Viva Aviva

Life insurance companies are notoriously difficult to fathom. Sometimes they have three sets of accounting processes, including an assumption on new premiums written but not yet collected. In the case of Aviva, things are likely to become a little easier to understand as next year will see the composite insurer reverting to an accounting standard used by other major insurers, so that will make comparisons easier.

However, one point comparison that is straightforward is the dividend yield on Aviva’s shares – it is comfortably ahead of rivals such as Prudential and Old Mutual at approaching 7 per cent. What's equally important is that the dividend payout, which is likely to cost about £705m for 2010, does not look in danger of being reduced.

Aviva has a healthy balance sheet; so much so that, of the major life assurers, it did not need to tap shareholders for extra funds during the financial crisis. Sure, there are some worries that tighter legislation may force insurers to keep more capital in reserve to meet potential downturns, but the current regulations are already pretty strict. And Aviva has a useful sum of £3.6bn over and above the existing regulatory requirements. Basically this means that it has a comfortable buffer against any further tightening in regulatory requirements.

Maintaining the revenue stream to support the dividend has been a priority for Aviva's bosses. Considerable work has been done to reduce the number of legacy systems (each one a back office operation designed to service a specific product) that Aviva runs. In addition, the Norwich Union general insurance side has been fully integrated into the mainstream operation. In fact, the group should deliver £400m in cost and efficiency savings by the end of 2012. What's more, a decision to close the final salary staff pension scheme to new entrants from April will reduce the pension fund deficit and boost the group’s net asset value by around £275m. It will also cut future funding costs by £50m a year.

Aviva has also finished a major overhaul of the way it operates. The non-life side – what used to be Norwich Union – remains broadly the same. The rest of the group used to trade in 28 countries and used 40 different brands. But that is likely to be cut to about 12 countries and the test to justify Aviva’s presence in any market will be either a contribution of $100m (£64m) to profits and a minimum 12 per cent return on capital or a franchise value of more than $1bn.

Current trading looks pretty solid too. In the nine months to end September, worldwide sales were up by 5 per cent at £35.9bn, and the group remains on target to generate £1.5bn of extra capital from trading in 2010; a target that it will renew for 2011. The general insurance side has performed well, helping to improve its combined operating ratio – which measures claims paid out as a percentage of premiums – to 97 per cent, better than the group's target of 98 per cent. The only weak performer has been sales of savings bonds, which fell to £1.3bn in the first nine months, 20 per cent lower than the same period in 2009.