Andrew Moss, Aviva’s chief executive, commented:
"It’s encouraging to see that people are continuing to save with companies they trust, like Aviva. Sales are resilient and we’ve taken action to improve margins in key markets. It is particularly pleasing to see bancassurance sales rebound as banks refocus on insurance as an important contributor to their earnings.
"We continue to manage our capital position effectively. At the end of March our capital surplus was significantly increased at £2.5 billion, after allowing for payment of the 2008 final dividend.
"A disciplined approach to writing business and a focus on capital management will continue to serve us well. We have a diversified business which spans 28 countries and sells through a range of distribution channels. We continue to navigate a steady course through challenging times."
OVERVIEW
In announcing our first quarter sales for 2009, we should acknowledge that the world is a very different place to the same period last year: world equity markets have fallen between 30% and 50%, sterling has weakened significantly against the euro and the dollar, and many economies are now in recession. Against this challenging backdrop, Aviva has delivered more than £10 billion of new long-term savings sales in the first quarter (2008: £9,848 million) and maintained margins (full year 2008: 2.1%). This is a resilient and encouraging result. People are continuing to save with companies they can trust and our business has inbuilt strength through the diversity of its products, geography and distribution.
A clearer picture of the emerging trend in the current climate can be seen by comparing the first three months of this year with the final quarter of 2008. Worldwide life and pensions sales are 2% down on a local currency basis. Within this, sales in Europe have rebounded strongly, up 16%. In the UK life and pension sales are down by 17% following our decision not to write some corporate business where margins do not currently meet requirements, notably bulk purchase annuities. After excluding these large corporate transactions, consumer-driven sales remained relatively stable in the UK. In the US, sales are down 12% and annuity margins are beginning to rise as we seek to moderate volume growth and balance the high demand for attractive guaranteed products with our desired capital position. In Asia sales are down 6%.
Sales through bank partnerships accounted for almost a third of our life and pensions sales in the first quarter, with sales up 20% over the same period a year ago. While the banking sector has been through a tough period, customers are still turning to their banks for advice and banks are now keen to increase their focus on insurance sales as an important contributor to their earnings.
We have significantly enhanced our capital position over the last three months. We have taken action to increase the IGD capital surplus, the benchmark of capital strength in our industry, from £2.0 billion at the end of 2008 to £2.5 billion at the end of March, after deducting the 2008 final dividend. The significant take-up of the scrip dividend has reduced the cash and capital cost of the final dividend by nearly £0.2 billion and we intend to offer a scrip dividend to shareholders for 2009. We have increased equity hedges to provide important protection in the event of further equity market falls and we retain significant capital benefit if equity markets improve. Consequently a 40% fall in equity markets would reduce the IGD by only £0.2 billion at 31 March 2009 but a 40% rise in markets would benefit the IGD by £0.8 billion.
Performance in the first quarter was satisfactory in the general insurance business. People still want to protect their homes, cars and businesses. We remain on track to deliver a combined operating ratio in line with our group ‘meet or beat’ target of 98%.
The move to a global brand, a key part of the “One Aviva, twice the value” strategy, is well advanced. In the UK Norwich Union will become Aviva on 1 June and we will become Aviva in Ireland and Poland next year. Our UK campaign has proved highly effective. Lower media costs and greater effectiveness mean we have been able to cut the planned overall costs significantly. In a recent report by Brand Finance, Aviva was the only insurance brand to have moved up the rankings on brand valuation in the past year and is now ranked as the fourth most valuable insurance brand in the world.
The economic outlook remains uncertain for 2009. We remain steadfast in our focus on managing a healthy capital position while transforming our business to take advantage of profitable growth opportunities when the world economy recovers.
BUSINESS REVIEW
Long-term savings
Our worldwide life and pensions new business sales have increased by 11% since the same period last year, down 4% on a local currency basis. Compared to the last quarter of 2008 sales are up 3% in sterling and down 2% in local currency. A regional analysis of these results is presented below.
Note that all 2008 PVNBP figures included in the comments below have been restated on to a market consistent embedded value basis. Unless stated, growth numbers are presented on a sterling basis.
United Kingdom
In the first quarter of 2009, Aviva’s UK life business has continued to focus on a strategy of disciplined deployment of capital, product innovation, execution of the simplification agenda and reduction of operating expenses, while improving customer service. In parallel, preparations for the change of brand on 1 June are progressing well and reaction has been positive from customers and distributors.
Life and pensions new business sales were 12% lower at £2,505 million (2008: £2,850 million) and sales of collective investments were also lower by 60% at £175 million. In a market where customers’ ability to save and plan effectively has been impacted, the fall in sales reflects our focus on re-shaping the business by moving away from lower margin products and the discipline of writing new business above target hurdle rates of return. This focus has seen us reduce commission in late 2008 and early 2009 for individual pensions, group pensions and bonds. As a result, the capital consumed1 in the first quarter of 2009 was over one third lower than the same period last year, and margins were ahead of those achieved in 2008.
"We continue to manage the risks associated with the UK commercial property portfolio closely. In the first quarter of 2009 there have been no new defaults. Interest service cover2, which represents the main source of security, remains at a healthy 1.3 times. Of the interest due in the first quarter of this year, 99% has been received and our borrowers are not experiencing additional difficulties in rental collections," Aviva reports.
The core life and pensions sales performance in the first quarter of this year bears greater comparison with the final quarter of 2008, coinciding with the start of the recession in the UK. Excluding the effect on sales of bulk purchase annuity (BPA) and lumpy group money purchase schemes in the fourth quarter of last year, the overall sales performance has remained stable (1Q 2009: £2.4 billion; 4Q 2008: £2.4 billion). We have seen at least a 12% increase in sales in a number of product lines when compared to the fourth quarter, including individual pensions (1Q 2009: £900 million; 4Q 2008: £777 million), protection excluding creditor (1Q 2009: £232 million; 4Q 2008: £207 million) and individual annuities (1Q 2009: £407 million; 4Q 2008: £328 million).
The first quarter results include a strong performance from the joint venture with the Royal Bank of Scotland, where life and pensions sales increased by 27% to £382 million (2008: £300 million), principally driven by the comprehensive and simplified pension proposition launched at the end of 2008 and a sustained level of protection sales following our partner’s renewed emphasis on the retail mortgage market.
Pension sales fell to £989 million (2008: £1,116 million) relative to the same period last year. We are continuing to extend and enrich Aviva’s proposition, an example being the February launch of our new Pension Tracker capability providing customers with an engaging, simple way of managing their pension plans using a Virtual Online Guide. The pipeline of group pension new business tender activity has increased significantly following the launch of this innovative tool.
Overall protection sales have fallen by 24% to £245 million as a result of the Competition Commission’s ruling on payment protection insurance heavily impacting creditor sales. Sales of protection products, excluding creditor, were £232 million, down only 1% relative to the same period last year but up 12% on the fourth quarter of 2008. This is driven by our broad distribution reach through the RBS and other partnerships, and the attractiveness of our Simplified Life proposition which contributes over 35% of core protection weekly new business applications.
Total annuity sales have fallen by 8% to £475 million (2008: £518 million). We continue to actively quote for BPA business, but our disciplined approach to targeting a minimum level of return has resulted in sales of £68 million (2008: £32 million), lower than the previous three quarters. Sales of individual annuities of £407 million fell by 16% compared to a very strong first quarter in 2008. The 24% increase in sales compared to the fourth quarter of 2008 is encouraging.
Bond sales have fallen by 16% to £713 million (2008: £849 million). We continue to reshape our approach to this market by moving away from lower margin products and to focus on improving returns using targeted commission reductions. In line with this emphasis on profitability, we recently announced the withdrawal of the Inflation Protected Guarantee option, which has proved increasingly difficult to price in the volatile stock market conditions.
Equity Release sales grew by 89% to £83 million (2008: £44 million) benefiting from proposition enhancements and extension of distribution through key IFA relationships.
Business simplification continues at pace. The migration of the Lifetime book to Scottish Friendly is complete, as is the first tranche of the collective investment portfolio to IFDS3. In March we successfully completed another phase of the outsourcing to Swiss Re; 1.7 million policies have now been migrated with further migrations planned later this year. These business simplification initiatives, which have allowed us to decommission 225 systems, have resulted in us announcing earlier this month headcount reductions of 1,100 permanent and 590 contractor roles.
Negotiations with the policyholder advocate on the re-attribution of the inherited estates of CGNU and CULAC are drawing to a close. The estimated estate value at the end of March was £1.4 billion. No decision has yet been made but the capital impact of any offer, if agreed, would be substantially lower than previously announced and would be largely mitigated by future planned capital actions and there would be no need to raise additional external capital.
New business strain and associated required capital
Interest service cover is the ratio of rental income on the properties divided by interest due on the loans
IFDS are International Financial Data Services, the UK’s leading supplier of services and systems to retail and institutional fund managers, fund distributors and platforms
Europe
"We have a strong portfolio of businesses across Europe, with operations in both mature western economies such as France, Spain, Italy, the Netherlands, Belgium, Germany and Ireland, and a number of developing central and eastern economies. Our focus in 2009 is to manage sales growth in line with our approach of prudent capital management. Across the region we meet customers’ needs through a broad product offering and a range of distribution channels. This diversity has enabled us to deliver a resilient sales performance despite a challenging economic environment. In addition, the strength of the euro has had a positive impact on total sales," Aviva announces.
Life and pensions sales increased by 11% to £4,735 million (2008: £4,279 million), supported by the strength of the euro. On a local currency basis sales were down 6%. In comparison to the fourth quarter of 2008, life and pension sales were up 20%, 16% in local currency. Investment sales of £300 million (2008: £300 million) were in line with the prior year. Against a backdrop of continuing economic uncertainty, this is a robust performance achieved through the strength of our geographical and channel diversity. In particular a number of our bancassurance partnerships have performed well this quarter, with bank partners increasingly recognising the potential of this channel in a difficult economic environment.
In France sales were up 20% reflecting the beneficial effect of the euro. On a local currency basis sales were level in a declining market. Although volatility in global investment markets continues to impact unit-linked sales, this was offset by an increase in the performance of other savings products. We also experienced excellent sales in the bancassurance joint venture with Crédit du Nord.
In Poland, life and pension sales were 38% lower. This is principally because 2008 sales included significant volumes of short-term endowment policies sold through Deutsche Bank, before this special promotion was closed later in 2008. Regular premium life sales continued to perform well with a strong increase reflecting additional policies sold to the existing customer base during the quarter.
Sales in Italy were considerably higher, up 68% against the prior period. Bancassurance sales performed well, and were boosted by strong sales of a profit-sharing product offering guarantees sold through UniCredit and the inclusion of sales from our UBI Vita4 acquisition. While unit-linked sales were lower, sales through Avipop helped to lift protection sales.
In Spain, sales increased by 16% including the favourable impact of exchange but were 4% lower in local currency. Lower pension and protection sales were partially offset by an increase in savings sales with many customers selecting these products following reductions in short-term interest rates.
Sales through Delta Lloyd were 8% ahead of the prior year reflecting the strength of the euro. On a local currency basis sales were down 10% reflecting the continuation of challenging market conditions. Following its acquisition in June 2008 Swiss Life Belgium contributed sales of £139 million, whereas the prior period included £114 million of one-off large corporate pension business.
In Ireland sales were down 43%, in line with the sharp decline in the Irish life and pensions market. This reflects reduced demand across both retail and bancassurance channels with consumers being deterred by volatile equity markets, the slowdown in economic growth and property market uncertainty.
Other Europe includes a number of markets which, although currently experiencing challenging conditions, have high potential for future growth. Sales in these markets were lower by 14%. Sales in Turkey grew by 26% reflecting both an increase in policies sold and a focus on higher premium business. Sales in Romania were higher due to the introduction of compulsory pensions during 2008. Sales in Hungary were lower, reflecting a decline in the popularity of unit-linked products. On 14 April we announced the acquisition of ING’s non-state pension fund business in Russia, making us the leading foreign owned provider in this sector of the Russian market.
18 June 2008
North America
In the US, total sales increased by 84% to £1,929 million (2008: £1,048 million). On a local currency basis sales were up 33%. We have adjusted the growth strategy that has driven our historical sales results with an approach designed to further focus on profitability, productivity, and capital efficiency. While first-quarter sales remained strong as consumers continued to seek products with guarantees during the current economic turbulence and recognise Aviva as one of the stronger market participants, compared to the fourth quarter of 2008 sales were flat on a sterling basis and down 12% in local currency.
Annuity sales increased 152% to £1,752 million (2008: £694 million). This growth is equivalent to an 83% increase on a local currency basis, as compared to the first quarter 2008. Sales were flat compared to the stand-alone fourth quarter 2008 on a local currency basis. To align our growth with the overall annuity market, we have taken a number of actions including reducing broker commissions and increasing pricing of our products. These actions will have a positive effect on our new business margins for the full year 2009.
Life product sales, which mainly include indexed and non-indexed universal life and term assurance products, totalled £177 million (2008: £132 million), equivalent to a 3% fall on a local currency basis. This result reflects the slow down in the overall life sales market as life products are increasingly being considered a discretionary purchase by consumers. Despite the current trends, we remain optimistic for future growth. In the first quarter, we signed five Brokerage General Agencies, adding a new distribution channel to enhance our life sales. In the first quarter, we also launched a new competitive life product, and are actively marketing our “Wellness for Life” programme in key States. This programme provides premium reductions to customers who maintain healthy lifestyles. We provide wellness information through our affiliation with the world-renowned Mayo Clinic Health Solutions.
To balance the overall level of sales there were no funding agreement sales in the first quarter (2008: £222 million). While funding agreements will not be a primary focus in 2009, we will continue to evaluate opportunities against our overall strategy on a case-by-case basis.
Asia Pacific
Life and pension sales were 8% lower at £400 million (2008: £437 million), reflecting economic contraction and the low interest environment which causes customers in most markets to prefer bank deposits (which are government guaranteed in a number of markets) over insurance products. When compared to the last quarter, sales were broadly flat. Investment sales were 46% lower at £269 million (2008: £498 million) due to investor caution in the current volatile markets.
Our new joint venture in South Korea has contributed 23% of the region’s life and pension sales. The sales have come mainly via the bancassurance channel with our partner Woori Bank and its subsidiaries. Sales from Malaysia and Taiwan are higher than the same period last year but have dropped against last quarter due to the withdrawal of capital intensive products.
Our joint venture in China, Aviva-COFCO, has maintained life and pension sales in line with the same quarter last year and broadly in line with last quarter. The low interest rates in this market have meant that insurance savings products are now relatively less attractive to customers than in prior periods. As a result, sales growth has slowed. We have recently expanded our distribution network to Hubei province and are now in ten provinces, with a total of 40 city branches (2008: eight provinces, 27 city branches).
Life and pensions sales in Singapore and Hong Kong were down 6% and 67% respectively against the prior year, reflecting lower bancassurance sales and the staged withdrawal of capital inefficient products in Hong Kong.
In Australia, life and pension sales were down 24% due to the closure of a Capital Protection product at the end of 2008 and lower superannuation and group risk sales resulting from less fluidity in the employment market.
Investment sales in both Singapore and Australia were dampened by the economic climate and specifically in Singapore by a prior year change to local pension laws which restricts external contributions from the government pension fund.
In India, life and pension sales were 60% down on the prior year reflecting market and economic conditions, higher expected lapses and merger activity in bancassurance partnerships. However, against last quarter, sales have improved from successful product launches.
"Despite the global economic and financial turbulence, Asia remains an attractive region with high growth potential and strong industry prospects. We will continue to expand our distribution network and develop our relationships with our business partners," Aviva declares.
General insurance
Our first quarter combined operating ratio is in line with our target to ‘meet or beat’ a combined operating ratio of 98% and we expect to achieve our target for the year. During the quarter, weather experience has been neutral across the group as favourable experience in the UK has offset the cost of storms in France.
United Kingdom
The UK general insurance operation, first quarter performance has benefited from better than expected weather resulting in reduced claims frequency. Premium volumes have reduced reflecting our stance of writing business for profit rather than volume, the withdrawal of single premium creditor products and the impact of the depressed economic climate, particularly in commercial lines where exposures are reducing. We have maintained excellent progress on our programmes to transform the business with their focus on core insurance skills, customer service and driving down distribution costs and are on track to deliver further annual cost savings of £150 million by 2010, bringing the total savings to £350 million from this business. We remain ahead of plan in the transformation of customer service centres with nearly half of business now being undertaken by the new centres of excellence.
Europe
Our general insurance and health businesses continue to perform well. In France, premiums have increased in a mature and very competitive market. In contrast, Ireland continues to be affected by aggressive competition.
In Ireland our health business is outperforming our competitors by a significant margin in terms of new members. By leveraging the Aviva brand and the established distribution network we have increased our membership to 200,000, achieving a 9% market share at the end of the first quarter of 2009.
In the Netherlands we expect continuing pressure on rates and aggressive competition to impact general insurance premiums. The sale of our health business to OWM CZ Groep Zorgverkeraar completed on 1 January 2009.
North America
In Canada we continue to experience premium growth, despite the difficult economic environment, due to a combination of strong commercial lines growth and better retention in personal property. We have implemented a new approach to pricing in personal lines in Ontario which is improving segmentation of the renewal book and competitive pricing on new business.
Fund management
Aviva Investors
Aviva Investors has performed in line with management expectations for the first quarter of 2009, recording total net funded inflows of £1.9 billion, of which £1.1 billion were sourced from third party clients and £0.8 billion from fellow Aviva group companies. The business continues to seek to grow while maintaining a close focus on cost control and underlying market conditions.
While the business continues to implement its longer term strategy, opportunities have also been taken to launch and to market products aligned to investor demand in the current climate. This has included a focus on areas such as liquidity funds, with growing investor inflows in France and the UK during the quarter contributing strongly to sales performance, as well as convertible and high yield bonds. Cross border sales remains a key focus with opportunities being pursued across the Aviva Investors regions in North America and Asia Pacific as well as UK and Europe.
CAPITAL MANAGEMENT
IGD solvency
The estimated group regulatory capital position based on the EU Insurance Groups Directive solvency surplus has increased to £2.5 billion as at 31 March 2009 after taking into account the 2008 final dividend in full. We have increased equity hedges to provide important protection in the event of further equity market falls and we retain significant capital benefit if equity markets improve. Consequently, a 40% fall in equity markets would reduce the IGD by only £0.2 billion at 31 March 2009 but a 40% rise in markets would benefit the IGD by £0.8 billion.
The considerable increase in the surplus IGD results from the ongoing operating profits of the group, 80% of which is derived from our general insurance businesses and the in-force books of our long term savings businesses, and also from a number of management actions. These include the issue of hybrid capital and additional re-insurance in our UK life business. The 35% take up of the scrip dividend has benefitted the IGD in terms of reducing the impact of the dividend payment by nearly £0.2 billion. There is also an increased contribution from the Delta Lloyd business, which includes the benefits of the sale of the DL Health business on 1 January 2009. These benefits have been achieved despite the adverse movements in markets worldwide in the first quarter of the year.
As we outlined in March this year, the group has a number of options available to increase the IGD surplus and this result demonstrates that we are able to execute these. There remain a number of other options available to increase IGD further, including re-insurance and securitisation, as well as ongoing earnings retention.
Ratings
The Standard & Poors (S&P) ratings of the main operating subsidiaries are AA- ("very strong") with a Negative outlook. The group is rated Aa3 (“excellent”) by Moody’s and the rating is under review for possible downgrade. AM Best's ratings of the main operating subsidiaries are A ("excellent") with a Stable outlook.
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