Aviva Plc Value Stock - Dividend - Research Selection
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Description of the company
History and development of Aviva
Aviva plc, a public limited company incorporated under the laws of England and Wales, is the holding company of the Aviva Group. The Group provides customers with long-term insurance and savings, general and health insurance, and fund management products and services. Our purpose is to free people from fear of uncertainty. The long-term strategic framework for Aviva is based on our investment thesis of cash flow plus growth.
The Group was formed by the merger of CGU plc and Norwich Union plc on 30 May 2000. CGU plc was renamed CGNU plc on completion of the merger, and subsequently renamed Aviva plc on 1 July 2002. CGU plc and Norwich Union plc were both major UK-based insurers operating in the long-term insurance business and general insurance markets. Both companies had long corporate histories.
CGU plc was formed in 1998 from the merger of Commercial Union plc and General Accident plc. General Accident plc was incorporated in 1865. Commercial Union was incorporated in 1861 and in 1905 acquired Hand in Hand, which was incorporated in 1696.
Norwich Union plc was founded as a mutual society in 1797, and had expanded as a global business by the 20th century. In 1997 it demutualised and became an English public limited company.
On 10 April 2015, the Group completed the acquisition of Friends Life Group Limited through an all share exchange. Further details can be found in ‘IFRS Financial Statements – Note 2 – Subsidiaries’.
Our strategic framework
Our strategic framework increases the focus on the things that really matter and put the customer clearly at the centre. It provides clear direction across all our markets for how we run our business. Our overarching purpose is to free people from the fear of uncertainty. And we have a clear strategy to deliver our investment thesis of cash flow growth by always putting our customers first. Our Strategic Anchor is the ‘what we do, how we do it and where we do it’ of our strategy – True Customer Composite, Digital First and Not Everywhere.
· True Customer Composite
Meeting all customer needs across life, general, accident and health insurance and asset management.
· Digital First
Emphasising customer experience driven by digital – online and mobile.
· Not everywhere
Focusing only in markets and segments where we can win.
This is all underpinned by our values of kill complexity, care more, never rest and create legacy, the core beliefs at the heart of how we do business.
Our business operates across four main market sectors – life insurance and savings; general insurance, accident and health insurance and fund management, providing services to over 33 million customers worldwide. We operate in 16 different countries and have approximately 29,600 employees.
The Group’s operating segments are determined along market reporting lines. The operating segments are: UK & Ireland; France; Poland; Italy, Spain and Other; Canada; Asia; and Aviva Investors. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group Chief Executive Officer (CEO) for the operating segment for which they are responsible. Due to the size of the UK & Ireland segment, it has been split into separate life and general insurance segments, which undertake long-term insurance and savings business and general and health insurance respectively. Aviva Investors, our fund management business, operates across most markets providing fund-management services to third-party investors and to our long-term and general insurance businesses.
The activities of the acquired Friends Life business are included within the UK & Ireland Life, Asia and Aviva Investors segments.
Life insurance and savings business
Long-term insurance and savings business accounted for approximately 82% of our total worldwide sales from continuing operations for the year ended 31 December 2015. We reported total long-term insurance, savings and health new business sales from continuing operations of £33.1 billion1.
In the UK we have a market share of 13.32% based on annual premium equivalent (APE) data as at 30 September 2015. We also have life insurance businesses in Ireland, France, Italy, Spain, Poland, Turkey and Asia. Further details of our position in each market are set out in the market sections below.
Brands and products
In 2010, we brought all our businesses together under the Aviva brand, which remains the case for the vast majority of our products and services.
Our long-term insurance and savings businesses offer a broad range of life insurance and savings products. Our products are split into the following categories:
· Pensions – a means of providing income in retirement for an individual and possibly his or her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.
· Annuities – a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or index-linked.
· Protection – an insurance contract that protects the policyholder or his or her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole of life and critical illness cover and group schemes.
· Bonds and savings – accumulation products with single or regular premiums and unit-linked or guaranteed investment returns. Our product ranges include single premium investment bonds and regular premium savings plans.
· Investment sales – retail sales of mutual fund type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).
· Other – includes equity release contracts.
Some of our insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as ‘participating’ contracts.
General insurance and health insurance
General insurance and health insurance accounted for 18% of our total worldwide sales for the year ended 31 December 2015. In the year ended 31 December 2015, we reported general and health insurance net written premiums of £7.5 billion1, 5.
We are a leading general insurer in the United Kingdom and Canada with 12.4%3 and 8.4%4 market share respectively. We also have general insurance operations in France, Italy, Ireland, and Poland. We sell health products in the UK, Ireland, France, Singapore and Indonesia. In the year ended 31 December 2015, 52%5 of our total general insurance and health new business was written in the UK.
Brands and products
Our general insurance business operates under the Aviva brand globally and concentrates on the following products:
· Personal lines – motor, household, travel and creditor;
· Commercial lines – fleet, liability and commercial property insurance;
· Health insurance – private health insurance, income protection and personal accident insurance, as well as a range of corporate healthcare products; and
· Corporate and specialty risks – products for large clients or where the risk is specialised.
Aviva Investors, our fund management business, provides fund management services to Aviva’s long-term insurance and savings, and general insurance operations as well as to third-party investors. The fund management operations are in the UK, Europe, North America and Asia. All sales of retail fund management products are included in our long-term insurance and savings business sales.
Aviva Investors was ranked 48th globally by assets under management6. Total worldwide funds managed by Aviva Investors, at 31 December 2015, was £290 billion. The substantial majority of this relates to Aviva’s insurance and savings operations.
Brands and products
Aviva Investors operates under a single brand across the majority of the Aviva Group’s markets. Its products cover a broad range of asset classes. In Europe, this includes open-ended collective investment schemes which are domiciled in France, Luxembourg and Poland; while in the United Kingdom, this includes segregated mandates and specialist funds for pension schemes, local authorities and insurance companies, as well as retail and wholesale products. Other offerings include specialist property funds and money market funds.
Customers can buy our products through a range of distribution channels, including:
· Direct – in many of our markets, customers can buy our products over the telephone or via the internet. This method of distribution is most commonly available for simple products which do not require advice.
· Direct sales force – in some of our European and Asian markets we operate direct sales forces that only sell Aviva’s products and the sales forces receive commission on the products they sell.
· Intermediaries – we offer a range of long-term insurance, savings, retirement, general insurance and health insurance products which can be bought through an intermediary, such as an independent financial adviser or an insurance broker. Subject to regulatory requirements, intermediaries receive a commission on sales of Aviva’s products.
· Corporate partnerships, bancassurance and joint ventures – Aviva is a corporate partner for many organisations, including banks and other financial institutions, who wish to offer their customers insurance products. We have various distribution agreements with bancassurance partners and joint ventures across the markets in which we operate. In return for offering our products to their customers, the bank or joint venture partners receive a commission as a percentage of sales and in some cases achieve extra commission if agreed target levels of sales are met. Certain agreements have a profit sharing element based on a predetermined percentage. In some cases, if the agreed targets are not met, certain terms of the contract can be renegotiated. Under the joint venture agreements, the cost of running the venture are often split between the partners.
Further details of the distribution channels specific to each market are included in the following market analysis.
UK & Ireland Life
Business overview and strategy
On 10 April 2015, the Group completed the acquisition of Friends Life Group. Integration of the Friends Life UK business is in progress.
The UK business is a leading long-term insurance and savings provider with an overall market share of 13.3%7, based on annual premium equivalent (APE) data as at 30 September 2015. The Irish business is a large life and pensions provider in Ireland.
Our strategy in the UK is to offer great value to our customers through our market leading expertise in Retirement, Corporate Benefits, Protection and Health products, continue to improve cash generation and deliver profitable growth whilst continuing to integrate Friends Life and realise synergies.
Our Irish long-term business is now focused primarily on distribution through intermediaries. On 1 January 2015, following approval from the High Court of Ireland in December 2014, the Irish business, (previously within Aviva Life and Pensions Ireland Ltd) was transferred to Aviva Life and Pensions UK Ltd (UKLAP) becoming a branch of UKLAP.
Market and competition
Over the last few years, Auto-Enrolment, pension freedoms and the Department of Work and Pensions (DWP) charge cap have transformed the way that long-term savings products are bought and sold in the UK.
The changes to annuities announced by the UK Chancellor of the Exchequer in the Budget in March 2014 have given increased flexibility to how customers can access their pension since coming into effect in April 2015. These changes are having a significant impact across the market and have seen many customers defer their decision regarding their pension, driving a general decline in the market for individual annuities. The Department of Work and Pensions (DWP) charge cap of 75 basis points came into force in April 2015, and the removal of active member discounts (AMDs) commences from April 2016. We implemented these changes in 2014, ahead of the regulatory requirement.
The UK long-term savings market is highly competitive and we consider our main competitors to be Standard Life, Prudential, Legal & General, Scottish Widows, JRP Group and Royal London.
Since the return to growth in the life and pensions market in Ireland in 2013, there has been continued and increasing growth in 2014 and 2015. The life insurance market in Ireland is relatively concentrated. We consider our main competitors to be Bank of Ireland Life, Irish Life, Zurich Life and Friends First.
In the UK, we provide a comprehensive product range focused on both the consumer and corporate markets. The pensions and retirement products we offer include personal pensions, equity release, annuities and income drawdown. Our annuity offerings include immediate life, enhanced, fixed-term annuities and with-profits pension annuities. We provide a number of traditional life insurance products, including level-term, decreasing-term (with or without critical illness), guaranteed whole of life insurance, over 50s life cover and income protection. Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, investments with guarantees and with-profits products. A direct to consumer platform was launched in June 2015, offering new retirement propositions and investment products
In Ireland, our long-term insurance and savings business offers a wide range of products with our focus being on protection, annuities and pensions and savings products. Our protection products include life insurance, mortgage protection and specified illness. The pensions and savings range covers retirement and investment products and is delivered by taking advantage of the Aviva Investors fund propositions.
We have a multi-distribution strategy, which means we sell our products through intermediaries, corporate partners, in the workplace, and directly to customers.
Our direct to consumer platform was launched in June 2015, offering new retirement propositions and investment products.
In the UK, we have exclusive distribution deals for the sale of protection products with Royal Bank of Scotland, Barclays, Santander, Tesco, the Post Office, Connells, Countrywide, and LSL estate agents.
We remain committed to building on our existing relationships and distribution partnerships as well as growing our workplace and direct channels.
In 2015 we also launched Aviva Life Protection Solutions to advisers and customers in the UK, which offers flexible cover with all policy documents stored online.