Aviva Plc · LSE:AV.
Aviva — Investor Day (October 2004)
79 slides from Aviva's investor day presentation, Oct 8, 2004
Slide 1: Analyst Presentation: Transforming Life and Driving for Value
Analyst Presentation Transforming Life and Driving for Value 8th October 2004 © Aviva plc
Slide 2: Gary Withers, Chief Executive
Gary Withers Chief Executive
Slide 3: Agenda
Agenda Norwich Union Life Strategy Gary Withers Product and Distribution Strategy Peter Hales Achieving Operational Excellence Mike Kirsch Q&A Driving for Value Mike Urmston Jim Newman Confident about continued success Gary Withers Q&A 1230 Lunch
Slide 4: Our Ambition: Clear market leader in savings and insurance
Our Ambition: Clear market leader in savings and insurance • Top 3 positions in Life, Pensions and Investments • Value based management – increase new business IRR to 15% in 2007 (12% 1H 2004) – gross annualised cost savings of £130m pa by 2007 (based on 2003 cost base) – FTE reduction of 20% (2002-
Slide 5: The world has changed… Old World
The world has changed… Old World • The industry was focused on APE, NBAV growth and access to customers • Capital was freely available: leveraged our with-profits advantage • NBAV was the key product and sales metric • High investment returns meant good value for customers and limited focus on costs
Slide 6: … New World
… New World • No ‘easy wins’ for customer or shareholder: value management is now key • Focus on maximising new business IRR and returns on existing book: cost management is critical for both • Capital model has changed and moving to more of a banking model • Service demands are high and will remain
Slide 7: Well positioned for the New World
Well positioned for the New World • Multi-product, multi-channel, brand strength • Scale to drive cost economies and innovate • Financial strength and market position to take the tough decisions • Experienced management team
Slide 8: Making Progress towards our goal
Making Progress towards our goal Market Position Scale & Innovation Financial Flexibility •Market leader for •Achieved cost •With profit realistic new business with savings of £140m in position of £4.2bn 12.1% market 2003 share •Securitisation of •Established equity release •Most trusted and operati
Slide 9: But much remains to be done
But much remains to be done Market Position Scale & Innovation Financial Strength •Strengthen •Further £130m •Develop and investment and annualised savings broaden group pensions by 2007 through cost securitisation to position efficiency create a flexible financing model •Develop Lifetime •Business
Slide 10: The Market has still not taken off
The Market has still not taken off Half yearly market APE progression (Total Life, Pensions and Investments APE) 6,000 5,500 5,000 4,500 4,000 3,500 3,000 1H 99 2H 99 1H 00 2H 00 1H 01 2H 01 1H 02 2H 02 1H 03 2H 03 1H 04 Source: ABI data
Slide 11: The Market has still not taken off
The Market has still not taken off 5 year Total Market APE Moving Annual Growth Rate (Total Life, Pensions and Investments APE) 15.0% Stakeholder Surge Dot com 10.0% bubble bursting Market 5.0% recovery? Market Market growth growth 0.0% 2000 2001 2002 2003 2004 -5.0% Market decline Decline in -10.0%
Slide 12: The Market has still not taken off
The Market has still not taken off Half yearly market APE progression 5 year Total Market APE Moving Annual Growth Rate (Total Life, Pensions and Investments APE) (Total Life, Pensions and Investments APE) 6,000 15.0% Stakeholder Surge Dot com 5,500 10.0% bubble bursting Market 5,000 recovery? 5.0%
Slide 13: ...and we will achieve growth on our terms
When the market turns…we will be ready • Strong competitive position: product and distribution • Efficient and scaleable operating platform • Financial strength and metrics ...and we will achieve growth on our terms
Slide 14: Peter Hales: Product and Distribution Strategy
Peter Hales Sales and Marketing Director Product and Distribution Strategy
Slide 15: 3 key areas at the heart of our current success
3 key areas at the heart of our current success... Brand • Market Leading • Highest Awareness • Most Trusted Products Products • Broad Range • Customer Orientated • Value Focus Distribution Distribution • Broad Access • Strong Relationships • Well positioned for the future ...and our confidence for
Slide 16: Brand Strength
Brand Strength We will continue to leverage our brand strength and use it as a source of competitive advantage
Slide 17: Brand Recognition
Brand Recognition 100 90 80 70 60 50 92 90 87 40 85 84 80 80 79 78 71 70 30 64 48 20 41 10 0 h y e ric s ine SB x l be ion ay Lif tia e lifa l le Zu ws ra Lif e tL en sT rcl Ab ab Un un Ha nc ne ido rd rec Ba ud uit yd /S lia Ge da ich W Pr Eq Di Llo nA an rw ish l& a ish Ax St Su No ga ott ott Sc l
Slide 18: Advocacy
Highest levels of trust and advocacy in Life and Pensions market… % 50 45 40 Advocacy % 5 10 20 25 30 25 Trust Source: TRBI Brand Tracking Study Q2 2004 • Trust in the Norwich Union brand continues to build • Norwich Union has made further advances in levels of advocacy for the brand …a source of co
Slide 19: Growing Customer Confidence – A Market Leader
Growing Customer Confidence – A Market Leader • Raising Standards accreditation • Treating Customers Fairly • Financial Capability • Providing sustainable guarantees through financial strength • Transparency on with-profits Customer Focus • Implementing the benefits of researching the customer over
Slide 20: Product Strategy
Product Strategy We will use our broad product mix and strong market positions to: • deliver value for customers and shareholders, and • continue to increase our influence with distributors
Slide 21: We have a broad product mix
We have a broad product mix... Total Market Norwich Union H1 2004 = £5.0bn APE and H1 2004 = £605m APE and £28.7bn total premiums £3,465m total premiums 12% 8% 9% 16% Annuities 19% Bonds & Savings 16% 16% Group Personal 10% Pensions Individual Pensions Corporate Pensions Investment Funds 13% 17% 14%
Slide 22: Strong market share in the main product areas
We have consistently maintained strong market share in the main product areas... 20% 40% 15% 16.9% 14.5% 14.6% 13.5% 10% 10.7% 10.2% 5% 6.9% 0% Annuities Bonds & Group Individual Corporate Investment Protection Equity Savings Personal Pensions Pensions Funds Release Pensions Source: ABI / MSE H1 200
Slide 23: Stability during volatility
Stability during volatility... Total Market Share - Discrete Quarters £bn APE 2.7 14% 12% 2.6 10% 2.5 NUL L&P Market Share 8% 2.4 6% Market Size 2.3 4% 2% 2.2 0% 2.1 Source: ABI / MSE H1 2004 & Aviva results Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Total IFA Market Share - Dis
Slide 24: Life, Pensions & Investments market expected to grow
We expect the Life, Pensions & Investments market to grow across all products; being a broad based product provider we should do well... APE £bn £13 £12.6 bn £10 £10.1 bn Market £8 Growth 25% £5 NU Growth 31% £3 £0 2004 2007 Source: Norwich Union Life Market APE £bn …giving us the opportunity to foc
Slide 25: Market Growth - £bn APE
Market Growth - £bn APE Pensions Market Growth Pensions: £6 - low point of margin cycle £5 £5.2 bn £4.7 bn - market activity before and after Pensions £4 £3 11% Simplification Growth £2 - distributors and providers able to profitably £1 focus on mainstream market sectors £0 2004 2007 Protection Mark
Slide 26: Market Growth - £bn APE
Market Growth - £bn APE Investments Market Growth Investments: £6 - low point in the savings cycle (savings £5 £5.2 bn ratio back at late 1980’s levels) £4 - stabilising equity markets £3 £3.5 bn 49% Growth - returning consumer confidence £2 £1 - housing market slowing £0 2004 2007 Annuity Market Gr
Slide 27: Norwich Union is well placed for growth opportunities
Norwich Union is well placed to take advantage of further growth opportunities • Strength of our brand ensures customer pull in an intermediated market • Flight to quality will continue, benefiting providers with real financial strength • Strong distribution partnerships give access to all key custo
Slide 28: Distribution Strategy
Distribution Strategy Multi-channel offering with distributors prioritised on customer access and value
Slide 29: Maximise access to customers through optimum distributors
Maximise access to customers through the optimum number of distributors Leading IFA market share: - 90% of IFA firms placed new business with Norwich Union within the last 6 months - Leading provider to the top 3 IFA networks: Bankhall, Sesame and Tenet; with a combined salesforce of over 16,000 RIs
Slide 30: Depolarisation expected to change the face of distribution
Depolarisation expected to change the face of distribution... Market Distribution Mix Market Distribution Mix 2004 2007 Direct Direct DSF DSF IFA - 9% 5% Whole of Commission 5% 14% Market & Multi-tie Distribution Banc- 42% 49% Groups Banc- assurance 24% 16% assurance 16% 20% EBC / IFA EBC / IFA Fee
Slide 31: Multi-tie: We are well placed for the future
Multi-tie: We are well placed for the future • Multi-tie agreements secured with: - UK’s largest network - Bankhall - Sesame - Portman Building Society - Discussions in progress with many major distributors • Top choice for IFA Life & Pensions Multi-ties - 65% of IFAs questioned would include Norwic
Slide 32: RBSG Joint Venture (Bancassurance)
RBSG Joint Venture (Bancassurance) SUCCESSES ISSUES OPPORTUNITIES • Development of • Recent volume growth • Significant growth partnership and strength has been below potential - customer of relationship expectations penetration about half of • NUL and RBSG have • Impact of limited product market le
Slide 33: A strong partnership committed to future growth
A strong partnership committed to future growth “ With our JV partner Norwich Union we have created strong foundations on which I am confident we will achieve substantial long term growth in our bancassurance business. We enjoy excellent working relationships with Norwich Union and are committed to
Slide 34: The Lifetime Portfolio will lead and grow the UK wrap market
The Lifetime Portfolio will lead and grow the UK wrap market... • £150bn will be invested through wraps by 2008 (Source: Datamonitor) • The Lifetime Portfolio launches in Q4 2004 Benefits: • Customer: Transparent charges, wide range of product wrappers, choice from 50 fund managers and 700 funds, an
Slide 35: We are confident about the future
We are confident about the future... • Market leader through a period of market turbulence • Top 3 positions in Life, Pensions and Investments markets • Successful broadly based distributor relationships focusing on shared value • Continued use of our strong brand awareness, customer focus and finan
Slide 36: Mike Kirsch: Achieving Operational Excellence
Mike Kirsch Operations Director Achieving Operational Excellence
Slide 37: Operational excellence ambition: 7,000 people in 9 locations
Our operational excellence ambition is focused on our customer service and technology business units 7,000 people in 9 Glasgow locations Newcastle York Sheffield Norwich Bristol Pune Stevenage Croydon
Slide 38: Achieving operational excellence: Old World
Achieving operational excellence: Old World • Historically strategic emphasis has been on rapid business growth and achieving our merger commitments • Improving service whilst building cost efficiency • Too complex and fragmented: Need to simplify • Customer demands have increased: Need to respond
Slide 39: New World: strategic imperatives for operational excellence
New World: We have a number of strategic imperatives to deliver operational excellence and cost efficiency • Multi-sourcing • Leveraging scale and improving productivity • Building excellence in process management • Improving service experience
Slide 40: NUL driving towards efficient and effective performance
NUL is driving towards achieving both efficient and effective performance High 2007 Competitor A Efficiency Total expenses 2003 FUM Competitor B Competitor E Low 2002 Competitor C Competitor D Low High Effectiveness (IFA Service ratings)
Slide 41: We have made good progress
We have made good progress Customer Service Demand and Headcount 250 Comparison 2003-4 5400 200 Demand (Left Scale) 5200 5000 Life Operations 150 4800 Demand (activity hours) UK FTE 4600 100 4400 50 FTE (Right Scale) 4200 0 4000 Jan- Jun- Dec- Jun- 03 03 03 04 • Overall productivity increase of 40%
Slide 42: Our 2007 picture continues this progress
Our 2007 picture continues this progress across customer services and technology business units • Further operational cost savings of £55m by end 2007 • Further productivity increases of up to 50% • Improved service experience • Reduced UK headcount across customer service and technology business un
Slide 43: These 2007 objectives will be achieved through core strategies
These 2007 objectives will be achieved through 3 core strategies • Multi-sourcing - Offshoring - Outsourcing • Process Excellence • eCommerce
Slide 44: Customer service offshoring model
Our customer service offshoring model builds capability and flexibility • Major captive operational site in Pune, India - Started November 2003 - 450 people already employed offshore, building to 1,300 by end 2005 predominantly back office • Effective development of customer service offshore capabil
Slide 45: Offshoring brings significant financial benefit for NUL
Offshoring brings significant financial benefit for NUL Why Offshore? UK staff India staff Facility / Technology VAT Annualised costs costs supplier Saving costs 40% Cost 100%
Slide 46: Fundamentally transforming technology and change functions
We are fundamentally transforming our technology and change functions • Redefined business model for technology and change - 50:50 in-house vs outsource model • Selected two global outsourcing partners, based in India - Tata Consultancy Services (TCS) and Wipro IT Services • UK transformation partne
Slide 47: Process Excellence standardises and simplifies the business
Process Excellence enables us to standardise and simplify the business • Implementing a process excellence programme across customer services and more widely within NUL - Focus on customer needs - Simplify and standardise • LEAN and 6Sigma will deliver cost and quality benefits - Building significan
Slide 48: eCommerce offering enhances efficiency and intermediary experience
Our eCommerce offering has progressed well and will enhance efficiency and the intermediary experience • Our eCommerce developments are focused on the intermediary • The proportion of eBusiness will continue to increase - 20% of new business today and expected to grow to 70%+ by 2007 - e-servicing w
Slide 49: Successful transformation will result in
Successful transformation will result in: • Efficient and effective delivery - Further annualised cost savings of £55m from 2003 - Unit cost reductions in excess of 35% - Significant improvements in productivity, flexibility and quality • Recognised by customers and intermediaries for quality of ser
Slide 50: Norwich Union, an Aviva company
NORWICH UNION ari AVIVA campany
Slide 51: Mike Urmston: Driving for Value
Mike Urmston Chief Actuary Driving for Value
Slide 52: Driving for Value - Agenda
Driving for Value - Agenda • Building a flexible financing model • Improving efficiency of capital structure • Impact of non-profit Fund Merger Mike Urmston • Estate re-attribution • Annuitant mortality • PSB / ICA • Changing market • Cost savings • Management actions on New Business Jim Newman • Ma
Slide 53: Building a flexible financing model
Building a flexible financing model • Applying banking techniques and developing new financing tools - eg Securitisation • Capability built to use for Protection new business • Further options around existing business • Continuation of effective financing solutions • Use of re-insurance financing, s
Slide 54: Securitisation of New Business Strain
Securitisation of New Business Strain: market leading approach • Innovative financing arrangement with RBSG • Creates £200m facility, financed via conduit US dollar CP issuance • Creates matched funding for our new term and mortgage protection life insurance business • Provides alternative source to
Slide 55: Impact of Fund Merger
Improving efficiency of Capital Structure: Impact of Fund Merger • Good progress in merging Norwich Union Linked Life and Norwich Union Life and Pensions non-profit funds • 9 funds in total • Around 5m policyholders • Improves operational efficiency • Reduces solvency requirements by c£200m: freeing
Slide 56: Estate re-attribution
Improving efficiency of Capital Structure: Estate re-attribution • With-profit funds extremely strong with estate of £4.2bn, 30 June 2004 (CULAC £1.5bn, CGNU £1.4bn, NULAP £1.3bn) • CP 04/14 gives greater clarity from FSA on options and process involved and validates this option • Will continue to a
Slide 57: Annuitant Mortality: MSS Basis
Annuitant Mortality: MSS Basis • Strong MSS reserving basis with prudence in base table as well as assumption for future improvements • Future improvements in mortality based on medium cohort (males 100%, females 75%) but subject to overriding minimum of 0.5% p.a • Explicit, prudent allowance for an
Slide 58: Annuitant Mortality: Other Issues
Annuitant Mortality: Other Issues • Achieved Profits • Current actual experience in line with assumptions • Same assumption for future improvements in mortality as for MSS basis • Includes best estimate allowance for anti-selection • CMI Report 21 • Latest report from CMI indicates that “experience
Slide 59: Prudential Sourcebook Developments
Prudential Sourcebook Developments • ICA modelling capability developed for non profit business in Q1 04 • Initial estimates of ICA produced 30 June 04 • Results finalised on 30 September 2004 • Expecting no adverse impact on Shareholder Capital • With Profit realistic reporting - initial views on c
Slide 60: Implications of ICA modelling developments
Implications of ICA modelling developments • Market leading understanding established of risks to capital position has been gained • Shifted management focus from a traditional insurance model, focusing on APE and margin, to a banking model, focusing on return on capital • Clarified understanding of
Slide 61: Jim Newman, Finance Director: Driving for Value
Jim Newman Finance Director Driving for Value
Slide 62: The UK market is undergoing change
The UK market is undergoing change •With Profit business represented 46% of total Life and Pensions YTD NBM progression New Business Contribution (19% 1H04) 26.0% 26.0% 24.0% 24.0% 22.0% 22.0% •We have replaced this by strong actions to 20.0% 20.0% improve non profit: non profit margin 18.0% 18.0% i
Slide 63: Achieved substantial savings: more to come
Achieved substantial savings: more to come 2003 2004 2005 2006 2007 Acquisition cost ratio/ APE 31.0% 27.5% 26.5% 24.5% 22.0% Maintenance cost per policy 47.4 43.4 43.1 42.4 41.7 • Improving cost ratios reflect cost reduction actions which are further supported by future growth • Off-shoring, out-so
Slide 64: Expected benefits from initiatives
Expected benefits from initiatives Expected Benefits 2004 2005 2006 2007 Cumulative Benefits 32 76 108 130 • Benefits are expected to be realised through: • Business Services outsourcing • Operations offshoring • process excellence initiatives • realignment and cost reduction of the distribution mod
Slide 65: One off costs expected in 2004-2007
One off costs expected in 2004-2007 Costs of initiatives 2004 2005 2006 2007 One off Cost (64) (49) (28) (11) • One off costs incurred in 2004 are principally made up of: • severance payments • property vacation • retraining • change management • Costs will directly impact our NULS result
Slide 66: We are in a strong position
We are in a strong position Total Cost Ratio (includes commission)(FUM %) 1.80% 1.70% •Costs in line with our competitors. 1.60% 1.50% •NUL progress reflects the work already done on 1.40% the expense base. Norwich Union 1.30% Average Top 10 1.20% •Picture can be distorted by fluctuations in new 1.1
Slide 67: Range of returns on current Products
Range of returns on current Products IRR WP Annuity UL Bond Protection Pensions relative sales of NUL product Margin
Slide 68: Growing IRR embedded as key management target
Growing IRR embedded as key management target IRR Indicative Return from New Business 1% annual growth: 15% 15% target by 2007 Capital management Product mix Tools Product design 10% Commission Cost reduction 2004 2005 2006 2007
Slide 69: Management Actions on New Business
Management Actions on New Business • Enhanced capability for protection, supported by reduced commission on business not submitted electronically (Oct 2004) • Reduced commission on main Individual Pensions classes from 04/10/04 • Withdrew Group Your Pension and Group Your Pension Select in Q2 2003 •
Slide 70: Management actions on Existing Book
Management actions on Existing Book • We have potential value in our existing book (£3.7bn) • Focus on - persistency management - cost reduction - claims control - investment performance
Slide 71: Equity Release provides further value to the business
Equity Release provides further value to the business • We are market leaders - 40% market share • £1.8bn loan book, 96,000 customers • Embedded Value 30/6/04 £133m, LAOP £21m • Increased visibility in NU results under European Embedded Value
Slide 72: Summary: In a strong position to manage capital and deliver value
Summary: In a strong position to manage capital and deliver value • Market leading capital management capability and management of risk • Focused on deployment of capital to create value (IRR) • Successfully maintained new business profitability despite reduction in with-profits business • Huge pote
Slide 73: Gary Withers: Confident about continued success
Gary Withers Chief Executive Confident about continued success
Slide 74: Ready to drive value from future growth
Ready for future marketplace • Multi-product and multi-channel distribution strategy is the right formula and now being copied by competitors • Efficient operating platform • Modern financing and risk capability • Management capability Ready to drive value from future growth
Slide 75: The future is uncertain...
The future is uncertain... Sales GOLDEN? BENIGN? CO NT RA CT E STABILIS 1998 - 2003 2004 2005 2006/07
Slide 76: Whatever the future brings...
Whatever the future brings... BENIGN GOLDEN Leverage product Leverage scale & distribution & capital strength strength Our efficiency & Our brand flexibility drives & scale value drives value …we deliver value in both scenarios
Slide 77: Clear market leader in savings and insurance
Clear market leader in savings and insurance • Best brand and strongest distribution • Value based management – increase new business IRR to 15% in 2007 (12% 1H04) – reduce costs by £130m (2004-2007) – reduce headcount by over 20% (2002-2005) – scope to increase market share to 15-20% in the medium
Slide 78: Norwich Union, an Aviva company
NORWICH UNION ari AVIVA campany
Slide 79: Disclaimer
Disclaimer This presentation may contain certain “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. By their nature, all forward-looking statements involve risk and uncertai