Aami Sets Bar For Nrma
Sydney Morning Herald
Saturday July 15, 2000
This week, NRMA's Eric Dodd started the roadshow for the group's $4 billion listing with a bang by telling fund managers that results for the year just ended would be 50 per cent higher than prospectus forecasts.
Yesterday, NRMA's major car insurance rival, the Royal & Sun Alliance-owned AAMI, announced a 29 per cent lift in profit for the 1999 year.
At face value, the performances of NRMA and AAMI would suggest that there is good money to be made from car insurance. In fact, the stories of the results are quite different and help to illustrate the challenges, and perhaps opportunities, facing Dodd as he takes NRMA through to a new era as a listed, for-profit company.
The surge in NRMA's profitability came very late in the year. Indeed, the bulk of the revision from the prospectus forecast of a $184 million profit to the $276 million now expected related to the steep rise in the Australian sharemarket in the last week and a half of June.
What that, and NRMA's performance history, says is that, as an insurer, NRMA is a great investor.
Over the past 15 years, NRMA hasn't made an underwriting profit from its insurance activities, chalking up underwriting losses of more than $2 billion. According to its prospectus, it expects to again lose money at the underwriting level this year and next, albeit at lower levels than in recent years.
AAMI's results, on the other hand, show that it has been consistently profitable at the underwriting level.
Despite the underwriting losses and it should be said that the AAMI experience is atypical of the general insurance industry, where underwriting losses are the norm NRMA has been consistently, occasionally heavily, profitable throughout most of its recent history.
That flows from the investment earnings on both its technical reserves and its retained surpluses/shareholders' capital. The reliance on investment earnings has, not surprisingly, injected substantial volatility into NRMA's results.
AAMI has been far more consistent, largely because it hands its reserves over to its shareholders to invest.
Its results are notional as it assumes, rather than earns, a 6 per cent return on its technical reserves and a risk-free rate plus 3 per cent for its invested shareholder funds. In 1999, that meant a 9 per cent return.
Given the investor-friendly climate over the past decade, its results would almost inevitably have been substantially better had it been able to invest on its own behalf. As it is, it has generated pre-tax returns on equity of more than 20 per cent for the past five years.
The two companies make a good comparison because, while NRMA would describe itself as a financial services group, it is still, at this point, largely a general insurance group with a very heavy reliance on car insurance.
It is also probably fair to say that, in AAMI, which is essentially a monoline insurer, NRMA sees a benchmark for what it would like to become in its core general insurance operations. AAMI's success in recent years has been driven by stringent control of its claims and expense ratios, despite a terrific reputation for customer service.
NRMA's demutualisation provides the opportunity, and the need, for NRMA to build on the improvement in the fundamentals of its business that Dodd has been achieving.
There is sufficient growth in the area of general insurance NRMA dominates to enable a well-run and focused company to make money at the operational level, particularly given the problems experienced by the other major player, the AMP-controlled GIO.
Dodd is pursuing a strategy of diversification for NRMA to reduce its exposure to the NSW market and its concentration on car insurance. Unlike AAMI, to this point, NRMA is trying to evolve into a broader financial services group. That makes it even more important that the underlying performance within insurance continues to improve.
While NRMA has tried to hose down expectations of an acquisition spree post-listing, it does have an acquisition strategy and needs to have one to remove some of the volatility from its results it needs to take some of its surplus capital out of market exposures and invest it in operational earnings.
Dodd faces some awkward issues in managing NRMA's evolution.
The demutualisation and the boardroom warfare entailed has been distracting for the group and the recent controversy over Dodd's relationship with his chairman, Nick Whitlam, and the demarcations of their roles suggests that it won't simply end with the listing.
The market, and the reshaped board of NRMA, can be expected to deal fairly brutally with any further governance issues that arise post-listing, but the potential for instability is inherent in the group.
And Dodd would be aware that the listing will create a question mark over NRMA's high customer retention rates, particularly once policyholders can sell their shares and become simply customers rather than policyholder members. Certainly, NRMA's competitors see an opportunity to win market share.
The fact that Dodd has survived and that the business has fared pretty well, despite the recent distractions, suggests a successful transition from the old NRMA to the new isn't beyond him and the organisation.
He could receive some help from an unexpected quarter.
AAMI's success has been built on its focus and the fact that for most of its history it had a large number of insurance company shareholders. The senior management has long made it clear that they believe that a large part of AAMI's success related to its specialisation in car and home insurance and the intensity of focus that has generated.
They have steadfastly resisted suggestions that the AAMI brand could be extended further into financial services.
Last year a gradual rationalisation of its shareholder structure ended when RSA became the sole shareholder and stepped up its exposure to, and therefore interest in, Australia with the Tyndall acquisition.
RSA's Australian managing director, Mike Wilkins, is AAMI's new chairman. In the annual report AAMI issued yesterday there was an interesting interplay between him and chief executive Brian Keane.
In his chairman's report, Wilkins said that AAMI now enjoyed such a solid marketplace presence that it had the opportunity, ``should it wish," to successfully expand its range of product and services.
In his report, Keane commended RSA for ``resisting any temptation to change the sensibly restrained and supportive approach it has demonstrated over the years as its relationship with AAMI has grown".
This hints at potential pressures and frictions at a point when NRMA's major rival has an historic opportunity to profit from any NRMA distraction. Dodd wouldn't be displeased.
bartho@theage.fairfax.com.au
© 2000 Sydney Morning Herald