Guldeling for Eatle Star - July 1992
General
I The short-term priority for Eagle Star is to improve performance and restore profitability
in order to re-establish, by the end of IM, a firm base for future sustained and
profitable growth. Premium growth is secondary to the achievement of satisfactory
returns.
2. The long-term objective for Eagle Star is to be the premier composite insurance
company in its selected markets. 'Premier' means:
- being one of the top 3 in terms of profitability;
- being in a leadership position in terms of good market share in the selected
markets in order to achieve economics of scale and to be able to influence key
external variables;
- outperforming the competition in terms of growth in market share, quality and
range of service and distribution, and innovation.
3. Eagle Star should seek increased rates of sustainable growth in profitable business,
building on its strengths and concentrating on UK Personal Lines Life and Non-Life
Insurance. Large commercial should be continued only where it is clearly profitable and
supports the main focus or where exiting would destroy value. Resource will be directed
to those geographic markets where Eagle Star occupies, or has the potential to occupy, a
premier position, and will be withdrawn from markets where this is not considered
feasible.
4. For the longer-term, Eagle Star should continue to review and develop X-ays of reducing
its vulnerability to marked fluctuations in profits, including altering the balance of its
activities between Life and Non-Life business, improved control over aggregate risk
exposure, re-insurance and the further development of fee - business.
5. Eagle Star must ensure the highest standards of compliance with local regulations
throughout its business.
Financial Guidelines - General Insurance
6. Eagle Star's general insurance business should seek to achieve a minimum insurance
result (including AM) pre-tax return of 3% of net premium income with an objective
to inc 2- this to 5% by the end of the plan period. To achieve this 5% return, a
combined ratio target of 105 % and an attributable investment return of IO % of technical
reserves is required.
7. Additionally, Eagle Star should seek to ensum that (a) its combined ratio by major class
and (b) its expense ratio by major class are superior to those of its leading comparator
companies. PQ
C)
8. Eagle Star's conventionally measured solvency margin (unsmoothed funds as a
peiceritage of net written premiums) should be I 10% of the median margin of the five
major listed UK competitom Co@@on should be given in the next year to
establishing a more refined risk based capital test which more fully reflects the risks
associated with Eagle Star's business. 4N.
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Figancial Guidelines - Life Assurance
9. A minimum overall prof it target of 20% of new annual premiums plus 2% of single
premiums should be achieved.
10. ne current expense overrun should be eliminated by no later dw 1996 with the 1993
expense overrun before Systems Development costs not. exceeding f7m.
11. World-wide total life premium Income (measured as annual premiums + 10% of single
premiums should be increased by at least 10% per annum in real terms, based on 1991
premium income levels.
12. Eagle Star Life Assurance Company should seek to maintain a free asset ratio expressed
as free assets to with profits liabilities of a minimum of 25 % subject to the condition that
the ratio of surplus (before implicit items) to statutory minimum solvency is at least 2.0
times. Consideration should be given in the next year to establishing a more refined risk
based test which more fully reflects the risks associated with Eagle Star Life's business.
Financial Guidelines - Eagle Star Asset Managers
13. Eagle Star should seek to outperform the market in respect of investment return. The
measurements of performance adopted are that the total return on each broad asset class
should exceed the return on the appropriate benchmark index and in respect of the Fixed
Interest portfolio and UK Equities, an outperformance of at least 0.5% should be
achieved. T'he overall return should exceed the monthly weighted average of the
benchmark indices which am compounded to calculate the annual benchmark return.
Indices selected have been separately identified for Shareholders and Life Funds and will
additionally vary within funds depending upon the business classification.
Financial Guidelines - Eagle Star Holdines
14. Life business dividends should equate at minimum to the value of the transfer from the
We Funds. General business dividends should be at least equivalent to the franked
income received on shareholder funds to enable advantage to be taken of the tax credit
attached to this income.
15. Assuming increases in franked income of 15% per annum from 1993 onwards and an
increase in the Life Fund transfer of 13% per annum, the following W dividend
payments to B.A.T Financial Services Limited will be required:-
LM im M IM M im M
Life 43 49 55 62 70 so PQ
General 2Q AQ 46 U fil 2Q CD
E
TOTAL la
The minimum requirement for 1992 is estimated at 980 million which represents
the FII received by General Business VO million, and Life Business VO million, Jh-
to the end of 1992 which has riot ben covered by dividends paid to BAT. rt is (Jr.
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recognised that solvency issues and availability of distributable reserves am
ible restrictions on the payment of this dividend. However, full consideration
posts
should be given to means of passing up the tax credit attaching to the FII received
including, if necessary, the recapitalisation of Eagle Star Insurance Company
Limited
Any payment of dividend above the minimum required to cover FII received is
dependent upon the minimum solvency criteria in paragraphs 9 and 12 being achieved.
16. 'ne guidelines have been set recognising that Eagle Star is currently in a 'recovery'
situation. The underlying requirement in establishing the guidelines is to return to a
shareholders funds RONA requirement of 25% of smoothed opening funds although in
the short to medium term this requirement varies sign because of the current
trading conditions and Eagle Star's current relatively low capital base-
17. In the life assurance business, Eagle Star should aim for the annual increase in
embedded value, together with the net transfer to the shareholders, to be on average
over a five year period at least 17% of the opening embedded value (after adjustment for
the disposal of Australian Eagle). This measure will be reviewed following finalisation
of the industry proposals on life business profit measurement.
Swing Priorities
18. Distribution Channels: In both Life and General, Eagle Star should review the
profitability of individual products and distribution channels in order to improve overall
profitability. The Plan should include strategies and objectives for each distribution
channel. Eagle Star should seek to develop greater controVinfluence over distribution
channels, through arrangements with intermediaries such as building societies and broker
chains, and by using technology as a linking factor. Priority should be given to the
development of good quality Mega-ties, with an objective of one significant tie each I
year.
19. Management : A high priority should be given to ensuring that the management
strength of the Company is sufficient both to support the planned expansion of the
existing activities and to develop and implement plans for accelerated growth. The use
of bench marking should be developed to raise standards of selection and development of
management.
20. I.T. and Systems Development : Eagle Star should implement its agreed LT. strategy
on schedule. The Plans should detail how Eagle Star will establish future competitive
advantage through I.T. using a benchmarking process.
21. Staff: ne Plan shotdd demonstrate ft commitment to reduce staff levels by 1000 from
their September 1991 level by the end of 1993.
22. Overseas Companies: Me Plan should include a review that demonstrates how each
overseas company meets or is able to meet the objective to be a leading player in its
market
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23. General Insur2ace: Domestic Mortgage Indemnity (DMI) business should only be
written to support other leading lines of business such as House and Contents, on a
proportionate basis. It should not grow too rapidly, for example in a recovery property
market, without prior discussion by the Financial Services Strategy Group. Eagle Star
should minimise its dependence on property values.
24. Eagle Star's performance in the London Market should continue to be improved,
through better control of aggregate risk and operational efficiencies. The strategy for this
operation should be reviewed.
25. A study should be completed by March 1993 of the establishment in the UK of a
Farmers' style direct selling operation, using Farmers' expertise, Allied Dunbar's
recruitment capability and Eagle Star's products.
26. In Life, Eagle Star should continue to reduce the proportion of turnover accounted for
by low-margin high-strain products and to achieve improved profitability as a base for
developing and implementing strategies for markedly increasing the size of the UK Life
business through achieving leadership positions in profitable growth segments of the
market.
27. The Plan should demonstrate steady improvement in productivity and expense ratios to
the best levels in the industry.
28. The Plan should consider the possible opportunities that might arise from the ending of
front end loading.
29. A paper should be produced jointly with Allied Dunbar by the end of 1992 on the means
to integrate operations in Spain with a view to using this as a blueprint for development
in other overseas markets.
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HCB/djs
23rd July 1992
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