Can Aviva convince the market, and its staff, of its Ireland strategy?

Next week, the insurance industry, investors and City analysts will be scouring Aviva’s third-quarter results statement for clues on how it intends to merge its Irish business with the UK.

Most of all, nearly 2,000 nervous staff in Ireland will be trying to work out whether they are likely to survive a redundancy programme that is expected to claim around 950 jobs.

Aviva rocked the market when it revealed its plans last week, which will see 180 administration and Ireland-based support roles for its European operations disappear over two years from March. The remaining redundancies will come from the Irish general and life assurance teams and represents the biggest job loss programme by a single company in Ireland since 2009.

If I look back over the last five or six years, I’ve seen at least two or three major insurers shake up their businesses and it causes disruption.”

Grant Ellis, Broker Network

An Aviva spokesman insists that “this is just a proposal at this stage” and that it is “business as usual for brokers and customers”.

But, given that group chief executive Andrew Moss has already complained that its Irish workers are paid a fifth more than those in the UK, the proposal will almost certainly become reality.

Poor morale, poor service?

And experienced brokers do not believe that current service levels can be maintained, at least over the course of the redundancy programme. This is one of a number of challenges that the new UK & Ireland chief executive, Trevor Matthews, faces in merging these two distinct geographies.

Broker Network chairman Grant Ellis says that productivity levels will inevitably fall as staff fear for their jobs. For example, claims are unlikely to be handled as quickly.

“If I look back over the last five or six years, I’ve seen at least two or three major insurers shake up their businesses and it causes disruption,” Ellis says.

“Individual people are affected and they tend to take their eye off the ball, so the backlog of work will get bigger. They should be 100% focused on the brokers and their ultimate customers, but instead they will worry about redundancy.”

Aviva’s Irish employees have demonstrated their anger since the announcement, union Unite has claimed, with every meeting held with staff resulting in a vote in favour of holding a ballot for industrial action.

Ellis does believe that the move is “sensible” in the long-term, as Ireland is not a huge market and this is similar to amalgamating a large UK city into the British division.

Get your tech right

But the group will have to improve its technology if the expected backlog is not to get even greater once the merger is completed.

“The challenge is to take costs out while maintaining a service for customers at a good-to-reasonable level,” Panmure Gordon analyst Barrie Cornes says. “They will have to make better use of smarter IT.”

The better technology available in the UK should help improve Ireland’s expense ratio, a measure of operational efficiency. At the moment, this is 19% in Ireland, nearly double the UK’s 10.5%.

But analysts at Exane BNP Paribas have warned in a note that cost savings, which they anticipate to be £30m a year, would be offset by lower revenues in Ireland.

This chimes with one of the key union arguments against the cuts, that Aviva should not be diminishing its presence in a market that made an operating profit of £32m in 2010.

Is it all just political?

The Exane note also pointed out that the decision might have been driven by political uncertainty. One of the reasons Aviva is thought to have put so many of its resources into Ireland was to take advantage of the low corporation tax. Given the country’s economic restructuring in the wake of the financial crisis and pressure from other EU states to increase that rate, those tax advantages might not last.

The thing that struck me about the UK and Ireland statement, and frequently [in other statements] from Aviva, is that whenever they mention savings they say that this will enable more competitive pricing.”

Richard Gradidge, Numis Securities

Richard Gradidge, an analyst at Numis Securities, adds that it is easier for Aviva to look for cost savings through redundancies in Ireland than in continental Europe due to lighter labour laws. As Aviva is looking to reduce prices, it was always likely to make savings where they could be pushed through quickest.

Gradidge warns that Aviva group and UK bosses Moss and Matthews will be under pressure for any cost savings to show up in the company’s earnings. At present, it seems that Aviva is simply looking to pass the savings on to customers.

“The thing that struck me about the UK and Ireland statement, and frequently [in other statements] from Aviva, is that whenever they mention savings they say that this will enable more competitive pricing,” Gradidge notes. “This suggests that the savings will be invested in growth and ensuring greater sales volume.”

Aviva might well be making its business more efficient, but it will have to ease the concerns of brokers, staff and investors quickly if the insurance giant is to make the changes work.