Worldwide long-term savings new business 9 months to 30 September 2007
Aviva UK
Business Update
The company has made significant progress in its strategic priorities outlined in October 2006 including legacy simplification, service and retention improvements and cost efficiency. In addition to the £125 million savings announced last year, Norwich Union Life announced earlier this month its plans to deliver a further £100 million of cost savings by the end of 2009. The company continues to focus on enhancing the value of its existing business, and growing long-term savings new business sales at least as fast as the market, while maintaining or increasing margins.
Legacy simplification: In October, Norwich Union Life completed the successful transfer of 1,000 of its employees to Swiss Re. The business process outsource agreement will migrate almost three million legacy policies by early 2009, and will continue the provision of great service in a manner that is significantly more cost effective for Norwich Union.
Service: Service continues to improve and now supports the company's strategic objective to “make it easier” for customers. Norwich Union launched its group personal pension “service promise” in August and now offers its “service promise” across its full life and pension product range. In September, Norwich Union won the Best Investment Service award from Moneyfacts, further highlighting the company's significant service achievements.
Efficiency review: Norwich Union Life aims to deliver £100m of cost savings by the end of 2009 by continuing to simplify its legacy systems and business processes. The partnership with Swiss Re is a key catalyst for further simplification of infrastructure and processes. The cost savings will eliminate the existing business expense experience variance in the UK Life business in 2009. These savings are in addition to the previously announced efficiency review to save £125 million of annualised cost savings by 2008, which is on track for completion by the end of this year. Since that announcement, the company has already delivered £115 million of savings. The savings are emerging through improved new business margin, reduced existing business expense experience variance and reduced costs in its non-life subsidiaries.
Sales update
Norwich Union's total sales, including investments, grew 5% to £10,949 million (2006: £10,464 million).
Norwich Union continued to balance its sales and profitability and successfully maintained its new business volume at more profitable terms, with new business margin increasing to 3.1% (2006: 2.9%). As a result, new business contribution before cost of capital increased by 6% to £270 million (2006: £254 million). New business contribution after cost of capital increased by 12% to £229 million (2006: £205 million) following a review of capital assumptions.
Collective investment sales grew by 31% to £2,199 million (2006: £1,673 million). During the first half of the year, the company experienced very strong sales across its property funds, with sales slowing in the third quarter due to unsettling market conditions and seasonal patterns. Norwich Union believes property remains an attractive long-term asset class and launched a European property fund earlier this year. In addition, the company continues to focus on its UK equity, guaranteed and socially responsible investment funds, with the latter benefiting from a particularly high level of consumer interest.
Norwich Union bond sales were up 13% to £2,864 million (2006: £2,532 million). The most popular funds were with-profits, guaranteed and balanced managed, which appealed to more cautious investors at a time of market uncertainty. The company's with-profit sales increased by 50% to £865 million (2006: £575 million) and unit-linked sales were slightly down at £1,657 million (2006: £1,709 million).
Total pension sales were strong at £3,520 million, although lower than in 2006 as the A-day effect tapered away. SIPP4 sales grew strongly to £383 million (2006: £101 million). Corporate pension sales were up 2% to £856 million (2006: £840 million) as the trustee-based corporate pension market continued to remain active. Expanding its position in the corporate market, including corporate pensions, is a key focus for Norwich Union.
Annuity sales grew significantly by 29% to £1,503 million (2006: £1,161 million). The company's price competitiveness, supported by excellent service, has enabled it to be successful in securing internal transfers in a growing market. Norwich Union has continued to secure more bulk purchase annuity schemes and expects to establish an increased market presence by the end of the year.
Norwich Union continues to review its UK annuitant mortality assumptions, in particular those relating to future rates of mortality improvements. This review and research into projection methodologies has resulted in the strengthening of the company's best-estimate annuitant longevity assumption by increasing the minimum mortality improvement factors, bringing these into line with the recent CMI working paper 27. The effect of this change is to reduce the embedded value by approximately £100 million. Alongside this change, Norwich Union has reduced the required capital for the UK annuity business from 150% to 100% of required minimum margin, bringing it into line with the economic capital requirement for this business. The combined impact of these changes on overall embedded value and new business contribution before cost of capital is broadly neutral. New business contribution before tax but after cost of capital improves by an estimated £12 million at 30 September 2007. The impact on reported results on an IFRS basis is broadly neutral.
Protection sales were lower at £702 million (2006: £823 million) due to the slowdown in the payment protection insurance market and the conclusion of a number of partnership agreements in 2006. As part of its new partnership agreement with the Post Office, the company launched an over-50s life cover product in August which is marketed in more than 14,000 branches and available through phone and website applications. Norwich Union and the Post Office will continue to develop new and simplified customer propositions.
Equity release sales of £161 million were lower (2006: £235 million) in a particularly competitive market. Norwich Union continues to manage its equity release business for the long term, prioritising business profitability over volume.
The company's share of sales from its bancassurance partnership with RBSG continued to show excellent growth with total sales up by 31% to £1,153 million (2006: £879 million). The increase in the number of advisers to 920 (full year 2006: 760) and the successful bond and collective investments customer propositions contributed to this significant sales growth. The strong performance in collective investments is expected to continue with the recent launch of the Capital Protected Investment product.
The pre budget review proposes changes in capital gains tax regulation which may reduce the attractiveness of some life industry savings products. Norwich Union is in dialogue with the government and the ABI to ensure that regulation minimises unintended impacts for both consumers and the industry. The company's product breadth enables it to mitigate its exposure to changes that affect any particular product.
The company expects full year market growth to be at the top end of its original forecast of 5% - 10%5 on an annual premium equivalent (APE) basis, with the company delivering 8% APE sales growth in the first nine months of 2007. Latest available data indicates that the company's market share was 10.9% in the first half of the year5 (full year 2006: 10.9%). Norwich Union reaffirms its aim to grow long-term savings new business sales at least as fast as the market, while at least maintaining margins.
- 4. Included in collective investment sales.
- 5. Total ABI market and latest available market share based on ABI total market data (including collective investments) on an APE basis.
