Interim results - 6 months ended 30 June 2007
Operating and financial review
Overview
Aviva achieved continued strong growth in the 6 months to 30 June 2007, with total long-term savings new business sales up 25% to £19,294 million (2006: £15,631 million). The overall increase reflects growth in life and pension sales of 19% to £15,543 million (2006: £13,147 million), and strong investment sales, up 52% to £3,751 million (2006: £2,484 million). Aviva USA has delivered an excellent performance with sales of £1,716 million from the combined business (2006 pro forma: £1,253 million), a pro forma increase of 51%.
Aviva UK achieved a record half year with total sales increasing by 7% to £7,415 million (2006: £6,899 million). The company delivered good life and pension sales of £5,820 million (2006: £5,816 million), and at the same time improved its margin levels. Growth in life and pension sales would have been 4%1 if consistent operating assumptions had been used in the comparative half year. Collective investment sales rose significantly by 47% to £1,595 million (2006: £1,083 million). Additionally, Aviva UK's share of sales through its bancassurance joint venture with The Royal Bank of Scotland Group (RBSG) was up by 30% to £777 million (2006: £598 million).
Outside of the UK, Aviva's long-term savings new business sales grew strongly by 39% to £11,879 million (2006: £8,732 million), reflecting strong growth in all regions and particularly from businesses acquired in Ireland and the United States during 2006. Life and pension new business sales were 35% higher at £9,723 million (2006: £7,331 million), while investment sales grew by 56% to £2,156 million (2006: £1,401 million). New business contribution before the effect of required capital increased by 29% to £372 million (2006: £292 million).
United Kingdom
This was a record half year from Norwich Union with total sales, including investments, up 7% to £7,415 million (2006: £6,899 million). Norwich Union's strong performance built on the exceptional sales growth that the company delivered in the first half of 2006 in the run up to, and post, A-Day. Sales in the second quarter of £3,915 million were 12% higher than the previous quarter and represent the highest quarterly new business sales for the company.
Norwich Union's market share has risen to 11.2% for the first quarter of 20072 (full year 2006: 10.9%).
Norwich Union delivered strong bond sales, up by 19% to £1,939 million (2006: £1,626 million). The company's guarantee-backed RPI bond grew strongly with sales of £570 million (2006: £297 million). The main with-profit funds have returned a performance ahead of expectations over the first half of 2007, which has allowed Norwich Union to remove market value reductions from all with-profit policies and improve final bonuses on unitised with-profit policies. The company maintained its level of unit-linked bond sales at £1,144 million and unit-linked offshore bonds increased by 28% to £90 million.
An excellent performance in collective investments resulted in sales growing by 47% to £1,595 million (2006: £1,083 million) as the company continues to benefit from offering a broad range of funds including socially responsible investment, property and UK equity funds. In the UK, all companies sector, three funds were placed in the first quartile over the year to 30 June; the NU sustainable futures growth, NU UK ethical and NU UK focus funds. The company will continue to focus on collective investments and will be launching further propositions in the year.
Following Norwich Union's exceptionally strong A-Day performance in 2006, total pension sales were £2,401 million (2006: £2,757 million). Individual pension sales (including group personal pensions) of £1,819 million (2006: £2,188 million) were lower but more profitable than in the first half of 2006, benefiting from the company's higher charging structure on stakeholder pensions introduced in 2006. Since its launch in April 2006, the company's SIPP3 sales have increased rapidly to £276 million (three months 2006: £21 million). Corporate pension sales were up 2% to £582 million (2006: £569 million) as the trustee-based corporate pension market remained active; however, the company still expects a market trend towards group personal pensions in the long term.
Annuity sales increased significantly to £927 million (2006: £748 million) as the company's competitive pricing and strong service continued to enable it to maximise internal transfer rates in a growing market. As part of its wider drive into the employee benefits market, the company has secured a small number of bulk purchase annuity schemes in 2007 with more business expected to come through in the second half of the year.
Equity release sales of £110 million were down (2006: £165 million) with this market remaining particularly competitive. Norwich Union expects its sales performance to improve in the second half of the year as it continues to strengthen its customer proposition, for example, through providing customers with easy to understand guidance on equity release products.
Protection sales were lower at £443 million (2006: £520 million) due to the slowdown in the payment protection insurance market and partnership agreements concluding in 2006. During the first half of 2007, the company maintained a leading position with financial advisers and further developed its direct to consumer capability in this market.
Norwich Union supports the broad thrust of the FSA recommendations on market change and believes that, assuming all stakeholders engage constructively, they provide a positive basis for improving consumer confidence and driving profitable market growth. The company supports the proposed solution to the issue of adviser remuneration, giving customers a clear understanding of the separate cost of the products, advice and ongoing service. However, Norwich Union believes that this basis should apply to all advisers to provide fair treatment for all customers.
Norwich Union strengthened its broad distribution footprint by securing three protection partnerships with The Post Office, HSBC and Bankhall General Insurance. The Post Office agreement will enable Norwich Union to work in partnership with the largest retail and financial services chain in the UK, providing access to more than 14,000 nationwide branches.
Norwich Union's share of sales from its bancassurance partnership with RBSG showed excellent growth across the product range, with total sales up by 30% to £777 million (2006: £598 million). The increase in the number of advisers to 900 (Full year 2006: 760) and a successful ISA campaign both contributed towards this strong performance. Furthermore, new business margin improved to 4.2% (2006: 3.2%) reflecting economies of scale and a more profitable product mix.
The company has continued to improve service levels to its customers and advisers. Customer satisfaction has increased to 73% (2006: 63%) with adviser satisfaction also improving to 65% (2006: 35%). Norwich Union launched its annuity “service promise” in May and will launch an equity release “service promise” later this month, to complement the already established protection, bond and individual pension promises.
Norwich Union continues to expect full year market4 growth of 5% - 10% on an annual premium equivalent (APE) basis, with the company having already delivered 9% APE sales growth in the first half of 2007. Norwich Union reaffirms its aim to grow at least in line with the market, while maintaining or increasing its overall new business margin from current levels.
Europe
Aviva's total sales in Europe, including investment sales, grew by 14% to £8,131 million (2006: £7,227 million). Life and pension sales grew by 12% to £7,353 million (2006: £6,645 million) and the margin was 3.8% (2006: 4.0%). This performance reflected the benefits of Aviva's diversified portfolio of businesses in countries currently experiencing varying market growth conditions.
Strong profitable growth was achieved in life and pension sales in southern Europe, with overall growth in Italy and Spain of 19% to £2,932 million (2006: £2,499 million). Sales also continued to expand in Ireland and Central and Eastern Europe. Life and pensions sales in Ireland increased by 62% to £889 million (2006: £558 million) and in Central and Eastern Europe by 44% to £554 million (2006: £390 million). Market conditions continued to be challenging in France and the Netherlands, where Aviva's life and pension sales decreased by 6% to £2,978 million (2006: £3,198 million). Nevertheless, Aviva's businesses in France and the Netherlands maintained a strong new business margin of 3.9% (2006: 3.8%).
France:
Aviva France's sales were £1,832 million (2006: £2,028 million) with underlying product margins maintained at full year 2006 levels. Sales in the comparative period in 2006 were buoyed by strong equity market performance.
The French long-term savings market decline for the five months to May 2007 was 5%5 reflecting the volatility in the financial markets and uncertainty regarding the outcome of the presidential elections held in May. However, there was an improvement in volumes towards the end of the second quarter. Working with its partner, AFER, France's largest savings association, Aviva France has continued to encourage Fourgous6 policy conversions with cumulative transfers to date of £4.5 billion including £438 million in the first half of 2007 of which approximately 30% has been invested in unit-linked funds. Aviva France does not include these value-enhancing conversions in new business sales.
Sales through our partnership with AFER decreased by 4% to £881 million (2006: £929 million). Unit-linked sales fell by 21% compared with the exceptional level in 2006, reflecting the impact of greater volatility in financial markets on customer behaviour, while euro sales were 4% higher. Enhancements to the AFER product made at the beginning of June combined with a successful advertising campaign resulted in strong year on year sales growth in that month.
Sales through the partnership with Crédit du Nord were also affected by the bancassurance market slowdown and reduced by 16% to £417 million (2006: £504 million).
Excluding partnership sales through AFER and Crédit du Nord, sales were £534 million (2006: £596 million). The proportion of unit-linked saving sales remained strong at 79% (2006: 78%) reflecting the success of Aviva France's products that offer a phased investment into equities and the launch of two further 'multi-manager' funds in the first half of the year.
The new business margin was 4.4% (2006: 4.3%), with a new business contribution of £80 million (2006: £87 million) as a consequence of lower sales.
The outlook for 2007 will be influenced by the market response to potential tax changes following the presidential election and the trends in the financial markets. Recent marketing initiatives, such as the AFER campaign, and our experience in responding to changes in the economic and regulatory environment means that the business is well placed to address these challenges.
Ireland:
Total new business sales in Ireland increased by 62% to £889 million (2006: £558 million)7.
Sales through Allied Irish Banks (AIB) increased to £435 million (five months in 2006: £223 million). These comprised £310 million of life sales, consisting primarily of single premium bonds and £125 million of pension sales. Pro forma8 sales growth for the six-month period was 70%. This substantial increase reflected the successful launch of the Secure Capital Fund in January 2007, a sales initiative on life savings products and increased pension sales driven by strong fund performances.
Sales through the broker channel were 37% higher at £454 million (2006: £335 million). Life sales were £149 million (2006: £131 million), reflecting strong sales of the Secure Capital Fund. Pension sales were 52% higher at £305 million (2006: £204 million), reflecting higher sales of investment-only business and the continued success of the revised Horizon product re-launched in September 2006.
The continued development of new products and expansion of the range of funds offered through the bank and broker networks combined with strong market conditions are expected to contribute to further growth in 2007.
Italy:
In Aviva Italy total sales grew strongly by 16% to £1,818 million (2006: £1,583 million). This growth contrasted with the Italian market, which showed a decline in total sales of 6%9.
Sales through the UniCredit Group increased by 25% to £1,106 million (2006: £898 million) reflecting the continuous development of our relationship with the UniCredit Group and successful marketing campaigns carried out in the first half of the year.
Banche Popolari Unite sales increased by 36% to £479 million (2006: £356 million) benefiting from higher sales of structured bonds following the issue of a new index-linked product and sales through Banca delle Marche were £39 million (2006: £24 million).
Sales through the Banca Popolare Italiana Group network were adversely affected as the bank focused on its merger with Banco Popolare di Verona e Novara (BPVN) and were £175 million (2006: £281 million). The merger is now complete and the combined bank, Banco Popolare, has agreed an exclusive distribution deal to sell Aviva's credit protection and non-life products through its network of 2,200 branches.
New business contribution increased to £49 million (2006: £38 million), reflecting the growth in sales and the benefit of a change in sales mix towards regular premium products, generating an increased margin of 2.7% (2006: 2.4%).
Long-term growth potential remains strong and Aviva Italy continues to develop its bancassurance partnerships. The timing of marketing campaigns and new product launches will vary throughout the year with some resulting volatility in sales levels each quarter.
Netherlands (including Germany and Belgium):
Delta Lloyd's total sales increased by 11% to £1,511 million (2006: £1,381 million) driven by a 75% increase in investment product sales. The Dutch life and pensions market has continued to be challenging, with a decline in mortgage-related business and unit-linked sales. In this environment, Delta Lloyd life and pension sales were stable year-on-year, and 11% higher excluding the one-off effect of the £125 million Delta Lloyd pension scheme premium in the first quarter of last year.
Life and savings sales were £420 million (2006: £525 million). Mortgage related business in the Netherlands declined due to lower activity in the mortgage market, and savings sales have been affected by negative press-coverage of unit-linked policy charging across the industry. Pension and annuity sales were £726 million (2006: £645 million) with annuity sales higher due to more competitive pricing of Delta Lloyd's immediate annuity products.
Investment sales were 75% higher at £365 million (2006: £211 million), reflecting strong inflows into Delta Lloyd's new Select Opportunity fund, which focuses on undervalued European equities, and the DL Deelnemingen equity fund which retains its excellent performance in fund rankings.
New business contribution increased to £37 million (2006: £34 million) with a new business margin of 3.2% (2006: 2.9%). The 2007 margin improvement benefits from the change in economic basis relative to 2006.
The Dutch market is expected to remain highly competitive in 2007. In this context, Delta Lloyd continues its strategy of broadening distribution in order to strengthen its position in the market.
Poland (including Lithuania):
Aviva's life and pension operations in Poland and Lithuania are leading businesses in their respective markets. Total sales, including investment sales, increased by 60% to £520 million (2006: £326 million).
Life sales in Poland increased strongly to £179 million (2006: £136 million, including one-off sales of £16 million from a large group scheme). This performance reflected the successful launch of a structured bond product, a promotional campaign targeting single premium business and increased volumes through our bancassurance channel. Pension sales increased by 69% to £174 million (2006: £103 million) helped by the launch of a specialist sales team, a growth in transfer business and higher average premiums. Single premium pension sales also benefited from higher transfer activity. Life and pensions sales in Lithuania were stable at £26 million (2006: £25 million).
Polish investment sales were significantly higher at £141 million (2006: £62 million) reflecting the strong equity market performance and the benefit of marketing campaigns during the period.
Total new business contribution from life and pension sales was £17 million (2006: £14 million), driven by the strong growth in sales. Lower receipts of overdue premiums from the state pension agency, which have lower associated acquisition costs, and a change in product and distribution mix affected the new business margin, which was lower at 4.5% (2006: 5.3%).
The Polish insurance and investment markets continue to offer high long-term growth potential, supported by a favourable economic outlook. We are also confident that additional promotional campaigns will boost sales further during the year.
Spain:
Aviva Spain remains the leader in the life bancassurance market and ranks second in the life market overall10.
Life sales in Spain were £1,114 million (2006: £916 million). This performance reflected strong sales of savings products including the successful launch of the PIAS11 savings products that have been developed to take advantage of the more favourable tax regime for these products.
Sales through Aviva's bancassurance partnerships were £1,012 million (2006: £812 million). This strong performance was supported by marketing campaigns carried out by the bank partners in the first half of the year making Aviva the market-leader in PIAS products. Sales through Aviva Vida y Pensiones, which distributes through direct sales force and intermediaries, were £102 million (2006: £104 million).
The new business contribution was £88 million (2006: £88 million) with a lower margin of 7.9% (2006: 9.6%) reflecting higher volumes of long term savings products and a lower proportion of sales from mortgage linked protection products, while specific product margins have remained stable.
The timing of marketing campaigns and the trend for a concentration of pension business sales in the last quarter of the year results in some variation in sales from quarter to quarter.
Other Europe:
Life and pension sales in Aviva's other European businesses in the Czech Republic, Hungary, Romania, Russia and Turkey increased strongly by 45% to £175 million (2006: £126 million).
In Hungary sales increased by 57% to £71 million (2006: £44 million) principally from an increase in sales across all distribution channels, which was driven by Aviva's attractive unit-linked products. As a result, Aviva now ranks second in terms of new business in Hungary.
In Turkey, where Aviva is a top-five life and pensions provider, total sales were £82 million (2006: £65 million). Strong growth has been driven by the successful development of the sales force, increasing productivity and the number of advisers.
In the Czech Republic sales through the direct sales force channel increased, and in Romania the launch of new compulsory and voluntary pension products represents an opportunity for growth.
Russia commenced corporate sales in the second half of 2006 and individual sales started this year. The development of the bancassurance network and the direct sales force are expected to drive growth during the remainder of the year.
North America
Total new business sales in the United States were £1,716 million (2006: £289 million) and pro forma sales have increased by 51%12 (pro forma 2006: £1,253 million). This represents a record first-half sales performance from the former AmerUs operations across all business lines. It is anticipated that sales growth will continue to be strong.
Sales of annuities reached £1,293 million (2006: £261 million), a pro forma increase of 58% over the prior period (pro forma 2006: £901 million). In a flat indexed annuity market, Aviva USA increased its market share by the introduction of new products, a successful marketing campaign at the beginning of the year and the expansion of the distribution network. During the first half of 2007, Aviva USA has added three new independent marketing organisations (IMOs) and 44 new wholesalers, and over 6,000 new agents have been contracted.
Life sales were £271 million (2006: £28 million) representing a pro forma increase of 10% over the prior period. Increased indexed life sales more than offset reductions in sales of lower margin traditional and universal life products that were discontinued in the period as part of a product rationalisation process.
Funding agreement sales, which are irregular in nature, totalled £152 million (pro forma 2006: £81 million).
New business contribution increased to £57 million (2006: £5 million), a pro forma increase of 60% over the prior period. New business margin improved to 3.3% (2006: 1.7%), driven by a greater proportion of higher margin indexed product sales and improving expense performance.
Asia Pacific
In line with its long-term strategic ambitions, Aviva continues to achieve a strong rate of growth in new business sales with total sales 72% higher at £2,032 million (2006: £1,216 million) driven primarily by significantly higher sales in the Asian businesses. New business contribution from life and pension sales increased by 78% to £32 million (2006: £19 million) producing a new business margin of 4.9% (2006: 4.8%). Growth potential for the region remains strong and Aviva's diversified distribution model places the business in a strong position for continued growth.
Australia:
Total sales increased by 55% to £1,270 million (2006: £830 million), driven primarily by significantly higher investment sales through Navigator, the master trust fund administration business. Life and pension sales increased by 68% to £240 million (2006: £145 million) as a result of a £64 million one-off transfer in of group business and growth in protection business.
In response to recent tax changes that affected the superannuation market, Aviva Australia has focused on capturing the one-off opportunities presented. Sales through Navigator increased by 63% to £950 million (2006: £589 million) as a result of changes in superannuation legislation and the positive impact of strategic investments in key independent advisers. Other investment sales were £80 million (2006: £96 million).
Singapore:
Total sales increased by 124% to £486 million (2006: £227 million). Life and pension sales increased by 55% to £138 million (2006: £93 million) as a result of direct sales of a new savings product. Aviva's partnership with DBS is ranked third in the bancassurance market.
Sales through Navigator, the investment fund administration business, increased significantly by 172% to £348 million (2006: £134 million), reflecting strong distribution relationships with key brokers, a comprehensive range of funds offered and a buoyant equity market. Aviva remains the market leader in the developing broker market as well as the employee benefits and healthcare segment.
Hong Kong:
Total sales increased by 124% to £486 million (2006: £227 million). Life and pension sales increased by 55% to £138 million (2006: £93 million) as a result of direct sales of a new savings product. Aviva's partnership with DBS is ranked third in the bancassurance market.
China:
Sales through the joint venture life business Aviva-COFCO have increased significantly by 168% to £96 million (2006: £38 million). Aviva's 50% share was £48 million (2006: £19 million). Aviva has increased its presence in the country to seven provinces, with a total of 17 city branches. Sales also benefited in the period from a new range of unit-linked products that have complemented our universal life products.
India:
Total sales from Aviva's joint venture with the Dabur Group increased to £221 million (2006: £173 million) and Aviva's 26% share of new business sales was £57 million (2006: £45 million). Aviva is the eighth largest private insurer in India and one of the leaders in the bancassurance market with over 30 distribution agreements in place. Sales are expected to continue to increase through India's bancassurance partnerships and through ongoing expansion of the direct sales force which now numbers more than 27,000 agents (June 2006: 11,800).
Sri Lanka:
In Sri Lanka, Eagle is the third largest life insurer and has become the leader in the life bancassurance market. Total life sales were £9 million (five months in 2006: £6 million).
Notes:
- Comparative sales figures are stated before the effect of year end 2006 assumptions changes. Restating sales comparatives for the effect of 2006 persistency assumption changes, in order to give a like-for-like comparison using the same persistency basis, results in the following growth progression:
- Total sales, including investments, would have increased by 11% to £7,415 million (2006: £6,699 million)
- Life & pension sales would have increased by 4% to £5,820 million (2006: £5,616 million)
- Total pension sales would have fallen by 6% to £2,401 million (2006: £2,557 million)
- Latest available ABI market share data on an APE basis.
- Included in collective investment sales.
- Total ABI market (includes collective investments).
- Based on gross written premium for the six months to 30 June 2007.
- Fourgous policy conversions enable tax efficient investment in a mix of 'Euro' and unit-linked funds providing policyholders with the opportunity to enjoy a greater flexibility in managing their funds. Unit-linked funds are more capital-efficient.
- Sales for January 2006 did not include sales through AIB as the partnership began in February 2006.
- Pro forma sales for 2006 represent the sum of sales through AIB, including the period prior to beginning of the partnership in February 2006, plus sales through Hibernian's existing broker channel, on a consistent basis.
- Market sales growth is calculated using the volume measure, single plus annualised regular premiums.
- Based on gross written premiums as at 31 March 2007.
- PIAS are newly introduced savings contracts with tax benefits if they are in force for ten years and if an annuity is purchased at maturity.
- Pro forma increases are based upon the combined sales for the former Aviva business based in Boston and the former AmerUs Group for the 2006 half year and are stated on a constant exchange rate basis.
