Aviva plc FY19 results - part 2 of 5

RNS Number : 0606F
Aviva PLC
05 March 2020
 

START PART 2 of 5

Page 1

Contents

Overview

Page

Key financial metrics

02

1  Solvency II return on equity

03

2  Solvency II capital and cash

04

i  Operating capital generation: Solvency II basis

04

ii  Solvency II future surplus emergence

05

iii  Cash remittances

06

iv  Centre liquidity

06

3  Solvency II position

07

i  Solvency II position (shareholder view)

07

ii  Movement in Solvency II surplus

08

iii  Diversified SCR analysis

09

iv  Solvency II sensitivities

10

v  Solvency II net asset value

11

vi  Solvency II regulatory own funds and debt leverage

11

4  Controllable costs

12

5  Profit and earnings per share

13

6  Divisional performance

14

i  UK Life and Investments, Savings & Retirement

14

ii  General Insurance

18

iii  Europe Life

23

iv  Asia Life

25

7  Life business profit drivers

27

Financial supplement

28

A  Income & expenses and IFRS capital

29

B  IFRS financial statements and notes

38

C  Analysis of assets

93

Other information

110

Alternative Performance Measures

111

As a reminder

Throughout this report we use a range of financial metrics to measure our performance and financial strength. These metrics include Alternative Performance Measures (APMs), which are non-GAAP measures that are not bound by the requirements of IFRS and Solvency II. Further guidance in respect of the APM's used by the Group, including a reconciliation to the financial statements (where possible), can be found within the Other Information section.

 

At our capital markets day in November 2019 we announced robust financial targets focussed on economic value and that we have simplified our operating model into five new business divisions (Investments, Savings & Retirement; UK Life; General Insurance; Europe Life; and Asia Life) from 2020.

 

Investments, Savings & Retirement will bring together Aviva Investors and the UK Savings & Retirement business which is currently reported within UK Life. General Insurance will include our Europe and Asia general insurance operations as well as UK General Insurance and our Canadian general insurance business. Europe Life and Asia Life will only include our Europe and Asia life and health businesses.

 

In the Overview section of this report, our 2019 performance against our new targets has been presented having regard to the new divisions. In section 6.i, UK Life and Investments, Savings & Retirement have been presented together for both the Solvency II operating capital generation and Solvency II return on capital metrics. This is consistent with the targets presented at the capital markets day. Other key performance indicators (KPIs) have been presented separately for UK Life and Aviva Investors within section 6.i. Sections 6.ii to 6.iv set out the performance of General Insurance, Europe Life and Asia Life respectively.

 

In the 2019 Annual Report and Accounts (including IFRS financial statements), we continue to report the results of our businesses by market (UK Life; Aviva Investors; UK General Insurance; Canada; Europe and Asia) on the basis they were managed in 2019. Section A of the financial supplement in this report includes a reconciliation between Group adjusted operating profit as presented in the Overview (section 6 - Divisional performance) to Group adjusted operating profit as presented in B6(a) Segmental information.

 

All references to 'Operating profit' represent 'Group adjusted operating profit'.

 

# symbol denotes key financial performance indicators used as a base to determine or modify remuneration.

denotes APMs which are key performance indicators. Following a review of the Group's APMs in 2019, we have made certain changes to ensure that they remain relevant and useful to shareholders. These changes are outlined within the Other Information section.

 

All percentages, including currency movements, are calculated on unrounded numbers so minor rounding differences may exist.

A glossary explaining key terms used in this report is available on www.aviva.com/glossary

 

 

Page 2

 

Profit


2019
£m

Restated1

 2018
£m

Sterling % change

Operating profit2,‡#

3,184

6%

Operating earnings per share2,3‡#

60.5p

56.2p

8%

IFRS profit before tax attributable to shareholders' profits

3,374

2,129

58%

Basic earnings per share

63.8p

38.2p

67%

Capital Position


31 December 2019

31 December 2018

Change

Estimated shareholder Solvency II cover ratio4,‡#

206%

204%

2pp

Estimated Solvency II surplus4

£12.6bn

£12.0bn

5%

Solvency II net asset value per share4

423p

392p

8%

Solvency II debt leverage

31%

33%

(2)pp

Dividend


2019

2018

Sterling % change

Final dividend per share

21.40p

3%

Total dividend per share

30.90p

30.00p

3%

Solvency II basis: Operating capital generation (OCG)‡# and Cash remittances‡#


Solvency II Operating capital generation

Cash remittances


2019
£m

2018
£m

Sterling % change

2019
£m

2018
£m

Change

Group

2,259

3,198

(29)%

2,597

3,137

(17)%

Solvency II basis: Operating own funds generation and Return on capital/equity


Solvency II Operating own funds generation

Solvency II Return on capital/equity


2019
£m

2018
£m

Sterling % change

2019
%

2018
%

Change

UK Life and Investments, Savings & Retirement

1,314

1,663

(21)%

9.5%

11.3%

(1.8)pp

General Insurance

628

532

18%

14.0%

11.7%

2.3pp

Europe Life

574

384

50%

10.3%

6.9%

3.4pp

Asia Life

187

144

30%

12.7%

9.7%

3.0pp








Group5

2,257

2,022

12%

14.3%

12.5%

1.8pp

Expenses


2019
£m

Restated1

2018
£m

Sterling % change

Operating expenses

4,119

4,138

-

Controllable costs

3,939

3,968

(1)%

Value of new business: Adjusted Solvency II basis (VNB) and Present value of new business
premiums (PVNBP)




VNB



PVNBP


2019
£m

2018
£m

Sterling % change

2019
£m

2018
£m

Sterling % change

UK Life

592

15%

Europe Life

414

517

(20)%

13,772

12,641

9%

Asia Life

206

189

9%

3,057

2,656

15%

Other

12

15

(19)%

1,266

1,520

(17)%

Total

1,224

1,202

2%

45,665

40,763

12%

General insurance combined operating ratio (COR) and Net written premiums (NWP)




COR



NWP


2019

Restated1

2018

Change

2019

2018

Change

United Kingdom

97.9%

94.6%

4,218

4,193

1%

Canada

97.8%

103.1%

(5.3)pp

3,061

2,928

5%

Europe

95.7%

93.5%

2.2pp

2,017

1,985

2%

Group6

97.5%

97.2%

0.3pp

9,309

9,114

2%

‡ Denotes Alternative Performance Measures (APMs) which are key performance indicators of the Group. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

#  Denotes key performance indicators which are used by the Group to determine or modify remuneration. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

1   During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax attributable to shareholders' profit. Following the change in the definition of Group adjusted operating profit, COR, operating expenses and operating earnings per share have also been restated to include the amortisation and impairment of internally generated intangible assets. Comparative amounts have been restated resulting in an increase in prior period COR of 0.6%, an increase in prior period operating expenses of £112 million and a reduction in prior period operating earnings per share of 2.2 pence.

2  Group adjusted operating profit is a non-GAAP APM which is not bound by the requirements of IFRS. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

3  This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

4  The estimated Solvency II position represents the shareholder view only. See section 3 for more details.

5  Includes Group centre, debt costs and other items not allocated to the markets.

6  Group includes Asia & Other net written premiums of £13 million (2018: £8 million)

 

 

.

 

Page 3

 

1 - Solvency II return on capital/equity

At our Capital Markets Day in November 2019, we announced robust financial targets focused on economic value, to measure our progress in meeting our key strategic initiatives. Solvency II return on capital / equity was introduced to measure return generated on shareholder capital at business division and Group level and is used by the Group to assess performance and growth, as we look to deliver long-term value for our shareholders.


Operating own funds generation



2019

New
business (life)
£m

Existing business (life)
£m

Non-life
capital generation
£m

Other1

£m

Total
£m

Opening
own funds
£m

Return on capital/equity
%

UK Life and Investments, Savings & Retirement

381

9.5%

General Insurance

-

-

548

80

628

4,498

14.0%

Europe Life

167

240

-

167

574

5,548

10.3%

Asia Life

111

57

-

19

187

1,470

12.7%

Group centre costs and Other

-

16

(187)

9

(162)

(1,800)

n/a

Solvency II return on capital (unlevered) at 31 December

659

507

431

944

2,541

23,551

10.8%

Less: Senior debt



(12)

-

-

Subordinated debt





(272)

(6,979)

-

Solvency II operating own funds generation at 31 December





2,257



Direct capital instrument and Tier 1 notes



(34)

(731)

-

Preference shares2





(38)

(450)

-

Net deferred tax assets





-

(95)

-

Solvency II return on equity at 31 December





2,185

15,296

14.3%

Less: Management actions and other1





(944)

-

(6.2)%

Solvency II return on equity (excl. management actions)





1,241

15,296

8.1%

1  Other includes the impact of capital actions and non-economic assumption changes.

2  Preference shares includes £21 million of dividends and £250 million of capital in respect of General Accident plc.


Operating own funds generation



2018

New
business (life)
£m

Existing business (life)
£m

Non-life
capital generation
£m

Other1

£m

Total
£m

Opening
own funds
£m

Return on capital/equity
%

UK Life and Investments, Savings & Retirement

347

11.3%

General Insurance

-

-

532

-

532

4,535

11.7%

Europe Life

253

256

-

(125)

384

5,539

6.9%

Asia Life

89

76

-

(21)

144

1,477

9.7%

Group centre costs and Other

-

31

(344)

(90)

(403)

(1,503)

n/a

Solvency II return on capital (unlevered) at 31 December

689

835

299

497

2,320

24,737

9.4%

Less: Senior debt





(3)

-

-

Subordinated debt





(295)

 (7,922)

-

Solvency II operating own funds generation at 31 December





2,022



Direct capital instrument and Tier 1 notes





(36)

 (731)

-

Preference shares2





(38)

 (450)

-

Net deferred tax assets





-

 (84)

-

Solvency II return on equity at 31 December





1,948

15,550

 12.5%

Less: Management actions and other1





(497)

-

(3.2)%

Solvency II return on equity (excl. management actions)





1,451

15,550

9.3%

1  Other includes the impact of capital actions and non-economic assumption changes.

2  Preference shares includes £21 million of dividends and £250 million of capital in respect of General Accident plc.

In line with targets presented at Capital Markets Day, we have presented a combined Solvency II return on capital for the UK Life and Investments, Savings & Retirement business divisions.

Solvency II return on equity has increased by 1.8pp to 14.3% over 2019 (2018: 12.5%) mainly driven by:

· In UK Life and Investments, Savings & Retirement, overall return on capital has reduced by 1.8pp to 9.5% largely due to adverse experience on protection business and no benefit from transitional relief on new business. In 2018, new business written contributed to the calculation of transitional measures (in line with clarification issued by the PRA since 2017) but it is no longer applicable to the Group in 2019.

· In the General Insurance business division, return on capital increased by 2.3pp to 14.0% driven by Canada, where benefits from the extensive profit remediation plan put in place towards the end of 2017 are materialising.

· In the Europe Life business division, return on capital has increased by 3.4pp to 10.3%. This was primarily driven by modelling and assumption changes in Italy which are partly offset by a reduction from new business in France and Italy due to the impact of lower interest rates.

 

 

Page 4

 

2 - Solvency II capital and cash

2.i - Operating capital generation: Solvency II basis‡#

Solvency II operating capital generation (OCG) measures the amount of Solvency II capital the Group generates from operating activities. Capital generated enhances Solvency II surplus which can be used to support sustainable cash remittances from our business, which in turn, supports the Group's progressive dividend as well as funding investments that provide sustainable growth.


Operating capital generation ‡#


Of which:

2019 £m

Impact of new business (life)

Earnings from existing business (life)

Non-life capital generation

Other

OCG1

Total
OCG


Own funds OCG

SCR
OCG

UK Life and Investments, Savings & Retirement

(45)

814

90

401

1,260


1,245

15

General Insurance

-

-

615

(41)

574


628

(54)

Europe Life

(189)

515

-

428

754


574

180

Asia Life

(7)

64

-

3

60


187

(127)

Total market Solvency II operating capital generation

(241)

1,393

705

791

2,648


2,634

14

Group centre, debt costs and Other

-

(5)

(419)

35

(389)


(377)

(12)

Total Group Solvency II operating capital generation

(241)

1,388

286

826

2,259


2,257

2

1  Other includes the impact of capital actions and non-economic assumption changes.

 


Operating capital generation ‡#


Of which:

2018 £m

Impact of new business (life)

Earnings from existing business (life)

Non-life capital generation

Other

OCG1

Total
OCG


Own funds
OCG

SCR
OCG

UK Life and Investments, Savings & Retirement

(116)

1,096

126

841

1,947


1,606

341

General Insurance

647

647


532

115

Europe Life

(69)

446

347

724


384

340

Asia Life

64

(11)

55


144

(89)

Total market Solvency II operating capital generation

( 183 )

1,606

773

1,177

3,373


2,666

707

Group centre, debt costs and Other

(14)

(717)

556

(175)


(644)

469

Total Group Solvency II operating capital generation

(183)

1,592

56

1,733

3,198


2,022

1,176

1  Other includes the impact of capital actions and non-economic assumption changes.

Solvency II OCG was £2,259 million for 2019 (2018: £3,198 million).

The UK Life and Investments, Savings & Retirement OCG has reduced by £687 million to £1,260 million. This is mainly due to adverse experience on the protection business, no benefit from the loss of transitional relief of new business and a reduction in Other OCG, partially offset by new business strain which has reduced over the year due to reinsurance actions taken even though volumes increased. In 2019, Other OCG includes the beneficial impact of longevity assumption changes which is partially offset by other non-economic assumption changes while 2018 primarily included the beneficial impact of both longevity assumption and other non-economic assumption changes.

The General Insurance OCG reduced by £73 million to £574 million. In Canada, there was an increase of £118 million as benefits from the extensive profit remediation plan put in place towards the end of 2017 are materialising. This is more than offset in the UK, where there has been a reduction of £151 million, primarily due to the alignment of UK digital business costs within the UK General Insurance business and continued investment in our IT infrastructure. Alignment of the UK digital business costs has resulted in an increase in the Solvency Capital Requirement (SCR) due to differential capital treatment for insurance and non-insurance entities.  

The Europe Life OCG has increased by £30 million to £754 million as increases in Other OCG and returns on existing business have been partially offset by the increase in new business strain as a result of the low interest rate environment. In 2019, Other OCG includes the beneficial impact of modelling and assumption changes in Italy as well as increased hedging in France, while other OCG during 2018 was due to assumption changes and a benefit arising from the transfer of pensions business into a supplementary occupational pension fund (FRPS) in France.

Group centre, debt costs and Other has reduced by £214 million to £(389) million. There has been an increase in OCG due to the reduction of costs as a result of the alignment of UK digital business in UK General Insurance and UK Life and a reduction in programme spend at Group Centre. This has been offset by a reduction in Other OCG as 2018 included the benefit of a model change to vary the volatility adjustment (VA) on France business in the Group SCR.

 

 

Page 5

 

 

2.ii - Solvency II future surplus emergence

Emergence of future profits and release of Solvency II capital requirements - life business (undiscounted)




Total
2019
 bn

Total
2018
 bn

Year 1


 1.4

Year 2




1.4

 1.3

Year 3




1.3

 1.1

Year 4




1.2

 1.0

Year 5




1.1

 1.0

Year 6




1.0

 0.9

Year 7




0.9

 0.8

Year 8




0.8

 0.8

Year 9




0.7

 0.7

Year 10




0.7

 0.7

Year 11-15




3.5

 3.4

Year 16-20




2.9

 3.3

Year 20+




7.2

 8.2

Total net of non-controlling interests




24.2

 24.6

The table above shows the expected future emergence of Solvency II surplus from the existing long-term in-force life business. It has been determined in line with previous periods.

For business subject to short contract boundaries under Solvency II, allowance has been made for the impact of renewal premiums as and when they are expected to occur. The cash flows have been split annually for the first ten years followed by five-year tranches thereafter.

The projected surplus, which is primarily expected to arise from the release of risk margin (net of transitional measures) and solvency capital requirement as the business runs off over time, is expected to emerge through OCG in future years.

The projection is a static analysis as at a point in time and hence it does not include future new business or the potential impact of active management of the business (for example, active management of market, demographic and expense risk through investment, hedging, risk transfer, operational risk and expense management), which may affect the actual amount of OCG earned from existing business in future periods.

Total cash flows have reduced by £0.4 billion to £24.2 billion over 2019 (2018: £24.6 billion). The reduction is primarily driven by the strengthening of Sterling against the Euro over 2019.

 

 

 

Page 6

 

2.iii - Cash remittances‡#

Sustainable cash remittances to the Group from our businesses are a key financial priority. The table below reflects actual remittances received by the Group from our businesses, comprising dividends and interest on internal loans. Cash remittances are eliminated on consolidation and hence are not directly reconcilable to the Group's IFRS statement of cash flows. Details of cash remittances are disclosed within the respective business division performance disclosures in sections 6.i to 6.iv.


2019
£m

2018
£m

UK Life and Investments, Savings & Retirement



UK Life (Including Savings & Retirement) 1

1,387

2,152

Aviva Investors

86

92

General Insurance1,2

584

536

Europe Life

414

336

Asia Life

51

6

Other

75

15

Total

2,597

3,137

1  We use a wholly-owned, UK domiciled reinsurance subsidiary for internal capital and cash management purposes. Some remittances otherwise attributable to the operating businesses arise from this internal reinsurance vehicle.

2  2019 General Insurance cash remittances include £83 million (2018: £331 million) received from UK General Insurance, £nil (2018: £17 million) received from Ireland and £141 million (2018: £nil) received from Canada in February 2020 in respect of 2019 activity.

UK Life includes a special remittance of £500 million (2018: £1,250 million), and in 2019 General Insurance and Europe Life include special remittances from Italy of £65 million (2018: £nil) and £107 million (2018: £nil) respectively following the disposal of Avipop in 2018. 2019 remittances from Europe Life include remittances from France of £141 million (2018: £176 million), which are shown after adjusting for a capital injection of £139 million (2018: £nil), as the net amount more appropriately reflects the overall remittances received from France during the year. Other includes excess cash remitted to Group on the winding down of Aviva Re.

2.iv - Centre liquidity

Centre liquidity comprises cash and liquid assets. Excess centre cash flow represents cash remitted by our business divisions to the Group centre less central operating expenses and debt financing costs. It is an important measure of the cash that is available to pay dividends, reduce debt or invest back into our business divisions.


2019
£m

 2018
£m

Cash remitted to Group

2,597

3,137

External interest paid

(456)

(507)

Internal interest paid

(58)

(47)

Central spend

(115)

(258)

Other operating cash flows1

236

112

Excess centre cash flow

2,204

2,437

Ordinary dividend

(1,184)

(1,128)

Share buy back

-

(600)

Net reduction in borrowings

(191)

(948)

Other non-operating cash flows2

(35)

(217)

Movement in centre liquidity

794

(456)




Centre liquidity as at end of February

2,368

1,574

1  Other operating cash flows include central investment income and one-off group tax relief payments.

2  Other non-operating cash flows include capital injections, advances and repayments of internal debt and other investment cash flows. Capital injections do not include the capital injection to France Life of £139 million in 2019 (2018: £nil), which is included within cash remitted to Group as it more appropriately reflects the overall remittances received from France Life during the year.

The increase of £ 794 million in centre liquidity is primarily driven by lower debt repayments and no share buy back in 2019, offset by lower cash remitted to Group.

 

 

 

Page 7

 

3 - Solvency II position

3.i - Solvency II position (shareholder view)

Shareholder view

2019
£m

2018
£m

Own funds

24,548

23,551

Solvency capital requirement

(11,910)

(11,569)

Estimated Solvency II surplus at 31 December

12,638

11,982

Estimated Solvency II shareholder cover ratio‡#

206%

204%

The estimated Solvency II shareholder cover ratio is 206% at 31 December 2019. The Solvency II position disclosed is based on a 'shareholder view'. The shareholder view is considered by management to be more representative of the shareholders' risk exposure and the Group's ability to cover the solvency capital requirement with eligible own funds and aligns with management's approach to dynamically manage its capital position. In arriving at the shareholder position, the following adjustments are typically made to the regulatory Solvency II position:

· The contribution to the Group's SCR and own funds of the most material fully ring fenced with-profits funds of £2.5 billion at 31 December 2019 (2018: £2.6 billion) and staff pension schemes in surplus of £1.2 billion at 31 December 2019 (2018: £1.1 billion) are excluded. These exclusions have no impact on Solvency II surplus as these funds are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised.

· A notional reset of the transitional measure on technical provisions (TMTP), calculated using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The 31 December 2019 position is based on a formal reset of the TMTP, in line with the requirement to reset the TMTP at least every two years and hence no adjustment is required. The 31 December 2018 Solvency II position includes a notional reset (£0.1 billion decrease in surplus). The TMTP is amortised on a straight-line basis over 16 years from 1 January 2016 in line with the Solvency II rules.

· The 31 December 2019 Solvency II position includes three pro forma adjustments. These relate to the disposal of Friends Provident International Limited (FPI) (£nil impact on surplus), the disposal of Hong Kong (£nil impact on surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion decrease in surplus as a result of an increase in SCR). The 31 December 2018 Solvency II position includes the pro forma impact of the disposals of FPI (£0.1 billion increase in surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion reduction in surplus as a result of an increase in SCR).

 


Own funds
2019
£m

SCR
2019
£m

Surplus
2019
£m

Own funds
2018
£m

SCR
2018
£m

Surplus
2018
£m

Estimated Solvency II regulatory surplus as at 31 December

28,347

(15,517)

12,830

27,567

(15,339)

12,228

Adjustments for:







Fully ring-fenced with-profit funds

(2,501)

2,501

-

(2,634)

2,634

-

Staff pension schemes in surplus

(1,181)

1,181

-

(1,142)

1,142

-

Notional reset of TMTP

-

-

-

(127)

-

(127)

Pro forma adjustments

(117)

(75)

(192)

(113)

(6)

(119)

Estimated Solvency II shareholder surplus at 31 December

24,548

(11,910)

12,638

23,551

(11,569)

11,982

 

 

 

Page 8

 

3.ii - Movement in Solvency II surplus

Shareholder view

Own funds
2019
£m

SCR
2019
£m

Surplus
2019
£m

Own funds
2018
£m

SCR
2018
£m

Surplus
2018
£m

Group Solvency II surplus at 1 January

23,551

(11,569)

11,982

24,737

(12,506)

12,231

Operating capital generation

2,257

2

2,259

2,022

1,176

3,198

Non-operating capital generation

178

(362)

(184)

(777)

(231)

(1,008)

Dividends1

(1,222)

-

(1,222)

(1,166)

-

(1,166)

Share buy-back

-

-

-

(600)

-

(600)

Hybrid debt repayments

(210)

-

(210)

(875)

-

(875)

Acquired/divested business

(6)

19

13

210

(8)

202

Estimated Solvency II surplus at 31 December

24,548

(11,910)

12,638

23,551

(11,569)

11,982

1  Dividends includes £17 million (2018: £17 million) of Aviva plc preference dividends and £21 million (2018: £21 million) of General Accident plc preference dividends.

The estimated Solvency II surplus is £12.6 billion at 31 December 2019 (2018: £12.0 billion), with a shareholder cover ratio of 206% (2018: 204%). The increase since 31 December 2018 is mainly due to the beneficial impact from capital generation partially offset by the payment of the Aviva plc dividend and the redemption of the hybrid debt in November 2019.

Non-operating capital generation is primarily due to the impact of a fall in interest rates, strengthening of Sterling against the Euro, employer contributions to the staff pension scheme and the impact of the transfer of the Ireland branch of the UK business to Ireland following the decision of the UK to leave the European Union partially offset by the narrowing of credit spreads and strong equity market performance in 2019.

 

 

Page 9

 

3.iii - Diversified SCR analysis


31 December
2019
£bn

31 December 2018
 bn

Credit risk

2.7

3.0

Equity risk

1.4

1.2

Interest rate risk

0.4

1.0

Other market risk

1.7

1.4

Life insurance risk

3.1

2.5

General insurance risk

0.8

0.8

Operational risk

1.1

1.1

Other risk

0.7

0.6

Total

11.9

11.6

The SCR has increased by £0.3 billion to £11.9 billion since 31 December 2018. The change in risk profile is predominantly driven by economic movements during 2019. Credit risk decreased by £0.3 billion due to the narrowing of sovereign bond spreads in Italy. Life insurance risk increased by 0.6 billion primarily due to increased longevity risk in the UK as a consequence of lower interest rates and narrowing of credit spreads reducing the impact of discounting. Interest rate risk has decreased by £0.6 billion primarily due to the re-assessment of the SCR interest rate stress.

 

 

 

Page 10

 

3.iv - Solvency II sensitivities

Sensitivity analysis of Solvency II surplus

The following sensitivity analysis of Solvency II surplus allows for any consequential impact on the assets and liability valuations. All other assumptions remain unchanged for each sensitivity, except where these are directly affected by the revised economic conditions or where a management action that is allowed for in the SCR calculation is applicable for that sensitivity. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns.

TMTP are assumed to be recalculated in all sensitivities where its impact would be material.

The table below shows the absolute change in cover ratio under each sensitivity, e.g. a 2% positive impact would result in a cover ratio of 208%.

Sensitivities


2019
Impact on
cover ratio
%

Changes in economic assumptions

25 bps increase in interest rate

4%


50 bps increase in interest rate

6%


100 bps increase in interest rate

11%


25 bps decrease in interest rate

(5%)


50 bps decrease in interest rate

(11%)


50 bps increase in corporate bond spread1

(4%)


100 bps increase in corporate bond spread1

(10%)


50 bps decrease in corporate bond spread1

3%


Credit downgrade on annuity portfolio2

(4%)


10% increase in market value of equity

2%


25% increase in market value of equity

5%


10% decrease in market value of equity

(2%)


25% decrease in market value of equity

(7%)


20% increase in value of commercial property

7%


20% decrease in value of commercial property

(9%)


20% increase in value of residential property

4%


20% decrease in value of residential property

(6%)

Changes in non-economic assumptions

10% increase in maintenance and investment expenses

(9%)


10% increase in lapse rates

(3%)


5% increase in mortality/morbidity rates - life assurance

(2%)


5% decrease in mortality rates - annuity business

(13%)


5% increase in gross loss ratios

(3%)

1  Credit spread movement for corporate bonds with credit rating A at a 10 year duration, with the other ratings and durations stressed by the same proportion relative to the stressed capital requirement.

2  An immediate full letter downgrade on 20% of the annuity portfolio bonds (e.g. from AAA to AA, from AA to A).

The Group continues to keep under review the allowance in our assumptions for future property prices and rental income in relation to our commercial and equity release mortgages, for the possible adverse impact including but not limited to the ultimate arrangements regarding the UK's exit from the European Union. At 31 December 2019, this allowance has been determined in line with previous periods and is estimated at £0.4 billion (2018: £0.4 billion). As more clarity is provided on the terms of the UK's exit from the European Union, the Group will look to establish core property assumptions without an explicit allowance for Brexit uncertainty.

Limitations of sensitivity analysis

The table above demonstrates the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analysis does not take into consideration that the Group's assets and liabilities are actively managed. Additionally, the Solvency II position of the Group may vary at the time that any actual market movement occurs. For example, the Group's financial risk management strategy aims to manage the exposure to market fluctuations.

As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocations, adjusting bonuses credited to policyholders and taking other protective action.

Other limitations in the above sensitivity analysis include the use of hypothetical market movements to demonstrate potential risk that only represent the Group's view of possible near-term market changes that cannot be predicted with any certainty and the assumption that all interest rates move in an identical fashion.

 

 

Page 11

 

3.v - Solvency II net asset value


2019
£m

pence per

share1

2018
£m

pence per

share1

Solvency II shareholder unrestricted Tier 1 own funds at 1 January

15,296

15,550

387p

Operating capital generation

2,257

57p

2,022

50p

Non-operating capital generation

178

4p

(777)

(19)p

Dividends2

(1,222)

(31)p

(1,166)

(29)p

Share buy-back

-

-

(600)

(4)p

Acquired/divested business

(6)

-

210

5p

Impact of changes to the value of subordinated liabilities

59

1p

68

2p

Impact of changes to the value of net deferred tax assets

17

-

(11)

-

Estimated Solvency II shareholder unrestricted Tier 1 own funds at 31 December

16,579

423p

15,296

392p

1  Number of shares in issue as at 31 December 2019 was 3,921 million (2018: 3,902 million).

2  Dividends includes £17 million (2018: £17 million) of Aviva plc preference dividends and £21 million (2018: £21 million) of General Accident plc preference dividends.

Solvency II net asset value per share increased by 31 pence to 423 pence per share (2018: 392 pence) mainly as a result of operating capital generation partly offset by the payment of the external dividend.

3.vi - Solvency II regulatory own funds and debt leverage

Regulatory view

2019
£m

2018
 m

Solvency II regulatory debt1

7,892

8,160

Senior notes

1,052

1,113

Commercial paper

238

251

Total debt

9,182

9,524

Unrestricted Tier 1

20,377

19,312

Restricted Tier 1

1,839

2,096

Tier 2

5,794

5,811

Tier 32

337

348

Estimated total regulatory own funds3

28,347

27,567

Solvency II debt leverage4

31%

33%

1  Solvency II regulatory debt consists of Restricted Tier 1 and Tier 2 regulatory own funds, and Tier 3 subordinated debt.

2  Tier 3 regulatory own funds at 31 December 2019 consists of £259 million subordinated debt (2018: £253 million) plus £78 million net deferred tax assets (2018: £95 million).

3  Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excedents (PPE) into Solvency II own funds. The PPE has been included in the France local regulatory own funds in 2019 but it is not included in the Group regulatory own funds.

4  Solvency II debt leverage is calculated as the total debt as a proportion of total regulatory own funds plus commercial paper and senior notes.

Solvency II debt leverage has reduced by 2pp to 31% (2018: 33%). This was due to a reduction in debt and an increase in Unrestricted Tier 1 own funds over 2019. The reduction in debt was driven by redemption of the Group's 6.875% £210 million Tier 1 notes in November 2019. These instruments were classified as Restricted Tier 1 own funds.

 

 

 

Page 12

 

4 - Controllable costs


2019
£m

Restated1

2018
£m

UK Life and Investments, Savings & Retirement



UK Life (including Savings & Retirement)

1,045

1,013

Aviva Investors

446

450

General Insurance

1,420

1,268

Europe Life

548

568

Asia Life

198

183

Other Group activities

282

486

Controllable costs2

3,939

3,968

Levies & premium taxes3

180

170

Operating expenses

4,119

4,138

1  Following the change in the definition of Group adjusted operating profit (see note B2(b)), operating expenses now include the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets. Comparative amounts have been restated resulting in an increase in the prior period operating expenses of £112 million.

2  The controllable costs APM is a new APM based on operating expenses adjusted to exclude premium taxes, fees and levies that vary directly with premium volumes. The controllable costs APM provides more relevant information by excluding costs which management cannot actively control other than by controlling premium volume.

3   Premium taxes, fees and levies that vary directly with premium volumes are excluded from controllable costs.

Controllable costs have decreased by 1% to £3,939 million (2018: £3,968 million) reflecting our focus on efficiency, partially offset by targeted spend on growth initiatives and IT simplification. The increase in controllable costs in UK Life and General Insurance partly reflects the alignment of the UK digital business with the UK Life and UK General Insurance businesses during the year, which is offset in other Group activities.

 

 

Page 13

 

5 - Profit and earnings per share


2019
£m

Restated1

2018
£m

Operating profit before tax



UK Life and Investments, Savings & Retirement



UK Life (including Savings & Retirement)

1,855

1,886

Aviva Investors

96

147

General Insurance

594

609

Europe Life

827

807

Asia Life

276

263

Other Group operations (note A1)

(26)

(212)

Market operating profit

3,622

3,500

Corporate centre (note A2)

(183)

(216)

Group debt costs and other interest (note A3)

(255)

(280)

Operating profit before tax‡#

3,184

3,004

Tax attributable to shareholders' profit

(668)

(625)

Non-controlling interests

(98)

(100)

Preference dividends and other2

(51)

(53)

Operating profit attributable to ordinary shareholders

2,367

2,226

Operating earnings per share‡#

60.5p

56.2p

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax. Following the change in the definition of Group adjusted operating profit, operating earnings per share have also been restated to include the amortisation and impairment of internally generated intangible assets. Comparative amounts have been restated resulting in a reduction in prior period of 2.2 pence.

2  Other includes coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax).

IFRS profit after tax

2,663

1,687

Basic earnings per share

63.8p

38.2p

Operating profit increased by 6% to £3,184 million (2018: £3,004 million). During 2019, as part of our strategy to simplify our business, we aligned our UK digital business with our UK Life and UK General Insurance businesses. Whilst the effect of this is broadly neutral at Group level, it has had an impact on UK Life and UK General Insurance's operating profit this year which is explained below.

UK Life operating profit decreased by 2% to £1,855 million, which includes the adverse impact of the UK digital alignment. Excluding this, operating profit was up 1% which includes higher profit in annuities and equity release and further benefits from changes in longevity assumptions, partly offset by lower profit in protection and the legacy book.

Aviva Investors operating profit decreased by £51 million, mainly driven by lower operating revenue in 2019.

In our General Insurance businesses, operating profit decreased to £594 million (2018: £609 million). In the UK, general insurance operating profit was down 35% to £250 million (2018: £383 million), which includes the adverse impact of the UK digital alignment of £113 million. Excluding this, operating profit was down 5% due to higher expenses reflecting continued investment in IT infrastructure and less favourable prior year reserve releases, partly offset by lower weather costs compared to 2018. In Canada, operating profit improved by £164 million as the benefits from the extensive profit remediation plans that were put in place from late 2017 earned through, as well as more favourable prior year development and weather costs compared to 2018. Excluding disposals, Europe general insurance operating profit reduced by 23% to £154 million (2018: £199 million) mainly driven by higher large losses and less favourable prior year development in France and the impact of a new motor levy in Ireland.

Europe Life operating profit increased by 2% to £827 million (2018: £807 million), mainly driven by higher positive inflows from our hybrid savings product in Italy and improved profit in Ireland, partly offset by lower protection profit in France and lower fee income on assets under management in Poland.

In our Asia Life businesses, operating profit has increased by 5% to £276 million (2018: £263 million). Excluding FPI and Hong Kong, operating profit increased by 32% to £157 million (2018: £119 million) driven by growth in Singapore and China.

Other Group operations include investment return on centrally held assets, the results of our internal reinsurance business and the results of other operations. Total net loss in relation to non-insurance activities was lower at £26 million (2018: net loss of £212 million) mainly reflecting the alignment of the UK digital business to UK Life and UK General Insurance and lower Group head office costs.

Operating earnings per share increased by 4.3p to 60.5p (2018: 56.2p) due mainly to the increase in operating profit.

 

 

 

Page 14

 

6 - Divisional performance

6.i - UK Life and Investments, Savings & Retirement

In November 2019 we announced the creation of the Investments, Savings & Retirement (IS&R) business division, effective from 1 January 2020, which brings together Aviva Investors and the modern UK Savings and Retirement business to create a wealth and asset management business with a larger customer base, scale of assets and strong advisor relationships; this division is well positioned for growth. The division will be a leading provider of mass market savings and retirement solutions in the UK and the owner of a strong international asset management brand.

From 2020, our UK Life division incorporates three lines of business: annuities & equity release, protection & health, and heritage. This division is key in generating sustainable cash flows. This section summarises the performance of UK Life and Aviva Investors during 2019 on the basis on which they were managed during the year.

£m (unless otherwise stated)

2019


2018

Sterling % change

Constant currency %

2019

Restated
2018

Sterling % change

Constant currency %

UK Life and Investments, Savings & Retirement









Solvency II operating own funds generation and return on capital

Solvency II operating own funds generation

Solvency II return on capital

UK Life (including UK Savings & Retirement)

1,244

1,552

(20)%

(20)%

9.3%

10.9%

(1.6)pp

(1.6)pp

Aviva Investors

70

111

(37)%

(37)%

13.7%

22.7%

(9.0)pp

(9.0)pp


1,314

1,663

(21)%

(21)%

9.5%

11.3%

(1.8)pp

(1.8)pp










Solvency II operating capital generation‡# and cash remittances‡#

Solvency II operating capital generation

Cash remittances

UK Life (including UK Savings & Retirement)

1,170

1,821

(36)%

(36)%

1,387

2,152

(36)%

(36)%

Aviva Investors

90

126

(29)%

(29)%

86

92

(7)%

(7)%


1,260

1,947

(35)%

(35)%

1,473

2,244

(34)%

(34)%










UK Life (including UK Savings & Retirement)









Operating profit1,‡#





1,855

1,886

(2)%

(2)%

Controllable costs





1,045

1,013

3%

3%

New business









 PVNBP





27,570

23,946

15%

15%

 VNB





592

481

23%

23%










Aviva Investors









Revenue





542

597

(9)%

(9)%

Controllable costs





446

450

(1)%

(1)%

Operating profit1,‡#





96

147

(35)%

(35)%

Assets under management





£346bn

£331bn

5%

5%

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated. There is no impact on profit before tax.

UK Life (including UK Savings & Retirement) overview

During 2019, UK Life operating capital generation and operating profit both decreased due to a reduction in management actions and the alignment of UK digital business costs to UK Life, which is broadly neutral at Group level. Excluding the impact of these, growth in the bulk purchase annuities (BPA) business has offset the impact of expected outflows of the legacy book and reduced protection profits.

Operating and financial performance

Solvency II operating own funds generation and return on capital

UK Life (including UK Savings & Retirement) Solvency II return on capital reduced by 1.6pp to 9.3% (2018: 10.9%) and Solvency II own funds generation decreased to £1,244 million (2018: 1,552 million). This is largely due to no benefit from transitional relief on new business together with adverse experience on protection business. In 2018, new business written contributed to the calculation of transitional measures (in line with clarification issued by the PRA since 2017) but it is no longer applicable to the Group in 2019. 2018 own funds generation included £218 million of transitional benefits.

Operating capital generation‡#

UK Life Solvency II operating capital generation (OCG) has reduced to £1,170 million (2018: 1,821 million). This is mainly due to the absence of transitional benefits on new business together with adverse experience variances and a reduction in assumption changes and management actions. These have been partially offset by lower new business strain which has significantly reduced due to reinsurance actions. The impacts of longevity assumption changes are broadly comparable in 2018 and 2019, but 2019 includes adverse impacts from persistency and other non-economic assumption changes. 2018 also included positive impacts from modelling changes and additional equity volatility hedging that did not re-occur in 2019.  

Cash‡#

Cash remitted to Group by UK Life was £1,387 million (2018: 2,152 million), including a £500 million special remittance following recent longevity developments. 2018 included £1,250 million of special remittances, £750 million due to positive longevity developments and management actions and the final Friends Life integration remittance of £500 million.

# Symbol denotes key financial performance indicators used as a base to determine or modify remuneration.

‡ denotes APMs which are key performance indicators. There have been no changes to the APMs used by the Group during the period under review.

 

 

Page 15

 

6.i - UK Life and Investments, Savings & Retirement continued

Operating profit1,‡#, new business and net flows

Operating profit‡#

2019
£m

Restated1

2018
£m

Sterling % change

Long-term savings2

211

13%

Annuities and equity release

866

777

11%

Protection

166

221

(25)%

Legacy3

274

316

(13)%

Health

35

38

(8)%

Other4

303

347

(13)%

Total UK Life operating profit‡#

1,855

1,886

(2)%

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated. There is no impact on profit before tax.

2  Includes workplace, platform, individual personal pensions and heritage pensions.

3  Legacy represents products no longer actively marketed, including with-profits and bonds.

4  Other life represents changes in assumptions and modelling, non-recurring items and non-product specific overheads.

UK Life & Health operating profit decreased by 2% to £1,855 million (2018: 1,886 million). Within this, lower profit in protection and our legacy book were offset by higher profit in annuities & equity release. There was a lower contribution from other items mainly due to the alignment of UK digital business costs within UK Life (which is neutral at Group level). More details are set out below.




PVNBP



VNB

New Business Margin

Gross of tax and non controlling interests

2019
£m

2018
£m

Sterling % change

2019
£m

2018
£m

Sterling % change

2019
%

2018
%

Long-term savings

18,884

0.7%

Annuities and equity release

6,182

4,784

29%

284

196

45%

4.6%

4.1%

Protection

1,875

1,799

4%

126

140

(10)%

6.7%

7.8%

Health and Other

629

534

18%

41

34

21%

6.5%

6.4%

Total

27,570

23,946

15%

592

481

23%

2.1%

2.0%

PVNBP increased 15% to £27,570 million (2018: 23,946 million) as strong growth in BPA, workplace pensions, group protection and equity release was partly offset by lower platform and individual annuity volumes. VNB increased by 23% to £592 million (2018: 481 million), mainly reflecting growth in volumes and higher margins in annuities & equity release.

Managed assets and net flows

Platform
£m

Pensions and other long-term savings £m

Total long-

term savings

£m

Annuities and equity release £m

Other UK

non-profit

£m

Total UK Life (excluding UK with-profits) £m

With profits and other
£m

Total UK Life £m

Managed assets at 1 January 2019

22,643

248,238

Premiums and deposits, net of reinsurance

5,662

9,555

15,217

4,038

1,376

293

20,924

Claims and redemptions, net of reinsurance

(2,206)

(7,584)

(9,790)

(2,802)

(2,559)

(15,151)

(4,232)

(19,383)

Net flows

3,456

1,971

5,427

1,236

(1,183)

5,480

(3,939)

1,541

Market and other movements

2,986

13,842

16,828

4,353

2,074

23,255

3,243

26,498

Managed assets at 31 December 2019

29,085

108,873

137,958

67,143

23,705

228,806

47,471

276,277

Managed assets increased 11% to £276 billion (2018: 248 billion). Overall net flows were positive at £1.5 billion mainly due to new business growth in long-term savings and annuities & equity release.

Long-term savings

Long-term savings managed assets increased 19% to £138 billion (2018: 116 billion), with net fund inflows improving to £5.4 billion (2018: 5.0 billion). Within this, heritage pensions net outflows were £2.1 billion (2018: £1.9 billion). These were more than offset by workplace pension net fund flows which grew to £4.8 billion (2018: £3.7 billion), driven by new scheme wins with large corporates, the benefits of higher auto enrolment contributions and improved retention. Positive net fund flows of £3.5 billion (2018: 3.9 billion) along with market movements have resulted in platform managed assets growing 28% to £29.1 billion (2018: 22.6 billion).

Operating profit has increased by 13% to £211 million (2018: 187 million).

Long-term savings VNB increased 27% to £141 million (2018: 111 million) as a result of growth in workplace pensions VNB. Platform VNB has been impacted by lower volumes driven by uncertain investment markets.

 

 

Page 16

6.i - UK Life and Investments, Savings & Retirement continued

Annuities & equity release

Annuities & equity release operating profit increased to £866 million (2018: 777 million). Within this, new business profit increased to £506 million (2018: 363 million) as BPA volumes increased 55% to £4.0 billion (2018: 2.6 billion), including the partial buy-in of the Aviva staff pension scheme (£1.7 billion). Volumes in Individual annuities were 5% lower as we took a selective approach to trading to focus on margins. Existing business operating profit fell by £54 million to £360 million (2018: 414 million) as there has been no repeat of either the in-year favourable longevity experience in 2018 or the £24 million benefit seen in 2018 from asset mix optimisation.

Annuities & equity release VNB increased 45% to £284 million (2018: 196 million) despite the absence of new business transitional benefits in 2019. Growth has mainly been driven by higher BPA volumes written on a higher average margin due to pricing discipline, improved reinsurance rates and securing higher quality assets.

Protection

Protection operating profit decreased by 25% to £166 million (2018: 221 million) reflecting continued competitive trading conditions in the market, including the impact of hardening reinsurance rates and adverse claims experiences in group protection.

Overall protection VNB decreased by 10% to £126 million (2018: 140 million) mainly due to hardening reinsurance rates with PVNBP up 4% to £1,875 million (2018: 1,799 million). Group protection volumes grew strongly driven by large corporates growth. Individual protection volumes were stable despite competitive trading pressures.

Legacy

Legacy contributed operating profit of £274 million (2018: £316 million). 2019 fee income was impacted by lower asset values at the start of the year following weak investment markets towards the end of 2018. The fall in profit was broadly in line with the impact of expected net outflows.

Health

UK Health operating profit decreased by 8% to £35 million (2018: 38 million). Health and Other VNB improved to £41 million (2018: 34 million), due to growth in health volumes.

Other

Other operating profit is £303 million. During 2019, there was a net benefit from assumption changes of £574 million. Within this, continued net positive longevity and mortality developments, including adopting CMI 2018, gave a benefit of £751 million which was partly offset by updates to persistency (£126 million charge) and other assumptions. A benefit to reflect changes to our unitised with profit reserving approach (£167 million) was largely offset by a number of other modelling changes. We have recognised a £175 million provision to allow for certain pension policyholders that may not have been adequately informed of switching options available to them.

In 2018, Other of £347 million mainly included the benefit of continued positive longevity developments which led to a positive change to base mortality for individual annuities of £345 million. Updates to the rate of mortality improvements, including CMI 2017, had a benefit of £251 million and a refinement to BPA modelling together with changes to base mortality and improvements had a benefit of £132 million. Longevity benefits were partly offset by the recognition of an additional £175 million provision relating to potential redress for advised sales by Friends Provident (of which over 90% of cases relate to pre-2002) and a £119 million adverse impact in respect of the settlement of certain legacy reinsurance arrangements.

Controllable costs

Controllable costs increased 3% to £1,045 million (2018: 1,013 million), including the effect of realigning £52 million of UK digital business costs to UK Life. Excluding these costs, controllable costs reduced by 2%. We have benefited from a continued focus on efficiency while continuing to invest in growth and simplification initiatives, including improvements to customer experience.

Aviva Investors overview

This was a challenging year for Aviva Investors leading to a reduction in revenue for the year. However, having invested in our investment capability and distribution in 2018, we have started to see the benefits of this investment in 2019, with net positive external clients flows in the year and a significant improvement in investment performance demonstrating the incremental value that we have achieved for our investors.

Cash‡#

Cash remitted to Group was £86 million (2018: 92 million).

Controllable costs

Aviva Investors controllable costs decreased to £446 million (2018: 450 million). The decrease in expenses includes £11 million cost savings partly offset by £7 million non-recurring restructuring costs.

Operating profit‡#

Fund management operating profit decreased by £51 million to £96 million (2018: 147 million). Revenue decreased by £55 million to £542 million (2018: 597 million) driven by high margin external outflows, the effect of the 2018 disposals of an indirect real estate multi-manager business and our interest in the management of a pan-European commercial property fund, reduced internal client demand for originating assets and lower fee income due to run-off of the legacy internal client book of business. Cost control by the business helped mitigate the impact on profitability.

 

 

 

Page 17

 

6.i - UK Life and Investments, Savings & Retirement continued

Net flows and assets under management and under administration

Assets under management represent all assets managed by Aviva Investors. These comprise assets which are included within the Group's statement of financial position and those belonging to external clients outside the Group which are not included in the statement of financial position. Internal legacy relates to assets managed by Aviva Investors on behalf of the Group relating to products that are no longer actively marketed.


Internal legacy £m

Internal core £m

External
£m

Total
£m

Aviva Investors



Assets under management at 1 January 2019

83,615

183,011

64,080

330,706

Total inflows

10,328

42,605

10,590

63,523

Total outflows

(18,143)

(41,216)

(8,250)

(67,609)

Net flows

(7,815)

1,389

2,340

(4,086)

Net flows into liquidity funds and cash

845

266

188

1,299

Transfers out to external managers

-

-

(3,223)

(3,223)

Market and foreign exchange movements

8,282

10,027

3,127

21,436

Assets under management at 31 December 2019

84,927

194,693

66,512

346,132

Externally managed assets under administration at 1 January 2019


29,104

Externally managed assets under administration net flows and other movements




7,188

Externally managed assets under administration at 31 December 2019




36,292

Assets under management and administration at 1 January 2019




359,810

Assets under management and administration at 31 December 2019




382,424

Assets under management increased by £15.4 billion to £346.1 billion (2018: 330.7 billion). This is due to £21.4 billion of favourable market and foreign exchange movements, external net inflows of £2.3 billion and £1.3 billion net flows into liquidity funds and cash, partly offset by outflows on our Aviva client of £6.4 billion and £3.2 billion of assets transferred to an external manager, which were previously managed by Aviva Investors under a legacy distribution agreement. Assets under management and administration at 31 December 2019 were £382.4 billion (2018: 359.8 billion).

 

 

 

Page 18

 

6.ii - General Insurance

£m (unless otherwise stated)

2019

Restated1

2018

Sterling % change

Constant currency %

2019

Restated1

2018

Sterling % change

Constant currency %

Operating profit‡# and controllable costs



Operating profit1



Controllable costs2

UK

250

383

(35)%

(35)%

726

600

21%

21%

Canada

191

27

603%

591%

402

391

3%

1%

Europe (exc. Avipop)

154

199

(23)%

(22)%

288

271

7%

8%

Asia

(1)

(2)

41%

43%

4

4

(4)%

(7)%


594

607

(2)%

(2)%

1,420

1,266

12%

12%

Disposals (Avipop)

-

2

(100)%

(100)%

-

2

(100)%

(100)%


594

609

(3)%

(3)%

1,420

1,268

12%

12%










NWP and COR




NWP




COR

UK

4,218

4,193

1%

1%

97.9%

94.6%

3.3pp


Canada

3,061

2,928

5%

3%

97.8%

103.1%

(5.3)pp


Europe (exc. Avipop)

2,017

1,971

2%

3%

95.7%

93.5%

2.2pp


Asia

13

13

-

(3)%

n/a

n/a

n/a



9,309

9,105

2%

2%

97.5%

97.2%

0.3pp


Disposals (Avipop)

-

14

(100)%

(100)%

-

87.8%

n/a



9,309

9,119

2%

2%

97.5%

97.2%

0.3pp











Solvency II operating own funds generation





628

532

18%

18%

Solvency II return on capital





14.0%

11.7%

2.3pp

2.2pp










Solvency II operating capital generation‡#





574

647

(11)%

(13)%

Cash remittances‡#





584

536

9%

9%

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. There is no impact on profit before tax. Following the change in the definition of Group adjusted operating profit, COR has also been restated to include the amortisation and impairment of internally generated intangible assets. Comparative amounts have been restated.

2  Comparatives have been reclassified to reallocate non-insurance operations of Europe and Asia to their respective market segments to better reflect the management of the underlying businesses.

Overview

Aviva's General Insurance business operates at scale in the UK and Canada and we have a European business that operates in France, Ireland, Poland and Italy.

During 2019, as part of our strategy to simplify our business, we aligned our UK digital business with UK General Insurance and UK Life. It has had a significant impact on a number of UK GI's headline metrics this year which is explained in the analysis below.

Overall, General Insurance net written premiums were up 2% to £9,309 million (2018: £9,119 million) driven by growth in commercial lines. Operating profit was slightly lower at £594 million (2018: £609 million), and the COR was 97.5% (2018: 97.2%). Excluding the adverse impact of £113 million from the alignment of UK digital, operating profit increased 16% to £707 million (2018: £609 million), and the COR improved 0.9pp to 96.3% (2018: 97.2%). Within this, significantly improved profitability in Canada was offset by lower profits in the UK and from our European businesses.

All percentage movements below are quoted in constant currency unless otherwise stated.

Operating and financial performance

UK General Insurance

As noted above, the alignment of the UK digital business with UK General Insurance during the year has had a significant impact on UK GI's headline metrics in 2019.

Operating profit ‡#

Overall, operating profit was down 35% at £250 million (2018: £383 million). Excluding an adverse impact of £113 million from alignment of UK digital, operating profit was down 5% at £363 million (2018: £383 million). Within this, there was a 10% fall in the underwriting result to £199 million (2018: £221 million) which included higher expenses reflecting continued investment in our IT infrastructure and less favourable prior year reserve releases but lower weather costs compared to 2018. Long-term investment return was up 3% at £166 million (2018: 161 million).

Following the announcement by the Lord Chancellor on 15 July 2019 to increase the Ogden discount rate from the -0.75% set in 2017 to
-0.25%, balance sheet reserves in the UK were calculated using a discount rate of -0.25% at 31 December 2019. This compares to the Ogden discount rate1 applied at 31 December 2018 of 0.00%. This has resulted in a strengthening of claims reserves of £45 million. The negative impact of this reserve change has been excluded from operating profit in line with previous periods. See note A11. The Ogden discount rate is expected to be reviewed again by the Lord Chancellor within five years.

 

 

 

 

 

 

 

‡ Denotes Alternative Performance Measures (APMs) which are key performance indicators of the Group. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

#  Denotes key performance indicators which are used by the Group to determine or modify remuneration. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

1  The Ogden discount rate in Scotland is still at -0.75%.

 

 

 

Page 19

6.ii - General Insurance continued

UK General Insurance continued

NWP and COR

NWP increased by 1% to £4,218 million (2018: £4,193 million). UK Personal lines NWP reduced 4% to £2,399 million (2018: £2,494 million) as we maintained our pricing discipline in Motor and targeted reductions in poor performing segments, combined with the continued run-off of the Creditor book. Home premiums were broadly stable. UK Commercial lines NWP increased 7% to £1,819 million (2018: £1,699 million) driven by a combination of volume and above inflation rate increases. There was an 8% increase in Commercial non-motor NWP to £1,264 million (2018: £1,167 million) with solid growth in SME and Global Corporate Specialty (GCS), while Commercial motor NWP increased 4% to £555 million (2018: £532 million).

Overall, UK GI COR was 97.9% (2018: 94.6%). Excluding the 2.7pp effect of the alignment of UK digital, COR was 0.6pp higher at 95.2% (2018: 94.6%) for the reasons described in relation to operating profit above.

Personal lines COR of 99.3% (2018: 92.9%) was 6.4pp higher year-on-year, of which 4.6pp reflects the UK digital alignment. Excluding this, Personal lines COR was 1.8pp higher reflecting higher expenses and lower prior year reserve releases, partly offset by lower weather costs. Commercial lines COR of 96.0% (2018: 97.3%) was 1.3pp better year-on-year, reflecting higher prior year reserve releases and lower weather costs.

Controllable costs

Controllable costs increased to £726 million (2018: £600 million). Excluding the impact from the alignment of UK digital, controllable costs were up 3% to £619 million (2018: £600 million) reflecting continued investment in our IT infrastructure, partly offset by savings in the underlying costs of running the business.

Canada

Operating profit ‡#

During 2019, operating profit of £191 million (2018: £27 million) improved due to the extensive profit remediation plan put in place towards the end of 2017 with actions around pricing, indemnity management and risk selection.

In 2019, the underwriting result was a profit of £65 million (2018: loss of £90 million), mainly driven by premium rate increases, lower claims frequency and severity in our personal lines business, better weather conditions compared to the long-term average and favourable prior year reserve development, partly offset by higher commission. Long-term investment return improved 11% due to higher yields on short-duration securities and actions to optimise returns within our fixed income portfolio.

NWP and COR

Net written premiums were £3,061 million (2018: £2,928 million), up 3% on a constant currency basis. In personal lines, NWP was broadly stable at £2,100 million (2018: £2,107 million). Commercial lines NWP increased to £961 million (2018: £821 million) due to growth in Global Corporate and Specialty new business and rate increases put through during renewals.

The COR improved to 97.8% (2018: 103.1%) due to the improvement in the underwriting result described above.

Controllable costs

Controllable costs were 1% higher in constant currency at £402 million (2018: 391 million), reflecting increased investment in claims personnel and processes, investment in our pricing capabilities and the Global Corporate and Specialty business and continued investment in our IT infrastructure, mostly offset by lower real estate and other operating expenses.

Europe

Operating profit ‡#

Excluding disposals, Europe general insurance operating profit reduced by 22% to £154 million (2018: £199 million). Dealing with each of the markets in turn:

· In France, operating profit was £65 million (2018: 92 million), with growth in net earned premiums of 6%, particularly in commercial lines, more than offset by higher large losses and less favourable prior year reserve development than 2018.

· In Poland, operating profit was £20 million (2018: 21 million) with net earned premiums in line with 2018.

· In Italy, excluding disposals, operating profit was down 23% to £22 million (2018: 30 million). Within this net earned premiums were down 3% as underwriting actions taken on the personal motor book during 2018 earned through and there were higher large losses in commercial lines and higher expenses.

· In Ireland, operating profit reduced to £47 million (2018: £56 million) driven by a soft market in personal lines with earned premiums 2% lower than 2018, and higher expenses (driven largely by the impact of the new motor levy of 2% applied to all motor policies since December 2018), partly offset by lower large losses and more benign weather than 2018.

 

NWP and COR

Excluding the disposal of Avipop, NWP increased by 3% to £2,017 million (2018: £1,971 million) with growth in France, Italy and Poland (particularly in commercial lines) partly offset by lower premiums in Ireland as we maintained strong underwriting discipline in a soft personal motor market.

COR has increased by 2.2pp to 95.7% (2018: 93.5%) for the reasons described in the operating profit section above.

Controllable costs

Controllable costs were up 8% to £288 million (2018: 271 million) excluding the disposal of Avipop, which includes investment in underwriting platforms in Italy.

‡ Denotes Alternative Performance Measures (APMs) which are key performance indicators of the Group. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

#  Denotes key performance indicators which are used by the Group to determine or modify remuneration. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

 

 

Page 20

 

6.ii - General Insurance continued

Solvency II and cash remittances

Solvency II operating own funds generation and return on capital

General Insurance Solvency II return on capital increased by 2.3pp to 14.0% (2018: 11.7%) and Solvency II own funds generation increased to £628 million (2018: 532 million). The increase is driven by Canada, where benefits from the extensive profit remediation plan put in place towards the end of 2017 are materialising. In the UK, own funds generation was broadly stable as the impacts of the alignment of UK digital business costs and continued investment in our IT infrastructure were offset by favourable weather experience and assumption changes. In Europe, there is a reduction due to large losses and less favourable prior year development releases in France and higher expenses in Ireland and Italy.

Operating capital generation‡#

General Insurance Solvency II operating capital generation has reduced by £73 million to £574 million (2018: 647 million). In Canada, there was an increase of £122 million as benefits from the extensive profit remediation plan put in place towards the end of 2017 is materialising. This is offset in the UK, where there has been a reduction of £151 million, primarily due to the alignment of UK digital business costs within the UK General Insurance business, continued investment in our IT infrastructure and an increase in capital requirements due to volume growth in Commercial lines. Alignment of the UK digital business costs has resulted in an increase in the solvency capital requirement due to differential capital treatment for insurance and non-insurance entities. In Europe, there is a reduction is due to large losses and less favourable prior year development releases in France and higher expenses in Ireland and Italy.

 

Cash‡#

Cash remitted to Group increased by £48 million to £584 million (2018: £536 million). In Canada, cash remitted increased to £156 million (2018: 28 million), reflecting improved underwriting performance. This was offset by a reduction in cash remitted from UK General Insurance which reduced to £248 million (2018: £361 million), reflecting lower Solvency II operating capital generation primarily due to the alignment of UK digital. Cash remitted from Europe was £180 million (2018: £147 million), which includes a £65 million special remittance following the disposal of Avipop in Italy in 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

‡ Denotes Alternative Performance Measures (APMs) which are key performance indicators of the Group. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

#  Denotes key performance indicators which are used by the Group to determine or modify remuneration. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

 

 

Page 21

 

6.ii - General Insurance continued

2019

UK Personal £m

UK Commercial £m

Total UK
£m

Canada Personal
£m

Canada Commercial £m

Total
Canada
£m

Europe
£m

Asia
£m

Total
£m

General insurance










Gross written premiums

2,470

2,154

4,624

2,134

1,070

3,204

2,121

15

9,964

Net written premiums

2,399

1,819

4,218

2,100

961

3,061

2,017

13

9,309

Net earned premiums

2,440

1,721

4,161

2,078

884

2,962

1,982

15

9,120

Net claims incurred

(1,545)

(1,049)

(2,594)

(1,421)

(531)

(1,952)

(1,306)

(12)

(5,864)

Of which claims handling costs



(155)



(116)

(64)

-

(335)

Earned commission

(599)

(364)

(963)

(378)

(194)

(572)

(365)

(2)

(1,902)

Earned expenses

(279)

(239)

(518)

(233)

(140)

(373)

(225)

(3)

(1,119)

Underwriting result

17

69

86

46

19

65

86

(2)

235

Long-term investment return (LTIR)



166



133

76

1

376

Other1



(2)



(7)

(8)

-

(17)

Operating profit (GI)



250



191

154

(1)

594

General insurance combined operating ratio










Claims ratio

63.3%

60.9%

62.3%

68.4%

60.0%

65.9%

65.9%


64.4%

Of which:










Prior year reserve development (%)



(2.6)%



(0.6)%

(1.8)%


(1.7)%

Weather claims (under)/over long-term average (%)



(2.4)%



(0.7)%

1.2%


(1.0)%

Commission ratio

24.6%

21.2%

23.1%

18.2%

22.0%

19.3%

18.4%


20.8%

Expense ratio

11.4%

13.9%

12.5%

11.2%

15.8%

12.6%

11.4%


12.3%

Combined operating ratio

99.3%

96.0%

97.9%

97.8%

97.8%

97.8%

95.7%


97.5%

Assets supporting general insurance business










Debt securities



2,323



4,633

2,209

81

9,246

Equity securities



744



231

161

-

1,136

Investment property



414



-

170

-

584

Cash and cash equivalents



609



158

160

23

950

Other2



1,882



150

387

-

2,419

Assets at 31 December 2019



5,972



5,172

3,087

104

14,335

Debt securities



2,367



4,445

2,179

72

9,063

Equity securities



568



208

90

-

866

Investment property



380



-

148

-

528

Cash and cash equivalents



700



130

371

15

1,216

Other2



1,776



207

615

-

2,598

Assets at 31 December 2018



5,791



4,990

3,403

87

14,271

Average assets



5,882



5,081

3,245

96

14,304

LTIR as % of average assets



2.8%



2.6%

2.3%

1.0%

2.6%

1  Includes the result of non-insurance operations, unwind of discount rate, pension scheme net finance costs and IFRS 16 leases expense interest.

2  Includes loans and other financial investments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 22

 

6.ii - General insurance continued

Restated1 2018

UK Personal
£m

UK Commercial £m

Total UK
£m

Canada Personal
£m

Canada Commercial £m

Total
Canada
£m

Europe
£m

Asia6

£m

Total
£m

General insurance



Gross written premiums

2,562

1,942

4,504

2,143

904

3,047

2,075

14

9,640

Net written premiums

2,494

1,699

4,193

2,107

821

2,928

1,985

13

9,119

Net earned premiums

2,493

1,613

4,106

2,116

839

2,955

1,963

11

9,035

Net claims incurred

(1,546)

(1,019)

(2,565)

(1,609)

(513)

(2,122)

(1,264)

(7)

(5,958)

Of which claims handling costs



(159)



(110)

(60)

-

(329)

Earned commission

(601)

(336)

(937)

(377)

(172)

(549)

(368)

(1)

(1,855)

Earned expenses

(168)

(215)

(383)

(234)

(140)

(374)

(204)

(5)

(966)

Underwriting result

178

43

221

(104)

14

(90)

127

(2)

256

Long-term investment return (LTIR)


363

Other2



1



(3)

(8)

-

(10)

Operating profit (GI)3,4



383



27

201

(2)

609

General insurance combined operating ratio





Claims ratio

62.0%

63.2%

62.5%

76.1%

61.1%

71.8%

64.4%


66.0%

Of which:










Prior year reserve development (%)



(2.5)%



(1.3)%

(2.8)%


(2.3)%

Weather claims (under)/over long-term average (%)



(0.7)%



0.3%

1.7%


0.1%

Commission ratio

24.1%

20.8%

22.8%

17.8%

20.5%

18.6%

18.7%


20.5%

Expense ratio

6.8%

13.3%

9.3%

11.1%

16.7%

12.7%

10.4%


10.7%

Combined operating ratio3,4

92.9%

97.3%

94.6%

105.0%

98.3%

103.1%

93.5%


97.2%

Assets supporting general insurance business



Debt securities



2,367



4,445

2,179

72

9,063

Equity securities



568



208

90

-

866

Investment property



380



-

148

-

528

Cash and cash equivalents



700



130

371

15

1,216

Other5



1,776



207

615

-

2,598

Assets at 31 December 2018



5,791



4,990

3,403

87

14,271

Debt securities


9,791

Equity securities



492



247

33

-

772

Investment property



323



-

176

-

499

Cash and cash equivalents



546



140

399

14

1,099

Other5



1,763



252

650

1

2,666

Assets at 31 December 2017



6,144



4,912

3,681

90

14,827

Average assets



5,968



4,951

3,542

89

14,550

LTIR as % of average assets



2.7%



2.4%

2.3%

-

2.5%

1  Following a review of the Group's presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity. See note B1 for further information.

2  Includes the result of non-insurance operations, unwind of discount rate, pension scheme net finance costs and IFRS 16 leases expense interest.

3  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. There is no impact on profit before tax. Following the change in the definition of Group adjusted operating profit, COR has also been restated to include the amortisation and impairment of internally generated intangible assets. Comparative amounts have been restated.

4  Comparatives have been reclassified to reallocate non-insurance operations for Europe and Asia to their respective market segments to better reflect the management of the underlying businesses.

5  Includes loans and other financial investments.

6  Aviva Re is no longer included and comparative amounts have been restated from those previously reported.

 

 

Page 23

 

6.iii - Europe Life

£m (unless otherwise stated)

2019


2018

Sterling % change

Constant currency %

2019

Restated1,2

2018

Sterling % change

Constant currency %

Solvency II operating own funds generation





574

384

50%

53%

Solvency II return on capital





10.3%

6.9%

3.4pp

3.6pp










Solvency II operating capital generation‡#





754

724

4%

6%

Cash remittances‡#





414

336

23%

24%










Operating profit‡#








France





408

418

(2)%

(2)%

Poland





174

177

(2)%

-

Italy (exc. Avipop)





173

147

17%

18%

Other Europe (exc. Spain)





72

50

47%

51%






827

792

4%

6%

Disposals (Avipop, Spain)





-

15

(100)%

(100)%






827

807

2%

4%










Controllable costs





548

568

(4)%

(2)%










New business




PVNBP




VNB

France

5,702

4,335

32%

33%

168

210

(20)%

(19)%

Poland

624

486

28%

30%

64

58

10%

13%

Italy (exc. Avipop)

5,537

6,263

(12)%

(11)%

147

222

(34)%

(33)%

Other Europe

1,909

1,541

24%

28%

35

24

46%

56%


13,772

12,625

9%

10%

414

514

(19)%

(18)%

Disposals (Avipop)

-

16

(100)%

(100)%

-

3

(100)%

(100)%


13,772

12,641

9%

10%

414

517

(20)%

(19)%

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated. There is no impact on profit before tax.

2  Comparatives have also been reclassified to reallocate non-insurance operations to their respective market segments to better reflect the management of the underlying businesses.

Overview

Aviva operates in a number of markets in Europe with insurance operations in France, Italy, Poland, Ireland and Turkey. During 2019 we have focused on the development and implementation of our market strategies for organic growth and the integration of Friends First in Ireland. In 2019, excluding disposals, operating profit increased by 4% to £827 million (2018: £792 million) with growth in Italy and higher profit in Ireland, partly offset by lower profits in France and Poland.

All percentage movements below are quoted in constant currency unless otherwise stated.

Operating and financial performance

Solvency II operating own funds generation and return on capital

Europe Life Solvency II return on capital has increased by 3.4pp to 10.3% (2018: 6.9%) and Solvency II operating own funds generation increased to £574 million (2018: £384 million). This was primarily driven by modelling and assumption changes in Italy which are partly offset by a reduction in own funds generation from new business in France and Italy due to the impact of lower interest rates. 2018 included the adverse impact on own funds arising from the transfer of pensions business into a supplementary occupational pension fund (FRPS) in France (note the overall impact on capital generation was beneficial due to a significant reduction in solvency capital requirement).

Operating capital generation (OCG) ‡#

Europe Life Solvency II operating capital generation has increased by £30 million to £754 million (2018: £724 million). Increases in management actions and higher returns on existing business have been partially offset by the increase in new business strain as a result of the low interest rate environment. In 2019, management actions included the beneficial impact of modelling and assumption changes in Italy as well as increased market risk hedging in France, while 2018 included the beneficial assumption changes and a benefit arising from the transfer of pensions business into a supplementary occupational pension fund (FRPS) in France.

Cash‡#

Cash remitted to Group was £414 million (2018: £336 million). This includes a special remittance of £107 million following the disposal of Avipop in Italy in 2018. 2019 remittances from France are £141 million (2018: £176 million), which are shown after adjusting for a capital injection of £139 million (2018: £nil), as the net amount more appropriately reflects the overall remittances received from France during the year.

Operating profit‡#

Excluding the impact of disposals, the operating profit of our life and health businesses grew by 6% to £827 million (2018: 792 million). Dealing with each of the markets in turn:

· In France, operating profit reduced by 2% to £408 million (2018: £418 million). Within this, the life result was down 5% to £387 million (2018: 408 million), mainly due to lower protection profit (including adverse claims experience in 2019), partly offset by an increase in savings business profit. The health result was £21 million (2018: 10 million) following actions to improve profitability.

· In Poland, operating profit was flat in constant currency terms at £174 million (2018: 177 million), with lower fee income on assets under management as a result of weak equity markets towards the end of 2018 offset by a more favourable mix of new business, and an improved result on protection business.

‡ Denotes Alternative Performance Measures (APMs) which are key performance indicators of the Group. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

#  Denotes key performance indicators which are used by the Group to determine or modify remuneration. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

 

 

 

Page 24

 

6.iii - Europe Life continued

Operating profit‡# continued

· In Italy, operating profit was £173 million (2018: 147 million), an increase of 18% with significant net inflows to our hybrid product in 2017 and 2018 driving higher revenue on assets under management and an increase in profit from existing business.

· In Ireland, operating profit increased to £59 million (2018: £40 million), an increase of 49% mainly driven by a one-off benefit from methodology and assumption changes and the inclusion of a full year of Friends First in 2019.

· In Turkey, operating profit was £13 million (2018: £10 million), mainly driven by strong growth in our protection business.

Managed assets and net flows


2019
£m

2018
£m

Managed assets at 1 January

118,502

114,068

Premiums and deposits, net of reinsurance

12,474

11,746

Claims and redemptions, net of reinsurance

(7,992)

(7,547)

Net flows

4,482

4,199

Market and other movements

2,596

235

Managed assets at 31 December

125,580

118,502

Net inflows in Europe of £4.5 billion (2018: £4.2 billion) include the growth in sales of our hybrid savings product in Italy and strong inflows into savings products in France. Favourable market and other movements in Europe were £2.6 billion (2018: £0.2 billion).

Controllable costs

Controllable costs for Europe Life reduced by 2% to £548 million (2018: £568 million). Excluding disposals, controllable costs were down 3% to £548 million (2018: £562 million) mainly due to a reduction in project spend in France partly offset by increased marketing and IT spend in Italy.

New business

Excluding disposals, PVNBP was up 10% to £13,772 million (2018: £12,625 million). VNB decreased by 18% to £414 million (2018: 514 million).

In France, PVNBP was up 33% reflecting growth in sales of with-profits savings products and the acquisition of a significant collective pension scheme with EDF. VNB was down 19% primarily due to an adverse margin impact from lower interest rates. In Poland PVNBP increased by 30% driven by the performance of our new protection product and pensions transfers. In Italy, PVNBP was down by 11% due to a reduction in standalone with-profits and unit-linked volumes, partially offset by further growth in our hybrid product whilst VNB margins were adversely impacted by lower interest rates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

‡ Denotes Alternative Performance Measures (APMs) which are key performance indicators of the Group. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

#  Denotes key performance indicators which are used by the Group to determine or modify remuneration. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

 

 

 

 

Page 25

6.iv - Asia Life

£m (unless otherwise stated)

2019


2018

Sterling % change

Constant currency %

2019

Restated1,2

2018

Sterling % change

Constant currency %

Solvency II operating own funds generation





187

144

30%

27%

Solvency II return on capital





12.7%

9.7%

3.0pp

3.0pp










Solvency II operating capital generation‡#





60

55

9%

7%

Cash remittances‡#





51

6

-

-










Operating profit‡#









Singapore





145

123

17%

14%

China





25

22

18%

18%

Other Asia (exc.FPI & Hong Kong)





(13)

(26)

52%

54%






157

119

33%

29%

FPI





128

151

(16)%

(16)%

Hong Kong





(9)

(7)

(26)%

(21)%






276

263

5%

4%










Controllable costs





198

183

9%

6%










New business




PVNBP




VNB

Singapore

1,580

1,279

24%

19%

159

152

5%

2%

China

718

650

10%

10%

43

42

1%

1%

Other Asia (exc.FPI & Hong Kong)

406

279

45%

41%

8

-

-

-


2,704

2,208

22%

20%

210

194

9%

6%

FPI

351

448

(22)%

(22)%

(1)

(2)

7%

7%

Hong Kong

2

-

-

-

(3)

(3)

-

-


3,057

2,656

15%

13%

206

189

9%

6%

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated. There is no impact on profit before tax.

2  C omparatives have also been reclassified to reallocate non-insurance operations to their respective market segments to better reflect the management of the underlying.

Overview  

We are focused on high potential markets in Singapore and China. All of our markets provide access to a combined population of over 3 billion people, with relatively low insurance penetration compared to Western markets. We currently provide life and health insurance solutions to over 5 million individuals across our markets in Asia.

During 2019, Asia Life delivered growth in VNB and operating profit whilst continuing to expand and strengthen its multi-channel platform. Singapore grew its distribution network with a total of 1,819 advisers as of 31 December 2019. Aviva-COFCO, our joint venture in China, continued to focus on its core agency channel, made a positive recovery from regulatory tightening in 2018 and paid its first dividend to Group.

Our FPI business and our business in Hong Kong are classified as held for sale at 31 December 2019.

All percentage movements below are quoted in constant currency unless otherwise stated .

Operating and financial performance

Operating own funds generation, return on capital and operating capital generation

Asia Life Solvency II return on capital has increased by 3.0pp to 12.7% (2018: 9.7%), Solvency II own funds generation increased by £43 million to £187 million (2018: £144 million) and Solvency II operating capital generation has increased by £5 million to £60 million (2018: £55 million). The increase is primarily due to growth and beneficial non-economic assumption changes in Singapore.

Cash‡#

Cash remitted to Group in 2019 has increased to £51 million (2018: £6 million), mainly attributable to improved performance in Singapore. China paid its first dividend to Group of £5 million (2018: £nil) in 2019.

Operating profit‡#

Operating profit from our life and health businesses was £276 million (2018: £263 million). Excluding FPI and Hong Kong, operating profit increased by 29% to £157 million (2018: £119 million). Within this, Singapore's result improved 14% to £145 million (2018: 123 million), with continued growth in our financial advisory channel, increasing new business volumes and improved profitability in health insurance. China's profit improved by 18% to £25 million (2018: 22 million). Due to run-off of its existing business, operating profit for FPI was £128 million
(2018: £151 million).

 

 

 

Page 26

 

6.iv - Asia Life continued

Managed assets and net flows


2019
£m

2018
£m

Managed assets at 1 January

14,775

14,526

Premiums and deposits, net of reinsurance

927

898

Claims and redemptions, net of reinsurance

(838)

(431)

Net flows

89

467

Market and other movements

274

(218)

Managed assets at 31 December

15,138

14,775

Singapore is the major contributor to Asia's managed assets, which overall increased to £15,138 million (2018: £14,775 million) in 2019. Net inflows were £89 million (2018: £467 million) with higher sales and higher net claims and redemptions compared to 2018, mainly driven by Singapore. Following increased sales through the financial advisers distribution channel, Singapore also paid out more claims, mostly from product maturities during the year.

Controllable costs

Total controllable costs for Asia Life subsidiaries was £198 million (2018: £183 million). Excluding Hong Kong and FPI, controllable costs were £155 million (2018: £140 million). The increase was mainly to support Singapore's financial adviser development initiative and organic channel growth across Asia.

New business

Excluding Hong Kong and FPI, PVNBP increased by 20% to £2,704 million (2018: £2,208 million), and VNB increased by 6% to £210 million (2018: £194 million). The increases were led by double digit PVNBP growth in Singapore and China.

 

 

Page 27

 

7 - Life business profit drivers



UK Life


Europe Life


Asia Life


Total


2019
£m

Restated1

2018
£m

2019
£m

Restated1

2018
£m

2019
£m

Restated1

2018
£m

2019
£m

Restated1

2018
£m

New business income

919

772

299

309

317

300

1,535

1,381

Underwriting margin

287

382

250

196

97

103

634

681

Investment return

1,321

1,406

1,231

1,131

251

233

2,803

2,770

Total income

2,527

2,560

1,780

1,636

665

636

4,972

4,832

Acquisition expenses

(407)

(425)

(302)

(335)

(250)

(217)

(959)

(977)

Administration expenses1

(797)

(821)

(588)

(525)

(115)

(101)

(1,500)

(1,447)

Total expenses

(1,204)

(1,246)

(890)

(860)

(365)

(318)

(2,459)

(2,424)

Other2

497

534

(84)

21

(17)

(41)

396

514

Life business operating profit

1,820

1,848

806

797

283

277

2,909

2,922

Health business operating profit

35

38

21

10

(7)

(14)

49

34

1,855

1,886

827

807

276

263

2,958

2,956

1   During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated. There is no impact on profit before tax.

2  Other represents DAC, changes in assumptions and modelling, non-recurring items and non-product specific items and excludes the total profit of £27 million (2018: loss of £3 million) for Aviva Investors' Pooled Pensions and Aviva Life Reinsurance. Additionally, comparatives have been reclassified to reallocate non-insurance operations for Europe and Asia to their respective market segments to better reflect the management of the underlying businesses.

Income: New business income and underwriting margin



UK Life


Europe Life


Asia Life


Total


2019
£m

2018
£m

2019
£m

2018
£m

2019
£m

2018
£m

2019
£m

2018
£m

New business income

919

772

299

309

317

300

1,535

1,381

Acquisition expenses

(407)

(425)

(302)

(335)

(250)

(217)

(959)

(977)

Net contribution

512

347

(3)

(26)

67

83

576

404

APE (£m)1

4,056

3,444

1,495

1,381

429

359

5,980

5,184

As margin on APE (%)

13%

10%

-

(2)%

16%

23%

10%

8%

Underwriting margin (£m)

287

382

250

196

97

103

634

681

Analysed by:









Expenses

62

63

64

67

77

75

203

205

Mortality and longevity

225

319

157

122

34

30

416

471

Persistency

-

-

29

7

(14)

(2)

15

5

1   APE excludes Retail Fund Management and Health business in Asia.

Income: Investment return



UK Life


Europe Life


Asia Life


Total


2019
£m

2018
£m

2019
£m

2018
£m

2019
£m

2018
£m

2019
£m

2018
£m

Unit-linked margin (£m)

835

903

592

581

213

204

1,640

1,688

As annual management charge on average reserves (bps)

57

66

136

136

245

217

83

89

Average reserves (£bn)1

146.1

137.6

43.6

42.8

8.7

9.4

198.4

189.8

Participating business (£m)2

132

165

549

461

4

4

685

630

As bonus on average reserves (bps)

33

39

77

68

9

10

59

55

Average reserves (£bn)1

40.4

42.4

71.3

67.5

4.3

4.1

116.0

114.0

Spread margin (£m)

286

266

2

2

7

7

295

275

As spread margin on average reserves (bps)

42

40

4

4

33

37

39

38

Average reserves (£bn)1

67.7

65.8

4.9

4.5

2.1

1.9

74.7

72.2

Expected return on shareholder assets (£m)3

68

72

88

87

27

18

183

177

Total (£m)

1,321

1,406

1,231

1,131

251

233

2,803

2,770

Total average reserves (£bn)1

254.2

245.8

119.8

114.8

15.1

15.4

389.1

376.0

1  An average of the insurance or investment contract liabilities over the reporting period, including managed pension business which is not consolidated within the statement of financial position.

2  The shareholders' share of the return on with- profits and other participating business.

3  The expected investment return based on opening economic assumptions applied to expected surplus assets over the reporting period that are not backing policyholder liabilities.

Expenses



UK Life


Europe Life


Asia Life


Total


2019
£m

Restated1

2018
£m

2019
£m

Restated1

2018
£m

2019
£m

Restated1

2018
£m

2019
£m

Restated1

2018
£m

Acquisition expenses (£m)

(407)

(425)

(302)

(335)

(250)

(217)

(959)

(977)

APE (£m)2

4,056

3,444

1,495

1,381

429

359

5,980

5,184

As acquisition expense ratio on APE (%)

10%

12%

20%

24%

58%

60%

16%

19%

Administration expenses (£m)

(797)

(821)

(588)

(525)

(115)

(101)

(1,500)

(1,447)

As existing business expense ratio on average reserves (bps)

31

33

49

46

76

66

39

38

Total average reserves (£bn)3

254.2

245.8

119.8

114.8

15.1

15.4

389.1

376.0

1   During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. There is no impact on profit before tax. Following the change in the definition of Group adjusted operating profit, administration expenses have also been restated to include the amortisation and impairment of internally generated intangible assets. Comparative amounts have been restated

2  APE excludes Retail Fund Management and Health business in Asia.

3  An average of the insurance or investment contract liabilities over the reporting period, including managed pension business which is not consolidated within the statement of financial position.

 

 

 

Page 28

 

Financial supplement



Page

A

Income & expenses and IFRS capital

29

B

IFRS financial statements and notes

38

C

Analysis of assets

93





In this section


A

Income & expenses and IFRS capital


Group adjusted operating profit

Reconciliation of Group adjusted operating profit to profit for the year

29

29

A1

Other operations

30

A2

Corporate centre

30

A3

Group debt costs and other interest

30

A4

Life business: Investment variances
and economic assumption changes

31

A5

Non-life business: Short-term fluctuation in
return on investments

33

A6

General insurance and health business:
Economic assumption changes

34

A7

Impairment of goodwill, joint ventures ,
associates and other amounts expensed

34

A8

Amortisation and impairment of intangibles acquired in business combinations

34

A9

Amortisation and impairment of acquired
value of in-force business

34

A10

Profit/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

34

A11

Other

34

A12

Net asset value

35

A13

Analysis of return on equity

36

A14

Group capital under IFRS basis

37

 

 

Page 29

 

Group adjusted operating profit‡#

For the year ended 31 December 2019

The table below reconciles Group adjusted operating profit as presented in Overview section 6 Divisional performance to Group adjusted operating profit as presented in note B6(a) Segmental information.


United Kingdom


Europe






UK Life
£m

UK GI
£m

Canada
£m

France
£m

Poland
£m

Italy, Ireland & Other
£m

Asia
£m

Aviva Investors £m

Other Group Activities £m

Total
2019
£m

Group adjusted operating profit before tax attributable to shareholders' profits











UK Life and Investments, Savings & Retirement

1,855

-

-

-

-

-

-

96

-

1,951

General Insurance

-

250

191

65

20

69

(1)

-

-

594

Europe Life

-

-

-

408

174

245

-

-

-

827

Asia Life

-

-

-

-

-

-

276

-

-

276

Other Group operations (note A1)

-

-

-

-

-

-

-

-

(26)

(26)


1,855

250

191

473

194

314

275

96

(26)

3,622

Corporate centre (note A2)










(183)

Group debt costs and other interest (note A3)










(255)

Group adjusted operating profit before tax attributable to shareholders' profits










3,184

For the year ended 31 December 2018 - restated1,2


United Kingdom


Europe






UK Life
£m

UK GI
£m

Canada
£m

France
£m

Poland
£m

Italy, Ireland, Spain
& Other
£m

Asia
£m

Aviva Investors £m

Other Group Activities £m

 Total
2018
£m

Group adjusted operating profit before tax attributable to shareholders' profits



UK Life and Investments, Savings & Retirement

1,886

-

-

-

-

-

-

147

-

2,033

General Insurance

-

383

27

92

21

88

(2)

-

-

609

Europe Life

-

-

-

418

177

212

-

-

-

807

Asia Life

-

-

-

-

-

-

263

-

-

263

Other Group operations (note A1)

-

-

-

-

-

-

-

1

(213)

(212)


1,886

383

27

510

198

300

261

148

(213)

3,500

Corporate centre (note A2)



(216)

Group debt costs and other interest (note A3)










(280)

Group adjusted operating profit before tax attributable to shareholders' profits










3,004

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax.

Comparatives have been reclassified to reallocate non-insurance operations of Europe and Asia to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6(a).  

Reconciliation of Group adjusted operating profit‡# to profit for the year


2019
£m

Restated1

2018
£m

Group adjusted operating profit before tax attributable to shareholders' profits

3,184

3,004

Adjusted for the following:



Life business: Investment variances and economic assumption changes (note A4)

654

(197)

Non-life business: Short-term fluctuation in return on investments (note A5)

167

(476)

General insurance and health business: Economic assumption changes (note A6)

(54)

1

Impairment of goodwill, joint ventures, associates and other amounts expensed (note A7)

(15)

(13)

Amortisation and impairment of intangibles acquired in business combinations (note A8)

(87)

(97)

Amortisation and impairment of acquired value of in-force business (note A9)

(406)

(426)

(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates (note A10)

(22)

102

Other (note A11)

(47)

231

Adjusting items before tax

190

(875)

Profit before tax attributable to shareholders' profits

3,374

2,129

Tax on Group adjusted operating profit

(668)

(625)

Tax on other activities

(43)

183


(711)

(442)

Profit for the year

2,663

1,687

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax.

 

 

 

Page 30

 

Other Group adjusted operating profit items

A1 - Other operations


2019
£m

Restated1,2

2018 
£m 

Other Group operations

(26)

(212) 

Total

(26)

(212) 

1  During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period other Group operations operating profit of £30 million. There is no impact on profit before tax.

2  Non-insurance operations relating to Europe and Asia have been reclassified to Europe Life, Asia Life and General Insurance to better reflect the management of the underlying businesses.

Other Group operations includes investment return on centrally held assets , the results of our internal reinsurance businesses and the results of other operations. Total loss in relation to other operations was £26 million (2018: £212 million).

Other Group operations includes net expenses of £15 million (2018 restated: £180 million) in relation to the Group's UK digital business. The reduction of £165 million from 2018 reflects the alignment of the UK digital business with the UK Life and UK General Insurance businesses during the year.

A2 - Corporate centre


2019
£m

2018
£m

Project spend

(30)

(80)

Central spend and share award costs

(153)

(136)

Total

(183)

(216)

Corporate centre costs of £183 million (2018: £216 million) decreased by £33 million mainly due to lower Group led project costs partly offset by an increase in central spend and share award costs.

A3 - Group debt costs and other interest


2019
£m

2018
£m

External debt



Subordinated debt

(336)

(364)

Other

(15)

(4)

Total external debt

(351)

(368)

Internal lending arrangements

16

13

Net finance income on main UK pension scheme

80

75

Total

(255)

(280)

The reduction in subordinated debt costs is due to the redemption of two subordinated debt instruments in full at their first call date in 2018. The increase in other external debt costs is due to the issuance of new senior notes in the last quarter of 2018.

 

 

Page 31

 

Non- operating profit items

A4 - Life business: Investment variances and economic assumption changes

(a)  Definitions

Group adjusted operating profit for life business is based on expected long-term investment returns on financial investments backing shareholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Group adjusted operating profit includes the effect of variance in experience for operating items, such as mortality, persistency and expenses, and the effect of changes in operating assumptions. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit, in investment variances and economic assumption changes.

(b) Methodology

The expected investment returns and corresponding expected movements in life business liabilities are calculated separately for each principal life business unit.

The expected return on investments for both policyholders' and shareholders' funds is based on opening economic assumptions applied to the expected funds under management over the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equity and property. Expected funds under management are equal to the opening value of funds under management, adjusted for sales and purchases during the period arising from expected operating experience.

The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating experience of the life business, or management decisions to change asset mix, the effect is included in the Group adjusted operating profit. The residual difference between actual and expected investment return is included in investment variances, outside Group adjusted operating profit but included in profit before tax.

The movement in liabilities included in Group adjusted operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. This would include movements in liabilities due to changes in the discount rate arising from discretionary management decisions that impact on product profitability over the lifetime of products.

The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside Group adjusted operating profit. For many types of life business, including unit-linked and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The profit impact of economic volatility on other life business depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.

(c)  Assumptions

The expected rate of investment return is determined using consistent assumptions at the start of the period between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.

The principal assumptions underlying the calculation of the expected investment return for equity and property are:



Equity


Property


2019

2018

2019

2018

United Kingdom

4.9%

4.8%

3.4%

3.3%

Eurozone

4.3%

4.4%

2.8%

2.9%

The expected return on equity and property has been calculated by reference to the ten-year mid-price swap rate for an AA rated bank in the relevant currency plus a risk premium. The use of risk premium reflects management's long-term expectations of asset return in excess of the swap yield from investing in different asset classes. The asset risk premiums are set out in the table below:

All territories

2019

2018

Equity risk premium

3.5%

3.5%

Property risk premium

2.0%

2.0%

The ten-year mid-price swap rates at the start of the period are set out in the table below:

Territories

2019

2018

United Kingdom

1.4%

1.3%

Eurozone

0.8%

0.9%

For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risk (assessed on a best estimate basis). This includes an adjustment for credit risk on all eurozone sovereign debt. Where such securities are classified as available for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.

 

 

Page 32

 

Non- operating profit items continued

(d)  Investment variances and economic assumption changes

The investment variances and economic assumption changes excluded from the life adjusted operating profit are as follows:

Life business

2019
£m

2018
£m

Investment variances and economic assumptions

654

(197)

Investment variances and economic assumption changes were £654 million (2018: £197 million negative). This is primarily due to the UK where there was a positive variance as a result of a reduction in yields, a narrowing of fixed income spreads and a consequent impact from economic assumption changes, including an alignment of methodology across the UK, partially offset by the impact of increases in equities. The impact of yields and equities reflect the fact that we hedge on an economic rather than on an IFRS basis.

The Group continues to keep under review the allowance in our assumptions for future property prices and rental income in relation to our commercial and equity release mortgages, and for the possible adverse impact including but not limited to the ultimate arrangements regarding the UK's exit from the European Union. At 31 December 2019 this allowance has been determined in line with previous periods and is estimated at £0.4 billion. As more clarity is provided on the terms of the UK's exit from the European Union, the Group will look to establish core property assumptions without an explicit allowance for Brexit uncertainty.

The variance in 2018 was primarily due to negative variances in the UK and Italy. In the UK, these variances were mainly due to an increase in yields, the widening of corporate bond spreads and an increase in the allowance for the possible adverse impact of the decision for the UK to leave the European Union, partially offset by the beneficial impact of our equity hedges. The negative variance in Italy was primarily driven by a widening of sovereign credit spreads and a fall in equity markets. 

 

 

Page 33

 

A5 - Non-life business: Short -term fluctuation in return on investments

(a)  Definitions

Group adjusted operating profit for non-life business is based on an expected long-term investment return over the period. Any variance between the total investment return (including realised and unrealised gains) and the expected return over the period is disclosed separately outside Group adjusted operating profit, in short-term fluctuations.

(b)  Methodology

The long-term investment return is calculated separately for each principal non-life market. In respect of equities and investment properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the long-term rate of investment return.

The long-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated long-term return for other investments (including debt securities) is the actual income receivable for the year. Actual income and long-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the long-term return reflects assets backing non-life business held in Group centre investments.

Market value movements which give rise to variances between actual and long-term investment returns are disclosed separately in short-term fluctuations outside Group adjusted operating profit.

The impact of realised and unrealised gains and losses on Group centre investments, including the centre hedging programme which is designed to economically protect the total Group's capital against adverse equity and foreign exchange movements, is included in short-term fluctuations on other operations.

(c)  Assumptions

The principal assumptions underlying the calculation of the long-term investment return are:


Long-term rate of
return on equities

Long-term rate
 of return on property


2019

2018

2019

2018

United Kingdom

4.9%

3.3%

Eurozone

4.3%

4.4%

2.8%

2.9%

Canada

6.0%

5.9%

4.5%

4.4%

The long-term rates of return on equities and properties have been calculated by reference to the ten-year mid-price swap rate for an AA rated bank in the relevant currency plus a risk premium. The underlying reference rates and risk premiums for the United Kingdom and Eurozone are shown in note A4(c).

(d)  Analysis of investment return

The total investment income on our non-life business, including short-term fluctuations, are as follows:

General Insurance and health

2019
£m

2018
£m

Analysis of investment income:



- Net investment income

622

63

- Foreign exchange gains/(losses) and other charges

55

(8)


677

55

Analysed between:



- Long-term investment return, reported within Group adjusted operating profit

381

370

- Short-term fluctuations in investment return, reported outside Group adjusted operating profit

296

(315)


677

55

Short-term fluctuations:



- General insurance and health

296

(315)

- Other operations1

(129)

(161)

Total short-term fluctuations

167

(476)

1  Other operations represents short-term fluctuations on assets backing non-life business in Group centre investments, including the centre hedging programme.

The short-term fluctuations during 2019 of £167 million favourable is primarily due to strong market conditions across all our major markets. This resulted in significant gains on equities plus gains on fixed income securities driven by interest rates falling and a narrowing of credit spreads. These gains are partly offset by losses on hedges held by the Group, including the Group centre hedging programme, and other adverse movements on centre holdings.

The short-term fluctuations during 2018 of £476 million adverse were primarily due to adverse market conditions across most of our major markets. This resulted in losses on fixed income securities driven by interest rate increases and widening credit spreads plus significant falls in equities and other adverse market movements on Group centre holdings.

 

 

Page 34

 

A6 - General insurance and health business: Economic assumption changes

In the general insurance and health business, there is a negative impact of £54 million (2018: £1 million positive) primarily as a result of a decrease in interest rates used to discount claims reserves for both periodic payment orders and latent claims.

A7 - Impairment of goodwill, joint ventures, associates and other amounts expensed

Impairment of goodwill, associates and joint ventures and other amounts expensed in the year is a charge of £15 million (2018: £13 million charge). This includes a £9 million impairment charge relating to the Group's associate in India.

A8 - Amortisation and impairment of intangibles acquired in business combinations

Following a change in the definition of the Group adjusted operating profit APM, Group adjusted operating profit now excludes only the amortisation and impairment of intangible assets acquired in business combinations. The amortisation and impairment of intangible assets acquired in business combinations decreased to a charge of £87 million (2018: £97 million charge) due to intangible assets which were amortised in full in 2018.

A9 - Amortisation and impairment of acquired value of in-force business

Amortisation of acquired value of in-force business (AVIF) is a charge of £406 million (2018: £426 million charge), which relates solely to amortisation in respect of the Group's subsidiaries and joint ventures. Impairment charges of £28 million in relation to Friends Provident International Limited (FPI) remeasurement losses are recorded within profit/loss on disposal and remeasurement of subsidiaries, joint ventures and associates. See note A10.

A10 - Profit/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

The total Group loss on disposal and remeasurement of subsidiaries, joint ventures and associates is £22 million (2018: £102 million profit). This consists of £6 million gains on small disposals, and a £28 million remeasurement loss in relation to FPI. Further details of these items are provided in note B5.

A11 - Other

Other items are those items that, in the directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. At 31 December 2019, other items is a charge of £47 million (2018: £231 million gain), which comprises the following:

· A charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims. Following the announcement by the Lord Chancellor on 15 July 2019 to increase the Ogden discount rate from the -0.75% set in 2017 to -0.25% (rate retained at -0.75% in Scotland), balance sheet reserves in the UK have been calculated using a discount rate of -0.25% at 31 December 2019. At 31 December 2018, balance sheet reserves were calculated using a rate of 0.00%. See note B11; and

· A charge of £2 million relating to the negative goodwill which arose on the acquisition of Friends First on 1 June 2018. An adjustment to the acquisition balance sheet of £2 million has been made in 2019, resulting in a corresponding decrease in the negative goodwill previously recognised.

 

 

 

Page 35

 

IFRS capital
A12 - Net asset value


2019
£m

pence per

share2

Restated
2018
£m

Restated
pence

per share2

Equity attributable to shareholders of Aviva plc at 1 January1

16,558

424p

16,969

423p

Adjustment at 1 January for adoption of IFRS 163

(110)

(3)p

-

-

Equity attributable to shareholders of Aviva plc at 1 January restated1

16,448

421p

16,969

423p

Group adjusted operating profit

3,184

80p

3,004

77p

Investment return variances and economic assumption changes on life and non-life business

767

19p

(672)

(17)p

Profit on the disposal and remeasurements of subsidiaries, joint ventures and associates

(22)

(1)p

102

2p

Goodwill impairment and amortisation of intangibles

(102)

(3)p

(110)

(3)p

Amortisation and impairment of acquired value of in-force business

(406)

(10)p

(426)

(11)p

Other4

(47)

(1)p

231

6p

Tax on operating profit and on other activities

(711)

(18)p

(442)

(11)p

Non-controlling interests

(115)

(3)p

(119)

(3)p

Profit after tax attributable to shareholders of Aviva plc

2,548

63p

1,568

40p

AFS securities fair value and other reserve movements

41

1p

(24)

(1)p

Ordinary dividends

(1,184)

(30)p

(1,128)

(29)p

Direct capital instrument and tier 1 notes interest and preference share dividend

(51)

(1)p

(53)

(1)p

Foreign exchange rate movements

(170)

(4)p

(2)

-

Remeasurements of pension schemes

(763)

(19)p

(236)

(6)p

Shares purchased in buy-back

-

-

(600)

(15)p

Other net equity movements

139

3p

64

13p

Equity attributable to shareholders of Aviva plc at 31 December1

17,008

434p

16,558

424p

1  Excluding preference shares of £200 million (2018: £200 million).

2  Number of shares as at 31 December 2019: 3,921 million (2018: 3,902 million).

3  The Group has adopted IFRS 16 Leases from 1 January 2019. In line with the transition options available, prior period comparatives have not been restated and the impact of the adoption has been shown as an adjustment to opening retained earnings. See note B1 for further information.

4  Other in 2019 relates to a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (see note B11) and a charge of £2 million relating to negative goodwill which arose on the acquisition of Friends First (see note A11). Other in 2018 includes a movement in the discount rate used for estimating lump sum payments in the settlement of bodily injury claims which resulted in a gain of £190 million, a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First, a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirements to equalise members' benefits of the effects of Guaranteed Minimum Pension and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on the 30 April 2018, and associated administration costs.

At 31 December 2019, IFRS net asset value per share was 434 pence (2018: 424 pence). The increase was mainly due to operating profit and favourable investment return variances (see notes A4 and A5), partly offset by dividend payments to shareholders and higher pension scheme remeasurements (see note B18).

 

 

Page 36

A13 - Analysis of return on equity  


Operating profit



2019

Before tax
£m

After tax
£m

Weighted average shareholders' funds including non-controlling interests
£m

Return on equity %

UK Life and Investments, Savings & Retirement





UK Life (including Savings & Retirement)

1,855

1,553

10,318

15.1%

Aviva Investors

96

66

514

12.8%

General Insurance

594

447

3,674

12.2%

Europe Life

827

568

3,698

15.4%

Asia Life

276

245

1,769

13.8%

Other Group activities1

(113)

(79)

6,386

N/A

Return on total capital employed

3,535

2,800

26,359

10.6%

Subordinated debt

(336)

(272)

(6,303)

4.3%

Senior debt

(15)

(12)

(1,345)

0.9%

Return on total equity

3,184

2,516

18,711

13.4%

Less: Non-controlling interests


(98)

(975)

10.1%

Direct capital instrument and tier 1 notes


(34)

(674)

5.0%

Preference shares


(17)

(200)

8.5%

Return on equity shareholders' funds


2,367

16,862

14.0%

1  The other Group activities operating loss before tax of £113 million comprises corporate costs of £183 million and other business operating loss of £26 million, partly offset by interest on internal lending arrangements of £16 million and finance income on the main UK pension scheme of £80 million.


Operating profit



Restated 2018

Before tax
£m

After tax
£m

Weighted average shareholders' funds
including non-controlling interests
£m

Return on equity %

UK Life and Investments, Savings & Retirement



UK Life (including Savings & Retirement)

1,886

1,544

10,687

14.4%

Aviva Investors

147

102

527

19.4%

General Insurance

609

473

3,834

12.3%

Europe Life

807

568

3,658

15.5%

Asia Life

263

239

1,645

14.5%

Other Group activities1

(340)

(249)

6,386

N/A

Return on total capital employed

3,372

2,677

26,737

10.0%

Subordinated debt

(364)

(295)

(6,767)

4.4%

Senior debt

(4)

(3)

(1,403)

0.2%

Return on total equity

3,004

2,379

18,567

12.8%

Less: Non-controlling interests


(100)

(1,074)

9.3%

Direct capital instrument and tier 1 notes


(36)

(730)

4.9%

Preference shares


(17)

(200)

8.5%

Return on equity shareholders' funds


2,226

16,563

13.4%

1  The other Group activities operating loss before tax of £340 million comprises corporate costs of £216 million and other business operating loss of £212 million, partly offset by interest on internal lending arrangements of £13 million and finance income on the main UK pension scheme of £75 million.

 

 

Page 37

 

A14 - Group capital under IFRS basis

The table below shows how our capital is deployed by market and how that capital is funded.


31 December 2019 Capital employed
£m

31 December 2018 Capital employed
£m

UK Life and Investments, Savings & Retirement



UK Life (including Savings & Retirement)

10,751

10,388

Aviva Investors

512

541

General Insurance1

3,603

3,754

Europe Life

3,663

3,665

Asia Life

1,749

1,702

Other Group activities1,2

5,903

6,104

Total capital employed

26,181

26,154

Financed by



Equity shareholders' funds

17,008

16,558

Non-controlling interests

977

966

Direct capital instrument and tier 1 notes

500

731

Preference shares

200

200

Subordinated debt3

6,206

6,335

Senior debt

1,290

1,364

Total capital employed4

26,181

26,154

1  Capital employed for United Kingdom General Insurance excludes c.£0.9 billion (2018: c.£0.9 billion) of goodwill which does not support the general insurance business for capital purposes and is included in other Group activities.

2  Other Group activities include centrally held tangible net assets, the main UK staff pension scheme surplus and also reflect internal lending arrangements. These internal lending arrangements, which net out on consolidation, include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance Limited.

3  Subordinated debt excludes amounts held by Group companies of £nil (2018: £5 million).

4  Goodwill, AVIF and other intangibles are maintained within the capital base. Goodwill includes goodwill in subsidiaries of £1,855 million (2018: £1,872 million) and goodwill in joint ventures of £11 million (2018: £13 million). AVIF and other intangibles comprise £2,800 million (2018: £3,201 million) of intangibles in subsidiaries and £27 million (2018: £33 million) of intangibles in joint ventures, net of deferred tax liabilities of £(413) million (2018: (475) million) and the non-controlling interest share of intangibles of £(28) million (2018: £(31) million).

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and other borrowings.

On 21 November 2019, the Group redeemed its £210 million 6.875% Step-up Tier One Capital Securities (STICS) in full at the first call date.

At 31 December 2019 the market value of our external debt (subordinated debt and senior debt), preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million), and direct capital instrument and Tier 1 notes was £9,764 million (2018: £9,278 million).

 

END PART 2 of 5

 


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