Aviva Plc

Summary

-  ■■ Aviva is the world's seventh largest insurance group and is the largest insurer in the UK. The company offers are long-term savings accounts, fund management and general insurance.

-  ■■ While half of Aviva’s business comes from the UK, it also has presence in France, the Netherlands, Spain, Italy, Ireland, Canada and Australia. Aviva operates through its subsidiaries under names such as Aviva, CGNU, Norwich Union, CGU, Morley Fund Management and Delta Lloyd.

-  ■■ The markets of Italy, Spain and Netherlands have proven to be most profitable because of strong bancassurance distribution partnerships, which in turn increased Aviva’s life insurance sales.

-  ■■ One of the problems Aviva faces is high level of debt. As on fiscal year end in 2003, the company had about $2.8 billion of subordinated debt, which in turn sets limits on the financial flexibility of the company.

Overview

Aviva is the world's seventh largest insurance group and is the largest insurer in the UK. The company offers long-term savings accounts, fund management and general insurance. The group, headquartered in London, employs approximately 56,000 employees and has about 30 million customers worldwide.

While half of Aviva’s business comes from the UK, it also has presence in France, the Netherlands, Spain, Italy, Ireland, Canada and Australia. Aviva operates through its subsidiaries under names such as Aviva, CGNU, Norwich Union, CGU, Morley Fund Management and Delta Lloyd.

The company's savings business provides long-term savings products, pension products, investments products, life assurance and health insurance. In the UK, the group provides these services mainly through its Norwich Union subsidiary. Norwich Union Life has bancassurance agreements with the Royal Bank of Scotland, partnerships with Tesco and Age Concern. Its other brand names include Yorkshire Insurance, Fidelity Life and Provident Mutual.

The company specialises in private motor insurance and small business insurance. Norwich Union Insurance sells insurance through brokers, corporate partnerships and also has retail direct distribution channels.

During the fiscal year 2003, Aviva's premium income was $52,954 million in 2003, an increase from $50,843 in 2002.

History

Aviva is a result of a merger between CGU and Norwich Union in 2000. The company was renamed Aviva after having been known as CGNU. Norwich Union was founded in 1797 and adhered to a policy of growth through acquisitions and geographic expansion. The company went on to include life, marine and motor insurance in its portfolio of operations. In 1959, the company acquired the Scottish Union and National Insurance Company.

CGU was formed as a result of the merger between Commercial Union Fire Insurance and General Accident in 1998. Commercial Union was initially formed in 1861. It merged with North British Mercantile and Northern and Employers Assurance in the 1960s as a way to counter the increased competition in the United States. Increasing competition in the UK led to a reorganisation and merger with General Accident in 1998, leading to the creation of CGU.

After the merger, the company started offering personal pension plans and also formed alliances to enter new markets in Italy and India. Later in 2000, the company merged with Norwich Union. The merged company's businesses included life and pensions, retail fund management and general insurance businesses and operated under the CGNU name. CGNU entered into bancassurance agreements in Spain and later in 2002, it had similar agreements in France, Italy, Netherlands and Hong Kong.

In 2002, CGNU changed its name to Aviva, although the Norwich Union name was retained. The company has since then expanded its overseas operations, more recently into India to include insurance brokerage as a part of its operations in 2004. In April 2004, Aviva also announced the extension of its bancassurance channel to Italy.

SWOT analysis

Strengths

Strong distribution channels: Aviva in the UK sells its products through independent financial advisers (about 48% of the new business sales worldwide in 2003), own direct sales channel (23%), bancassurance partnerships (25%) and through other partnerships (4%). The markets of Italy, Spain and Netherlands have proven to be most profitable because of strong bancassurance distribution partnerships, which in turn increased Aviva’s life insurance sales.

Strong position in Europe: Aviva is the largest insurance company in the UK with a market share of about 11-12% and one of the largest in Europe. The company distributes insurance products in the UK, and it enjoys top-five market positions in the Netherlands, Spain, Singapore and Turkey. Aviva is also the second-largest UK-based fund manager and is amongst the top five players in the Netherlands and Australia. This means that Aviva has diversified product offering which in turn makes the company more capable of absorbing potential changes in the market.

Weaknesses

High levels of debt: one of the problems Aviva faces is high level of debt. As on fiscal year end in 2003, the company had about $2.8 billion of subordinated debt, which in turn sets limits on the financial flexibility of the company. Other companies with lower level of debt have a more flexible capital structure and therefore have a competitive advantage over Aviva.

Decreasing sales in the UK life insurance market: UK life and pensions sales decreased between 2001 and 2003, which is one of the main problems the company faces at the moment. Other insurers, however, have also experienced such decline, and the recession of 2001 and 2003 can be partially blamed for the problems. Another reason is the high level of debt that means the company is less competitive, which in the increasingly more consolidated market can be risky.

Bancassurance deals financed through internal debt: Aviva has financed its bancassurance deals (having spent Ј1.8 billion in pursuing its bancassurance strategy) between 2000 and 2003 through what it calls ‘internal debt’ and as at the end of fiscal year 2003, internal debt accounted for Ј3.8 billion of Aviva's Ј20.5 billion of capital employed. The group also raised significant subordinated debt. Bancasurrance deals form an important part of Aviva’s business strategy and can be profitable, however the company risks some serious shortfalls in capital should some of the deals fail.

Opportunities

Bancassurance: this is exceptionally strong in some European markets, including France and Spain. Many European insurers have either been investing in bancassurance deals or are planning to do so. Aviva has pursued the strategy of investing in bancassurance and now has partnership agreements with ABN Amro in the Netherlands, UniCredito in Italy and other strong arrangements with banks in Spain. These bancassurance deals have saved Aviva from experiencing a further decrease in life insurance sales. Aviva also formed a bancassurance partnership with Credit du Nord, by which Aviva gained access to 1.3 million customers through more than 600 branches, making the company the only life insurer present in all distribution channels in France.

Define its strategy in Asia: Aviva decided to take advantage of the growing Asian markets by investing in Singapore, Malaysia, Thailand, Indonesia, Hong Kong, the Philippines and Marianas, Macau and Taiwan. However, in September 2004 the company decided to sell its Asian insurance business to Mitsui Sumitomo Insurance, Japan's second biggest insurer. Aviva explained this move by its new strategy to concentrate in China instead and the company opened two new life offices, in Beijing and Chengdu, China, at the end of September 2004 to operate alongside the office it opened in Guangzhou in January 2003. Aviva’s move is no different to what its competitors are doing - because of its strong growth; the Chinese market is now the Promised Land for troubled European insurers.

Threats

Fierce competition: Aviva has been trying to expand in countries outside the UK, especially in Italy, where the company sells through Unicredo's regional Cassa di Risparmio do Torino network. In France, Aviva started selling through SocGen's Credit du Nord branch network, where it competes against larger Societe Generale network. In Holland, Aviva has a bancassurance deal with ABN Amro and it competes against the largest Dutch providers, ING and AEGON. The main problem with expansion abroad is the local competition, which is typically different to the competition in the home market.

Changes in solvency rules: the UK life insurance market is likely to witness structural changes as with the mediation of regulatory bodies, the insurance companies shall have to provide for high solvency capital. Such changes in solvency rules would force Aviva to make changes in its investment portfolio thus affecting overall returns on these investments.

Company activity snapshot

" ■■ In September 2004 Aviva sold its Asian general insurance businesses in Singapore, Malaysia, Thailand, Indonesia, Hong Kong, the Philippines and Marianas, Macau and Taiwan to Mitsui Sumitomo Insurance, Japan's second biggest insurer. In August 2004 Aviva announced that it planned to place more emphasis on the Asian savings market, while in the past Aviva has concentrated mainly on Europe. Aviva opened two new life offices, in Beijing and Chengdu, China, at the end of September 2004 to operate alongside the office it opened in Guangzhou in January 2003.

- ■■ In February 2004 Norwich Union announced the closure of Hill House Hammond. The brokerage sector is struggling as a whole and further consolidation in this field may be inevitable as brokers face up to imminent FSA regulation. The move by Norwich Union will result in 1,200 of the brokers' 1,600 jobs being lost, with the remaining 400 being redeployed throughout Norwich Union.

-  ■■ In January 2004 Aviva reported a severe slump in pension sales as new individual pension sales fell by 20% in 2003 to Ј396 million. The insurer blamed the modest 1% per year annual management charge levied on stakeholder pensions for the decline in sales. Poor results are expected across the industry, as other providers will also have experienced difficulties in covering the cost of advice and marketing campaigns with the 1% charging structure.

-  ■■ Aviva announced its strongest quarter sales for the fiscal year ending December 31, 2003, generating worldwide sales of Ј14.4 billion for the period. Although the company's worldwide sales for the quarter were slightly down from the Ј14.6 billion it generated for the same period the previous year, the company's worldwide total bancassurance sales were up 27% for the period to Ј563 million.