News Column

Aviva PLC announces Q3'12 IMS

Nov 8 2012 12:00AM



LONDON -- (Marketwire) -- 11/08/12 --

STARTNews ReleaseAviva plcInterim management statement for the nine months to 30 September 20128 November 2012Dear shareholders,Aviva plc today announced its Q3 Interim Management Statement where theoperating profit trend is broadly in line with the half year.More importantly, I am pleased to report that we have taken, and arecontinuing to take, firm and decisive actions to transform Aviva. Thekey 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 streamsReporting on each of these in turn, the CEO search process is now welladvanced and in line with the original timetable set out by the Board.Shortlisted candidates are in the process of being interviewed bynon-executive directors, and on completion,we will then seek FSAapproval for the Board's preferred candidate.I am also pleased that we are getting good traction on building ourfinancial strength. Economic capital surplus* as at the end of October2012 was around GBP5.3 billion, up by GBP0.8 billion from the half yearand by GBP1.7 billion from the beginning of the year - in ratio termswe are currently around 146% versus our target range of 160-175%. IGDcapital surplus at the end of October was GBP3.7 billion, up GBP0.6billion from the half year and with a ratio of 167%. In the quarter wealso sold down part of our Italian sovereign bond holdings.In the quarter we reduced our Delta Lloyd holdings and announced thesale of our business in Sri Lanka. While we are not yet in a positionto make firm announcements on further non-core disposals, the progressis in line with planned timelines.We can now confirm that we are in discussions with external partieswith respect to our US life and annuities business and these are beingactively pursued.While not agreed, any such sale would come at asubstantial discount to IFRS book value, but would generate significanteconomic capital surplus. We believe any such sale would be in the bestinterests of the Group and we are hopeful of a satisfactory resolutionreasonably soon.Beyond this, there are eight smaller disposals which are now morelikely to be in 2013, and we expect all to be done without asignificant impact on the Group's IFRS book value.The transformation and earnings enhancement process continues apace. Akey initiative is the turnaround of our 27 "amber" business cells. Inthe quarter we assigned our most talented high-potential executives toeach cell and they produced a plan for each. The analysis tended toshow that within the cells we had a mix of performing as well asuneconomic or poorly performing sub-segments or products. The requiredactions ranged from revenue-enhancement, cost or loss reduction,capital withdrawal, or leveraging technology or the online space. Weare now in the process of refining and implementing these plans andbuilding the results into our 2013 and 2014 plans, and will be able toprovide a more comprehensive update at the 2012 full-year results.Unsurprisingly, getting traction on the change initiatives at Aviva hastaken time.On the one hand we are blessed with a terrific brand and reallyprofessional front-line staff who have the customer's interest fully atheart. For example, visiting the regional UK and international centresreveals an incredibly dynamic environment and a strong marketing ethic.The "systems thinking" initiatives are now well embedded in the cultureof the UK business.* The economic capital surplus represents an estimated position. Thecapital requirement is based on Aviva's own internal assessment andcapital management policies. The term 'economic capital' does not implycapital as required by regulators or other third parties. Pensionscheme risk is allowed for through five years of stressedcontributions.Chairman's review continuedOn the other hand, culturally the organisation has been more used tocollective decision making and has moved more slowly as a result. Thisinitially inhibited progress on some of the programmes possiblyexacerbated by an unwieldy centre and support infrastructure, with morebureaucracy than desirable. Although it will take time to change this,the pace of change is accelerating and we are beginning to make realprogress.There are nine specific transformation programmes and I'll cover eachin turn:Backing Winners - This aims to develop new revenue opportunities in thedeveloped markets, and involves a team of external professionals aswell as the transformation team. In addition there is a separateinitiative to invest new capital and expense resources in a few highgrowth 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 seekingat least GBP400 million of cost savings as well as the reallocation ofcapital from suboptimal segments. We have already removed four levelsof middle management in the UK and the programme is being extendedinternationally. We have also removed the regional layer of ourbusiness. In addition the review of head office, support activities andnon-staff costs is well advanced. By the end of the year we will havelocked-in a run rate cost reduction of GBP250 million and have specific2012 and 2013 plans in place on the balance. We are also in the processof producing a more efficient 2013 capital plan.Back Books - We are aiming strategically and tactically to reduce thedrag on economic return and concentration risk from capital-hungry,sub-optimal, or non-current legacy portfolios. Favourable economicoutcomes in this area are inherently difficult, but several modesttangible opportunities have been identified, and these are being workedthrough.Life Excellence - It is critical that we leverage best-in-groupcapability across all life segments. Specific initiatives includelaunching existing products into new markets, product re-pricing,improved underwriting standards, reallocation of capital, improved lossmitigation and cost reduction. The organisational team is now in placeand key positions assigned.GI Excellence - Given our largest general insurance businesses are inthe UK and Canada, it is important that we implement best-in-classtechniques across both as well as across the smaller GI segmentsinternationally. Specific initiatives include fully deploying existingrisk-based pricing systems, improved claims efficiency and thedeployment of sophisticated fraud reduction systems. This involvesadditional responsibility for existing professionals from the UK andCanada.Assets/Aviva Investors - We have initiated a programme to review theoverall asset portfolio of the group and the appropriate mix for a lowinterest rate environment. As part of this review, we will beundertaking additional work with Aviva Investors to develop a morecompelling external proposition.While Aviva Investors continues toserve the group well, it has fallen short of our aspirations to expandthe business externally.Product Tails - As with most firms we have a natural 80/20 to ourbusiness with a significant tail of products and segments that makelittle contribution to our success and in many cases erode value. Thisprogramme aims to eliminate these tails. This is a relatively recentinitiative and while an initial analysis has been conducted, itrequires further analysis and solutions.IT and Operations - This essentially involves a complete reappraisal ofour technology strategy and architecture, and also reviews our currentIT spend level of over GBP800 million per annum. The review has now beencompleted, has been formally approved, and will be implemented in threephases. As a result we will eliminate over 800 applications from ourcurrent legacy estate, adopt a more modern digital architecture,improve service standards and reliability and reduce IT revenue andcapital expense costs. In addition there is a separate programme tooptimise spend on the various operational change initiatives across theGroup which will result in more effective implementation, theelimination of waste and reduced costs.Chairman's review continuedPerformance Ethic - Aviva requires a more effective performanceculture. As such we are seeking significant change in the areas ofculture and values, performance targeting and measurement,communication, and remuneration practices across the Group. This workis well advanced. Additionally, the 2012 engagement and values surveyshave been completed by staff. All senior management have beencategorised in a nine-box performance and potential matrix, andforce-ranked on a 20/70/10 basis, and systems have been designed todifferentiate remuneration according to ranking, subject to furtherRemuneration Committee discussion and approval.Trading conditions though remain difficult and results have been mixedacross the Group. We nevertheless have strong positions in the UK,Canada, France and Singapore and our performance has been good in thesemarkets. In our life business in Spain and Italy markets are tough,driven by the external economic environment, with new business volumesconsiderably reduced. In Ireland, while a number of good actions areunderway to improve performance, the results are not yet acceptable.Although conditions will remain challenging, the strategic andtransformational programmes should enable us to improve our financialperformance and value significantly, making Aviva a better business forour customers, our people, our partners and a better investment for ourshareholders.John McFarlaneChairmanClick on, or paste the following link into your web browser, to viewthe associated PDF document. contacts Media contacts TimingsPat Regan Nigel Prideaux Real time media+44 (0)20 7662 2228 +44 (0)20 7662 0215 conference call: 0730 hrs Analyst conference call: 0930 hrsCharles Barrows Andrew Reid Tel: +44 (0)20 7136 2051+44 (0)20 7662 8115 +44 (0)20 7662 3131 Conference ID: 3528346David Elliot Sue Winston+44 (0)207 662 8048 +44 (0)20 7662 8221END This information is provided by RNS The company news service from the London Stock ExchangeEND

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