LONDON--(Marketwire - Nov 8, 2012) -
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News Release
Aviva plc
Interim management statement for the nine months to 30 September 2012
8 November 2012
Dear shareholders,
Aviva plc today announced its Q3 Interim Management Statement where the
operating profit trend is broadly in line with the half year.
More importantly, I am pleased to report that we have taken, and are
continuing to take, firm and decisive actions to transform Aviva. The
key priorities remain:
- To appoint a high quality CEO
- To build the company's capital and financial strength, reducing also
the risk and volatility of the balance sheetand income statement
- To narrow focus on attractive core businesses and dispose
intelligently of non-core segments
- To improve earnings performance and return on equity with the aim of
broadly replacing, by 2014, the earnings lost as a result of disposals
with new earnings streams
Reporting on each of these in turn, the CEO search process is now well
advanced and in line with the original timetable set out by the Board.
Shortlisted candidates are in the process of being interviewed by
non-executive directors, and on completion,we will then seek FSA
approval for the Board's preferred candidate.
I am also pleased that we are getting good traction on building our
financial strength. Economic capital surplus* as at the end of October
2012 was around GBP5.3 billion, up by GBP0.8 billion from the half year
and by GBP1.7 billion from the beginning of the year - in ratio terms
we are currently around 146% versus our target range of 160-175%. IGD
capital surplus at the end of October was GBP3.7 billion, up GBP0.6
billion from the half year and with a ratio of 167%. In the quarter we
also sold down part of our Italian sovereign bond holdings.
In the quarter we reduced our Delta Lloyd holdings and announced the
sale of our business in Sri Lanka. While we are not yet in a position
to make firm announcements on further non-core disposals, the progress
is in line with planned timelines.
We can now confirm that we are in discussions with external parties
with respect to our US life and annuities business and these are being
actively pursued.While not agreed, any such sale would come at a
substantial discount to IFRS book value, but would generate significant
economic capital surplus. We believe any such sale would be in the best
interests of the Group and we are hopeful of a satisfactory resolution
reasonably soon.
Beyond this, there are eight smaller disposals which are now more
likely to be in 2013, and we expect all to be done without a
significant impact on the Group's IFRS book value.
The transformation and earnings enhancement process continues apace. A
key initiative is the turnaround of our 27 "amber" business cells. In
the quarter we assigned our most talented high-potential executives to
each cell and they produced a plan for each. The analysis tended to
show that within the cells we had a mix of performing as well as
uneconomic or poorly performing sub-segments or products. The required
actions ranged from revenue-enhancement, cost or loss reduction,
capital withdrawal, or leveraging technology or the online space. We
are now in the process of refining and implementing these plans and
building the results into our 2013 and 2014 plans, and will be able to
provide a more comprehensive update at the 2012 full-year results.
Unsurprisingly, getting traction on the change initiatives at Aviva has
taken time.
On the one hand we are blessed with a terrific brand and really
professional front-line staff who have the customer's interest fully at
heart. For example, visiting the regional UK and international centres
reveals an incredibly dynamic environment and a strong marketing ethic.
The "systems thinking" initiatives are now well embedded in the culture
of the UK business.
* The economic capital surplus represents an estimated position. The
capital requirement is based on Aviva's own internal assessment and
capital management policies. The term 'economic capital' does not imply
capital as required by regulators or other third parties. Pension
scheme risk is allowed for through five years of stressed
contributions.
Chairman's review continued
On the other hand, culturally the organisation has been more used to
collective decision making and has moved more slowly as a result. This
initially inhibited progress on some of the programmes possibly
exacerbated by an unwieldy centre and support infrastructure, with more
bureaucracy than desirable. Although it will take time to change this,
the pace of change is accelerating and we are beginning to make real
progress.
There are nine specific transformation programmes and I'll cover each
in turn:
Backing Winners - This aims to develop new revenue opportunities in the
developed markets, and involves a team of external professionals as
well as the transformation team. In addition there is a separate
initiative to invest new capital and expense resources in a few high
growth and return opportunities. These are relatively new initiatives,
and we will have further clarity on their potential by year end.
Cost and Capital Efficiency - As previously announced, we are seeking
at least GBP400 million of cost savings as well as the reallocation of
capital from suboptimal segments. We have already removed four levels
of middle management in the UK and the programme is being extended
internationally. We have also removed the regional layer of our
business. In addition the review of head office, support activities and
non-staff costs is well advanced. By the end of the year we will have
locked-in a run rate cost reduction of GBP250 million and have specific
2012 and 2013 plans in place on the balance. We are also in the process
of producing a more efficient 2013 capital plan.
Back Books - We are aiming strategically and tactically to reduce the
drag on economic return and concentration risk from capital-hungry,
sub-optimal, or non-current legacy portfolios. Favourable economic
outcomes in this area are inherently difficult, but several modest
tangible opportunities have been identified, and these are being worked
through.
Life Excellence - It is critical that we leverage best-in-group
capability across all life segments. Specific initiatives include
launching existing products into new markets, product re-pricing,
improved underwriting standards, reallocation of capital, improved loss
mitigation and cost reduction. The organisational team is now in place
and key positions assigned.
GI Excellence - Given our largest general insurance businesses are in
the UK and Canada, it is important that we implement best-in-class
techniques across both as well as across the smaller GI segments
internationally. Specific initiatives include fully deploying existing
risk-based pricing systems, improved claims efficiency and the
deployment of sophisticated fraud reduction systems. This involves
additional responsibility for existing professionals from the UK and
Canada.
Assets/Aviva Investors - We have initiated a programme to review the
overall asset portfolio of the group and the appropriate mix for a low
interest rate environment. As part of this review, we will be
undertaking additional work with Aviva Investors to develop a more
compelling external proposition.While Aviva Investors continues to
serve the group well, it has fallen short of our aspirations to expand
the business externally.
Product Tails - As with most firms we have a natural 80/20 to our
business with a significant tail of products and segments that make
little contribution to our success and in many cases erode value. This
programme aims to eliminate these tails. This is a relatively recent
initiative and while an initial analysis has been conducted, it
requires further analysis and solutions.
IT and Operations - This essentially involves a complete reappraisal of
our technology strategy and architecture, and also reviews our current
IT spend level of over GBP800 million per annum. The review has now been
completed, has been formally approved, and will be implemented in three
phases. As a result we will eliminate over 800 applications from our
current legacy estate, adopt a more modern digital architecture,
improve service standards and reliability and reduce IT revenue and
capital expense costs. In addition there is a separate programme to
optimise spend on the various operational change initiatives across the
Group which will result in more effective implementation, the
elimination of waste and reduced costs.
Chairman's review continued
Performance Ethic - Aviva requires a more effective performance
culture. As such we are seeking significant change in the areas of
culture and values, performance targeting and measurement,
communication, and remuneration practices across the Group. This work
is well advanced. Additionally, the 2012 engagement and values surveys
have been completed by staff. All senior management have been
categorised in a nine-box performance and potential matrix, and
force-ranked on a 20/70/10 basis, and systems have been designed to
differentiate remuneration according to ranking, subject to further
Remuneration Committee discussion and approval.
Trading conditions though remain difficult and results have been mixed
across the Group. We nevertheless have strong positions in the UK,
Canada, France and Singapore and our performance has been good in these
markets. In our life business in Spain and Italy markets are tough,
driven by the external economic environment, with new business volumes
considerably reduced. In Ireland, while a number of good actions are
underway to improve performance, the results are not yet acceptable.
Although conditions will remain challenging, the strategic and
transformational programmes should enable us to improve our financial
performance and value significantly, making Aviva a better business for
our customers, our people, our partners and a better investment for our
shareholders.
John McFarlane
Chairman
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Contacts
Investor contacts Media contacts Timings
Pat Regan Nigel Prideaux Real time media
+44 (0)20 7662 2228 +44 (0)20 7662 0215 conference call: 0730 hrs
Analyst conference call:
0930 hrs
Charles Barrows Andrew Reid Tel: +44 (0)20 7136 2051
+44 (0)20 7662 8115 +44 (0)20 7662 3131 Conference ID: 3528346
David Elliot Sue Winston
+44 (0)207 662 8048 +44 (0)20 7662 8221
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