FY 2008 Part 1 of 5

RNS Number : 3471O

Aviva PLC

05 March 2009

 



AVIVA MAINTAINS DIVIDEND FOLLOWING STRONG OPERATIONAL PERFORMANCE IN TURBULENT MARKETS
Operating profits up; total return reflects investment markets; dividend maintained	IFRS operating profit up 4% to £2,297 million  IFRS loss after tax of £885 million  IFRS net asset value per share of 416 pence Total dividend per share maintained at 33.00p
MCEV result volatile in current investment markets	MCEV operating profit up 10% to £3,358 million MCEV loss after tax of £7,710 million MCEV net asset per share of 486 pence
Strong balance sheet and capital position	IGD solvency surplus of £2.0 billion at 31 December 2008 Prudent reserve strengthening undertaken  Consistent strategy through global crisis has ensured the financial health of Aviva
Resilient business flows from composite model and geographic spread	Life and pensions sales up 11% to £36,283 million General insurance result improved and combined operating ratio on target at 98% Difficult conditions in global markets has reduced asset management result
Transforming Aviva for the future	£340 million of £500 million 2010 cost savings target achieved  Significant progress in our UK business and launch of Aviva Investors Target to double US new business sales achieved a year early Move to global brand on track   Committed to delivery of target to double IFRS earnings per share by 2012

Andrew Moss, chief executive, commented:

'In a tumultuous year, our underlying business has shown great resilience. Operating profits are up and we have maintained our dividend. Bottom line earnings have been affected by investment markets which have predictably created significant unrealised losses during the year.

'Aviva remains financially strong. We've undertaken a thorough review of the value of our assets and liabilities, and have made cautious provision for future losses so that we are in good shape to withstand the ongoing volatility and uncertainty in world markets. Maintaining our capital strength has been a priority for us and remains so this year.  

'Meanwhile we continue to transform Aviva for the future. In these markets only the fittest will emerge as winners. Our increased share of the UK life and pensions market in 2008 is a good example of a market where we have growing competitive advantage. Our strategy is well-suited to current markets and our geographic diversity and composite model continues to deliver for us.'

Investor contacts	Media contacts	Timings	Contents
Andrew Moss [phone]	Hayley Stimpson [phone]	Newswire conference call 8.15 GMT	News release IFRS    1 MCEV    19 Capital management    61 Analysis of assets    77 Costs    106 IFRS supplement    108
Philip Scott [phone]	Sue Winston [phone]	Analyst presentation 9.30 GMT
Charles Barrows [phone]	James Murgatroyd/ Conor McClafferty [phone]	Live webcast www.aviva.com
Jessie Burrows [phone]

  2008 Key financial highlights



			IFRS				MCEV
	2008 £m	Restated 2007 £m	Growth %		2008 £m	Restated 2007 £m	Growth %
Life MCEV operating return / IFRS long-term business profit	1,694	1,610	5%		2,801	2,544	10%
Fund management	123	179	(31)%		42	90	(53)%
General insurance and health	1,198	1,021	17%		1,198	1,021	17%
Other:
Other operations and regional costs	(198)	(74)	(168)%		(163)	(70)	(133)%
Corporate centre	(141)	(157)	10%		(141)	(157)	10%
Group debt and other interest costs	(379)	(363)	(4)%		(379)	(363)	(4)%
Operating profit before tax	2,297	2,216	4%		3,358	3,065	10%
(Loss)/profit after tax	(885)	1,498			(7,710)	1,946
Total dividend per share	33.0p	33.0p			n/a	n/a
Net asset value per share	416p	494p			486p	763p
Equity shareholders' funds	£11,052m	£12,946m			£12,912m	£19,998m
Return on equity shareholders' funds	n/a	n/a			11.0%	10.4%

Chief executive's statement

Perspective on our markets	2008 has been an exceptional year. While short-term economic conditions have been very challenging, the long-term growth drivers of our business are sound. When times are tough people want to protect what they have, perhaps more than ever. People are living longer and still seeking to save for their long-term financial wellbeing. In some of the more mature markets new business flows are subdued, while in emerging markets there is new growth as prosperity improves, albeit at a slower rate than before. We remain committed to our vision of 'One Aviva, twice the value' which will unlock value, drive growth and realise the full potential of our existing businesses. The strategy remains well-suited to the current environment with its focus on increasing IFRS earnings and on cost savings. Our long-term view has meant that we have avoided excessive risk and this gives us great confidence as we look to the future.
Operating profits up and dividend maintained	Against the backdrop of some of the toughest markets in modern business history, we have delivered a 4% increase in IFRS operating profit to £2,297 million, demonstrating the underlying strength of our business. This is a solid trading performance with growth in both our life and pensions and general insurance businesses.   The strength of our earnings stream has enabled us to maintain our dividend. We have taken a conservative approach and our dividend is covered 1.9 times by IFRS operating earnings after tax. This is at the top end of the 1.5 to 2.0 times cover range. Our dividend policy remains unchanged. Our composite model combining life, general insurance and fund management continues to deliver for us. Around 80% of our profits come from our existing life portfolio and our general insurance business. This means that we are less dependent on long-term savings new business earnings and therefore more able to withstand the tough market conditions. This is an important factor in setting our dividend. Our geographic spread across four continents and diverse distribution also brings resilience.
Total return reflects marking to market of investments, reserve strengthening and exceptional costs	Our total result has naturally been impacted by the performance of investment markets, including the fall in equity, property and bond values. Assets are valued at their market value at the year end and the methodology demands that we take a very prudent approach to our valuation. The IFRS operating result after investment variances, but before exceptional costs, was therefore a loss of £153 million, which was a good result in the current environment. This is an unrealised loss and as markets recover, to some degree at some point, these unrealised losses will begin to reverse.  During 2008 we took steps to strengthen our balance sheet for the future. These exceptional costs include £326 million of restructuring costs, which will deliver cost savings of £500 million by 2010, one-off strengthening of general insurance reserves for asbestosis of £304 million and £126 million in respect of compensation for unit-linked insurance policies in the Netherlands. The resulting IFRS return after tax was a loss of £885 million.

MCEV result volatile in current investment markets

We are also reporting our results for the first time on the market consistent embedded value basis (MCEV). MCEV principles aim to improve transparency and comparability in embedded value reporting across Europe. This reporting basis is already in use by a number of our competitors in Europe. Aviva is one of the first to adopt it in the UK, with others adopting over time. The MCEV result will be volatile in difficult investment markets and further work is being done by the CFO Forum on the methodology to ensure it remains robust in such market conditions. MCEV reporting does not change the economics of our business, just the timing of when we report the profit we earn from our long-term savings business. On an MCEV basis our operating profit increased 10% to £3,358 million. Our operating loss after investment variances was £9,883 million and the loss after tax was £7,710 million.

Strong balance sheet and capital position

Customers and shareholders want to invest with companies that are financially secure. Our capital position remains strong. Insurers are required to hold a financial buffer over and above regulatory capital requirements. Our IGD solvency surplus was £2.0 billion at the 2008 year end. Over the course of 2008 we took early action to protect our capital position against further falls in equity markets through significant hedging arrangements. If equity markets were to fall a further 40% from 31 December 2008, our solvency surplus would be £1.2 billion. Maintaining this capital strength has been a priority in 2008 and will remain so in 2009. The quality of our balance sheet continues to be high. We are reporting a net asset value per share of 416 pence on an IFRS basis and 486 pence on an MCEV basis, after marking all financial assets to appropriate market values. Our assets are of high quality and our bond portfolio is well diversified by sector and geography. Our reporting methodology requires us to report the corporate bond portfolio at its market value as at the year end. In current conditions market values are very low. The unrealised losses on our balance sheet equate to 8% of the total bond portfolio. This is significantly above the highest ever actual default losses reported in the last one hundred years. Actual defaults in 2008 were £140 million, including losses on AIG, Lehman, Bradford & Bingley, Freddie Mac, Fannie Mae and Washington Mutual. This total loss represents just 0.2% of our total corporate debt portfolio. In addition, we have made prudent impairment charges of £260 million. Our UK commercial mortgage portfolio remains strong and defaults since 1992 have been minimal. 23% of the portfolio is effectively government backed and the remainder is well diversified by sector and location. Interest service cover and loan service cover remain strong at 1.3 times and 1.2 times respectively. We have built in significant protection in the event of default to limit our exposure. Our loans to the Dawnay Day group of companies are a good example of this, where we are pleased to report that the position has been resolved at no loss.   Even with such a sound track record, we have increased our short term default provisions in the UK for corporate bonds and commercial mortgages by £300 million and £250 million respectively. Together with our long-term default assumptions, this equates to a provision of £1.13 billion for the life of the corporate bond and commercial mortgage portfolio and creates a strong buffer against potential future losses.   We have also strengthened our general insurance reserves by £304 million, in respect of possible second generation asbestosis claims. This is in line with recent actuarial market studies and provides for estimated claims payments until 2045. Our total general insurance reserves are strong with a margin in excess of best estimates to protect against future deterioration in claims.

Resilient business flows	Our long-term savings sales were up 1% to £40,278 million. Within this, core life and pensions sales rose 11%, while investment sales were predictably lower, down 43%. General insurance premium income increased 5% to £11,137 million. Two-thirds of our business now comes from outside the UK and therefore currency appreciation brought us financial benefits. Life new business margins were lower at 2.1% (2007: 2.7%), reflecting a change in business mix towards spread business, such as annuities in the UK and group pensions business in the Netherlands.   Despite the downturn, Aviva continues to be attractive to customers seeking security for their long-term savings. We had a record year in our home market, achieving our highest ever UK life and pensions sales. In the United States we met our target of doubling new business, while maintaining margins, a year earlier than expected. In Asia Pacific we grew life and pensions business on the back of our Chinese joint venture and new ventures in Malaysia, South Korea and Taiwan. In Europe, the markets of central and eastern Europe were the highlight.  While the global banking sector has been under pressure, sales through our 90 bancassurance arrangements have held up well. Around a quarter of our new business sales come through banks and we are comfortable with this position. We believe that banks will give greater focus to their core retail operations in future and therefore insurance earnings will become even more important to them. It is a mark of the strength of our bancassurance franchise that we continue to be successful in this area at a time when some banks are facing great difficulties.
General insurance result improves	General insurance and health profits improved by 17% as a result of more normal weather conditions when compared to the exceptional 2007 UK floods. This was partly offset by lower prior year reserve releases and the impact of increasingly competitive markets. We are pleased to report a combined operating ratio (COR) of 98%. The COR is a measure of the profitability and efficiency of our general insurance business and this result is in line with our 'meet or beat' worldwide COR target of 98%.
Delivering our vision of 'One Aviva, twice the value'	During 2008 we have made significant advances in our agenda to transform Aviva and improve our operational efficiency and service to our 50 million customers. We have made excellent progress against our plan to reduce costs by £500m by 2010, primarily from our UK businesses. We have already delivered £340 million, of which more than 90% has flowed through to the 2008 result. We are on track to deliver the remaining savings on time and within budget. Cost control remains a firm priority for us. We have introduced shared services across a number of markets and our recently announced IT outsourcing arrangement with EDS will provide us with data centre services for UK, France, India and Ireland. We also exited from a number of non-core businesses during the course of the year.  We are pleased with our progress towards a global brand. We already operate as Aviva in most markets around the world. In June this year, Norwich Union will become Aviva in the UK. Name awareness of the change of name in the UK now stands at almost 80% following the first successful phase of advertising. Our businesses in Ireland and Poland have also started their journey to become Aviva in 2010.  The launch of Aviva Investors in September 2008 was another example of our vision in action. We have brought together our fund management operations in 15 countries into a single global business. Our aim is to grow this business significantly and accelerate its contribution to group profits. In Europe we are reshaping our business under the new leadership of Andrea Moneta, who joined us in the summer as chief executive, Aviva Europe. He has put in place a new senior management team and a pan-European structure. This will transform our business across our 15 markets, bringing improved efficiency and customer focus.

Creating value for customers and shareholders into the future

During these tough times we have continued to attract and retain customers wherever we do business, grow our earnings, preserve a strong balance sheet and maintain our dividend. We remain committed to our target to double IFRS earnings per share from 2007 by 2012 at the latest. The economic outlook is uncertain and top-line sales growth targets are not our priority. Maintaining a strong presence in each of our markets and performing in line with the market is a realistic aim. We have a focus on maintaining our financial strength while transforming our business for the future. This will deliver value for customers and shareholders alike and will ensure that we are well-placed for the future when the world economy picks up again.

Andrew Moss

Chief Executive

  Regional performance

United Kingdom

Life and pension sales up 1% to £11,858 million

Life IFRS operating profit up 4% to £751 million

Life MCEV operating profit up 7% to £883 million

Life new business gross margin down to 1.7% (2007: 2.4%)

UK general insurance result up 52% to £642 million and COR of 99% 

UK Life: 

We are pursuing a consistent strategy to transform our UK life business. We are simplifying our systems and reducing costs to give customers even better service. This is generating capital and increased profits, particularly from our existing business. We remain the UK market leader in a highly competitive market and can see our competitive advantage coming through with an increase from 10.4% to 11.3% in 2008 in a declining market and hitting 14% in the final quarter of the year. Our financial strength has meant that we have been able to provide products that are attractive to customers in the current economic climate. This broad product range and diverse distribution contributed to our highest ever life and pensions sales performance in 2008. Our joint venture with the Royal Bank of Scotland continued to perform well with sales up 1% despite banking sector difficulties.

We are ahead of schedule in our aim to reduce costs by £100 million by the end of the 2009, with £60 million already delivered in the year. Key to this is the simplification of our complex systems infrastructure, which is nearing completion. We have turned off over 200 systems to date and transferred the administration of one million legacy policies to Swiss Re through our outsourcing agreement. The delivery of these savings and other initiatives has meant that we have been able to improve customer service and halve our expense overrun in 2008 to £42 million and we plan to eliminate it in 2009. Our UK Life business also generates working capital for Aviva, enabling us to grow in developing markets elsewhere in the world.

Our plans for a potential reattribution of two of our with-profits funds continue. Following substantial reductions in the value of equity and property investments, the inherited estate was £1.4 billion at the year end compared to £2.1 billion at the 30 June 2008. On this basis our original offer no longer meets our criteria of being fair to both policyholders and shareholders. Our negotiations with the Policyholder Advocate to create a restructured offer continue and we hope to be in a position to update policyholders in the next few months. This is in addition to the special bonus of £2.1 billion to policyholders, of which two-thirds has already been added to policies.  

We expect the market to remain subdued this year. Our rigorous focus on profit and capital disciplines will drive continued operational and customer service improvements.

UK General Insurance: 

We are also transforming our UK general insurance business. We are simplifying our operating model, which has grown out of a number of predecessor companies over a number of years. Our focus is on our core insurance skills to improve customer service and drive profitable growth. We are ahead of plan in the transformation of our customer service centres and the simplification of our policy range.

Our general insurance result improved in 2008. This was driven by more normal levels of weather claims when compared to the severe flooding of 2007 and a significant reduction in costs. In 2008 we delivered cost savings of £265 million including £227 million against our 2010 target of £350 million, resulting in an improved expense ratio of 12.1% (2007: 13.9%). Our plan is to deliver a sub 11% expense ratio by 2010. At the same time we maintained business as usual by being voted General Insurer of the Year for the sixth year running by insurance intermediaries.

In 2008 we focussed on building insurance excellence through risk selection and sophisticated pricing techniques and by reshaping our book as well as delivering on the promise of scale. We have introduced new and innovative customer services, for example our new online motor insurance service gives potential customers our quote alongside those of our competitors, even if a competitor's quote is cheaper. The launch of our RAC panel this January completes the repositioning of our direct customer offering. 

Whilst we believe that market conditions will remain challenging into 2009, there are signs of the market hardening and we are seeing rating above claims inflation in all major classes for the first time in five years, This, together with the actions we have put in place in 2008, gives us confidence in delivering a UKGI COR in 2009 in line with our worldwide target of 98% or better.

  Regional performance continued

Europe

Life and pension sales up 8% to £16,990 million

Life IFRS operating profit up 13% to £881 million

Life MCEV operating profit up 9% to £1,638 million

Life new business gross margin down to 2.8% (2007: 3.2%)

COR of 97% 

Our European business is an excellent example of Aviva's diversity: we operate in 15 countries across Europe (ex UK) and our 20 million customers are served through a variety of distribution channels, including 31 bank partners, more than 5000 brokers and agents, and a direct sales force of more than 8500 consultants. It is this rich diversity which enabled us to sustain our life and pensions sales in 2008. Growth in the developing economies of central and eastern Europe offset more difficult conditions in the more mature markets of Italy and Ireland. We also saw real benefit from the appreciation of the euro, given the scale of our business in Europe.

In 2008 we continued to develop our business and strengthen our distribution capability in bancassurance in Spain, Italy Poland and Turkey. We also successfully launched a direct motor business in Poland and acquired VIVAS Health in Ireland.

This changing environment brings opportunities for Aviva in Europe. Bancassurance offers a valuable profit stream for banks in these challenging markets. As the leading bancassurer in the region we are well-placed to benefit and our industry leading business in Spain gives us a template for successful rollout to other countries.

Our general insurance combined operating ratio of 97% was ahead of our group target. Operating profit was down 26% reflecting competitive market conditions, investment in our new direct motor business in Poland and higher claims costs in Ireland.

We expect a subdued new business outlook across the region, particularly for long-term savings products where the current economic conditions mean that consumers' propensity to save is relatively low. General insurance markets continue to perform better in terms of volume, although price competition is fierce, particularly in the more mature western European markets.

North America

Life and pensions sales up 57% to £5,715 million

Life IFRS operating profit down 80% to £16 million

Life MCEV operating profit up 62% to £201 million

Life new business gross margin down to 1.0% (2007: 1.4%)

COR of 99% 

In the US we delivered a second year of record sales growth and achieved our target of doubling the scale of our business a year ahead of plan.

Expanded distribution, marketing programmes and new product launches contributed to strong sales of both our indexed annuity and indexed life products, and we remain the leader in both markets. The guarantees on our products are attractive in these uncertain markets, and we have responded by improving guaranteed income withdrawal benefits and introducing a new bonus index deferred annuity. Our decision to exit certain markets in 2007 to focus on selling higher margin products resulted in a slight decrease in sales of life products in 2008.

The Aviva brand is at the heart of these sales. Our financial strength and global scale have enabled us to grow our distribution fast and continue to expand our distribution network with a focus on larger brokerage general agents. Looking ahead, we will seek to optimise our business mix, growth and margin to deliver further profitable growth in the US. We expect to remain the leader in the indexed annuity and life markets but anticipate that our growth will be more in line with the market as we drive for further capital efficiency, productivity and profitability. 

In Canada we are the second largest general insurer, and continue to deliver profitable growth and generate capital. Premiums increased in both personal and commercial business with high retention levels across all lines of business. The combined operating ratio increased slightly in 2007 as good prior year loss development was offset by higher claims following a harsh winter and significant storm claims.

  Regional performance continued

Asia Pacific

Life and pension sales up 8% to £1,720 million

Life IFRS operating profit up 48% to £46 million

Life MCEV operating profit down by 17% to £79 million

Life new business gross margin down to 2.5% (2007: 4.1%)

Our footprint in Asia Pacific now extends to nine markets and it remains an attractive region for growth due to low insurance penetration in most countries, an ageing population, a fast expanding middle class and high gross domestic product (GDP) growth.

We are an established player in India and China, where we have gained ground quickly in these highly attractive markets which represent the greatest growth potential in the region. We are already the second largest foreign life insurer in China. Our 2008 sales include the new markets of Taiwan, Malaysia and South Korea, where in each case we are partnered with the country's second largest bank. We have more that 50 bancassurance partners throughout the region as part of our varied distribution mix.

During the year we expanded our distribution network and built our 'One Aviva' shared services model to realise synergies across Asia Pacific. We have created a regional product development team to anticipate changes in customer needs and to develop products to roll out across the region.

The Asia Pacific region holds significant potential for us over the long-term. In 2009 we will continue to grow our business in line with the market while ensuring efficient use of capital.

Aviva Investors

IFRS operating profit down 22% to £114 million

Group funds under management at 31 December 2008 up 6% to £381 billion

Funds managed by Aviva Investors at 31 December 2008 were stable at £236 billion 

Our launch of Aviva Investors in September 2008 brought together our fund management businesses in 15 countries to create a single global business. We aim to grow the business significantly and accelerate its contribution to group profits. To do this we aim to increase both third party business and cross-border sales. We made a number of key appointments during the year to build our global capability.

The challenging conditions in global financial markets had an impact on both funds under management and our profitability. While the decline during the year in funds under management in local currency terms had an adverse impact on the level of funds, this was offset by currency gains.

Information

Newswires: 

There will be a conference call today for wire services at 0815 hours (GMT) on [phone] Quote: Aviva, Andrew Moss.

Analysts: 

A presentation to investors and analysts will take place at 0930 hours (GMT) at St Helens, 1 Undershaft, London, EC3P 3DQ. The investors and analysts presentation is being filmed for live webcast and can be viewed on the Group's website www.aviva.com or on www.cantos.com. In addition a replay will be available on these websites later today. 

There will also be a live teleconference link to the investor and analyst meeting on [phone]. A replay facility will be available until 19 March 2009 on [phone]. The pass code is 4556391# for the whole presentation including Question & Answer session or 3833842# for Question & Answer session only.

The presentation slides will be available on the group's website, www.aviva.com/investors/presentations.cfm from 0900 hours (GMT).

The Aviva media centre at www.aviva.com/media includes images, company information and news release archive. Photographs are available on the Aviva media centre at www.aviva.com/media.

Notes to editors

Aviva is a leading provider of life and pension products in Europe with substantial positions in other markets around the world, making it the world's fifth largest insurance group based on gross worldwide premiums at 31 December 2007. 

Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total sales* of £51.4 billion at 31 December 2008 and funds under management of £381 billion at 31 December 2008. 

* Based on life and pensions PVNBP, total investment sales and general insurance and health net written premiums including share of associates' premiums.

Income statements and cash flows of foreign entities are translated at average exchange rates while their balance sheets are translated at the closing exchange rates on 31 December 2008.

The present value of new business premiums (PVNBP) is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the term of the new contracts, and is expressed at the point of sale.

All growth rates are quoted in local currency.

This preliminary announcement may include oral and written 'forward-looking statements' with respect to certain of Aviva's plans and its current goals and expectations relating to its future financial condition, performance and results. These forward-looking statements sometimes use words such as 'anticipate', 'target', 'expect', 'estimate', 'intend', 'plan', 'goal', 'believe' or other words of similar meaning. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which may be beyond Aviva's control, including, among other things, UK domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, the possible effects of inflation or deflation, the timing impact and other uncertainties relating to acquisitions by the Aviva Group and relating to other future acquisitions or combinations within relevant industries, the impact of tax and other legislation and regulations in the jurisdictions in which Aviva and its affiliates operate, as well as the other risks and uncertainties set forth in our 2007 Annual Report to Shareholders. As a result, Aviva's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Aviva's forward-looking statements, and persons receiving this announcement should not place undue reliance on forward-looking statements.

Aviva undertakes no obligation to update the forward-looking statements made in this announcement or any other forward-looking statements we may make. Forward-looking statements made in this announcement are current only as of the date on which such statements are made.

 

END

 

 

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