Annual Highlights for Co-operative Financial Services (CFS)

April 03, 2008

Annual Highlights for Co-operative Financial Services (CFS) for the year ending 12 January 2008

Financial Highlights

Total shareholder profit before tax, investment fluctuations, significant items and membership dividends was up 6.3 per cent at £155.4m (2006: £146.2m)

 This includes:

  • £67.1m from General Insurance (2006: £37.0m) 
  • £50.4m from Banking activities (2006: £76.3m) 
  • £37.9m (2006: £32.9m) from other shareholder activities

General Insurance claims ratio, despite severe weather events, was 64.3 per cent, an improvement of 9.3 per cent on the previous year

Banking bad debt levels reduced and costs have been controlled to offset inflation and achieve a 0.4 per cent improvement in the    Cost/Income ratio before significant items, from 65.2 per cent to 64.8 per cent

Long-term business in Life and Savings is transacted on a mutual basis with all profits retained for the benefit of policyholders. 

CFS Business Highlights

The transformation of CFS over recent years to support growth and improved business performance is now producing results. The like for like improvement in shareholder profit was achieved despite the worst flooding in the UK for 40 years and the credit crisis which has impacted global markets.

There have been significant product and service developments, particularly in the mortgage and motor sectors, new technology developed to support CFS financial advisers and four new corporate banking centres opened to support planned growth within the business to business market. As part of the investment programme CFS intends to double the number of its corporate centres to 22 by the middle of 2009.
The general insurance business delivered an outstanding business performance despite the considerable claims costs (£37.9m) incurred from exceptional weather events during the first half of the year. Major on-going and one-off improvements in claims handling and underwriting performance led to profits increasing by 81 per cent. The general insurance claims ratio, despite the severe weather events, was 64.3 per cent, a significant improvement of 9.3 per cent compared to 2006 as claims transformation initiatives continued to improve efficiency and customer service.

The banking business saw balance sheet growth in both lending and deposit balances particularly in the corporate sector which continues to build an excellent reputation for service and product innovation for a growing number of corporate customers. Banking profit, before investment write downs, improved by £5.9m from £76.3m to £82.3m (7.7 per cent) and reflected higher net interest income, lower costs and bad debts, offset by lower non-interest income. However, operating profit before tax and significant items of £50.4m compared to £76.3m in 2006 due to £31.8m of investment write downs through the Bank’s relatively small exposure to structured investment vehicles.

Gross earned insurance premiums for life and pensions business in 2007 was £534.2m compared to £548.4m for the corresponding period last year.

David Anderson, Chief Executive of CFS, commentary

'This is a very satisfactory trading performance and highlights the fundamental strength of our business, the quality and professionalism of our staff and a clear business strategy which is enabling us to invest in the right business areas. 

'The increase in profit which was achieved in very challenging market conditions did not impact on our ability to excel in other key areas. Throughout 2007 we continued to demonstrate leadership in areas of customer service and corporate social responsibility, which co-operative members and customers rightly expect of us.       

'This is a very exciting time for our business and the opportunities presented by a revitalised membership scheme and the new Co-operative brand, which is being adopted across the Co-operative Group’s family of businesses are very significant. There is clear momentum within our business and so far in 2008 sales volumes are up by around 30 per cent on the previous year.”  


The Bank's well-balanced approach to growth maintains the strength of its balance sheet in the current environment. Funding is overwhelmingly from retail and corporate deposits rather than from the financial markets and its reliance on wholesale funding is lower than most other Banks.  The quality of the mortgage book remains high and the Bank continues to reduce its exposure to unsecured assets. 

The Bank has maintained tight cost control in the period, which has resulted in business-as-usual operating costs reducing by £0.6m. As a direct result of focussed activities, particularly in the unsecured retail portfolios, there has also been a reduction in impairment charges from the levels reported last year. 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 the Bank’s credit assessments. The Corporate impairment charge tends to be more volatile due to the nature and timing of one off charges.

The Bank has maintained a strong balance sheet with consistent robust liquidity and capital ratios. The Basel I risk asset ratio was 13.5 per cent with a Tier 1 ratio of 8.8 per cent, substantially higher than the regulatory requirements laid down under Basel I by the Financial Services Authority (FSA).  The Basel 2 solvency ratio was 143.0 per cent.

The Bank has continued to innovate and build on its strong ethical and environmental credentials. In November the Bank launched the Think credit card, which 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 helping them to contribute towards protecting the rainforest.

The Bank is planning to increase significantly its lending commitment to the renewable energy sector where it will be focusing on large-scale project finance transactions as well as smaller community based schemes. The Bank also remains one of the 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.

General Insurance

The main drivers for the significant improvement in the General Insurance business were claims management activities, including improved, faster claims settlements.  New rating systems and more modern products have been launched, payment terms tightened and stricter underwriting introduced.

General Insurance is operating in a competitive marketplace, with aggregator sites taking a growing share of the market reflecting consumer’s increasing propensity to purchase insurance products via the Internet.  During the year a major emphasis was placed, therefore, on developing a distribution strategy, which enhances the business’ ability to meet and react to these changes in customer buying habits, and this has led to an increase in sales through direct and third party channels.

During 2006, the entire claims handling process was modernised, which has resulted in a significant improvement in the motor claims ratio in 2007. The improvements also enabled the business to provide excellent service and assistance to customers when the processes were severely tested 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.

A dedicated team of professional claims handlers was established in order to deal with all flood claims until they were settled and to expedite the settlement of claims as quickly as possible. The business utilised its 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 as 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.

Long-term business

The present value of New Business Premium for the 2007 was £466.3m, a reduction of 6 per cent on 2006, reflecting a decline in the numbers of Financial Advisers authorised to advise on Life & Savings products.

Gross earned insurance premiums for life and pensions business in 2007 were £534.2m compared to £548.5m for the corresponding period 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.

To meet the intermediary demand for Unit Trusts and unique responsible investment expertise, the three most popular UK funds (CIS Sustainable Leaders Trust, CIS UK Income with Growth, CIS UK Growth) were launched on the Co-funds and Fidelity IFA fund platforms, enabling improved access for intermediaries in the wider investment market for the first time.

Partnership arrangements

In October 2007, CFS entered into a new partnership agreement for the administration of its Life & Savings business which saw more than 800 staff transferred to Capita.  This new partnership with Capita will, over time, bring a step-change in the service provided to Life & Savings customers and will ultimately lead to the creation of a new Life & Savings Administration Operation in the City Centre of Manchester during 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 contract, which saw more than 200 staff transferred to Xansa, represents a broadening of the partnership to encompass the insurance side of the business in addition to the previous banking relationship. 

As part of a programme of change covering our customer processes, a five-year partnership deal with Communisis was signed in December. This agreement, which saw the print, mail and fulfilment operations based at Salford transferred to Communisis. This means over time, customers will have an improved service delivered through improved capability and process efficiencies.

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