More on Aviva
Aviva: Q1 new business
Aviva, announced what appeared to be healthy new business figures for the first quarter of 2005; worldwide life and pensions sales growing by 17% over the same period last year. A closer examination of the figures revealed that growth was due to a change in reporting yardstick, on the traditional APE basis growth was only 11%.
The company has changed the basis of calculating new business figures, abandoning the industry standard APE in favour of calculating the present value of new business premia. This is calculated as the present value of new regular premia plus 100% of single premia. The company says the “calculations are made using assumptions consistent with those used to determine new business contribution”.
The immediate impact of the change in the yardstick used to measure new business volumes is to flatter the figures. Aviva does disclose new business figures on an APE basis (buried amongst the supplementary information) and on an APE basis Aviva’s new business figures are a lot weaker: life and pensions growth of 11% and investment sales of 11%.
Apart from flattering the figures and obscuring comparisons with other firms in the industry it is not clear why Aviva has decided to change the basis of measurement, we believe significant changes in accounting policies need explanation, Aviva makes a cursory note that “all references to sales in this announcement refer to the present value of new business premiums unless otherwise stated”.
Net present value (NPV) is a method of calculating the current value long term cashflows but it will flatter insurers new business calculations in two ways:
1. Single premium products (which form the majority of life assurers sales) will be treated as an immediate sale-ie at 100% of value. APE takes only 10% of single premia paid as a sale in any year.
2. Under APE, regular premia paid are accounted for in full as a sale in the year in which the premium is paid. If no payment is received it is not treated as a sale. NPV must necessarily assume that future premia are paid (these values are discounted at a set interest rate to arrive at the present value). The question is, what happens if customers stop paying halfway? While we have no doubt that Aviva has made some adjustment for this factor in its calculations it does not see fit to disclose this and as such no assessment can be made as to whether the assumption is realistic.
In addition, the assumptions on which the NPV calculations are based will change from time to time making comparisons with the past more difficult. (This is particularly so in the case of the interest rate which will need to change as as market rates chnage.) NPV is intended to make a comparison between alternatives at a particular point in time.
Not surprisingly, the market reacted negatively to the announcement, the share dropping almost 4% to close at 577.5p. The life assurance industry has tested public confidence in the past, dodgy accounting will not help restore this in a hurry.
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