CGNU, the UK's largest insurer, yesterday paid the price for diving headlong into low-profit stakeholder pension business, with a fall in new business margins in the first three months of the year.
UK new business margins declined to 23.3 per cent from 25.8 per cent a year ago. CGNU, already under fire for plans to slash its dividend and change its name to Aviva, saw its shares fall 6 per cent to 728p.
CGNU has become the largest provider of low-cost stakeholder pensions, with 20 per cent of the market, since they were launched in April 2001. One of the ways it has gained market share is by offering higher commissions to intermediaries than some of its main rivals. CGNU does not expect positive cash flow from stakeholders, which can charge only 1 per cent a year, for eight to ten years.
Philip Scott, director of the UK life business, admitted that the rapid expansion of CGNU's stakeholder and other pension business had hit margins. He defended CGNU's policy on commissions, saying: "Our commissions tend to be average or slightly above. But we don't pay the highest commissions and since April we have reduced them."
Stakeholder new business helped to drive CGNU's UK life and pensions sales up 15 per cent to £339m on an annual premium equivalent (APE) basis, which takes account of current and future profits.
While the increase in business in the UK's mature market was viewed as impressive, analysts were disappointed with CGNU's performance in the rest of Europe, which the company had identified as a key growth area.
Roman Cizdyn, an analyst at Commerzbank, said: "Richard Harvey [CGNU's chief executive] told investors at the AGM that he was cutting their dividend in order to generate profitable growth. Well, it hasn't been that profitable and there has not been that much growth."
Growth in Spain, Italy and France was below expectations and some parts of Easter Europe, where CGNU hopes to attain strong growth, saw negative new business margins. Worldwide new business sales rose 10 per cent on an APE basis.
CGNU was lifted in the UK by its bancassurance links with Royal Bank of Scotland. Compared with a year ago, when the RBS deal was signed, CGNU's life and pension sales through UK joint ventures rose 157 per cent to £216m. CGNU said it planned to extend the venture with RBS to include sales of unit trusts and Isas from early 2003.
But total new business sales in the UK fell from £2.2bn to £2bn, reflecting lower with-profit premium bond and investment sales.
CGNU's new business figures compare unfavourably with those from rivals Prudential and Legal & General. The two did not publish information about margins, but they are thought to have maintained previous levels. CGNU's margins are expected to recover in the course of the year as it has increased sales of lucrative products such as with-profits bonds in recent weeks.