsued.
BATCO CONFIDENTIAL - CATEGORY 1: :%1INN"ESOT.-k
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--:r mac-ra-economiz ass--.)rious whiz-h have been
agreed-~ th e
by
a r = for use as bac.-2~nund to c~is review are as
Recover:, ~r3m -.he current slowdown 1-1 economic
gr3.z.1 -s
expec:e,-~ to be ~esisrant and, esoec-'ally in the
'.S aad
may be =--il 1992.
However, the med-4--c term prospects (zo L995) are
for
raasona'c' e rates o--' -rswth with Japan and the
key Far 7as:
ca=zries likel-, to re=ain the fas:est--,roving
economies.
There be co=tin.ing proble=s *n t-e USSR &a-4
-urope wnere a f-.;'-l recovery is not expected
u:::'--' the
.iddle --f the da--ade.
inceres: rates are genera'-ly ex?ez:ad to ease,
e-xce-,: In
jhere :here may be some '=crease or: cI=I:.."X::
':=tes.
-::-'-a::4on is ex;)ec--ed :3 moderate in
z=untr4es '-z cou-z
:a=aln a problem in Ls:~-a America.
'.5 Dollar -'s expe--:ad to strengthen against and
:-e
--o=-jare-; r-:n its average 1990 value. 7-There
coul also be a
s-:ran,---hen-'=g against the Yen.
--rnin3s per saare fo: leading UK companies ill
gr:n; only
3-1y in 199'- and afzer faster growth in 1992 will
settle ba--",
-z a gro-th rare arcuz--; 7% p.a.
:zestzenc ra:,-,r-.s are likely to be lower in the
1990s than 4::
::::e 1980S.
7 ersona.1 Lines General insurance and T.L-fe
premiums arze likely :o
-::crease faster than GD?. However, profit margins
are like! to
-e under pressure, especially in the UK General
mark&--. UK Li f a
a-so grow more slowly than in the 1980s.
::;arecte cocs=?tion continue to fall in the
developed
-world but tac:eases in the developing coumaries,
and especiall-,
-ill result in a modest IZ-1.5-. p.a. rare of
growth for
:-e world overall.
--ere vill be contiau4=3 opportunities for ?rivate
Sector
j.3ac=o companies to -=crease share in the former
monopoly
=ar'-e-.s and Iazernac'ozal Brands will
con.,--'nue to acn-'eve
sbove-a~erage growth.
--e induscrv ~s exz)ec::2; to continue its
successful -~-~--ence LM
-T;ainst product liabilizv litigation. Pr--fic
margins and
:-a:urns will stay hij~. especially in the US,
despite conrin-.;-4ng
-72SSUre on r4,e lndus~r--- through higher taxes
and izz-aasec
-zsc-:.C~ions b-jrLi ori c-e right to smoke and on
ad-774-sing.
~or econo=i-c recover--- (whi'l- =a-.-
i;ncerza:.rzies a -2 :he rate of
:-2 delayed) aa-~ r-.e poSsibility of a Labot;:-
Gover=en:: in tne
though: :o rel~ul-2 so
ecift:
BATCO C-DNFIDENTIAL - CATEGORY 1: NIINNESOT.~k
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4 . B.1.7 Industries' Obiecri-7es and Strace2ies
If B.A.T Industries Is to sur,--ve as an
iadepen~e=c
th
company must satis.-7 sharenolaeLs that i,. is
able tc provide a
bectzr return on cheir invesc=enc than could '~e
;r3vtdet by any
alternative zanagemenc.
Quantitative Objecti,7es
4.2 In the past, the requiremen: -.o satisfy
sharenolders has beer.
expressed as an objeccive to provide an
'above-average' return
an their shar2s. Based on tne expected
per--;---aace of
co,mparacor companies, it has been escimazed :hat
to ha-;e the
capability to provide this recurn, the Group
=ee-ds :-- ac*-ieve
-4 -rowt- ii pef Share (7-?S) at 11--Z -j.a.
sustaine
3 S4a:e las: year, however, --he expectations for
--?S growth in the
markec as a whole have been -educed and, as a
result, i:_may be
possible to achieve above-average perfor--azae a--
races o: growth
lo,,er than 15Z c.a. Thus the cuancitative tar
gets derived from
the recu`r-~-enc to deli,e7 13Z p.a. E?s =ay row
.De too
h igh
The danger o" setting tar7ez-s tnat are too h-"gh
is chat they may
induce 'shorz-termis.' and the rejection. of good
L::ves=enr-s
offerim; a reasonable but nor- ourscaading
rat-arn.
4.1z To avoid this danger, the criteria used in
evaluaziag the
Group's strategies in the current review have been
qualitative.
Qualitative Objectives
4.6 It is believed that B.A.T Industries cam
achieve a level of
perfor=amce that will satisfy shareholders over
the long-term
through concentraing its resources on Tobacco and
F17.ancial
Services and:-
(a) Eszablishing a global position of competitive
advantage in
Tobacco, enabling the Group to earn high returns
and
ac~--'eve 5Z p.a. vol"-e growth through i---aroved
=arker
penetration.
(b) Es:ablishing a leadership positior in
?rofi:able growth
markets in Financial Ser-iices, concentrating
first on the
UK and Normh America but subsequently expanding
elsewhere
in Europe and then worldwide.
'.7 There is also a requirement chat the
progression of profits
should be reasonably smooch and, for this reason,
another
inDorzan: objective is thaz t-e results should
have l-'=Lced Ln
vulnerabillt~r to factors outside the control of
the Grouo.
CD
0'\
13 ATCO CONFIDENTIAL - CATEGORY 1: Nil-NNESOTA
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Shorm-'ex-i CbJective3
.3 Following the dont-.ir7~ in profLzs in 1990, Z"
'e:e is also a
short-term req,ir~men: :0 restore cozfidenc~
through rap~__~
in 1991-992.
Al:eraacllve Strategies
her 'accor leeds :-, be ta'-en account Is t-a:
even
An o c.
if a company acn-a7es EPS r3wch which meets the
'above-average
targec, it may still be vulnerable to a bid ;--f
it can be sho;.-n
hat an alterna:~_,e sz-a:a2y ould
-1 provide a ~ezzer to
sharaholaers.
'.'C 'Ehis ts reflected in che ob4ec:ives to
ensure that the mar*ket;
value of B.A.7 :=z;ustries never falls below 857
of the break---,z
va',ue of the Grou:. Fowever, although this bakes
into account
one possible aLter-aacive strategy, I: is
be!-'eved that B.A.:
Industries shou__~ have a objective that on
alcar-natie
stra:e-,-! should -,-e7 a s_g7,:.::.canr_'y better
prospect :or
snareho Iders.
Crfzeria used in the Re~iev
In sumcary, the key cr4 zaria agai~s:: which tne
Group's
straze-zles have been :zeasured In this review are
to:-
(a) Be escabl_`3'-e-_4 as a ;,orldwide leader in
7obacca.
(b) '_:a-~e a lea_~_`ag position in profitable
growth war-kets
-Laaacial Services.
Cc) Avoid excessive vulnerability to factors
outside the
Group's cc=:,:nl.
(d) ~Achieve a rapid recover to profits in
1991-1992.
(e) 7-r-sure cha: there are no alternative
strategies offe:4-ag
si3nificaa:17 better prospects for shareholders.
In considering the priorities for action to
achieve these
objectives, partizulac emphasis has been given to
identi-7'=&
chose actions which will have most leverage in
enabling B.A.7
Indus:ries to acnieve its objectives.
Lr,
BATCO CONFIDENTIAL - C.NTEGORY 1: NTINNtSOTA
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B.A.: :adustries' Straceqies
e~rzra anaLysing the to which exi3cing plans are
11`1-cel-, to
.eec :-a Group's objec:1-les, ft may be helpful to
restate th
e
rac_'cnale for the ~;ro.o'3 s:rategy.
3.A.7 :ndstrles' str,~-.e3y is to pursue growth in
7obacco and
-Inanzial Services -A:h par-.11cular emphasis on
markets In the Sor::h
AcLan:~.= region but also seeking opporz-ities to
expand tn the Far
Easn and Easzern Zuroue.
1 =~-strial Strategies
3 ecause of the for tncreased penetration oE --he
f3 r-er monopoly market3, -o"acco still has a
potent.1-al flor aro,-tn.
'4 ilia is may not be enot;; -- to support
above-avera3e pr3f_'t3
r ; -.:- ess itself over the long t
7 ~ Ln. the Tobacco bus--'.-. er=, --he hi;h
racuzns available ta this sector enable the
businesses zo support
3 vera' Group profits gr3,,cn ac the required rate
throug" ;ravidlng
-
-as,
i ~:r investment in other activities.
7 iere are also additilonaL op?orcunities for
shorz-te= e3rnings
~r3~c" through pro,zi: Lnpr~:-jement in Tobacco.
71 ain,.ainin& long-tzr-, abcve-average E?S growth
depends an
-*nves:=encs 6hich ar.- -.e=selves capable of
self-!unded gr-:~th a:
c'-is rate. This was a key criterion for choosing
Financial
Other criteria .--re that:-
(a) -Mie sector o.zfers good opportunities for
growth through
direct expansion and through e~xtension into new
geographical
areas or complementar-7 activities.
B.A.T Industries has the skills necessary to add
value to the
businesses.
The financial scre.gths of B.A.T Industriess. will
be helpful
ta enabling the Financial Services businesses to
achieve
their full pocentlal.
Geogr aphical Strategies
Geographically, the Group has worldwide strengths
ia Tobaczo but
has a ;otential weakmess in that a significant
proportion a;
~obaczo profits are earned ia developing countries
where political
and economic instabili:,.r and remittance problems
reduce the qualit-
a' these earnings.
-12 As a result, it was agreed that the Group
should a!:: t:) increase
the ;roporcion of its profits derived from
relatively stable parts
0 ~ the world from whi=h profits can be rezitted
freely by
'
c;nceacracing expansion in these geographical
areas. (-r,
'~-_ as further a3zeed that although economic
growth was expected to
te most rapid in the Far East, entry to these
markets was likely to
`e di-ftcult and, as a consequence, expansion
should be
~oncencrated first in the :,*orth Atlantic region
(';orch America and
-o mo s t -g
_i: pe) where B.A.T :n_~ustries could easily
tu:_!~! on existt...,
i:r~,zths.
-.As also noted tna: '7ecauie of the Group's AC7
;os'_:!on. CID
UK profi:s ---;o~Ldl the added benef'.: ---
a:zractllng a
BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO
LITTGAT10.1;.
BATCo document for Province of British Columbia 26
October 1999


5. Ke~ Issues
5. '_ ne Grouo F_'=anciaL `zzecasr pre,enzed to te
Board izz Tune
sno-.;ed E at 13~' -a. However, ever.
fr--= 1989 to 199, p
though chis is below the tar;ec ra=a of 15Z p.a. ,
it snould
sr--4'--' be suffia-'a= -to provide
'azcre-average' perfor--ance.
;.z 7ha foracas: also showed ranid gr:vch in 1991
(127Z" an--; 1992
(42,~', by wh- z:-. t"me --?S was -orecas: ~o be
20-67 above :he level
azhieved I= 1939.
5.3 I.-h--e it oe questioned; .-he:-er --he race
of reco,.e::..
be S'f~ic`e-: :3 sac_'s_-*-7 the marke-_, the =ore
cr4r~z~_' _- -,;es-.4_::a
ma, be the deg:ae of coafidence r"-ar can be
placed in both the
sr.o::_te= a=d lozg-zerm forecas:S.
5.~ 7ie -nancil_ Forecast paper ".,e seas
I-.1vi:-, of the
olel:al'. forecast to the level- and pazzarn of
results --zom Eagle
Sta: and
z :: is imDc:-:a= :o no:a, howeer, :-.at the
forecasts a-so deoend
an cnallenzimz assumn:ions about --'-e levels of
perfo=aare that
-:.!l be ac~-_'eed elsewnere 4.:-. t.- eG:ozD.
5 6 Fo- Tobacco, proi`ts growth o--' p.a. is
forecas= over the
f~va -ears to 1990 to 1995 whila ze-_ zurnovez
increases by 9.5.
p.a. and sales vol=e by on-17 2.8Z p.a. (which is
st4-'--"
better than the 0.3;: p.a. achieved from to
3 . 7 Hargins whtz` improved from 9.-'.' in 1986
to 11.6t in but
,-h'z'- then bell back to 10-87 In '1990, are
forecast tz Improve
to 14.2,-. by 1995.
5.8 Fo: Financial Ser-vices, premium gro-,th in
the Non-Life
bus'nesses is forecast to be 10.1-' p.a. fzom 1989
to 1996 while
prof4ts inc:sase by 10.8Z, with a rapid recovery
from the low
point (loss) in 1990, based on Improvements in
both underwriting
and t--est--enz performance.
5.9 Ufe business is forecast to show a 14.8t p.a.
increase in
prof_~cs f-:c= a 13.27 p.a. increase In premium
income.
5 3 ':hese forecasts will be particularly
difficult to achieve in the
ces:Lng ope:azing environment ex-nected in the
1990s.
I.-. :he analsis hich follows, therefore,
particular anchasis
nas been giea to the key sr-aregies which must be
successful if
level c-- performance Is to be achieved. Lrl
7 _=-.nasis has also been given to consider4ag
additiona- action (Z)
3 ight be taken to accelerate profits growth or
=oensace :-^r anv shorzfallls in pec~or=ance,
concenz-acizg on
:-:s-i a:::L:ns high a-ppeac :~ o"zr --he --j3s--
leverage.
BATCO CO'~FIDENTIAL - CATFGORY 1: NIINNESOT.-k
TOBACCO LITIGATION.
BATCo document for Province of British Columbia 26
October 1999


6. Tobacco and Other Co-erc-lal Ati--zies
3.1.7 Ir-dustries' Objective3
-he Group's objec:lve ;or it-3 -.-ooacao
activities reflect the
r e.:,uiremenc :har- 11: shouLd be a source of
profits growth to its
0-.;-, right ar,--' shov-Ld also pr-.,4-,-4e
sur?lus cash for Izvestmeac I:-.
oz"er aczi,.-_-_ies I-- ocner r-- pr:)7~_de the
additional growth
to enable B.A.7 :=_`ust:,_es as a whole to achieve
above-avera3e rates o-: E-25 g7-j.tt.
6 2 7%-s will be achle~ie(i ens-4ri=z rhaz :he
business has a globa-
za-_aoilit-y '-ased on def~_ned z2=re:i:_J-,e
advantages whin'- will
enable It to achieve izzreasad =arkec shares In
the more
pr-~fitable segments of :he =arke:.
5.2 order t-- focus zhe availanLe ~_`nancial and
management
.esou:zes on the achie,ame~:: of --his primaz-r
objecci-;e, there
-.--'!L also be an aim to reduce the involvement
o--- the Groun's
7 o'-_acco bus:-zesses I= cz~er :_-_=erzial
activities and :o pursue
-hez
n~.estzent _':~ these on -, ~ t,-.ey are necessary
either to
su?port the -obacnz business or as a means for
protecting the
v- ue of :-=-.s ~r_-= zanaoz ie 7a=i:ted to the
UY.
ne Mariz
6. ~. 10eveloDmen:_- over the zast bear ha,7e not
suggested a need for
any major cranges in t.-.e key ass;.Lmptioms about
the Tobaczo
6.5 Me~4-im-ter_- growth in cigarecte consumption
is ex?ec:ei to be
1.=ited to around D.a. wizh continuing contraction
In the
developed world (-Ik.' p.a.) being offset by
growth I= the
developing countries (~L~7 p.a.), China (+4Z p.a.)
and Eastern
Europe (+I: o.a.).
6.6 T%e expanding mar,er-s in the developing
countries (-h--*ch accoun:
for rwo-chi:ds of BAT's total volume) will
continue to offer a
good potential for growth but the greatest
opportunities for the
z-_".-ate sec::or comianies wi'-:. be in increased
penetra=1on of the
foroer moncooly markers in the Far East, Europe
(including
Eastern Eur-_-je) and tne USSR.
6.7 international Ft'-ter Brands will continue to
offer good
prospects for profitable Zr=-zh and, in the short
ter=, the best
00 oarvini-es for growz-i be through expanding
ex-.orts. T=
the --edium to longer te---, however, it will be
advantageous to
have manu--ac:uring bus-;-iesses established in
the far--er monapol-,
zar!mts. CD
6-1 taxa:ion and more sz-;.:,.zent regulations
limiting szoki-az (ZD
CD
are expec-_ei to be :eatures both in the developed
.;3 7 and. 'ncreaSLnZ_. in. _`e,eloping countries.
However,
pressu:es are ex~;eiz-_2~ :z oe manageable and do
not chanze
-7 ~e genera7 out'oo*K for :~-e --obacco induscry.
Uthough p-.zcu7-
-:.z2r- - - -.; i 11 --Q
aga:_ns: 2cte manu.~actirers
C:)
.7.:,_nue. no ma,cr reve--se :o- ::-.e in--ust-',
is exp---
BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO
LITIGATION.
BATCo document for Province of British Columbia 26
October 1999


6.9 7~:-2 --;o7L~ =arkec will can:-=e --a be
dominated by PhL-4 Yor--S,
3'-" --, R-IR and Rot.-,mans, wi:- ?h*-Iip
~Lzzrrf-s providing the
S:r~~-igesr co.pericl-on for vo*--=e g--,wrh and
market shara.
6.',3 7he generally high level Of ;7--fi:a~lli:7
achieved by zhe
'ead--'ng cobacco companies Is e--,oec--a,-J to
continue. The US;, is
a-x-.ac:ed to remain the mos: ~r-fita':!-e marker,
desnita
C,;=:-'-.iuing volume de~liaes, -n::ans4-fied
compec-'rion a.=
do--;n:;zadiug-
6 and espec-~ally Burley ':o:)acco, could be in
short supply
o-.-a-- the next I-'- years and cou-Id represent
an opporturity
f-.7 selected Grouv comoa=-4es ex-;and exoorts and
:o become
es:sr,Lished as supplLers c:: :'-a wo-.-'-~!
market.
6 ks3=4-ag no ad-.,erse deve'--o=e=--s I-. produc:
liabiliz-7
l--*:4-p::ion, che key ancercaizzies in the
=arkeec assessments
o--~:-ned above are as folio-is:-
Demand could be furz~a-- -evressed by an increase
in
ans-4-smoking pressures and by increased rates Qf
excise.
Oemaa~ could also be da-;--assed, espec;ally in
the
developing countries, :he e-viected world-wide
economic
recover,! is delayed.
(z' As a consequence, the Val'ue-For-Monev segment
oz the
marker may increase more quickly than is curreazly
assumed.
F-%por:s to Eastern Zuro~e and to the USSR could
be
constrained, at leas: in the short term, by
economic and
balance-of-paymeats d-;!----'cul:--'es-
6.13 The other major uncertaiat7 4s how
compet-tcrs' strategies may
be affected by the change in =anagezent ac Philip
Yorrts and by
ccn:inuing developments vithia R.J. Reynolds and
Re='zrandt/Rochmans.
3-A.7 ladustzies' Strategies for Tobacco
6.14 7~.e key strategies for Tobacc~ are to:-
(a~ maintain a strong pos--*:--'on I:, the CS
domestic market.
Strengthen the posi-.4-o7 in International Brands
as the
basis both for accelera:ed growth In exports and
for
recovering or increasi-.g share in key do-estic
markers.
z:' Continu a to seek oppor:--Lnitf-es to tn,.est
in new aarker-s
,ith good medium or 1cr.;:-ter= prospec:s.
Upgrade the qualm:---, an--~ ex-periance cf
=anageLs-
SATCO CONFIDENTIAL - CATEGORY 1: NIINNESOT.-k
TOBACCO LITIGATION.
CD
BATCo document for Province of British Columbia 26
October 1999


TM T-1 -11
Kav ?Izures for Tobacco 1990-1995
1 9 9 0 1 9 9 5 CGZ (. n.a.)
Net Trad. Ner Trad. Net Trad.
Vol=e Sales Prof. Vol=e Sales
- Prof. Volume Sales Prof.
(ba) 7 ETT (Em) (b.) ~U)
9-- --,Z7: 437, 2, 8L7 5.2 IL.3 14.2
2 5 7. 3 7,~ 3-7 i-?D 3.6 7.9 10.6
71 3.3 6.- 11.3
Sc a Cruz 136 i9A 2C 9 7:-z i.2 19.5 1. 6
-asco ~9
i a 5
7'-
?2
.73.3 ii2 (5.4) L.3 9.5
(7)
54,6
3,8Cz
966
646
5..97~ --3
1,8'
3.0
9.=
13.4,
U-T
CD
.C:b
'r(-r) (-n NFTT) FNTI A L - CATF ORY 1: :%1 INA
ESOTA TO BACCO LITIGATIO.N'.
BATCo document for Province of British Columbia 26
October 1999


- 14 -
Curren: ~t:for_~ance/?ros?ect3
6.15 ':z:- " shows summary figures -.or L990 azd
'1995 for the Group' s
businesses taken from the Grouo '11na=cial
Forecasz.
6.16 Ka--- faarures of these figures are-
7 he !z-.or:a,-ce of Brown & '-;il-a=scn, wh`ch
also pro~"es
a Kev contribution to the Grout's cas.-. flow.
'-ie contrast becween the growc- razes for. vol=es
37 p.a net sales (9 .5: p a 4-5Z -:.a. excluding
`n"Iaz'on) and trading pr-j-:s p a.).
7 ~e shar-i Sain in prof --':abil in Souza Cruz.
7 - whizin for 990
ihe contras: in trading profits per -3illa
from -Z4.7 in Brown & Willia=soa : ZC I
raages o ia Souza
Cruz.
The I-jc-:-_2nce of Brown & Williamson
6.'.7 7ti 1991 budget for 3rown S Will-lansoa
shows 797: of the
c::-_zJ_'bu:ioa to profits before common costs is
derived the
comes ic. market. This contribution is pro-.;ided
by a forecas:
'lior
-=e of 56.3 billion cigarattes out of a total of
101 bil
':: 3r-,-.n & Williamson and 569 billion for the
Group overall.
6-8 the US domestic. market in 1991, over 80Z of
the brand
c=t:ribucion is forecast to come from 31-7 billion
sales of
products, including 67Z from 24-3 billion of Kool
s--!s. This compares with 20Z of concrtbutioa from
25.1 bill-ion
V_-ze-For-Money (VFH) brands.
6.19 Tte US cigarette market is forecast to
decrease by 2.!,'- p.a.
from 1990 to 1995, with a reduction of 5.5Z p.a.
in full-revenue
8.1 :
b-.izds being offset in part by an p.a. iazrease
in VF4
b ~Zds .
6.20 Bz_,wa & 'Williamson are expectiag to lose
market share in
f----'-:evenue brands overall but to be able to
contain the
ret-aczion in Kooi volumes to 4.7.' p.a. and to
increase Capri
sa'ats by 4-7Z p.a. VFM sales are forecast to
increase by 11.3:
p.r.. led by italeigh Extra (Ext=a-Low Price) a-ad
Richland 20s
bzz4ed by continuing growth in Viceroy.
6.21 :~_s::iza the downtradirig, the overall
margin measured as :.he
rT:4 o o- domestic contribution to sales N
forecast to rise f-.::=
n 1990 to 38.97. in 1995 based an an assumption
that
t7 lzes overall will grow faster than imflation
and that there
be continuing improvements in manufacturing and
efficiency.
i.:_" kay assumptions for Brown & '-;L_!i=son are
that
e==-:Z will increase by 9..~'. p.a. '.to= .13..~
Dillioa -'-:. 11~:9n. ~z
-or. i-
n 1995 and that --ac?,ias (c~:nr: t_'_-ut Ions/
sales)
v -a
-.o7 23.3:~ in 1990 to 71.37: in. '-?95.
BATCO CC'-FTDENTIA L - CATEGORY LMINNESOTA TOBACCO
LITTGATIO'.-.
LrI
IZ)
CD
BATCo document for Province of British Columbia 26
October 1999


6 7he second =as: '-=portanr cont:--'buzor to the
Group's :ohac:~:
profits 4S concributing 39.-~ of profits in 1990.
Ir
addition, --: is a-so an important zzontri~ucor to
Group cash
flow.
S . BA-.Co . ;-s -7: racas:ing volume grow--:~ of
3 .6Z p -a sales gr-jw-ch
of 7.91. p.a. and profits agrovth of 10.6. p.a.
over the pet'-ad
i990-1995, --~,th margins (Tradiag ?rofit/Ner
Turnover) increasing
~om 21.87 --*:1 1990 to 24.7Z in 1995.
Key ass=-p:-'or-s underl,ing these -zr-zcas-,s are
thac::-
(a) BA7~3. car. increase the share of
rn:ernatianal Brands from
LL.--, in L990 to 13.0Z in "-9?5, reversir4 a
downward
I
from 12.37 in 1985.
(.Z)) -here -is coac4-nuing pr~g:ess in t-e China
market.
( a) -H~-r:i Ls continuing pr33-.ess in a:ner
export mar.,ets
(d) S-a:-a losses in kev dcmes:~-: mark2:s (e.g.
Mmlays~-a an,-~
-Ust:alia) can be reversed.
(a) --here is caricinuing progress on prnductivizy
improve=e=ts,
in=luding manufacturing rac~onalisacion.
6 - In L991, 2%7Z a,-: the sales of BA:C3.
subsidiaries is accounted
for by exports mainly through BA7= and BAT aong
Kong who
together are forecast to provide 43Z (i160
million) of trading
profits for the year. A large proportion of this
is accounted
for by the Ciina market.
6.^-7 Other issues within BATCo. will be the need
to increase T.,
income and a continuing reduction in activities
not direc=-'~-
related to Tobacco. Looking to the longer term,
there is also a
need to continue to seek opportunities for
investment in me.
markets including Mexico, Turkey, Bur=a, Vietnam
and the Fastern
European mar .kets.
6.23 SATCF is forecasting a volume increase of
3-3.' p.a. from 1990 to
1995, largely depending on increased sales to East
Ger--any and a
doubliig of special business from 1.5 to 3.0
billion. However,
although sales in ;best Germany are forecast to
increase by only
1.1Z p-a-, market share is projec:ed to improve
from 21-1: to
23.7Z folio-ing a progressive reduction fro= 24.6,
i-a 1985.
6.-'? Over the fie years to 1995, Set Turnover is
forecast
increase by 5.1Z p.a. and Trading Profits by 11.3.
p.a., -
margiis inprovi=g from 16.17 -to largely due to
ioprovenen:s ta --he ratio of costs to sales.
Key ass-nzlons underlying rhe plans ara that gains
In mar,e:
share ~rz= Lucky Scrike to ad ?.l1 Mail (0.9~ t:~
,.S:" :-fsac a concinuinz but sLc-e-, rate of
decrease in H3
C'. ^- . -- ~ :: o * , . Y~ " .
13 ATCO CONFIDENTIAL - CATEGORY 1: NTINNESOT.x
TOBACCO LITIGATION.
U1
CD
CD
1--D
(-N
13 ATCo document for Province of British Columbia
26 October 1999


- 16 -
Socza C ruz-
-he !o-ecasr for Souza Cruz sho.s domesti: volumes
increas--'=g
21 7'
fr= 123.0 bill'-on L= 1990 to '142.6 bill4or i=
1995 -:;.a.)
.h-e marker share remains around 80%. At the same
time, 'eaf
e-.K-.)o::s increase from 50,500 tons to 64,700
to=s (5.1. p.a.~.
7 : --~ '(ev issue for Souza Cruz is :he req
'ui=e--en: to negotiate
Gcvet-=ent cigarette prices which will allo- the
company to
zlose the current cosr/price gap and to earn
trading pr~-!'-:s
f:= the domesc~r- market.
Ct-e: issues are the need to c-:.=ple:e the agreed
divestment ~,f
,'-a noa--obacco activities and to upgrade the
manufacturizg
- 4
~ac-'--.-ies so that the company can maia-zain its
damest4c zar'.'e:
. 7
zcs:.~:.on and can also suppor: am expansion of
cigarette
ex"33 ::3.
:"erial Tobacco (T-,a ca)
the very severe increases In. exzfsa, the Caaad-aa
c:.;a:a::e market is axpecze~i to decline by
around 5Z p.a.
lmt:erial Tobacco are forecasti=& a slo-er rate of
decline
ca-:.---: share continuing to increase by around
0.5"-1.0Z p.a.
:s current level of just over 60Z.. Despite this
dec-ine,
pr:).-zs are expected to increase by around LO. p.
and the
ac:!--:--- is forecast to produce a substanz-fal
cash surplus.
i-33 --lie key issues for loasco are concerned
more %-;ith the
non--3bacco activities and this is dealt -ith
separatel! lacer
ir~ the review.
Group Strategic Issues for Tobacco
-6 -he review of :he iudividual ooerat~oas
outlined above
underlines the importance of Brown & Williamson.
In vie- of the
c--r-.ezt shortfalls against budget in this
company, it is
suggesced that there should be an urgent
To establish revised forecasts !or 1991, 1992 and
be,,ond,
'a)
based on current strategies.
a) To assess the impact an the achievement of the
Group's
short and loag7-cerm objectives.
To consider possible alzarnative strategies.
Lj--
7 he achievemenc. og the forecast results for the
other Tobacto CD
'ousinesses (including US exports) depends on
achieving L=:ove'-4
valu=e growth and market shares. Success of the
exist-'ag
programmes to enhance the competitive position of
the Gro,.;-:*s
:nza:n.ational Brands and to inzrove the focus and
ccs:-L-;:~ecriveness of sellin3 -nto ex-jort
=arkats by
zz-::7-:.aac~ng sales and o?c-:=,= so,rc~-r-z o4-
prod.cts '~e
in ensu-.i-,3 that the forecast leveLs of
perfor=a=ce f_n
a:a azne~ed.
BATCO CO\FIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO
LITIGATION.
BATCo document for Province of British Columbia 26
October 1999


6.38 ;Ls a ssa_~:_Ial :ase of th-,s, the proposed
new arrane=en:s for
sai'l-'a; Loco ~hiaa should bac- improve market
penetration and
i=zraase ;rof-_':abil_'tv-
6.39 There Ls also a cooplemencary Lmitiaci~e to
review the Grou-;'s
::apacity; to ensure that there is sufficient
apac-,-.7 to =ee: the ex-jected total demand, that
expa sion is
-)I_anne,_4 an a ~roup-ide racheL than an
indi'viduaLl company basis
aa' that there are programmes in hand to upgrade
any facilizies
.jhiz~ are operating below opzimum levels of
productivity or are
,mca;aole of ;roducing cigarettes of the quallt~
required zo
:=oete in i::--ar-iarional, marKe:s.
6.40 Management development and tra~_ning is a key
element in
i==oviag the eff-ecciveness a-- the human resource
within the
'ius-'3ess and another kev Laiz_;2rive has been to
consider ho-
:'--;s mi--ht be improved. The conclusions from
this are
due to be in tne Aucumn.
6. soecific _4z:.:-_'a:_ive to improve the
eEfecziveaess a-- markeciz;
in :he Group -'s a seminar whic' has been arranged
for Tovember.
7 he -i-- this meeting is to prov4de around 30
younger
generai managers .no are jud3eA- to have top
management potenc-4---
an oppor:-anit-7 to improve their knowledge and
expertise in
ke, asoec--s a' marktetln; through discussions
bet-,een themselves
azc with outs--'de speakers who have
comjlej=entar7 ski-is and
ax-_eriance.
6.4Z 7he main means for increasing the penetration
of the former
moaopoly markets has been through exports but
outside the EZ__-
(assuming that this effectively becomes a single
market), there
may be problems in continuiag to e--paad in this
way, especiaii-,
in countries --mere balaace-of- payments problems,
some form of
protection for local producers or the distribution
s!s--m limits the extent of imports. There is
therefore a need
-o continue to seek opportunities for investment
in domestic
produc:ion in markets where the Grout) is not yet
established in
or--;a,: to prov4_~!e a base for continuing medium
and longer-term
e_x-.)a as io a .
ConcIus ions /Rzco~emdations
6.-~3 The inziarives outlined in paragraphs
6.37-6.42 which are being
co--ordiaated by the Tobacco Strategy Review Team
are designed t:
enable the Gr:uz to achieve its short and
Long-term objectives.
io-e~er, there are three areas
-here it might be appropriate co
zgive ~-.zzher emphasis. L7.
CD
6. --iere is a nee._4 both in International 3rands
and, more
gemera.ly, to '3onitor and imp:,ove the levels of
Smoking Quali:-.-
to cc=pecitors' products. A new programme has been
to '-:::)rove the -.aethods used to measure
Smoking Qua.,-,*:-:-
to a__3w the ef--orzs to LmProve this to be given
a L14
-_aa-2- :a z-.;s -lio-,ever. *: '-z also
recommended chat =are
e==n.asis sn..11 be gien ;o technical product and
process
,e,e
-z)c=e7.-- ",:.-nin Operz:"a; ~;ro.o plans.
BATCO CO,FTDENTT.%L - CATEGORY 1: NIT:,NES0TA
TOBACCO LITIGATIO'.'.
BATCo document for Province of British Columbia 26
October 1999


7 ~a p:oiec: to :--,grade ::ainin; and
deve-'opmeir might also be
exzenced co consider how the cua-'i:-,r of
recruitment might be
enhanced
'6 More f=damenca-''-?, the possible shorzfaLls in
Brown &
,;il-'ia=son and ne ulnerabiliz, of BATCo. and
ocher com-.an4es
to var~-acions t~ relaztvely vola:'.Ie markets
could lead -.o a
:eqt;i-.e=enc f3r- sj-gnific-anc pro4i:s
imvrovement elsewhere.
7 It is rherefora iuggesce-i chat, in addition to
the special
of Brown & there should also be anocher study ca
Ldent---y the =a--:: areas of leve:age w-ith-'n
the Tobaczo busines-s
and to dece='-::a here profit i=-jrovemeac
programmes mig-: be
most effect~ve-
Ns an example c- :;%is, an fmprovemeut in
contribucion of Z'- pe-
=ille in Souza --:---z could resul: in an 8,
(-2".49 million)
imcrease in profits in '.995. Other elements of
the
bus-'=ess where ---gmificanc imprx--ements might
be achieved are
US az' ~;erman 2~:C''::-.zs a:= in so.e of the
lower prof i:abi'-
i:-iin BATCo.
BATCO CONFIDENTIAL - CATEGORY 1:.N1t.1;1;E5OTA
TOBACCO LITIGATION.
13 ATCo document for Province of British Columbia
26 October 1999


?'_aancial S-ices
Industries' Objectives
7.1 The long-terr= objecti- f:;r 3-A.- :nduscr4es
in Ficanc4al
* : ned- globa-'-'7
Services is to be esta: s. . in leadership
positions
in profi:ab~*.e grz-rli zz:-!:a:s concenz:aziag on
petsonal-lines
business.
7.2 The agreed medi,=-ter-_ '.f_`.,e year)
aio4ectives are to build on
the e--Ist-fag strengths ~_:- General (?&C)
Insurance, Life
Assurance and associaza--; ?easions and Investment
business,
ncludiag Tusc Bank4z~,
Nort'
t- e a n d a Ameriza. There is
also an ob-,ec-.-1ve to seta_, to exzaad
progressively into
c3 mplemencaZ7 mar.Kets, i=zlud_~ng those in the
rest of Eurone
and, longe!, ca=, the FS: --asz: and Eastern
Europe.
he Market
7.3 General (?i--) irisuran:z- -as grot` prospects
slightly faster
:,ian the Z:-owc,~. in G37 3!-57 p.a. in real ter-
in the UK and
': S.:,) .ne main o;Dor:-_-_"_ies for -avid growth
are through
markec share gains an: .. a_~;aasioz overseas. The
fc=er is likely
to be parzlcularl-.- diffiz-:1: in the UK (and
Coaciaen:al Europe)
as overseas organisac-4:= seek to establish firm
positions as
the European Single programme in insurance opens
up.
7 .4, ComDecition in the is intense and likely to
remain so.
In Commercial Lines, c--szamers are becoming core
sophisticated
at price comparisons az_~ there is also likely to
be a trend
toward self-insurance. := personal Lines, price is
also likely
to become progressive-1-7 =ore iapor:azt.
7.5 An upturn in premium r_=:as is expected in
late L991 or 1992 in
the UK and 1992-1993 in :he US, vith Personal
Lines rates
strengthening ahead o_~ :zm.ercial Lines. Industry
profitability
is expected to improve about a year later than
premium rates.
US profit margins are ex--ected to recover to
around their
historical average, but 7K margins are likely to
remain low by
h'srori.al standards ---.e: the med--'- tar=.
7.6 7he fastest real rates cf growth in acn-life
premiums are likely
be found in the Far Zast economies
(at 10%-15Z p.a.), with
opportunit-'es for rapi_~ .7ro.th in the
medium-loager term in both
latin America and Easza-.;'Cen: --al Europe (at
around 10Z p.a. in
).
terms
.
;.7 The ouclock for LiZe ass-.:zance growth is
slightly stronger- than
'
:hat for non-lt;e insu-a=ce. Real growth in the
1 _990s is CD
expected to be around i-. p.a.
in the US and 4." p.a. in the UK. CD
Faster growth is Like-'-:, ia the Far East markets
and Western
-urope (at around 107 ::.a. in real terms), with
longer-term N.)
opportunizies possibile't-7 Easz ern"Cenr7al
Europe (10Z p.a.) and
iatin America :.a.). Growth rates in North America
and
'.;estern Euro- ~e bv --gher savings ratios and,
in
:-e lat:er, b, a private pension
7 rOVLSion.
BATCO CONFIDENTIAL - CATEGORY 1: NIINNESOT.-k
TOBACCO LITIGATIO,;.
BATCo document for Province of British Columbia 26
October 1999


-:A3LZ F';.
Fiaancial Se~-ices F=f'-:3 (2-3)
1989 :990 i991 1995
Eagle Scar
No n - e
:=v.
2 9 0
.ransfer ~15 --Z'a, r:63) (-,q-,
:38 2~'
s tmen t ncome 208 317
Resul: (95)
~reshan '4,
Total Non-L-jfe ,5 -6) 4 412
- Life 43 z.3 66 117
- total Eagle Star 308 _zi~) 70 529
Allied Dunbar 106 (5 LZ 262
-arners
- liou-Life 250 4S 298 570
- Life 72 70 68 128
Imasco (Grow) Share) 75 58 113
Other 2 1 1
TOTAL 813 622 1603
,a) Includes Group Smoothing Restricc.4--= ~f
'b) After cakirg account of milliou, c-.:1o=
oro~ision
CD
(Z)
CD
.Z.
r"i
LN
BATCO CONFMENIIAL - CATEGORY 1: ",11NNESOTA
TOBACCO LITTGATIO.N.
BATCo document for Province of British Columbia 26
October 1999


7.~ Lif~ assurance comoanies will -face increased
comper-4-c-lor. for
long-te= savizgs from other "nancial iasci:ucions,
:'i. banks and buiL~iing sociec~es- There -.r-'Il
also continue to
be intense competition to sec-'e direct
dis:7'-burion lizir-s,
parz:.cu:arly in the UK and --uro:ie, whiz- -w--11
influence the
structure of the -'ndust-.I and adverse it
marg4as.
17 affect prof -
7 he progressive i=plemenrarior. of the E~ropean
Single Marxer
programme will also increase competitive pressures
and further
undermine profit zargins. Thus, overall, profits
will grow
slightiv slower than oremiums over the
med-J'=-Ionger te=.
B.A.T Industries' Strategies for Financial
Ser-7ices
7 .3 --lie key sz:ategies for Financial Se-tices
are:-
(a) To i=Drove profitability ia all ex'-stiag
businesses --ri-n
particular ezphasis on under-,;r-':'-ng
petformance and
ex?ense ratios.
the less profitable and
o withdraw progressively -from
core risky activities acd to dives: peripheral
businesses
wh--ah do not contribute to the main directions of
szra:egic thrust.
To continue to strengthen tt"ne comze:it-'ve
position o-- :he
businesses in their home markets, concentrating
or.
e=hancing the strength of distribution and
upgradin; I.:.
s -,s t ems
1 d) Tc evaluate opportunities for geographical
ezzansion
initially in the US and Continental Europe but
also
considering strategies for longer term expansion
I:: the
Fa: East and Eastern Eurone.
Cur-cent Perforrsance/Prospects
7.1C Table F! shows the contributions to profits
from the Mai::
7 inancial Services activities in 1989, 1990, 1991
and 1995. Key
features of this analysis are:-
a) The importance of Eagle 5car and particularly
the
unc~erwriting result and :he unrealised gains.
,b) The reduced contribution from Canada Trust and
Fa=ers in
1990, due in part to adverse exchange rates,
without whit'n
rlr--ers pro-rits would have increased by 8%.
(z~ The steady growth in proffzs Ero= the Life
businesses
~t.ich, because of the acaounting conventions
used, are
understated. C:)
C)
7. 11 Tlie strategies an~ action plans
undet-!,ring the forecasts
eacn aajor element o~~ the bus4-ness are s=martsed
In the
.,a-3zra;-s which follow.
co
CD
BATCO CONFIDENTIAL - CATEGORY 1: MINNI:SOTA
TOBACCO LITIGATION.
BATCo document for Province of British Columbia 26
October 1999


!,gle Star
-he Long-term s:racegic aim for Eagle Star's Ul
General
Insurance activities is co imorove its marKe:
raak,'ng su:~ *
chat i: beco.es the principal challenger to Sum
Uiiance -or
market leadersnip. However, in response to the
current
difficult operating environmenc, greater emphasis
s currenzly
being put on consolidation and improving
per_~ormaace to pos:.::.on
-he business better for taking advantage af more
favouran-le
growc~- conditions when the insurance cycle
i=proves.
.1' 7he operation is a major player in the UK
NTon-Life market, vizt:
a gcoc reputation with both in--ermediaries a-ad
the imsur.4-ng
publ.'--. 1: holds strong posizions in Emplo,,ers
'
'2 ersonall TraveL, Perscrial and Commercial Hator
aad
e 1991-1995 ?1an projects Eagle Star's UK Generai
Insurance
net written prenium growth to be about 14. p.a.
over t .he
1990-L995 period (12-, p.a. for 1989-L995).
Fersoaal Lines
business is projected to increase ac arouzd '15Z
p.a. p.a.
for 1989-1995), with Commercial Lines grow-ch
beia3 abou:
-.-,.a. (10'. =.a.for 1989-1995), with the balance
bet-.;ee:-.
?ersonal and Commercial Lines shifting fr---
57:4.1 in 1990 zo
61 :39 i:: 1995. Market share is assumed to r4-se
from 6.15' ----
1990 to 8.2Z in 1995, with marlket share gaias
accounting for
just under half of the projected Increase -4=
preniums.
13 T
- ~he Plar: assumes thac Eagle Szarls UK
under-.4ting marg4z wiJI
improve progressively from -32.3Z in 1990 to
-*-7.3!: in 1991 and
-7.3," in 1995. However, the latest view (as
e-t?ressed iz the
firs: quarter QPR) is that the 1991 margin will be
worse than
expec:ed az: -23.4t, reflecting the coarinuiag
highly co.pet!.::J-e
environment in the UK market.
-.16 7he prioriz-, elements of Eagle Star's
straregy are cc:-
(a) Improve both control over risk exposure and
the quality of
underwrizing.
(b) Red-ace e-viense ratios cz levels will
safeg,,ar_~_ Zagle
Star's competitive position.
(c) Focus on those products and distribution
channels --mich
offer the best prospects for proficable growth.
(d) Increase control/influence over disnributiom
chaarels
through joint ventures with building socie:ies and
broker
chains and by using I.T. cc develop a competitive
edge Qin
-i::'i smaller brokers. C__
In addition, Zagle Star is seeking ways to reduce
fluc::uations
in p-of':s, including further development cf its
re-Lnsrance
szrz:egy and iz--reased ephasis on fee-base~_
bustness.
c0
BATCO CONFIDENTIAL - CATEGORY 1: NTINNESOT.1,
TOBACCO LITIGATION.
BATCo document for Province of British Columbia 26
October 1999


-;~::ies ralaz~ng to these pz-~iez::;ors ara:-
-ssues. sansi::4- - -
a'. 7ie ability to secura the anticipated marke:
share gains
-47en t~
ne compet4t,".e aa:ure of the marke::pl- ace and
Zag-'e
com-mitmen: tz secur-ag premium ra:e 4aareases
even
zhough this may res~C-: in shor---term loss of
business.
7 he :iming and scrangth of che anticipated
i=Dro,vemencs in
pramium rates. A.I-.nough premium rates are
expectea to
- through this year and next, the UK market is
exDec:ad
.rM
:~ remain highly c=petizive over che medi= te---3,
i:h
overseas entra=:s seeking co secure business in
the most
a=racci,e marken se3ments at highly competizive
rates.
.M: Az-ievement of the =7oJec:ad improvements i-i
Eagle Sta:'s
u=der-.r4-:!:Lg ratio.
~e race o~ increase in market share by the direct
in tars
and Eagle Scat's ability to respond throu;~ Eagle
Star
DI*:aZt.
Rezaar-ion of the b~s--ness' major distribuc--:s.
Hazlo 3z:ar's (and the Gro,-z's) results will also
be sensi:--'ve
~er'o=a=ce respect :a smoothed capital
appreciation.
Eagle Sca:'s smoothed capital appreciation is
projected to
izorove from Z-107 million in 1990 to E241 million
in 1995. t
r,,)=s a major par-. of Eagle Star's projected
Non-'--Ife profits
mos: ?ea:s and accounts for 46Z of the anticipated
rezovery i=
profits between '1990 and 1995.
Kev ass-motions in the Eazle Star Plan with
rega----; to proje.:ed
realise,-` and unrealised capital gains are:-
(a' 7.7hat capital appreciation on equities will
be 18Z in 199'
ar--1 average 1OZ p.a. in subsequent years.
b 7haz, after falling by about 5% in 1991,
properzy values
--'l1 then rise by about 8Z p.a. on average.
--a: g4lt prices rise by about 3-. in 1991, but
re-.:a-.-.
~-az beyond then.
- Compa:4-sor of these assumotions wich those made
by external
22
ana-*,ys:s suggests that there is a danger that in
the later years
o4 :he ?!an profits gro&rtL, arising from capital
appreciation
could c7ove to be weaker :han the projections used
in the Eagle
S:a7 ?-'a::. It is also l."kely that such profits
will prove mc-a
~o*acile than ne assumptions used in the ?Ian.
i=plied by z'
The lonz-:erm objeccive for Eagle Star's ErK Life
operation CD
is :o z7,-w oarke: share significantly to become
one of the ' to o CD
---,e7, -4-fe offices, continuing to achieve an
azzepca-_'_1-2 -Z--
r
I ---a UK L4 ~'e and Pensi-s arket is emvected co
con~`-e
over the medi= tz=, profit =argins are
--.3 decline as a rasuLt of higher commission
rates anZ
:oroe:i:ion E7::: the banks and buildlinz
sacia--fes.
BATCO CONFTDENTIAL - CATECORY 1: NIINNESOT.~
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BATCo document for Province of British Columbia 26
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7 ~, -In pro Eag-'-2 Star' s nL~ zusine-is p-4
..r.~ - - - - 'lior
u -- -:--Isrs) :-sing f:= EIO, ::t- - (on zhe
basis of aznua-
p:=- -.=.s plus 10Z of iew singl-~ --'n 1990 to
ZZS5
in a growth raze c-- 227 ?.a. This ts exuec:e--4
:o
res--` -- in ma:,-ac: share rising from I.St zo
3.2'-.
Zag'- Star's :aoendencL on the -7., ma.-keL ~whic-
-is ex-jectec* :3
dec-a3se in ~---;ortance in the ~:K) Is pro'esred
to decrease ':om
6-'-, --- 59' fz;- new anr.---a1-pren'--.=
business, and from 98,'. t~- 597
-or s-'agle-;,re=ium business. '-Eagie Star's
sales through rhe
mesa-:4-es and Bris7ol & Wes:) are assumed to
increase
be:-.;een 1990 aa` 1995 from 8.~-: :o 16.8Z for
new annual pre=i-=s
an~- f--m -o 4.--7-. for sing-2 preci=s-
- -::s Js expected t.3 be sli7ht-'-.- lower than
the rats of
7
F
p--3=-= growrn, averaging '-5!:-'-6t p... o,er the
'.990-1.995
7 he ?~JNA target for ::-e UK business is act
~,~ezted :o
be -~e: until 1993 because of co=iDeci:i've
cressures on ne,
'ous~-a-2ss ma-,7~.=s, investment in I.T., az:~
the costs of achieving
d:-s::'-buz--*cn tc inz7ease marke: share.
-k el~~men: in the drive to azhieve
sa:--'sfac!:o-.-- profizabi'-i:v
is ::.a--.~ec-F.ncrease t .%e size of the
b~:siness in or-~er t:;
s-zz*.;ra cne az--:.ZLpared scale economies.
:z Ez~':~on, 4--,--ther emohasis -is being to the
nee--4 to
!--;::ve prof--abilit- through lavestmen: -'i
I.T.; improved
ser--~,~e; bet:ar management of resources and
productlvit7;
gr-2-2-e: accoLn:abilizy for product and
c.,iaane--- profitability;
-'-::-.ved pro~-jct mix; and razf-onalisatior- of
product lines.
Ker elements in determining whether or no: Eagle
Star will be
suzzessful in achieving its medium-term
ozojections are:-
(a' The ef--activeness of distribution.
61
Develo=ent of a more sharply- focussed and
streng::.ene~
produc: base.
profitabilic:: :h1rough containing expenses and
improved understanding of individual product
profizability.
Building service advantages over competitors
through
improved training and systems impro,7ement in
order to
improve distri'zuzion-
(e' A conz--nuing; focus on ensuring tha--
inves~.ment re:urrs are U7
-za--nra-'ned at compe:"t4-.e leeLs ead that these
are CD
zommun-zated to the market. CD
CD
B-\TCO CONFIDENTIAL - CATFGORY 1: MINNESOTA
TOBACCO LITIGATION,
13 ATCo document for Province of British Columbia
26 October 1999


- 2-' -
7.29 -::7 :ne overseas operatioas, Eagle Star's
objecrl-ve is to
a -2-ie posi:_-'z:-.s iz selec::ed niche markets
where --he
c=:an-. can bt:'_Ld susra4_-ian!_e compe:i-_ive
positions and produce
s ~ ~ - . . . .
--.proved med-'= and long-term financial
7 genera' s-:ateg! to acnieve these objec:~,ies is
to
amr- build on exiszing major businesses, dispose
of
=a-~ina_- oDerations aid invest i-n selected
azrrac=:Lve marke,:
7 3 1 ac::.,,7.s '-.a4_ng -taken in suovorz af
this strategy are:-
Z 3:7-2ng:nening of ZaT,_'a Star's ?os-":_Jon in
the London
Ha- :*.~e : .
-_z=ans~_on and 1zzro--enc of the domestic
operations ia
~_stza_-_'a and Souc- -_zr~_za.
of European, Non-1-ife operations that lack
_e_=sor_=Z_1a po:anzial 'or pr-afi_:able gro-,ch.
:_~antf_~fcazior. of a:--:-aczive Life market
opportunities in
_S:uthe:-m Europe, As-a an-' Eastern, Europe.
&11-4ed
~__i azraed oerall objecz-'-:e for A.1lied Dunbar
is to build or
:::-a s::rz-::g::n or trie Sailes rorce to expand
the exisrlng bus4ness,
:=cen:rS:.-n,T on its core products
i - Although a small operation
`--3 bee= star:ed in Spair., the UK remains Allied
Dunbar's
;:~=a-7 geographic focus.
7.3-- :: is z-2-aeral-17 accepted that Allied
Dunbar is in a leadersh-4;
-:zsltion vitnin its market sector, based on:-
- t`e largest direct sales force in its market
sector;
- 7-_a7ketiag ability;
- -==ova:~ve produc= *zenef'-ts;
- a strong reputation for client service,
including in the
--.k market;
- e_~fac-_ive use of information technolog7;
;i :u---enz market share of 4.2' of the UK
Individual Life Lrl
--d ?ensions market (9.57 for those offices
involved in
CD
aunit-liaked market). CD
C-D
7.3- has beer. reflected in a strong performance
ia 4t:.
--!ze-az -,ea-s with regard to growth in
production and profits.
'=_;,eve7. the severity of the economic and
competitive pressures (-N
~dersely af-fected Allied Dunbar's performance. In
co
-- -' Z a-.. ~roduczzion and manpower ere
significantly bela-.;
32
BATCO C;]',NF1DENT1.AL - C.',TEGORY 1: MINNESOTA
TOB.-kCCO LITTGAT10N.
BATCo document for Province of British Columbia 26
October 1999


---e chanze-i eav~.ro=enz, a 7an_gma o~_
tnitiac'-s
has `-e-2n In or~_er to rasrore mo-r.:= oE r.-
bus--::Lss and prozec-_ rne gro.rn or tne
ous:.ness over the
medf_= :a=. -%ese Lniti.rives focus on Associate
recen::Ifoc;
an~ inzr~duc:lon of new -,rocuz::s, e
--ie nhancemen:s
to 'k-2, s,3ze=s, improved perormance incen-ives;
and expense
red-z::I~ns- kct-'311 I's also in hand to
i=--iro,e r-*-e qualic,
prod---:f_on an_~ size of :-ie Sales Force.
7.36 Curren: ;roje-:4ons sho, ULied Dunbar azn~
-evia; premium growth
of &`cu: _*~', :,.a. over tne 1990-m.995 per:.od
(broadly in line
:- ex?~c:ed grou-t- rate of the total UK
ind_;~iduai L"e
ard ?e:.s;__-ns =a-.ke:) with produc::_'on
increasing hy 15,'-167 p.a.
Fr-.):~_:Z is expeazad to progress a: arzuz--;
17!.' p.a. on
ave:-_~,-!. Z'iougn the increase in L991 is
o:c;je::::ed ::) be only
9 t.
7.1-7 Th e for A11_-'-zd~ Dunoar are.-
a'~ ~2 ao:~oint=ei: of a new Chief Exe:-_-~i%a .
;,:-._~e-:e=enc of the planned _-mprove=erz:s in
ne7for--ance in
provide a szrDng base for f-acure growth.
c, -_z_,e1o;;=ent of a longer term plan for
ex:ancing
diszribuzion, complementing the strengths o-- the
direct
3-'es -force by developtag a partners hiD another
major
7 _:nancial Services organisa::ion capaole of
providing a
-=ant volume of qualizy referrals.
Farmers Grauv
7.38 Fa=e=s' mission is to be recognised as tne
premier (besc)
ins=a=ce company in America, securing a place in
the top three
.-ite7s in. every market segment in which it
competes.
-19 1: is c=ren:ly the third largest insurer in
the overall
geog:Zzaical market in which it competes for both
?ersonal Auto
(9.!Z =arker- share) and Homeowners (8.1:).
7.-'0 7he o*:)jec---'ve agreed for Farmers is :3
ac-leve a stead,
inz--ease in net income a;-' at least 15Z p.a.
from the management
of -.'--e ?7ope:--.y and Casualty businesses and
-from ownership of
Life :=surance subsidiaries.
1 :: has also been agreed that while pursuing
organic growth Ln
vLzhiz :.:s existing businesses, Farmers should
also see.-. to CD
expa::z -:,co me. States, aiming to achieve
mar'.-cer positions
to --'-iose achieved for the existing bustaesses.
CZ>
.;I-.
7.-: The Far=ers oase-case projec:.-'ons show
-.nat pcemium growth in r1j
the lxcnanges is expected to average 11:-IV: p-a.,
with policies U-4
in ::r:a increasing by about 5Z p.a. Yznaizement
Company net co
inz=e :s e~-:ecred to -'-se by 17". p.a. -_~fe
subsidiar, rev~enues
Ln
'j, p.a. and ne: '-ncc-De b, 1,
BATCO CO'-_z-DENT1AI_ - CATEGORY 1: MINNESOTA
TOBACCO LITIGATION.
BATCo document for Province of British Columbia 26
October 1999


7 3 K,2v --'ss,;es beInz addressec' *o- 7_==ers :o
_~-orove 4---s comoe:_'::_~ve
-jos o n; a r.~_ b u a o n s i or. 1 e a = a r s h
i o --' n c I ud e
Rez!uzLng ::-.e Zxznanges' -:ensp rac-'os and
n c~e
expense c~:n:r:%. - ---a Ope7at-4ons.
(b) Raistn; tne Lind e:wr _'n,v a'-__-*_'-_':-~ of
agears znroug'n
:_provin- ::.-ie o~ :.2snaizal S--:;Por-. an' b"
an_z :-espoisibill:-, closer to
(c) :=:Drovin; :'-e ra:io-
-_nz:reas-r- --ne :-_aL::-- az--: of :~Ie
sales~or::e.
::-,e :>enezra:Lz= o-- Farzers e_c4_sz::.ng
customer
base by zhe -=ber ot ?olicles sold to each
i ou s eao
f) Enzouragfzg z~a crass-selling o~ Life produc:s
Io,~ the
.armers A.Zec, zorze.
,3) 1xz-2n~i== 'rar=e:s' geographic base, g-viag
to
~zo.:~-Iaster~ States.
=e, :),sinass :he
7 ~=- "=Z ' :3
eaS, tech=olog-4ca-' competizive acTaarage rarougn
.ae progressive incroauc::,oa of the Business
Processing
7-1 Consideration --'s als,-j be,rg gfve= to
possibl-e acqi;isitions aimed
a: acaelerazing :he race a~ which new markets
might be
de,eloped. It -as been agreed, however, that a
pre-requisite
for =aking any SC.., aCqUjSi-4onS is that they
should have
sufficient mama-,emenz scre=g:n to support their
0_n
developoen:.
C.-t:~cal assi=:;:~ons re--a--ior to ac-ievement
a- the imoroved
per:o--mance are that:-
(a) Pressures ~or rate rollbacks and increased
regulation of
nsur-a-ice ndustr7 be largely resisted.
Cb) ?olicies '-z forze can be increased by about
5Z p.a.
(c) Expense ratios im the Excnanges can be reduced
by five
percentage poizzs (including a zeduc:ion ia the
Management
7'!e), to a level where the Exchanges are
competitive with
other -3ajo:7 ~irac: '.-ri:ers.
(d) *I'nde:----n.:'_.-g per-3=ance is i-proves.
BATCO CO'-FIDENTT.IL -CATFGORY 1: NIINNESOT.-k
TOBACCO LITIC.-MON.
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BATCo document for Province of British Columbia 26
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Camacia Trnst
_6 :masco' s 1991-99~ -ec--s a race of grow:-. in
Canad s
:,.znover of 87 P.a. c,e
sLign:1, above this rl:
g:owc-. is anzicipa:as :
in res,)cnse to the c-,::-7
signi-ica-atly in the
i=-Pro,es.
na ~'.99-_-_995 per:od, wit'n grow:n beia;
Z P.a. --or 199' -~d bev-d. F r of,'
e in 199' as margins are squeezec
econc=,-c :ecess:.on 'but to improve
Fears :o around 15% p.a. as the econ=,
'7 gr
7 he key issues to be :eso_,7eA_ -2;arding the
`_:=a owt:. ~.IE
cevelopoenr of Canada are:-
71,e nee~i to =a.-g:.zs .
erasures to fur7:ner the efficienc-7 o;: the
b-nch nesvor'.-
c 7he neet! to i=- -=-e C7's =arketiag, "n order
to mee: :he
increased com=e::.__:.z= :z= banks and ot:he:s.
`szao_!_:s1-_4ng c=::-ol o~ -e~_eral a=,-; at'
for the --.::.::e deve'~o
n ans ment o: -_n_,s o.s*,aess.
-.a) :der c ification merger o:-Dort=_4::fas vi:n
o:-_r
trust com?anies.
T'ne implicatic::-_ :- :ne i--pendIng F4::anc`a._1
Ser-:ices lez_fslazion
and the US!Can_2_~Z ---A for the opera:ing
env-'roamenz in Canada.
Grouz Strategic Issues for "imancial Services
7.48 The expec:ed con-.ia,.:_4= severe pressure on
profitability will need
to be met by decisi-,e action iz all couparies,
concentrating
particularly on the aznievemei: of improved
under-~riting perzormaace
and reduced e_xpezse eels .
'he review has also =~_erlined the imporzaace of
Eagle Star boz'- i~
dete-=ining the rate 3f recovery in 1991-1992 and
in contr-ibutiag to
:'lie growth in profi:-z :o 1995.
7.3C -. relaced issue is :-e need to reduce the
degree of vulne-abi' `=y to
var--'a=ions due to the '_3 insuraace cycle and to
variations in the
stock market affectf=2 the unrealised element of
investment inzc,me.
7.51 :.ookLag to the longer tar--, there will be a
need to resolve the
cur7ent uncertainties about the actracci-:eness of
the UK G'arieral
'ns-=ance and Canadia:: Bamking markets.
--here will also be a =eed to cc=sider how the
distribution of Allied
Dunbar can be extende--_ b, develooing channels
zompleentar, to the
_`i7ac: sales force.
kncz-ler '-ey issue oa to de:-2--.zine how the
Group's b,;s-'nes-s
shoLLL~ develop thei: oas,_':-_'ons in UK/Eur:oe,
Norzh America and,
lo-ze7 tz=, in the 7-as: anC else-herz, 4n-_!.d;n&
Eas-_ern lurooe.
-.-.e zua1::,- and of 7.anagemen: -;t__ be a
c:4:~zal
_4 e:a=inan: o~ succe4s a:~_~ :h_'i is refleczed
the projez: z:
t-,d _1._-.azge=e::s ::7 :3azaie: C:2!7,.71; --na
d2,jel3:;-_27i:
t,~:slzessei-
BATCO CONFIDENTIAL - CATEGORY 1: MINNESOT.x
TOBACCO LITIGATION.
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Co=c-'-,i3 4-o=3 /RecamseadaCioas
rs c ."e, 4s :nar tne original
conclusion from the re
ass-=ocioas regardlag the poten--al for rapid
profits g7o.th
r-e --mancial, Services sec---.r may to be
do'61,;raded.
*':-.;ever, arhough there are dou~:3 abouc the ~:<
General
:nS-arance and Canadian Trust Bazing marxecs -hich
need to be
there is no evidence -: suggest that the sector as
a
does not have the pocea:_~al to provide the Group
~_c`
a'-_=-.e-average pro-;-,':s growth
_._ia pr:.or:.:-4es for ac:ior- within tne
Operating Grouos
to re_~Iect the principal issues which need to be
7 a so ' vej .I= aril_' be partic-.~lar-1,;
im-.)o.-zan,, to ensure tna-- :-e
=::7ezaszs -_'7L Eagle Scar are ac-_-'eved and to
obtain the plan
has oeen promised for C. -I'aancial, it order to
resolve
uncertainties regarding tnis company.
~e exist-ag priorities at the Z-antre a-so reflect
the major
ror the GzauD's Fina=z_-'_1_ Ser:i-zes o-oerations
as a
-.i:- are to:-
tne Groun's distri".oucioc.
kgri-2 plans to deve7oo
capability for botn Life _=::,i General Insurance
i-, -the U-K.
Agree measures to mini=fse tne impact of large
va.-Jat-ors
_z -
in rhe reported results - ne MK GeaeraL Insurance
business and re-evaluate :-e ac:raztiveaess to the
Grouz
o- c'nis market.
Identify the elements of _.-ag term stracegies for
Coatimental Europe and :'_-a 7ar East and pursue
specific
opportunities as they ar--se.
Agree and i=Dlement an --*==-.oved Group--ide
training and
management development -;-.::3ram.e for Financial
Se-.;ices
subsidiaries.
-'-s -for the Tobacco businesses, may be felt that
this final
sho,_-'~ be extended to cc=s"iet
~ha: additional action might
'--e taken z~~ attract the best ---=z mazagers to
the Group.
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BATCO CONFIDENTIAL - CATEGOR'y 1: ',IINNESOTA
TOBACCO LITIGAT:01;.
BATCo document for Province of British Columbia 26
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a. Associated CooDanies
'as:
n year's revie it .;as ::-:2d chat, exz- the
s:)ec-
in -a: 2' compamLes, o:
:ase :;~ Aracruz zraz- the kss.c~ -
che most imparzan: are :::asco in Canada an.'
7~,~, im :nd--'a.
ha,e Tenerally been tharacterisec by having a
re-azive-7 larie
Pr::-;=r-_ion of other ac:-4vit-'es, outside
Tobaz::, and FinanziaL
-he-e are inherent prolbl=s in :;~couciling ::-.e
ia:aresz_S af
7 nduscries -;ich zhose o-- :-e other
sharea-z---ers,
3 e=-27a_`IY wish che comvanies t:~ -pursue
dIversifization
sz:azegies outside the main s:razegic thrust o--
:-e
7-ierz_ is also a corrinuiag in agreefaz
a:p_-op::._::e
levee-- of d--'-.'-'dend payments.
I= :::ie case of the Australian A-isociate
Awa:~_', :-ese
d~-'zulzies were resolved by effec:Ively
enzham;ing a
in:erescs in the non-Tobacco ac:-'vicies for a
`~:-27LSt in the Aus:ralian Tobazz3 business anci
~-_rinz ::~e oas:
vea: 3.kTC3.'s 327 sharehold_~r.7 '--
Skaadinav4-3., ::^__aznzs
De=,za:`_< has been exchanged f-.r a 32: direct
lzvesz=~n: t h e
business.
Thera are coat4nuin3 objec:47es to dispose o!
--7.e
..a::-.;= and to restructure the s-~arehcldiag in
-.;ay
waizn will increase control over :he Tobact-z
bus-_*ness a=_~ e_4ze-
re_~-jce or eliminate rhe interests in ITC's =ier
a=:4_-_*-_-'es-
;Z. - For :=asco, the main elements =z the current
ze--for-jazz-a- and
p-.zs?ects cat be su=arised as -follows-.-
a'. Imperial Tobacco, accou=:img for 4Z.--, c f
zoaso'__f!azee
operating earnings in 1-991), is the zarkpz leader
fa the
Canadian Cigarette market -aith reasoaabie
prosDec:s for
growth in a shrinking mar:czt.
(b:- Shoppers Drug contributed' 9.4'- of earz'-ngs
and is also a
marker leader with good prospects for Sro,;-.h.
dardee's and opera-__'=g in the US Food =-:tkez,
Contr4buced 8-3Z to earn-;zgs and pro"ts were dowz
45t on
1989. The comoanv is also in an indusz--v sector
which is
under considerable pressure.
d' CT Financial contrIbure-4 33.7-, of earm_~ng~
La Ic:-- but
profits -ere about 10- dc--r on 1989. 7hera is
severe
pressure on margins in :"-s sector. -_-asco hava
7.ot yet
agreed a-strategic plan wt.rh CT Finantial b~t are
hoping
00,
do so by mid-I
ie, 7here is also a small To`_acco re:ail_-*:-.z
c`ain azz:-_nting
:or of earnings in 1990 and res--'--".;a-'
~;erisz_=7
az:ivi:_4es tiich provide-_: a net
coq-.:-_-_t::~_:)n of o_-
.2 a7,:.. -.'Z s
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BATCO CONFIDENTTAL - CATEGORY 1: NUNNFSOTA TOBACCO
LITIGATMN.
BATCo document for Province of British Columbia 26
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s ar. ec4 s::; ,g pro ~ec: to cc-is ide: the opc
Ions f:.- a
7 -2 5 - 7'-: Cn zc fcne B.A.7 T.-,cus:r4es'
snareholding a-!,::g
si=llar L_-ies :c chat acnieved for che ocher
Associates.
::ea-.-:.::e, ::he pr-_ori:_es for Izascc are:-
a 7- ~avi-aw their corpora-_e objectives and to
agree
ap?ropriace targets for profits gro.ta and lt~els
o_~
_~-_'vi~end paymeats.
_c agree a sn rsccver~ plan for Hardee's aa- a-!so
-.i'ans -or a -1ch--a.al from this activity.
obca--'-. a s---a:e7-c :,an ~or 07 Financial. and
:o az:aa
:-a plans for zhe furz-har develoDmenr- of this
ac:ivi:_-
7 o agrae an imD_1t=enca:-_'on plan to mee: the
requ-4:amem:
under :ne new --,ancia~' Services legislation
cha;: Inaszo's
s-areholding in ~7 Financial should be reduced cc
65-Z.
7 ; agree plans f:7 aa-ze-etaring ri:ndra-al ro=
:ne
res'dual Genstar ac:ivi:ies.
bare a-so be a continuing objec:'ve to increase
-.-e
of zoa:rol t-a: is exerz: .sed over the sz:aregies
and p:a=s o~
bc:- :.asco and 17C.
9. couclusicas
9.1 rev'_'ew sujoor:s the view :ha: B.A.7
Industries can prov"e
an above-average return to shareholders over the
long ce=
L`roug` concentrating t"he Group's resources in
pursuing grozn
"
"
-
4
= -obacco and Financial Services
9.1- Hc,;ever, in order to be effective in
implementing this strategy
ar.,_~ to meet the require=enc chac there should
also be a rapid
rezover7 in profits in 1991-1992, it will be
necessary to give a
h-'z,. priority to ensuring that Brown &
Williamson and Zag'a Star
coce as close as possi;Le to meeting both their
short-term and
iozg-ter= forecasts.
~.3 S`zze current trends suggest that this may be
difficul- to
acn,ieve, it is recommended that there should be a
specific
recuire=ent in the October previews, both in these
companies and
more generally, to identif7 the principal
opportunities ror
p r improvement, both in the short and long term,
concentrating on those businesses which are
currently operazz-ag
a: lo-.; '-evels of prof':abillity and where the
scale is su_-fizienz
tc -.ro,ide significant leverage.
9 1: should also be nozec that although the level
of un:acove:aa' CD
-*, ' - I~orecast to fall in the period 1995,
s ' to I it is not
(D
e--iaa-_ed completaL:-, In addition, the improved
recover-, a-so
de---!7cs on the forecas:s for -agle Star be'-19
achieved. Hence
-.ni ca-c :a:,- ~jr additional UK --r3f.-zs
corzlnue
a: I 1c, level, increasing che leverage of any
i_--arovezencs a:
-.-.:.3 t:--72 chat can be -:_Tze.
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9.1- ~.a cur7en: sc-_trezy ---r Financial
Ser-:'-cas --'s to concent:ace
rsz: on s:rang:henI_::.; :-e Grou-p's
pos--'::.j:-. General f?SC) a,-~
Insura=::e in the '-'K and ',S.-~ and :o coas~der
szraregies for
e-c-_endiag in:z) compLe=encary ma:iececs lo. --ne
~:SA, the Rest_of.
.;:ope and, longer te=, 4-nto c-e -ar --as: Ind
tne Res: or tn~_
inclding Eas::.a-:-. Zurove, concen::ra::-_mg on
Personal-Liaes
:),s; .,e5s -
9 `owever, cnera also a requ-4--=enz: zz;
re~_..:ce the
a- roup pro"its to rne UK under%rriti=g cyc-e arid
to variacions
,~ aunrealised invesrmenc gains (or losses, . It
has also been
zuesz`oned hecher the ',7K General :nsuraacs
=arkec and Canadian
Sankin.7 can off-27 the level. of :a mee: t .ne
zri:arion tna: each Group business shou_'-_~ be
capable of
self-f,=dec' giowth a: a .bove-average ra:as. ~_'t
is theta;ore
7 ec=meqdec' :hat a szu_~y should be se: u; -.--
resolve these
issues.
9.7 s:udy, -)cher stui~~_es to decar=ine :'-a
'--est oppor:unities
'37 P:'-J:l: _Mprovezen: and the projec: :a
czasider possible
cnanges in z-,e relationship _:t: Imasco lead t~;
=cciiffzaci~ns in the Group's szrzaregy.
9-S 7h4s g: sotoe va-, :a meeting the o:.ie:-
zriterion agains::
Imich :he emisting sz:razegies have bee= measured;
that there
s'-ould be ao alzarnat-ve scrazagy of--a:4-rg a
bet-tar rezurm to
snare-clde:s.
9. `cwever, i: *411 not necessarfly cover all
:)ossilole oo:fors aa~
i: may be t~oughr wor:nwhile, therefore, c: set up
a separate
sz~=y to consider more radical aIzernar_-',;as.
Even if the resul:
of this stu_~y is negazive, it will still ha-,e
value in
c:z-11--ming :*-e validizy of the Group's c-ar:eat
strategies.
BATCOCO~-FIDENTIAL-CATEGORY 1: NIINI;ESOT.-k
TOBACCO LITIGATION.
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BATCo document for Province of BritiSh Columbia 26
October 1999