Aviva defends business model as global sales rise to £35.9bn

AVIVA delivered a robust defence of its composite business model yesterday as it unveiled worldwide sales growth of 5 per cent to £35.9bn in the first nine months of 2010.

The group has been under pressure from investors to increase value in its life and general insurance businesses after rejecting a 5bn takeover approach from rival RSA for the general insurance arm in the summer.

Andrew Moss, chief executive, said the divisions are "excellent businesses in their own right, with strong market positions, good growth prospects, and attractive returns". He said there are "significant advantages of running both of these businesses under a global brand", including diversification of risk, more resilient cashflows and earnings than monoline insurers and lower capital requirements.

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Mr Moss added: "There are clear synergies to having life and general insurance under one roof, including the operational benefits of shared back-office functions, IT and finance resource, and the opportunity to transfer skills and knowledge across the group." He said the group is "on track to deliver strong profitable growth" and promised 400m in equal cost and efficiency savings, coming on top of 500m in savings between 2007 and 2009.

Britain's second-biggest insurer said it would sell its Taiwanese business and exit other countries as part of a plan to concentrate on markets where it can make at least 100m in annual operating profits.

Sales for total long-term savings, including life and pensions, rose 6 per cent to 28.5bn in the nine months to September, compared to the same period last year. The general insurance business saw a 4 per cent increase in written premiums to 7.3bn.

Toby Strauss, the York-based chief executive of Aviva's life business, said he was "very pleased" with the third quarter results. His division employs 8,000 people, including 4,000 at York, Sheffield and Leeds.

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"Long-term sales up 22 per cent year on year. Life and pension sales up 15 per cent. Internal rate of return is holding strong at 15 per cent. We are getting the growth while maintaining our margins and profitability. It's disciplined growth," he said in an interview with the Yorkshire Post.

Mr Strauss said he continued to keep "a wary eye" on the economic outlook and its potential impact on jobs, consumer confidence and propensity to save over the long term. "Other than that, we see we have got good strength in each of our areas. We are going to invest in each of the propositional areas. We continue to expect to see continued momentum," he added.

Aviva has reduced its headcount by nearly 20 per cent in the last three years, including 1,700 in York. It has also closed its final salary pension scheme.

Asked if the cost-cutting plans would mean more UK job losses, Mr Strauss said: "We don't believe so at the moment." Mr Moss yesterday confirmed 200 employees in Canada would lose their jobs.

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Mr Strauss said the group will focus on savings through more efficient use of suppliers, greater synergies between the life and general insurance divisions and a combined approach to e-commerce, as opposed to the existing multitude built up over the years. He said Aviva would continue to invest in five main areas in its life business – corporate, protection, annuities, individual savings and health products.

Corporate sales are benefiting from the shift from defined benefit to defined contribution pension schemes, while Aviva should also benefit from the introduction of NEST, the new workplace pension plan, said Mr Strauss.

He said the group would introduce new technology, including more automated underwriting, to enhance sales in its protection offerings.

He expects annuities sales to continue to rise due to the number of people hitting 65 over the next few years and their preference for guaranteed income.

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For individual savings and pensions products, Aviva will create one approach for customers to manage their products "through one lens", said Mr Strauss.

Health sales are also likely to grow as people prefer to pay for protection rather than rely on the state to provide care, he added. Mr Strauss, a former management consultant at McKinsey & Company, assumed the CEO's role in January this year.

He said: "I'm really enjoying it. It's a great business. I like York. We have a strong position in the market both in terms of product and proposition and distribution through independent financial advisers and banks. I look forward to building on that."

Shares closed last night up 9.06p at 402.30p, a rise of 2.44 per cent.

What the analysts say

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SOME City analysts yesterday gave a thumbs-up to Aviva's third-quarter figures.

Nick Holmes, at Nomura International, said: "We continue to view Aviva as one of the most undervalued stocks in the sector and it remains a top pick."

Duncan Russell, at JP Morgan Cazenove, said Aviva's operations are "on track with a strong performance". He said the group's target to deliver 1.5bn in operational capital by 2011 should please the market."

A note from Citi said Aviva should sell unattractive businesses to reduce leverage.

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