Aviva 2005 Annual Report Download - page 27

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Business review
Aviva plc 2005
Adverse persistency and expense variances have been offset by
mortality profits of £105 million (2004: £51 million profits) arising
principally on protection contracts, better than expected default
experience on corporate bonds and commercial mortgages of
£19 million (2004: £29 million). Additionally, £110 million has
arisen from the change in the level of required capital for annuity
business from 200% to 150%.
Adverse exceptional expenses of £148 million (2004: £153 million
adverse) included £47 million in respect of ongoing restructuring in
the UK life business and a further £101 million of other exceptional
and project costs associated with regulatory change and strategic
initiatives.
Persistency experience on our unitised with-profit and unit-linked
bonds, as well as pensions products, continues to be adverse,
generating a loss of £78 million (2004: £50 million loss). This loss
principally arises in relation to bond contracts, on surrenders
occurring at set anniversary dates where market value adjustments
do not apply. Actual lapse experience has continued to be higher
than assumed, notwithstanding the change in lapse assumptions
made in 2004. While action is ongoing to improve our current
persistency experience, this coupled with an increase in the
expected number of lapses on pension business has resulted
in a provision for lapses with a consequential adverse impact
on profits of £130 million (2004: £110 million adverse).
Our total sales, including investment sales were up by 2% to
£10,213 million (2004: £10,031 million). Our fourth quarter sales
were the highest of the year, and reflected the actions taken in
the second half to improve performance and volume growth in
our key markets. We took strong and appropriate pricing actions
to generate medium and long-term profitable growth.
Our new business contribution was £265 million (2004:
£269 million) reflecting the change in product mix during the
second half of 2005.
We launched our pension simplification (A-Day) strategy in
October 2005 and are well-positioned to benefit in what we
anticipate will be a growing market. We will offer flexible solutions
for our customers’ long-term needs and are confident in our
ability to grow our pension business and reduce costs after A-Day.
We are continuing to review the possibility of a reattribution of the
inherited estate, or orphan assets, of two of our with-profit funds,
CGNU Life and Commercial Union Life Assurance Company.
The inherited estate consists of surplus assets accumulated over
time in a with-profit fund. We are exploring the benefits to
policyholders and shareholders from a reattribution and have
established a project team to perform the research. Under FSA
rules, a condition of the new regulatory system for reattributing an
inherited estate is the appointment of an independent policyholder
advocate to represent policyholder interests. We welcome this
initiative and are pleased to announce the appointment of Clare
Spottiswoode, a former director of Ofgas, as the policyholder
advocate. At this stage, no decision has been taken to proceed
with a reattribution; it will only be undertaken if there are clear
benefits for policyholders and shareholders.
We shall continue to focus on profitable growth for shareholders,
while maintaining market-leading positions in our chosen sectors.
We constantly monitor market developments and will exploit
opportunities as they arise.
Success through bancassurance
Our distribution strategy is to offer choice and excellent service
to customers through a mix of distribution channels. This includes
bancassurance, in addition to other channels such as independent
advisers, direct sales and partnerships with non-banking
organisations.
What is bancassurance?
Bancassurance is the distribution of insurance products by banks.
It is a significant sales channel in most countries and dominant in
a few. The sales model varies according to the market place and
the type of partnership, and can include sales by bank counter
staff, by a branch-based adviser or by referral from the branch
to one of our sales advisers.
Why distribute through banks?
Banks typically have large customer bases, well-established
and trusting relationships with their customers and well-known
brands. Banks also have financial knowledge of their customers
and are in a good position to identify financial needs and
appropriate products, including insurance solutions. This leads
to a cost effective form of distribution for insurance products.
We have expertise in product design, insurance risk management,
service delivery and the sales process for insurance products.
Particularly important for our success is our knowledge and
experience of making bancassurance partnerships work effectively
in many different markets. We also have a highly respected brand
name that complements our bank partners’ strong brands and
reputations. Through bancassurance partnerships, we can achieve
high sales volumes with economies of scale. In turn, these
benefits are passed on to consumers through competitively
priced products.
For a partnership to work successfully there must be clear benefits
for both parties.
How are we doing?
We have a leading position in bancassurance distribution
throughout the world and it is an integral part of our distribution
strategy. We generate significant sales volumes through our
partnerships, and see bancassurance as continuing to grow in
future years. This year, bancassurance has generated 25% of
Aviva's new long-term savings business, an increase from 23%
in 2004. Additionally, we are rapidly becoming the “partner of
first choice”.
Specific details of our major bancassurance partnerships are set
out in the detailed reviews of the business units.
Bancassurance