Final Results - Part 2 of 4

RNS Number : 0466H
Aviva PLC
08 March 2018
 

Start part 2 of 4

Page 1

Contents

In this section

Page

Overview

 

Key financial metrics

2

1

Operating profit

3

2

Cash

5

i

Cash remitted to Group

5

ii

Excess centre cash flow

5

iii

Operating capital generation: Solvency II basis

6

iv

Solvency II future surplus emergence

7

3

Expenses

8

4

Value of new business

9

5

Combined operating ratio

10

6

Business unit performance

11

i

United Kingdom

11

ii

International

14

iii

Asia

17

iv

Aviva Investors

18

7

Profit drivers

19

i

Life business

19

ii

General insurance and health

22

iii

Fund flows

24

8

Capital & assets summary

25

i

Summary of assets

25

ii

Net asset value

26

iii

Return on equity

27

iv

Solvency II

28

Financial supplement

31

A

Income & expenses

32

B

IFRS financial statements and notes

37

C

Capital & liquidity

95

D

Analysis of assets

99

E

VNB & Sales analysis

122

Other information

130

 

 

 

Page 2

 

Foreword

All references to Operating profit1,7 represent 'Group adjusted operating profit' as an alternative performance measure which is not bound by IFRS. Further explanation can be found in the Analyst Pack Glossary. All currency movements are calculated on unrounded numbers so minor rounding differences may exist.

Operating profit

 

 2017
£m

 2016
£m

Sterling
% change

Life business

2,882

2,642

9%

General insurance and health2

700

833

(16)%

Fund management

164

138

19%

Other3

(678)

(603)

(12)%

Total2

3,068

3,010

2%

 

Operating earnings per share2,4,7

54.8p

51.1p

7%

Cash remittances5,7 and Operating Capital Generation (OCG): Solvency II basis5,7

 

2017

2016

 

Cash Remittances
£m

OCG
£bn

Cash Remittances
£m

OCG
£bn

United Kingdom5,6

1,800

2.8

1,187

2.8

Canada

55

(0.1)

130

0.3

Europe5,6

485

0.9

449

1.0

Asia & Aviva Investors

58

0.1

39

-

Other8

-

(1.1)

-

(0.6)

Total

2,398

2.6

1,805

3.5

Expenses

 

 2017
£m

 2016
£m

Sterling
% change

Operating expenses7

3,778

3,408

11%

Integration & restructuring costs

141

212

(33)%

Expense Base

3,919

3,620

8%

 

Operating expense ratio7

52.7%

50.5%

2.2pp

Value of new business: Adjusted SII basis7

 

2017
£m

2016
£m

Sterling

% change6

Constant currency

% change6

United Kingdom

527

429

23%

23%

Europe

533

429

24%

17%

Asia & Aviva Investors

183

134

37%

33%

Total

1,243

992

25%

21%

General insurance combined operating ratio7,9

 

2017

2016

Change

United Kingdom6

93.9%

106.3%

(12.4)pp

Canada

102.2%

93.0%

9.2pp

Europe6

93.3%

95.1%

(1.8)pp

Combined operating ratio

96.6%

100.1%

(3.5)pp

IFRS profit after tax

 

 2017
£m

 2016
£m

Sterling
% change

IFRS profit after tax

1,646

859

92%

Basic earnings per share

35.0p

15.3p

129%

Dividend

 

2017

2016

Sterling
% change

Final dividend per share

19.00p

15.88p

20.0%

Total dividend per share

27.40p

23.30p

18.0%

Capital position

 

2017

2016

Sterling
% change

Estimated Shareholder Solvency II cover ratio7,10,11,12

198%

189%

9.0pp

Estimated Solvency II surplus7,10,11,12

£12.2bn

£11.3bn

8%

Net asset value per share7

423p

414p

2%

1    Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

2    2016 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional adjusting item. 2016 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

3    Other includes other operations, corporate centre costs and group debt and other interest costs, including coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax).

4    Net of tax, non-controlling interests, preference dividends, coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax). The calculation of earnings per share uses a weighted average of 4,041 million (2016: 4,051 million) ordinary shares in issue, after deducting treasury shares.

5    Cash remitted to Group and Solvency II operating capital generation are managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, cash remittances from Ireland were not aligned to the new management structure within Europe, but they were reported within United Kingdom.

6    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

7    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

8    Other includes other Group activities and Group diversification benefit

9    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change.

10  The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds of £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus of £1.5 billion (2016: £1.1 billion). These exclusions have no impact on Solvency II surplus.

11   The estimated Solvency II position includes the pro forma impacts of the disposals of Friends Provident International Limited (£0.1 billion increase to surplus) and the Italian Avipop Assicurazioni S.p.A (£0.1 billion increase to surplus).

12   The 31 December 2016 Solvency II position included pro forma adjustments for the impact of the announced disposal of Antarius and the future impact of changes to UK tax rules announced by the Chancellor of the Exchequer's Autumn statement, which was removed following clarification in the 13 July 2017 Finance Bill. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional provisions (TMTP) to reflect interest rates at 31 December 2016 £0.4 billion decrease to surplus.

 

 

 

Page 3

 

 

2017 overview

The Group has increased operating profit, grown cash remittances and strengthened its Solvency II capital position. Operating earnings per share rose 3.7p to 54.8p (2016: 51.1p).

This year has seen a significant amount of disposal activity as we complete our Not Everywhere strategy. In France we completed on the sale of Antarius to Sogecap, a subsidiary of Societe Generale in April 2017. In Spain we completed the sales of Unicorp Vida, Caja España Vida and Aviva Vida y Pensiones to Santalucía in September. In Italy, Banco Popolare served notice to terminate our distribution agreement and as a result on 25 August 2017 we announced that Aviva Italia Holdings has exercised an option to sell its JV Avipop Assicurazioni and its wholly owned subsidiary Aviva Vita to Banco BPM. In July, we announced the sale of Friends Provident International Limited (FPI) to RL360 Holding Company Limited followed by the announcement in October of the sale of our 49% shareholding in First Aviva Life (Aviva Taiwan) to our JV partner, First Financial Holding Co. Ltd. (FFH).

In terms of acquisitions, in April 2017 we acquired VietinBank's entire 50% shareholding in our life insurance joint venture VietinBank Aviva Life Insurance Limited (Aviva Vietnam) which is now a wholly owned subsidiary. On 14 November 2017, we announced that we had reached an agreement to acquire the Irish insurer Friends First Life Assurance Company dac (Friends First).

1 - Operating profit

Group operating profit

For the year ended 31 December 2017

 

 2017
£m

 2016
£m

Operating profit before tax attributable to shareholders' profits

 

 

Life business

 

 

United Kingdom1

1,758

1,523

Europe1

873

876

Asia

235

241

Other

16

2

Total life business (note 7.i)

2,882

2,642

General insurance and health

 

 

United Kingdom

443

423

Canada

46

269

Europe1

223

168

Asia

(8)

(13)

Other

(4)

(14)

Total general insurance and health2 (note 7.ii)

700

833

Fund management

 

 

Aviva Investors

168

139

Asia

(4)

(1)

Total fund management

164

138

Other

 

 

Other operations (note A1)

(169)

(94)

Market operating profit2

3,577

3,519

Corporate centre (note A2)

(184)

(184)

Group debt costs and other interest (note A3)

(325)

(325)

Operating profit before tax attributable to shareholders' profits2

3,068

3,010

Tax attributable to shareholders' profit

(639)

(706)

Non-controlling interests

(134)

(147)

Preference dividends and other3

(82)

(85)

Operating profit attributable to ordinary shareholders2

2,213

2,072

 

 

 

Operating earnings per share2,4

54.8p

51.1p

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2    2016 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional adjusting item. 2016 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

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

4    Net of tax, non-controlling interests, preference dividends, coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax). The calculation of earnings per share uses a weighted average of 4,047 million (2016: 4,051 million) ordinary shares in issue, after deducting treasury shares.

 

 

 

Page 4

 

 

1 - Operating profit continued

Operating profit was £3,068 million (2016: £3,010 million) representing an increase of 2%.

The life business operating profit increased to £2,882 million (2016: £2,642 million) mainly driven by the UK where we benefitted from growth in long-term savings, further optimisation of the annuity asset mix and an net increase of £290 million (2016: £151 million) primarily from our annual assumption review including longevity and modelling. In Europe, operating profit is flat reflecting underlying growth offset by the sale of Antarius and our Spanish operations during the year. Asia's contribution is broadly flat as it continues to invest for the future.

The general insurance and health business operating result decreased to £700 million (2016: £833 million). Overall the level of prior year reserve releases remain positive in 2017, however in Canada we have experienced increased claims severity and as a result we are strengthening reserves this year for this business. The UK and Europe results improved year on year and reported higher underwriting profits.

Fund management operating profit improved to £164 million (2016: £138 million) driven by revenue growth of 14% reflecting the full year benefit of the transfer of Friends Life assets and continued growth in the AIMS range of funds.

Other operations relate to non-insurance activities of the Group which incurred a loss of £169 million (2016: £94 million). This includes the savings platform business in the UK and reflects an increased investment in the development of the digital business, partly offset by income relating to insurance recoveries of £32 million (2016: £19 million).

 

 

 

Page 5

 

 

2.i - Cash remitted to Group

The flow of sustainable cash remittances from the Group's businesses is a key financial priority. We use a wholly-owned, UK domiciled reinsurer subsidiary for internal capital and cash management purposes. Some of the remittances otherwise attributable to the operating businesses arise from this internal reinsurance vehicle. The table below reflects actual remittances received by the Group.

Cash remittances for 2017 were £2,398 million (2016: £1,805 million) and include cash paid by our operating businesses to the Group, comprising dividends and interest on internal loans.

 

2017
£m

2016
£m

United Kingdom1,2

1,800

1,187

Canada

55

130

Europe2

485

449

Asia, Aviva Investors & Other

58

39

Total3

2,398

1,805

1    2017 cash remittances include £337 million received from UK General Insurance in February 2018 in respect of 2017 activity. 2016 cash remitted included £100 million from UK Life and £83 million from UK General Insurance paid in February 2017 and £159 million received from France paid in January 2017, in respect of 2016 activity.

2    Cash remitted to Group is managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, cash remittances from Ireland were not aligned to the new management structure within Europe, but they were reported within United Kingdom.

3    Cash remittances are eliminated on consolidation and are hence not directly reconcilable to the Group's IFRS statement of cash flows.

The increase in cash remittances to the Group was primarily driven by the UK businesses which includes an additional £500 million of Friends Life integration remittance, taking instalments to date to £750 million of the target of £1 billion. General insurance cash remitted in the UK increased to £434 million (2016: £91 million) as dividend payments in 2016 were lower due to funding the internal reinsurance arrangement.

Cash remittances from Canada decreased due to a lower operating profit. In Europe, an increase in cash remittances from France was partly offset by a reduction in cash remittances from Spain following the completion of the sale of the 50% shareholding in our life insurance and pension joint ventures. Cash remittances from Aviva Investors increased by 49% due to growth in the profitability of the business.

2.ii - Excess centre cash flow

Excess centre cash flow represents cash remitted by business units to the Group Centre less central operating expenses and debt financing costs. It represents cash and liquid assets held in the group holding companies, including Aviva plc. It is an important measure of the cash that is available to pay dividends, reduce debt, pay exceptional charges or invest back into our business units. It does not include cash movements such as disposal proceeds or capital injections.

 

2017
£m

2016
£m

Dividends received

2,213

1,635

Internal interest received

185

170

Cash remitted to Group

2,398

1,805

External interest paid

(549)

(540)

Internal interest paid

(66)

(85)

Central spend

(183)

(227)

Other operating cash flows1

56

(24)

Excess centre cash flow2,3

1,656

929

1    Other operating cash flows include central investment income and group tax relief payments and other financial cash flows previously reported under central spend.

2    This table represents cash movements only and therefore will not reconcile to accounting based disclosures throughout the Preliminary announcement.

3    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

The increase of £727 million in excess centre cash flow is primarily driven by higher cash remittances to the Group Centre as discussed above, coupled with lower central spend and increased other operating cash inflows. Central spend cashflow partly decreased as employees paid more into Aviva's share save scheme as it came in line with new limits set by HMRC. Increased other operating cash inflows of £56 million (2016: £24 million cash outflows) were mainly driven by tax relief receipts from UK businesses and investment income offset by hedging costs and adverse margin movements.

Group Centre liquidity consists of cash and liquid assets. Group Centre liquidity at 28 February 2018 was £2.0 billion (28 February 2017: £1.8 billion).

 

 

 

Page 6

 

 

2.iii - Operating capital generation: Solvency II basis

The active management of the generation and utilisation of capital is a primary Group focus, balancing new business investment and shareholder distribution to deliver on our 'cash flow plus growth' initiative.

Our principal source of Group centre liquidity is cash remittances in the form of dividends and debt interest receipts from our businesses. 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 fund business unit remittances and, in turn, the Group dividend as well as for investment in initiatives that provide potential future growth.

Solvency II OCG was £2.6 billion during 2017 (2016: £3.5 billion), incorporating £2.4 billion (2016: £3.6 billion) from our life business and £0.2 billion (2016: £(0.1) billion) from our general insurance, health, fund management and other businesses.

 

Life business SII Operating Capital Generation

Non-Life SII Operating Capital Generation

 

2017
£bn

Impact of New Business1

Earnings from Existing Business

Other2

Life SII operating Capital Generation

GI, Health, FM & Other SII Operating Capital Generation

Total SII Operating Capital Generation

United Kingdom & Ireland Life3

(0.1)

0.9

1.6

2.4

2.4

United Kingdom & Ireland General Insurance and Health3

0.4

0.4

Canada

(0.1)

(0.1)

Europe3

0.6

0.1

0.7

0.2

0.9

Asia & Aviva Investors

0.1

0.1

-

0.1

Group centre costs & Other2

(0.8)

(0.8)

(0.3)

(1.1)

Total Group Solvency II operating capital generation4

(0.1)

1.6

0.9

2.4

0.2

2.6

1    Impact of new business (Life) as set out in note 4 Solvency II Surplus impact of new business

2    Other includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.

3    Solvency II operating capital generation is managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, Solvency II operating capital generation from Ireland was not aligned to the new management structure within Europe, but it was reported within United Kingdom.

4    As reported in the movement in Group Solvency II surplus disclosure in note 8iv.

 

Life business SII Operating Capital Generation

Non-Life SII Operating Capital Generation

 

2016
£bn

Impact of New Business1

Earnings from Existing Business

Other2

Life SII operating Capital Generation

GI, Health, FM & Other SII Operating Capital Generation

Total SII Operating Capital Generation

United Kingdom & Ireland Life3

(0.1)

1.4

1.2

2.5

2.5

United Kingdom & Ireland General Insurance and Health3

0.3

0.3

Canada

0.3

0.3

Europe3

(0.1)

0.6

0.4

0.9

0.1

1.0

Asia & Aviva Investors

-

-

-

-

-

-

Group centre costs & Other2

-

-

0.2

0.2

(0.8)

(0.6)

Total Group Solvency II operating capital generation4,5

(0.2)

2.0

1.8

3.6

(0.1)

3.5

1    Impact of new business (Life) as set out in note 4 Solvency II Surplus impact of new business

2    Other includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.

3    Solvency II operating capital generation is managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, Solvency II operating capital generation from Ireland was not aligned to the new management structure within Europe, but it was reported within United Kingdom.

4    As reported in the movement in Group Solvency II surplus disclosure in note 8iv.

5    Solvency II operating capital generation excludes the impact of the change in the Ogden discount rate of c.£0.2 billion, which has been recognised as an exceptional adjusting item.

Solvency II OCG is the Solvency II surplus movement in the period due to operating items including the impact of new business, expected investment returns on existing business, operating variances, non-economic assumption changes and non-recurring capital actions. It excludes economic variances, economic assumption changes and integration and restructuring costs which are included in non-operating capital generation. The expected investment returns are consistent with the returns used under IFRS (as set out in notes A4 and A5 in the financial supplement), except in UK Life where a risk-free curve plus an allowance for expected real-world returns (less an adjustment for credit risk, where required) is applied. Total Group OCG is a component of the movement in Group Solvency II surplus over the period as set out in note 8.iv and is not reconcilable to IFRS.

For the life business, the impact of new business is the change in Solvency II surplus resulting from new business written in the period. Life business earnings from existing business is the Solvency II surplus movement in the period due to operating items excluding the impacts of New Business and Other OCG. Other OCG for life business includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.

The life business OCG reduced by £1.2 billion in 2017 from £3.6 billion to £2.4 billion. Earnings from existing business reduced by £0.4 billion from £2.0 billion to £1.6 billion. This was mainly due to the UK & Ireland, which in 2016 benefitted from changes relating to the Friends Life portfolio, including hedging activity.

Other OCG for life business decreased by £0.9 billion in 2017 from £1.8 billion to £0.9 billion. In 2017, UK & Ireland includes the benefit of non-economic assumption changes, including longevity, and the Friends Life Part VII transfer. In 2017, Europe includes the benefit arising from a model change in France to vary the volatility adjustment in the solo SCR calculation, which is partially offset by non-economic assumption changes. However, this model change in France has not been recognised at Group resulting in an offsetting adjustment in Group centre costs and Other.

The general insurance, health, fund management and other business OCG increased by £0.3 billion in the period reflecting higher surplus generation in UK&I GI and Europe, together with a greater benefit from Group diversification. This was partially offset by lower surplus generation in Canada primarily as a result of the lower underwriting result.

 

 

 

Page 7

 

 

2.iv - Solvency II future surplus emergence

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

2017
£bn

2016
£bn

Year 1

 1.5

1.4

Year 2

 1.4

1.3

Year 3

 1.2

1.2

Year 4

 1.1

1.1

Year 5

 1.0

1.0

Year 6

 1.0

0.9

Year 7

 0.9

0.8

Year 8

 0.8

0.8

Year 9

 0.8

0.7

Year 10

 0.7

0.7

Year 11-15

 3.4

2.7

Year 16-20

 3.6

3.3

Year 20+

 9.6

8.8

Total net of non-controlling interests

 27.0

24.7

 

The table above shows the expected future emergence of Solvency II surplus from the existing long-term in-force life business. 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 for the first ten years followed by five year tranches depending on the date when the surplus is expected to emerge.

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 cash flows are real-world cash flows, i.e. they are based on best estimate non-economic assumptions used in the Solvency II valuation and real-world investment returns rather than risk-free. The expected investment returns are consistent with the returns used in IFRS (as set out in note A4 in the financial supplement), except in the UK where a risk-free curve plus an allowance for expected real-world returns (less an adjustment for credit risk where required) is applied.

Solvency II future surplus emergence is a projection of the movement in Group Solvency II surplus from existing long-term in-force life business as set out in note 8.iv and is not reconcilable to IFRS. The projection is a static analysis as at a point in time and hence it does not include the potential impact of active management of the business (for example, active management of market, demographic and expense risk through investment, hedging, risk transfer and operational risk and expense management), which may affect the actual amount of OCG earned from existing business in future periods.

The total cash flows have increased by £2.3 billion over 2017, largely reflecting an increase in real-world returns in the UK following a change to the assets allocated to the calculation, model changes resulting in an increased solvency capital requirement in France and favourable foreign exchange rate movements in Europe.

 

 

 

Page 8

 

 

3 - Expenses

 

2017
£m

2016
£m

United Kingdom1

1,493

1,408

Canada

478

396

Europe1

820

765

Asia

207

177

Aviva Investors

409

367

Other Group activities

371

295

Operating cost base

3,778

3,408

Integration & restructuring costs2

141

212

Expense base

3,919

3,620

Operating expense ratio3

52.7%

50.5%

1   Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2   As reported within other expenses of £3,537 million (2016: £3,853 million) in the consolidated income statement.

3   Group operating expenses expressed as a percentage of operating profit before operating expenses and group debt costs.

The table below shows the lines of the IFRS consolidated income statement in which operating expenses have been included:

 

2017
£m

2016
£m

Claims handling costs1

330

290

Non-commission acquisition costs2

892

846

Other expenses3

2,556

2,272

Operating cost base

3,778

3,408

1    Operating expenses as reported within net claims and benefits paid of £24,113 million (2016: £23,782 million) in the consolidated income statement.

2    Operating expenses as reported within fee and commission expense of £4,329 million (2016: £3,885 million) in the consolidated income statement.

3    Operating expenses as reported within other expenses of £3,537 million (2016: £3,853 million) in the consolidated income statement.

Operating expenses were £3,778 million (2016: £3,408 million). The increase in operating expenses included £98 million of adverse foreign exchange movements, a full year of RBC operating costs, and the effect of targeted investment into IT, digital and growth initiatives including strengthening our Aviva Investors and UK capabilities. This was partially offset by savings arising from the disposals referred to in note B4.

Integration and restructuring costs have decreased by 34% in constant currency terms, to £141 million (2016: £212 million) as a result of lower integration spend on the Friends Life acquisition and completion of the Solvency II project in 2016. This was partially offset by integration spend relating to the RBC acquisition and restructuring costs in the UK and Europe.

The operating expense ratio of 52.7% is up by 2.2pp, impacted by the reduction in Canada operating profit and our investment in the growth of our businesses.

 

 

 

Page 9

 

 

4 - Value of new business (VNB) on an adjusted Solvency II basis

Following the introduction of Solvency II, the new prudential regulatory framework that came into force on 1 January 2016, the Group has calculated VNB on an adjusted Solvency II basis.

Adjusted Solvency II VNB reflects Solvency II assumptions and allowance for risk and is defined as the increase in Solvency II Own Funds resulting from business written in the period, adjusted to:

· Include business which is not included in the Solvency II Best Estimate Liability (BEL) valuation (e.g. UK and Asia Healthcare business, Retail fund management business and the UK Equity release business);

· Remove the impact of contract boundaries; and

· Include look through profits in service companies (where not included in Solvency II).

A reconciliation between adjusted Solvency II VNB and the Solvency II Own Funds impact of new business is provided below. The trend analysis of adjusted Solvency II VNB and adjusted Solvency II present value of new business premiums (PVNBP) is included in the financial supplement, section E: VNB & sales analysis.

2017

UK1
£m

Europe1

£m

Asia & Other
£m

Group
£m

Adjusted Solvency II VNB (gross of tax and non-controlling interests)2

527

533

183

1,243

Allowance for Solvency II contract boundary rules

54

(64)

4

(6)

Differences due to change in business in scope

(167)

(45)

(34)

(246)

Tax & Other3

(105)

(184)

(25)

(314)

Solvency II Own Funds impact of new business (net of tax and non-controlling interests)

309

240

128

677

 

2016

UK
£m

Europe1

£m

Asia & Other
£m

Group
£m

Adjusted Solvency II VNB (gross of tax and non-controlling interests)2,4

429

429

134

992

Allowance for Solvency II contract boundary rules

51

(55)

(9)

(13)

Differences due to change in business in scope

(131)

(41)

(51)

(223)

Tax & Other3

(74)

(150)

(13)

(237)

Solvency II Own Funds impact of new business (net of tax and non-controlling interests)

275

183

61

519

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2    The principal methodologies and assumptions underlying the calculation of adjusted Solvency II VNB are set out in section E1 and E14 respectively.                                                        

3    Other includes the impact of look through profits in service companies (where not included in Solvency II) and the reduction in value when moving to a net of non-controlling interests basis.

4    UK Life VNB includes £(12) million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund during the second half of 2016.

The Group's VNB increased by 25% to £1,243 million (2016: £992 million). This was driven by growth of new business in the UK, Europe and Asia.

The UK benefitted from strong growth in volumes across all segments partially offset but a change in product and asset mix. Following a clarification to the Solvency II rules made by the Prudential Regulation Authority (PRA) in 2017, new business written since the introduction of Solvency II has been reflected in the calculation of UK Life's transitional measures. This increased the adjusted Solvency II VNB (and Solvency II Own Funds impact of new business and Solvency II Surplus from life new business within OCG) by £96 million gross of tax and non-controlling interests as at 2017.

The increase in Europe was mainly driven by a change in business mix towards more profitable unit-linked and protection business in France and Italy and favourable foreign exchange movements, partly offset by lower volumes of with-profits business in France and the sale of Antarius. Asia benefitted from higher volumes of business in Singapore and China driven by sales growth in agency and broker channels and favourable foreign exchange movements.

The life new business written during the year has increased the Solvency II Capital Requirement by £0.8 billion (2016: £0.7 billion), split £0.4 billion (2016: £0.4 billion) for United Kingdom, £0.3 billion (2016: £0.3 billion) for Europe and £0.1 billion (2016: £nil) for Asia & Other business. This has resulted in a reduction in Solvency II Surplus from life new business of £0.1 billion (2016: £0.2 billion), split £0.1 billion (2016: £0.1 billion) for United Kingdom, £nil (2016: £0.1 billion) for Europe and £nil (2016: £nil) for Asia & Other business.

Solvency II Surplus impact of new business is set out in section 2.iii Life business Solvency II Operating Capital Generation impact of new business.

 

 

 

 

Page 10

 

 

5 - General insurance combined operating ratio (COR)1

 

Net earned premiums

Claims ratio3

Commission and

expense ratio4

Combined

operating ratio5

 

2017
£m

2016
£m

2017
%

2016
%

2017
%

2016
%

2017
%

2016
%

United Kingdom2,6

4,015

3,821

61.0

73.8

32.9

32.5

93.9

106.3

Canada

2,944

2,420

72.2

63.5

30.0

29.5

102.2

93.0

Europe6

2,001

1,747

63.1

66.0

30.2

29.1

93.3

95.1

Asia7

16

12

85.9

72.0

37.3

37.9

123.2

109.9

Total2

8,976

8,000

65.3

69.2

31.3

30.9

96.6

100.1

1    COR is now reported on an earned basis. Comparatives have been realigned to reflect this change.

2    2016 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL). 2016 includes the impact of the change in the Ogden discount rate which had an impact of 5.9pp.

3    Claims ratio: incurred claims expressed as a percentage of net earned premiums.

4    Commission and expense ratio: earned commissions and expenses expressed as a percentage of net earned premiums.

5    Combined operating ratio: aggregate of claims ratio and commission and expense ratio.

6    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

7    Includes Aviva Re net earned premiums.

Group COR for the period was 96.6% (2016: 100.1%).Excluding the one-off impact of the Ogden discount rate change (5.9pp) in 2016, COR has deteriorated by 2.4pp.

The claims ratio (excluding the impact of the Ogden discount rate change) increased by 2.0pp, mainly driven by Canada, where the significantly favourable prior year reserve releases seen in previous years, arising from better than anticipated results following the 2010 Ontario reforms, were not repeated. 2017 was also impacted by an increase in claims severity and frequency on all lines in Canada.

The commission and expense ratio has increased by 0.4pp due to changes in business mix following new partnerships in the UK and the consolidation of the Polish joint venture in Europe.

We continue to apply our reserving policy consistently and to focus on understanding the cost of claims to ensure that reserves are maintained at an appropriate level. Prior year reserve movements will vary year to year but our business is predominantly short tail in nature and the loss development experience is generally stable. In 2017, prior year reserve releases in our general insurance business of £27 million (2016: £241 million) had a favourable impact of 0.3pp (2016: 2.9pp) on our Group result. The impact of Ogden on our 2017 results is not material.

Normalised accident year combined operating ratio (COR)

The normalised accident year claims ratio and normalised accident year combined operating ratio represent the claims ratio and combined operating ratio adjusted to exclude the impact of the change in the Ogden discount rate, prior year claims development4 and weather variations versus expectations5, gross of the impact of profit sharing arrangements.

Group normalised accident year COR improved by 0.2pp driven by a decrease in the claims ratio in the UK and Europe as a result of our focus on disciplined pricing and underwriting, as well as claims and indemnity management, offset by higher claims frequency and severity on all lines in Canada.

 

UK1,2

Canada

Europe2

Total

 

2017
%

2016  
%  

2017
%

2016
%

2017
%

2016
%

2017
%

2016
%

Normalised accident year claims ratio3

64.0

65.7  

70.7

68.2

63.9

68.6

66.5

67.1

Impact of change in Ogden discount rate

-

12.4  

-

-

-

-

-

5.9

Prior year reserve release4

(1.0)

(2.2)  

1.3

(5.4)

(0.9)

(2.3)

(0.3)

(2.9)

Weather over/(under) long-term average5

(2.0)

(2.1)  

0.2

 0.7

0.1

(0.3)

(0.9)

 (0.9)

Claims ratio

61.0

73.8  

72.2

63.5

63.1

66.0

65.3

69.2

Commission and expense ratio6

32.9

32.5  

30.0

29.5

30.2

29.1

31.3

30.9

Normalised accident year combined operating ratio3

96.9

98.2  

100.7

97.7

94.1

97.7

97.8

  98.0 

Combined operating ratio

93.9

106.3  

102.2

93.0

93.3

95.1

96.6

100.1

1    2016 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

2    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

3    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

4    Prior year reserve release represents the changes in the ultimate cost of the claims incurred in prior years, gross of the impact of profit sharing arrangements.

5    Weather over/(under) long-term average represents the difference between the reported net incurred cost of general insurance claims that have occurred as a result of weather events and the equivalent long-term average expected net costs, gross of the impact of profit sharing arrangements.

6    Commission and expense ratio includes the impact of profit sharing arrangements.

The definition of COR has been changed to an earned basis. It was previously calculated on a hybrid basis: the claims ratio was on an earned basis with the incurred claims expressed as a percentage of net earned premiums; while the commission and expense ratio was on a written basis with written commissions and written expenses expressed as a percentage of net written premiums. This did not consider the impact of deferred commissions and expenses, which are included in the underwriting result. The new method is calculated as claims incurred, earned commission and earned expenses as a percentage of net earned premiums which aligns better to our underwriting result. Comparatives have been realigned for 2016 on an earned basis.

 

 

 

Page 11

 

 

6.i - United Kingdom

 

2017
£m

2016
£m

Sterling
% change

Operating profit1,2

 

 

 

Life

1,758

1,523

15%

General Insurance3

408

392

4%

Health4

35

31

13%

 

2,201

1,946

13%

Cash remitted to Group3,4

 

 

 

Life

1,366

1,096

25%

General Insurance and Health

434

91

377%

 

1,800

1,187

52%

Expenses

 

 

 

Operating expenses

1,493

1,408

6%

Integration and restructuring costs

76

134

(43)%

 

1,569

1,542

2%

Value of new business: Adjusted SII basis

527

429

23%

Combined operating ratio

93.9%

106.3%

(12.4)pp

Combined operating ratio excluding impact of change in Ogden discount rate1,3

93.9%

 

 

 

 

General insurance net written premiums2

4,078

3,930

4%

1   2016 excludes the impact of the change in the Ogden discount rate of £475 million, which was recognised as an exceptional adjusting item.

2   2016 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

3   2017 includes £335 million of cash received from the Group's internal reinsurance vehicle. 2017 general insurance cash remittances include amounts of £337 million received from UK General Insurance in February 2018 in respect of 2017 activity.

4   Cash remitted to Group is managed at legal entity level. As Ireland constitutes a branch of the United Kingdom business, cash remittances from Ireland were not aligned to the new management structure within Europe, but they were reported within United Kingdom.

Overview

UK Insurance (UKI) was created in 2017 by bringing our UK life, health and general insurance businesses together under a common leadership team to unlock the potential of our unique position as a large scale composite. The business delivered an increase of 13% in operating profit to £2,201 million (2016: £1,946 million), demonstrating the value of our market leading franchise.

      The Friends Life Part VII transfer was completed on 1 October 2017, delivering further capital benefits. Cash remittances of £1,800 million included special cash remittances of £500 million which arose from the Friends Life integration, taking the total paid to date to £750 million. We expect further payments in 2018 towards the £1 billion target.

Operating and financial performance

Operating profit

 

 

 

2017
£m

 

 

2016
£m

 

Operating Profit

New Business1

Existing  Business

Total
£m

New Business1

Existing  Business

Total
£m

Sterling
% change

Long-term savings2

(74)

259

185

(77)

219

142

30%

Annuities & equity release

335

390

725

305

351

656

11%

Protection

130

97

227

118

124

242

(6)%

Legacy3

-

331

331

-

332

332

-

Other4

-

290

290

-

151

151

92%

Life

391

1,367

1,758

346

1,177

1,523

15%

Underwriting result

 

 

246

 

 

232

6%

Longer-term investment return

 

 

163

 

 

162

1%

Other6

 

 

(1)

 

 

(2)

50%

General Insurance5

 

 

408

 

 

392

4%

Health

 

 

35

 

 

31

13%

Total Operating Profit

 

 

2,201

 

 

1,946

13%

1    New business represents the income earned on new business written during the period reflecting premiums less initial reserves and initial expenses (including commission) less deferred costs along with any changes to existing contracts, which were not anticipated at the outset of the contract that generate additional shareholder risk.

2    Includes pensions and the savings Platforms.

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 items.

5    2016 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional adjusting item.

6    Other General Insurance includes unwind of discount and pension scheme net finance costs.

UK Life operating profit increased by 15% to £1,758 million (2016: £1,523 million) driven by a 13% improvement in new business profits, continued growth of the long-term savings franchise, further optimisation of the annuity asset mix and an increase in the benefit arising from our annual assumptions review, including longevity.

UK General insurance operating profit increased by 4% to £408 million (2016: £392 million) due to an improvement in the underwriting result, reflecting broad-based organic premium growth of 4% and a continued focus on improving our core underwriting competencies.

UK Health operating profit increased 13% to £35 million (2016: £31 million).

 

 

 

 

Page 12

 

 

 

 

6.i - United Kingdom continued

Long-term savings

Long-term savings operating profit increased 30% to £185 million (2016: £142 million). The increase compared to 2016 is driven by assets under management (AUM)1 increasing to £118 billion (2016: £105 billion) due to positive net flows and favourable market movements, whilst maintaining a stable in-force profit margin and strict management of acquisition costs despite increases in new business sales. Net fund flows1 increased to £5.6 billion (2016: £2.9 billion) due to mandate wins in workplace pensions together with a sharp increase in net flows into the advisor platform, where AUM increased by 56% to £20 billion.

Annuities and Equity Release

Annuities and equity release operating profit increased 11% to £725 million (2016: £656 million). PVNBP increased by 58% to £4,287 million (2016: £2,711 million) with an increase in bulk annuities to £2,045 million (2016: £620 million). The profit impact of this was partly offset by a reduction in new business margins due to a change in product mix, with a shift towards bulks along with a change in asset mix. In addition, we have continued to optimise our asset mix by increasing the proportion of illiquid assets backing the in-force portfolio resulting in a £86 million benefit for existing business (2016: £50 million).

Protection                                                                                                                                                                                             

Protection operating profit decreased 6% to £227 million (2016: £242 million) with an increase in new business due to growth in individual protection sales, offset by a fall in existing business profits due to unfavourable claims experience in group protection.

Legacy

Legacy operating profit of £331 million was flat year on year (2016: £332 million). AUM in the legacy portfolio remained stable, with positive investment markets partially offsetting net fund outflows as policies matured. We continue to expect operating profit from the legacy business to decline by approximately 10% per annum over the medium term.

Other

Other of £290 million mainly relates to assumption changes. We recognised benefits from changes in longevity assumptions, including the impact of completing our review of the allowance for anti-selection risk of £170 million, updates reflecting our recent experience of £200 million and updates to the rate of historic and future mortality improvements, including the adoption of CMI 2016, of £340 million. These were partly offset by the impact of strengthening maintenance expense reserves by £89 million from harmonising the UK expense basis following the Friends Life Part VII transfer in 2017, recognition of future project cost reserves of £125 million and a £75 million product governance provision along with various other reserve and modelling impacts totaling £131 million. Other of £151 million in 2016 mainly related to longevity assumption change benefits partially offset by capital optimisation activity and other movements.

General insurance

The underwriting result increased by 6% to £246 million (2016: £232 million), our best underwriting result since 2006, with improvement in the underlying underwriting performance and broad based organic premium growth of 4%, partly offset overall by lower prior year reserve releases, with weather costs broadly flat.

      Longer-term investment return (LTIR) increased by £1 million to £163 million (2016: £162 million), with the reduction in the internal loan return (net neutral to Group), offset by improved investment levels. Excluding the internal loan impact, the UK general insurance operating profit was up by 7%.

Cash

Cash remitted to Group was £1,800 million (2016: £1,187 million) including an additional £500 million (2016: £250 million) of Friends Life integration remittance taking instalments to date to £750 million of the target of £1 billion.

      Excluding the integration remittances, UK Life remittances increased by 2% to £866 million (2016: £846 million).

      UK general insurance cash remitted increased to £434 million (2016: £91 million), due to cash being used to fund an increase in the internal reinsurance arrangement in 2016.

Expenses

Operating expenses increased by 6% to £1,493 million (2016: £1,408 million), as we invested in growth and simplification initiatives in the second half of 2017, and incurred the cost of increased general insurance levies. Excluding these initiatives and levie, UKI Operating expenses were broadly flat, reflecting tight control of the direct expense base as we absorb growth.

Integration and restructuring expenses reduced by 43% to £76 million (2016: £134 million) due to lower integration spend on the Friends Life acquisition.

 

 

 

 

 

 

 

 

 

 

1    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

 

 

 

Page 13

 

 

 

6.i - United Kingdom continued

Value of new business: Adjusted SII Basis (VNB)

 

2017
£m

2016
£m

Sterling

% change

UK Life

 

 

 

Long term savings

153

108

42%

Annuities and equity release

157

141

11%

Protection

183

151

21%

Health and Other

34

29

17%

Total

527

429

23%

VNB increased by 23% to £527 million (2016: £429 million) with growth across all segments.

Long-term savings VNB increased to £153 million (2016: £108 million), driven by continued growth from the savings platform, and new workplace pension schemes.

Annuities and equity release VNB increased to £157 million (2016: £141 million). Annuities were impacted by a change in product and asset mix, offset by a £96 million benefit to VNB following a clarification of the Solvency II rules.

Protection VNB increased to £183 million (2016: £151 million), benefitting from growth in both individual and group protection new business volumes as we see the continued benefit of our digital platform and composite model.

Health and other VNB increased by 17% to £34 million (2016: £29 million), due to increased volumes in our health business.

 

Net written premiums and combined operating ratio (COR)

 

Net written premiums

Combined operating ratio2

United Kingdom General insurance1

2017 £m

2016 £m

Sterling % change

2017 %

2016 %

Change

Personal Motor

1,142

1,076

6%

 

 

 

Personal Non-Motor

1,359

1,332

2%

 

 

 

UK Personal Lines

2,501

2,408

4%

92.0%

92.5%

(0.5)pp

 

 

 

 

 

 

 

Commercial Motor

514

538

(4)%

 

 

 

Commercial Non-Motor

1,063

984

8%

 

 

 

UK Commercial Lines

1,577

1,522

4%

96.7%

96.1%

0.6pp

UK General Insurance excluding impact of change in Ogden discount rate

4,078

3,930

4%

93.9%

93.9%

-

Impact of change in Ogden discount rate

 

 

 

 

12.4%

 

Total

4,078

3,930

4%

93.9%

106.3%

(12.4)pp

1    2016 excludes the one-off impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

2    The Combined operating ratio is now reported on an earned basis. Comparative have been realigned to reflect this change. See note 5 for details.

General insurance net written premiums

UK general insurance net written premiums increased by 4%, reflecting growth in our chosen channels and products including Digital Motor and Commercial Non-Motor. A new partnership with HSBC UK was launched in 2017, with growth expected in 2018 and 2019.

UK Personal Motor increased by 6%, particularly in Digital which grew by 17% from both volume and rate increases. Our pricing increases were broadly in line with the market in response to increased claims inflation, including the Ogden rate change, and an insurance premium tax (IPT) increase. UK Personal Non-Motor grew by 2%.

UK Commercial lines was up by 4%, reflecting continued growth in Commercial Non-Motor, partly offset by remediation in underperforming segments of Commercial Motor. This segment includes an 8% growth in Global Corporate Specialty (GCS).

General insurance combined operating ratio (COR)

UK general insurance COR of 93.9% was stable year on year (excluding the one-off 2016 impact of the change in the Ogden discount rate), reflecting further improvement in the underlying underwriting performance and premium growth, offset by lower levels of prior year reserve releases, with weather experience broadly flat. The commission and expense ratio was slightly higher as a result of the change in business mix, including the impact from new partnerships.

UK Personal Lines COR improved by 0.5 percentage points to 92.0%, as a result of growth in Digital and a combination of rate hardening and higher levels of switching which has allowed us to improve our risk mix.

UK Commercial Lines COR was 0.6 percentage points higher at 96.7%, reflecting an improvement in underlying performance offset by lower levels of prior year reserve releases.

 

 

 

 

Page 14

 

 

6.ii - International

(a)  Canada

 

2017
£m

2016
£m

Sterling
% change

Constant currency
% change

General Insurance operating profit

46

269

(83)%

(84)%

Cash remitted to Group

55

130

(58)%

(56)%

Expenses

 

 

 

 

Operating expenses

478

396

21%

13%

Integration and restructuring costs

15

18

(17)%

(22)%

 

493

414

19%

11%

Combined operating ratio1

102.2%

93.0%

9.2pp

9.2pp

Net written premiums

3,028

2,453

23%

15%

1    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

2017 overview

During 2017 we experienced a number of challenges in the Canadian market which have impacted on performance. These challenges include unfavourable changes in claims patterns affecting prior year reserve development across the industry and a second successive year of weather claims being adverse to the long-term average. However, we have grown net written premium by 15% with the results including a full twelve months of RBC General Insurance that we acquired in June 2016. The integration of RBC General Insurance progressed well, with the completion of a major new system implementation in 2017.

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

Operating and financial performance

Operating profit

 

2017
£m

2016
£m

Sterling
% change

Constant currency
% change

Underwriting result

(64)

168

(138)%

(135)%

Longer-term investment return

115

105

10%

3%

Other1

(5)

(4)

(25)%

(24)%

Total

46

269

(83)%

(84)%

1    Includes unwind of discount and pension scheme net finance costs

In 2017, operating profit decreased by 84%. The lower underwriting result was mainly driven by unfavourable prior year development, which deteriorated from £130 million favourable to £37 million unfavourable. Personal motor saw the biggest movement in prior year development as the reserve releases arising from better than anticipated results following the 2010 Ontario reform were not repeated. A number of new claim applications from prior accident years were also received in 2017. Within our commercial lines business, large losses were higher and we experienced a deterioration in our healthcare and commercial auto performance.

It was also an active year for weather events with weather exceeding the long-term average following numerous storms and the wildfires in British Columbia.

 The longer-term investment result increased due to the contribution from the RBC General Insurance acquisition.

Cash

Cash remittances during the period decreased to £55 million (2016: £130 million) due to lower operating profit.

Expenses

Operating expenses increased to £478 million (2016: £396 million) mainly due to including a full twelve months of RBC General Insurance. Integration and restructuring costs relating to the RBC General Insurance acquisition were down 22%.

Net written premiums

 

Net written premiums

Combined operating ratio1

 

2017
£m

2016
£m

Sterling
% change

Constant currency
%

2017
%

2016
%

Change

Personal Lines

2,171

1,680

29%

21%

102.5%

93.4%

9.1pp

Commercial Lines

857

773

11%

3%

101.2%

92.2%

9.0pp

Total

3,028

2,453

23%

15%

102.2%

93.0%

9.2pp

1    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

Net written premiums

Net written premiums were £3,028 million (2016: £2,453 million), up by 15%, primarily due to including a full twelve months of RBC General Insurance in 2017. Excluding RBC General Insurance, net written premiums increased by 5% with strong growth in both personal and commercial lines.

Combined operating ratio

The combined operating ratio (COR) was 102.2% (2016: 93.0%). Excluding prior year development and adverse weather experience, the COR was 3.0pp higher due to increased claims frequency and severity. The commission and expense ratio was slightly higher, as a result of the shift in business mix following the RBC acquisition and an increase in insurance premium tax, partially offset by lower general and administrative expenses.

 

 

 

Page 15

 

 

 

6.ii - International continued

(b) Europe1

 

2017
£m

20162

£m

Sterling
% change

Constant currency
% change

Operating profit

 

 

 

 

Life

873

876

-

(7)%

General insurance & health

223

168

33%

23%

 

1,096

1,044

5%

(2)%

 

 

 

 

 

Cash remitted to Group2

485

449

8%

1%

Expenses

 

 

 

 

Operating expenses

820

765

7%

-

Integration and restructuring costs

36

9

300%

263%

 

856

774

11%

3%

 

 

 

 

 

Value of new business: Adjusted SII basis

533

429

24%

17%

Combined operating ratio3,4

93.3%

95.1%

(1.8)pp

(1.8)pp

Net written premiums3

2,018

1,816

11%

4%

1    Our European business includes life and general insurance business written in France, Poland and Italy, life business in Ireland, Spain and Turkey and health business in France.

2    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated. This realignment was not implemented for cash remitted to Group, as this metric is managed at legal entity level and Ireland constitutes a branch of the United Kingdom business.

3    General insurance business only.

4    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

2017 overview

In line with our strategy of allocating capital where we can deliver higher returns, our European businesses announced three disposals in the period. In France, we completed the sale of Antarius in April 2017, to Sogecap, a subsidiary of Société Générale. In Spain, we completed the sale of our 50% shareholding in our life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as our retail life insurance business Aviva Vida y Pensiones to Santalucía. In Italy, we announced the termination of our distribution agreement with Banco Popolare. In 2017, we also announced our agreement to acquire Friends First Life Assurance Company in Ireland.

Total operating profit is down by 2% in constant currency compared to 2016; however, our continuing businesses have delivered an increase in operating profit, demonstrating the strength of our focussed approach.

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

Operating and financial performance

Operating profit

 

 

 

 

Life

General insurance & health

 

2017
£m

2016
£m

Sterling
% change

Constant currency
%

2017
£m

2016
£m

Sterling
% change

Constant currency
% change

France (excluding Antarius)

403

351

15%

8%

104

70

49%

37%

Poland1

156

132

18%

8%

21

8

163%

146%

Italy

168

170

(1)%

(8)%

45

42

7%

(1)%

Ireland

33

32

3%

(3)%

53

48

10%

3%

Other Europe (excluding Unicorp, Caja España and Aviva Vida)2

40

34

18%

16%

-

-

-

-

Total (excluding Antarius and Unicorp, Caja España and Aviva Vida)

800

719

11%

4%

223

168

33%

23%

Antarius3

22

78

(72)%

(74)%

-

-

-

-

Unicorp, Caja España and Aviva Vida4

51

79

(35)%

(40)%

-

-

-

-

Total5

873

876

-

(7)%

223

168

33%

23%

1    Poland operating profit benefits from an additional £15 million due to consolidating our joint ventures with the Bank Zachodni WBK SA for the first time in 2017.

2    Includes Spain and Turkey

3    In April 2017, Aviva sold its 50% shareholding in Antarius. The Antarius figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

4    In September 2017, Aviva sold its 50% shareholdings in life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as its retail life insurance business Aviva Vida y Pensiones. The related figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

5    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

Life operating profit was down by 7% to £873 million (2016: £876 million) which reflects the impact of disposals during the year. Excluding disposals life operating profit was up by 4%. In France, operating profit excluding Antarius was £403 million (2016: £351 million), an increase of 8% due to growth in protection and unit-linked products, and higher unit-linked fee income mainly due to favourable equity market movements. In Poland, operating profit of £156 million (2016: £132 million) increased by 8% as a result of favourable equity market movements on pension assets, an increase in fee income and the benefit of consolidating the joint venture with Bank Zachodni WBK SA for the first time in 2017. In Italy, operating profit of £168 million (2016: £170 million) was down 8%, due to the strain of writing high new business volumes of capital-light unit-linked hybrid products. Life operating profit in Ireland of £33 million (2016: £32 million) was down 3%, supported by favourable assumption changes in line with prior year but offset by a slight decrease in profitability due to a change in business mix.

 

 

 

Page 16

 

 

 

6.ii - International continued

General insurance operating profit increased by 23% to £223 million (2016: £168 million). This was mainly driven by France operating profit increasing to £104 million (2016: £70 million), with lower large loss experience and growth in the direct business. In Poland, operating profit increased to £21 million (2016: £8 million) mainly due to increased rate and lower claims frequency on the motor book and the impact of consolidating the joint venture. Operating profit in Ireland of £53 million (2016: £48 million) was up by 3%. Excluding the disposal of Ireland Health, which was disposed in 2016, Ireland operating profit was up by 23%, driven primarily by growth in our direct business, robust fraud management and strong rate increases.

Cash

Cash remitted to the Group was £485 million (2016: £449 million) a 1% increase due mainly to an increased dividend in France, partly offset by a reduction in cash remitted in Spain, following the disposals.

Expenses

Operating expenses of £820 million (2016: £765 million) were flat. This includes a decrease due to the disposal of Ireland Health in 2016, offset by the consolidation of the Polish joint ventures and investment in growth in our continuing businesses.

Integration and restructuring costs of £36 million (2016: £9 million) were up, driven by restructuring spend incurred mainly in France.

Value of new business: Adjusted SII basis (VNB)

 

2017
£m

2016
£m

Sterling
% change

Constant currency

% change

France (excluding Antarius)

216

189

14%

7%

Poland

57

54

5%

(4)%

Italy

179

83

116%

102%

Ireland

11

12

(3)%

(9)%

Other Europe (excluding Unicorp, Caja España and Aviva Vida)1

30

26

12%

23%

Total (excluding Antarius, Unicorp, Caja España and Aviva Vida)

493

364

35%

27%

Antarius2

12

36

(67)%

(69)%

Unicorp, Caja España and Aviva Vida3

28

29

(5)%

(11)%

Total4

533

429

24%

17%

1    Includes Spain and Turkey.

2    In April 2017, Aviva sold its 50% shareholding in Antarius. The Antarius figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

3    In September 2017, Aviva sold its 50% shareholdings in life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as its retail life insurance business Aviva Vida y Pensiones. The related figures shown represent a full year for 2016 and up to completion of the disposal in 2017.

4    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

VNB increased by 17%, and by 27% excluding disposed businesses, with a strong performance in Italy as a result of higher unit-linked and hybrid product volumes and an improved margin on with-profits products. VNB in France increased due to higher unit-linked and protection volumes, partly offset by lower volumes of with-profits products. Poland saw a 4% decrease, reflecting a market-wide reduction in unit-linked volumes. In Ireland, VNB was down 9% as a result of a very competitive annuity market reducing new business profitability.

 

Net written premium (NWP) and combined operating ratio (COR)

 

Net written premiums1

Combined operating ratio1,2

 

2017
£m

2016
£m

Sterling
% change

Constant currency
%

2017
%

2016
%

Change  

France

1,053

957

10%

3%

94.5%

97.0%

(2.5)pp   

Poland3

117

86

36%

25%

86.7%

97.8%

(11.1)pp   

Italy

412

395

4%

(3)%

94.2%

92.5%

1.7pp   

Ireland

436

378

15%

8%

91.4%

92.4%

(1.0)pp   

Total4

2,018

1,816

11%

4%

93.3%

95.1%

(1.8)pp   

1    General insurance business only

2    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

3    Poland net written premium and combined operating ratio excludes the joint venture in 2016 but has been consolidated for the first time in 2017.

4    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

Net written premiums

General insurance net written premiums of £2,018 million increased by 4% with growth in all our markets except Italy. In France and Ireland, general insurance NWP grew, primarily reflecting rating actions and strong growth in our direct business. In Poland, NWP increased by 25% to £117 million (2016: £86 million) with benefits from the consolidation of the joint venture partly offset by a reduction in motor volumes as part of underwriting actions taken. In Italy net written premiums decreased by 3% to £412 million (2016: £395 million) due to underwriting actions taken on segments of the motor book.

Combined operating ratio

The European COR has improved by 1.8pp primarily due to France's COR reducing by 2.5pp to 94.5% due to lower large losses and improved claims experience. Our claims ratio has decreased by 2.9pp to 63.1 % (2016: 66.0%) with an improvement across all markets except Italy. Most notably in Poland the claims ratio has improved due to underwriting action taken on motor business and the consolidation of the joint venture. The commission and expense ratio has increased due to a change in business mix, following the joint venture consolidation in Poland.

 

 

 

Page 17

 

 

 

6.iii - Asia

 

2017
£m

2016
£m

Sterling % change

Constant currency % change

Operating profit

 

 

 

 

Life

235

241

(2)%

(4)%

General insurance & health

(8)

(13)

38%

42%

 

227

228

-

(2)%

Expenses

 

 

 

 

Operating expenses

207

177

17%

13%

Integration and restructuring costs

-

17

-

-

 

207

194

7%

4%

Value of new business: Adjusted SII basis

162

106

53%

47%

Combined operating ratio1,2

123.2%

109.9%

13.3pp

13.3pp

Net written premiums1

13

11

18%

9%

1    General insurance business only.

2    The Combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

2017 overview

Investment in Asia's distribution channels and digital and analytic capabilities continued throughout 2017. Singapore grew its core distribution platform, Aviva Financial Advisers, while China expanded its agency and broker channels. In January, we announced a new joint venture with Hillhouse Capital and Tencent Holdings Limited which focuses on digital insurance in Hong Kong.

We continue to reallocate capital to focus and strengthen our footprint in Asia. In July, we announced the disposal of Friends Provident International Limited (FPI) followed by the sale of our 49% stake in our joint venture in Taiwan in October. Meanwhile, we acquired the remaining 50% shareholding from VietinBank in April and we launched Aviva Vietnam in August.

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

Operating and financial performance

Operating profit

 

2017
£m

2016
£m

Sterling
% change

Constant currency % change

Life operating profit

 

 

 

 

Singapore

118

112

5%

-

Other Asia (excluding FPI)

(2)

(11)

82%

91%

Total (excluding FPI)

116

101

15%

10%

FPI1

119

140

(15)%

(15)%

Total

235

241

(2)%

(4)%

General insurance & health operating profit

(8)

(13)

38%

42%

Total operating profit

227

228

-

(2)%

1    In July 2017, Aviva announced the sale of Friends Provident International Limited ('FPI'). The subsidiary has been classified as held for sale from July 2017, when management were committed to a plan to sell the business.

Operating profit from our life and general insurance and health businesses remained broadly flat at £227 million (2016: £228 million). Excluding FPI, life operating profit increased by 10% to £116 million (2016: £101 million) driven by higher profit generated from existing business in China, coupled with new business growth in Singapore from its financial advisory channel which was partially offset by our continued investments in digital and analytics capabilities.

The general insurance and health business reported a £8 million loss (2016: £13 million loss) as a result of higher claims experience from our health business in Singapore partly offset by an input tax refund from the local authority.

Cash

No dividends were remitted to Group during the year (2016: £nil) as we continue to reallocate capital to support growth in the region.

Expenses

Operating expenses were up by 13% to £207 million (2016: £177 million) reflecting the additional half year of expenses from Vietnam, higher distribution costs to support volume growth in Singapore and investment in digital and analytics capabilities.

Value of new business: Adjusted SII basis (VNB)

 

2017
£m

2016
£m

Sterling

% change1

Constant currency

% change

Singapore

123

95

29%

24%

Other Asia

45

7

543%

463%

Total (excluding FPI)

168

102

65%

57%

FPI1

(6)

4

(250)%

(248)%

Total

162

106

53%

47%

1    In July 2017, Aviva announced the sale of Friends Provident International Limited ('FPI'). The subsidiary has been classified as held for sale from July 2017, when management were committed to a plan to sell the business.

VNB increased by 47% to £162 million (2016: £106 million) reflecting higher volumes from Singapore's financial advisory channel. In China, VNB increased to £45 million (2016: £19 million) driven by sales growth in agency and broker channels and higher interest rates.

General insurance combined operating ratio (COR)

Net written premiums were £13 million (2016: £11 million). The combined operating ratio deteriorated by 13.3pp to 123.2% (2016: 109.9%) due to unfavourable claims experience and the continued softening of market premium rates for motor insurance in Singapore.

 

 

 

Page 18

 

 

 

6.iv - Aviva Investors

 

2017
£m

2016
£m

Sterling
% change

Revenue: Fee income

577

506

14%

Expenses

 

 

 

Operating expenses

409

367

11%

Integration and restructuring costs

3

19

(84)%

 

412

386

7%

Operating profit

 

 

 

Fund management

168

139

21%

Other operations

32

19

68%

 

200

158

27%

Cash remitted to Group

58

39

49%

2017 overview

We have made progress in externalising the business and developing higher value outcome-oriented propositions for our clients. We currently invest more than £353 billion of assets under management (AUM) providing the size and scale to successfully seek out opportunities across multi-asset, fixed income, equity, real estate and alternative investments to deliver specific investor outcomes.

Operating and financial performance

Revenue

Revenue has increased by 14% to £577 million due to the full year impact of on-boarding £14 billion of Friends Life assets in 2016, a 40% growth in the Aviva Investors Multi-Strategy (AIMS) AUM to £12.6 billion (2016: £9.0 billion) and a 24% increase in the origination of infrastructure assets to £4.1 billion (2016: £3.3 billion). The share of revenue from external clients increased to 34% (2016: 32%).

Expenses

Operating expenses increased to £409 million (2016: £367 million). Cost increases have been controlled and reflect the investment required to support the growth of the business. Integration and restructuring costs were £3 million (2016: £19 million).

Operating profit

Fund management operating profit increased by 21% to £168 million (2016: £139 million) driven by growth in revenue, with operating expenses increasing at a slower rate. This led to a 2pp improvement in the operating profit margin, calculated as fund management operating profit expressed as a percentage of revenue, to 29% (2016: 27%).

Operating profit from other operations of £32 million related to insurance recoveries (2016: £19 million, of which £16 million was from the Group's internal reinsurer).

Cash

Cash remitted to Group increased by 49% to £58 million (2016: £39 million) due to growth in the profitability of the business.

Net flows and assets under management

AUM represents all assets managed by Aviva Investors. These comprise Aviva (internal) assets which are included within the Group's statement of financial position and those belonging to external clients outside the Aviva Group which are therefore not included in the Group's statement of financial position. These assets under management exclude those funds that are managed by third parties.

Internal legacy are assets managed by Aviva Investors on behalf of internal Aviva Clients relating to products that are no longer actively marketed.

 

Internal Legacy
£m

Internal Core
£m

External
£m

Total
£m

Aviva Investors

 

 

 

 

Assets under management1 at 1 January 2017

97,290

190,667

56,561

344,518

Total Inflows

3,879

27,774

11,537

43,190

Total Outflows

(10,101)

(21,097)

(10,356)

(41,554)

Net Flows

(6,222)

6,677

1,181

1,636

Net Flows into Liquidity Funds

(732)

403

2,214

1,885

Retention of external mandate2

-

(13,414)

13,414

-

Disposals3

-

-

(714)

(714)

Market and foreign exchange movements

603

3,209

2,090

5,902

Assets under management at 31 December 2017

90,939

187,542

74,746

353,227

1    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

2    Retention of assets under management following sale of Antarius, resulting in a switch from Internal to External.

3    Disposal of Real Estate fund in February 2017.

Assets under management increased to £353.2 billion (2016: £344.5 billion) due to a combination of net fund inflows of £1.6 billion, favourable foreign exchange rate movements of £3.3 billion, favourable liquidity movements of £1.9 billion and the effect of market movements of £2.6 billion offset by the disposal of the Real Estate fund of £0.7 billion. As at 31 December 2017, £12.6 billion (2016: £9.0 billion) of funds under management were invested within our flagship AIMS fund range.

 

 

 

Page 19

 

 

7.i - Life business profit drivers

Life business operating profit before shareholder tax increased by 9% to £2,882 million (2016: £2,642 million), up 6% on a constant currency basis.

Overall, total income increased by 2% to £4,714 million (2016: £4,645 million) and total expenses increased by 8% to £2,260 million (2016: £2,096 million). This increase in net income was partly offset by a higher benefit from DAC and other items, driven by changes in actuarial assumptions in the UK, to give a total increase in life operating profit of £240 million for the year. The increase also reflects a positive foreign exchange impact of £64 million largely driven by the strengthening of the euro against sterling.

 

United Kingdom1

Europe1

Asia9

Total

 

2017
£m

2016
£m

2017
£m

2016
£m

 2017
£m

2016

£m

2017
£m

2016
£m

New business income2,10

868

777

335

291

252

184

1,455

1,252

Underwriting margin3,10

280

310

215

239

85

76

580

625

Investment return4

1,281

1,316

1,171

1,170

227

282

2,679

2,768

Total Income

2,429

2,403

1,721

1,700

564

542

4,714

4,645

Acquisition expenses5

(431)

(383)

(326)

(287)

(191)

(158)

(948)

(828)

Administration expenses6

(655)

(616)

(558)

(556)

(99)

(96)

(1,312)

(1,268)

Total Expenses

(1,086)

(999)

(884)

(843)

(290)

(254)

(2,260)

(2,096)

DAC and other7

415

119

36

19

(39)

(47)

412

91

 

1,758

1,523

873

876

235

241

2,866

2,640

Other business8

 

 

 

 

 

 

16

2

Total life business operating profit

 

 

 

 

 

 

2,882

2,642

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2    Represents the income earned on new business written during the period reflecting premiums less initial reserves.

3    Underwriting margin represents the release of reserves held to cover claims, surrenders and expenses less the cost of actual claims and surrenders in the period.

4    Represents the expected income on existing business (other than the underwriting margin). Life investment return comprises unit-linked margin, shareholders' return on participating business, spread margin and the expected return on shareholder assets.

5    Initial expenses and commission incurred in writing new business less deferred costs.

6    Expenses and renewal commissions incurred in managing existing business.

7    DAC and other mainly include the Deferred Acquisition Cost asset that is amortised in the period and included in operating profit for existing business, assumption changes and other one-off items.

8    Other business includes the total result for Aviva Investors Pooled Pensions and Aviva Life Reinsurance.

9    Following a change in the 2017 methodology applied by FPI, the deferred actuarial funding which forms part of the deferred expense for the Investment return business was included in the Unit-linked margin and not DAC and other. Comparatives have been restated for Investment return and DAC and other. The change resulted in an increase in the Investment return and a decrease in DAC and other for Asia by £123 million. Overall this change has nil effect in the Total life operating profit for Asia and the Group.

10  This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

Income: New business income and underwriting margin

 

United Kingdom1

 

Europe1

 

Asia

 

Total

 

2017
£m

2016
£m

2017
£m

2016
£m

2017
£m

2016
£m

2017
£m

2016
£m

New business income (£m)

868

777

335

291

252

184

1,455

1,252

APE (£m)2,3

2,893

2,373

1,327

1,319

358

270

4,578

3,962

As margin on APE (%)

30%

33%

25%

22%

70%

68%

32%

32%

Acquisition expenses (£m)

(431)

(383)

(326)

(287)

(191)

(158)

(948)

(828)

Net contribution

437

394

9

4

61

26

507

424

Underwriting margin (£m)

280

310

215

239

85

76

580

625

Analysed by:

 

 

 

 

 

 

 

 

Expenses

63

62

65

70

65

47

193

179

Mortality and longevity

217

247

157

152

21

27

395

426

Persistency

-

1

(7)

17

(1)

2

(8)

20

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2    Used as a measure of life sales. It is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. APE excludes UK Retail Fund Management and Health business in UK & Ireland and Asia.

3    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

(a)  New business income

New business income increased to £1,455 million (2016: £1,252 million), mainly driven by the UK, Asia and favourable foreign exchange movements of £25 million.

The net contribution from new business is the new business income less associated acquisition expenses (see (g) below). This increased to a profit of £507 million (2016: profit of £424 million).

In the UK, the net contribution from new business increased to £437 million (2016: £394 million) mainly driven by growth in the sales of individual protection business and annuities.

In Europe, the net contribution increased to £9 million (2016: £4 million) due to growth and margin improvements in Italy, consolidation of the joint venture with Bank Zachodni WBK SA for the first time in Poland offset by a reduced net contribution from France due to the disposal of the Antarius. New business margin on APE in Europe increased slightly to 25% (2016: 22%).

In Asia, the net contribution increased by 113% in constant currency terms to a profit of £61 million (2016: profit of £26 million) mainly as a result of higher sales in Singapore for with-profits business and higher sales volumes in China. New business margin on APE in Asia increased slightly to 70% (2016: 68%) due to higher acquisition expenses reflecting a change in product mix.

(b)  Underwriting margin

The underwriting margin decreased to £580 million (2016: £625 million). This was driven by the UK , as the margin decreased to £280 million (2016: £310 million) mainly due to a reduction in mortality margins. In Europe, the underwriting margin decreased by 15% on a constant currency basis to a profit of £215 million (2016: £239 million) mainly due to lower persistency margins in Italy and Ireland.

In Asia, the underwriting margin increased by 7% in constant currency terms to £85 million (2016: £76 million) mainly due to adverse mortality margins in Singapore offset by favourable expense margins on non-participating annuities in China.

 

 

 

Page 20

 

 

 

7.i - Life business profit drivers continued

Income: Investment return

 

United Kingdom1

 

Europe1

 

Asia7

 

Total

 

2017
£m

2016
£m

2017
£m

2016
£m

2017
£m

2016

£m

2017
£m

2016
£m

Unit-linked margin2,8 (£m)

847

798

585

546

202

235

1,634

1,579

As annual management charge on average reserves (bps)

73

75

138

148

213

276

97

104

Average reserves (£bn)6

116.8

106.7

42.3

36.8

9.5

8.5

168.6

152.0

Participating business3 (£m)

164

192

487

527

(4)

15

647

734

As bonus on average reserves (bps)

34

38

73

79

(10)

43

55

61

Average reserves (£bn)6

48.1

50.3

66.4

66.3

3.9

3.5

118.4

120.1

Spread margin4,8 (£m)

271

267

6

13

12

9

289

289

As spread margin on average reserves (bps)

42

43

13

29

80

75

41

43

Average reserves (£bn)6

64.2

62.0

4.5

4.5

1.5

1.2

70.2

67.7

Expected return on shareholder assets5 (£m)

(1)

59

93

84

17

23

109

166

Total (£m)

1,281

1,316

1,171

1,170

227

282

2,679

2,768

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2    Unit-linked margin represents the annual management charges on unit-linked business based on expected investment return.

3    The shareholders' share of the return on with-profit and other participating business.

4    Spread margin represents the return made on annuity and other non-linked business, based on the expected investment return less amounts credited to policyholders.

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

6    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.

7    Following a change in the 2017 methodology applied by FPI, the deferred actuarial funding which forms part of the deferred expense for the unit-linked business was included in the unit-linked margin and not DAC and other. Comparatives have been restated for Unit-linked margin and DAC and other. The change resulted in an increase in the unit-linked margin and a decrease in DAC and other for Asia by £123 million. Overall this change has nil effect in the Total life operating profit for Asia and the Group.

8    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

(c)  Unit-linked margin

Unit-linked average reserves have increased to £169 million (2016: £152 million), with the movement largely driven by favourable market performance in the UK. The unit-linked margin increased to £1,634 million (2016: £1,579 million). The margin as a proportion of average unit-linked reserves decreased at 97 bps (2016: 104 bps).

The unit-linked margin in UK has increased mainly due to favourable market movements and growth in the sales of group pensions. The margin on average reserves has decreased to 73 bps (2016: 75 bps) due to the expected run-off in the higher margin back book and lower margins on group pensions. The unit-linked margin in Europe increased to £585 million (2016: £546 million), mainly driven by the benefit of consolidating the Polish joint venture for the first time offset by lower margin in Italy due to change in product mix. The decrease in unit-linked margin in Asia to £202 million (2016: £235 million) is mainly due to lower sales volumes in FPI.

(d)  Participating business

Participating average reserves have decreased to £118 million (2016: £120 million). Income from participating business decreased to £647 million (2016: £734 million). In the UK, income has decreased mainly due to lower bonus return reflecting timing of maturities. In Europe, income has decreased to £487 million (2016: £527 million) due to lower income in France following the disposal of Antarius. The majority of participating business income is earned in France, where there is a fixed management charge of around 50 bps on the Association Française d'Epargne et de Retraite 'AFER' business, which is the largest single component of this business.

(e)  Spread margin

Spread business income, which mainly relates to UK in-force immediate annuity and equity release business, remained stable at £289 million (2016: £289 million). The spread margin decreased to 41 bps (2016:43 bps) mainly due to lower interest rates in the UK. In Europe, spread income decreased to £6 million (2016: £13 million), due to the sale of the Spain life business in September 2017. In Asia, spread business income increased to £12 million (2016: £9 million) due to higher volumes on non-participating business in China. 

(f)  Expected return on shareholder assets

Expected returns, representing investment income on surplus funds, decreased to £109 million (2016: £166 million). This is mainly due to the impact of the capital optimisation (hedging) activity in Friends Life and the fall in interest rates in the UK, both reducing the expected return on shareholder assets in UK Life.

 

 

 

Page 21

 

 

 

7.i - Life business profit drivers continued

Expenses

 

United Kingdom1

 

Europe1

 

Asia

 

Total

 

2017
£m

2016
£m

2017
 £m

2016
£m

2017
£m

2016
£m

2017
£m

2016
£m

Acquisition expenses (£m)

(431)

(383)

(326)

(287)

(191)

(158)

(948)

(828)

APE (£m)2

2,893

2,373

1,327

1,319

358

270

4,578

3,962

As acquisition expense ratio on APE (%)

15%

16%

25%

22%

53%

59%

21%

21%

Administration expenses (£m)

(655)

(616)

(558)

(556)

(99)

(96)

(1,312)

(1,268)

As existing business expense ratio on average reserves (bps)

29

28

49

52

66

73

37

37

Average reserves (£bn) 3

229.1

218.9

113.2

107.6

14.9

13.2

357.2

339.7

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2    APE excludes UK Retail Fund Management and Health business in UK & Ireland and 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.

(g)  Acquisition expenses

Acquisition expenses increased to £948 million (2016: £828 million) primarily reflecting higher sales volumes in all segments. In the UK expenses increased to £431 million (2016: £383 million) driven by higher protection sales. In Europe acquisition expenses have increased by 8% on a constant currency basis, mainly driven by higher sales in Italy offset by the sale of Antarius in France.

In Asia acquisition expenses increased to £191 million (2016: £158 million) due to higher new business sales in China. The overall group-wide ratio of acquisition expenses to APE remained stable at 21% (2016: 21%).

(h) Administration expenses

Administration expenses increased to £1,312 million (2016: £1,268 million). The expense ratio remained stable at 37 bps (2016: 37 bps) on average reserves of £357 billion (2016: £340 billion). The increase in the UK is driven by increased investment in growth offset by continued cost control. Administration expenses in Europe have increased to £558 million (2016: £556 million) due to adverse exchange rate movements of £37 million, the consolidation of the joint venture in Poland, higher renewal commissions in Italy, driven by business mix, offset by the disposal of Antarius in France. Asia administration expenses increased slightly in constant currency terms by 1%.

The overall increase in life business acquisition and administration expenses was £164 million, with increased costs due to higher sales volumes in Italy, increased investment in growth and higher protection sales in the UK offset by lower expenses in France.

(i)  DAC and other

DAC and other items increased to £412 million (2016: £91 million) mainly driven by assumption and modelling changes in the UK which benefitted from changes in longevity partially offset by strengthening of our expense assumptions and other reserve and modelling movements (refer 6.i - United Kingdom).

 

 

 

 

Page 22

 

 

7.ii - General insurance and health

2017

UK Personal
£m

UK Commercial
£m

Total UK1 

£m

Canada Personal
£m

Canada Commercial
£m

Total Canada
£m

Europe1

£m

Asia & Other2 

£m

Total
£m

General insurance

 

 

 

 

 

 

 

 

 

Gross written premiums

2,567

1,788

4,355

2,209

929

3,138

2,104

13

9,610

Net written premiums

2,501

1,577

4,078

2,171

857

3,028

2,018

17

9,141

Net earned premiums

2,461

1,554

4,015

2,103

841

2,944

2,001

16

8,976

Net claims incurred

(1,457)

(992)

(2,449)

(1,583)

(543)

(2,126)

(1,262)

(19)

(5,856)

Of which claims handling costs

 

 

(149)

 

 

(119)

(59)

-

(327)

Earned commission

(647)

(324)

(971)

(372)

(178)

(550)

(390)

(1)

(1,912)

Earned expenses3

(161)

(188)

(349)

(201)

(132)

(333)

(213)

(6)

(901)

Underwriting result

196

50

246

(53)

(12)

(65)

136

(10)

307

Longer-term investment return4

 

 

163

 

 

115

79

3

360

Other5

 

 

(1)

 

 

(4)

-

-

(5)

Operating profit

 

 

408

 

 

46

215

(7)

662

Health insurance

 

 

 

 

 

 

 

 

 

Underwriting result

 

 

32

 

 

-

7

(5)

34

Longer-term investment return

 

 

3

 

 

-

1

-

4

Operating profit

 

 

35

 

 

-

8

(5)

38

Total operating profit

 

 

443

 

 

46

223

(12)

700

General insurance combined operating ratio

 

 

 

 

 

 

 

 

 

Claims ratio

59.2%

63.8%

61.0%

75.3%

64.5%

72.2%

63.1%

 

65.3%

Commission ratio

26.3%

20.8%

24.2%

17.7%

21.1%

18.7%

19.5%

 

21.3%

Expense ratio

6.5%

12.1%

8.7%

9.5%

15.6%

11.3%

10.7%

 

10.0%

Combined operating ratio6

92.0%

96.7%

93.9%

102.5%

101.2%

102.2%

93.3%

 

96.6%

Assets supporting general insurance and health business

 

 

 

 

 

 

 

 

 

Debt securities

 

 

3,020

 

 

4,273

2,592

169

10,054

Equity securities

 

 

492

 

 

247

33

-

772

Investment property

 

 

323

 

 

-

176

-

499

Cash and cash equivalents

 

 

546

 

 

140

399

30

1,115

Other7

 

 

1,763

 

 

252

481

2

2,498

Assets at 31 December 2017

 

 

6,144

 

 

4,912

3,681

201

14,938

Debt securities

 

 

3,718

 

 

4,349

2,535

197

10,799

Equity securities

 

 

7

 

 

235

25

-

267

Investment property

 

 

208

 

 

-

133

-

341

Cash and cash equivalents

 

 

757

 

 

115

267

23

1,162

Other7

 

 

1,464

 

 

256

309

3

2,032

Assets at 31 December 2016

 

 

6,154

 

 

4,955

3,269

223

14,601

Average assets

 

 

6,149

 

 

4,934

3,475

212

14,770

LTIR as % of average assets

 

 

2.7%

 

 

2.3%

2.3%

1.4%

2.5%

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparatives balances have been restated.

2    Asia & Other includes Aviva Re.

3    Earned expenses include claims handling costs and earned expenses included in general insurance COR above, plus operating expenses of other non-insurance operations.

4    LTIR includes UK £52 million (2016: £62 million) and Ireland £6 million (2016: £7 million) relating to the internal loan. This is lower than 2016 primarily as a result of the reduction in the balance of this loan during 2017.

5    Includes unwind of discount rate and pension scheme net finance costs.

6    COR is calculated as incurred claims, earned commission and earned expenses, expressed as a percentage of net earned premiums. COR is calculated using unrounded numbers so minor rounding differences may exist.

7    Includes loans and other financial investments.

 

 

 

 

Page 23

 

 

 

7.ii - General insurance and health continued

2016

UK Personal
£m

UK Commercial
£m

Total UK1

£m

Canada Personal
£m

Canada Commercial
£m

Total Canada
£m

Europe1  

£m

Asia & Other3

£m

Total
£m

General insurance

 

 

 

 

 

 

 

 

 

Gross written premiums

2,476

1,743

4,219

1,711

831

2,542

1,891

12

8,664

Net written premiums2

2,408

1,522

3,930

1,680

773

2,453

1,816

12

8,211

Net earned premiums2

2,295

1,526

3,821

1,645

775

2,420

1,747

12

8,000

Net claims incurred2

(1,602)

(1,220)

(2,822)

(1,104)

(433)

(1,537)

(1,153)

(24)

(5,536)

Of which claims handling costs

 

 

(137)

 

 

(93)

(54)

-

(284)

Earned commission

(570)

(310)

(880)

(283)

(160)

(443)

(321)

-

(1,644)

Earned expenses4

(180)

(182)

(362)

(150)

(122)

(272)

(182)

(6)

(822)

Impact of change in Ogden discount rate excluded from underwriting result

230

245

475

-

-

-

-

-

475

Underwriting result2

173

59

232

108

60

168

91

(18)

473

Longer-term investment return5

 

 

162

 

 

105

69

3

339

Other6

 

 

(2)

 

 

(4)

-

-

(6)

Operating profit2

 

 

392

 

 

269

160

(15)

806

Health insurance

 

 

 

 

 

 

 

 

 

Underwriting result

 

 

28

 

 

-

7

(12)

23

Longer-term investment return

 

 

3

 

 

-

1

-

4

Operating profit

 

 

31

 

 

-

8

(12)

27

Total operating profit2

 

 

423

 

 

269

168

(27)

833

General insurance combined operating ratio2

 

 

 

 

 

 

 

 

 

Claims ratio2

69.8%

79.9%

73.8%

67.1%

55.9%

63.5%

66.0%

 

69.2%

Commission ratio

24.8%

20.3%

23.0%

17.2%

20.6%

18.3%

18.7%

 

20.6%

Expense ratio

7.8%

11.9%

9.5%

9.1%

15.7%

11.2%

10.4%

 

10.3%

Combined operating ratio7

102.4%

112.1%

106.3%

93.4%

92.2%

93.0%

95.1%

 

100.1%

Combined operating ratio, excluding the impact of change in Ogden discount rate7

92.5%

96.1%

93.9%

93.4%

92.2%

93.0%

95.1%

 

94.1%

Assets supporting general insurance and health business

 

 

 

 

 

 

 

 

 

Debt securities

 

 

3,718

 

 

4,349

2,535

197

10,799

Equity securities

 

 

7

 

 

235

25

-

267

Investment property

 

 

208

 

 

-

133

-

341

Cash and cash equivalents

 

 

757

 

 

115

267

23

1,162

Other8

 

 

1,464

 

 

256

309

3

2,032

Assets at 31 December 2016

 

 

6,154

 

 

4,955

3,269

223

14,601

Debt securities

 

 

3,993

 

 

2,999

2,407

209

9,608

Equity securities

 

 

8

 

 

188

21

-

217

Investment property

 

 

198

 

 

-

137

-

335

Cash and cash equivalents

 

 

639

 

 

107

197

26

969

Other8

 

 

2,559

 

 

135

313

1

3,008

Assets at 31 December 2015

 

 

7,397

 

 

3,429

3,075

236

14,137

Average assets

 

 

6,776

 

 

4,192

3,172

229

14,369

LTIR as % of average assets

 

 

2.4%

 

 

2.5%

2.2%

1.3%

2.4%

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparatives balances have been restated.

2    Excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL). See note A10 for further details.

3    Asia & Other includes Aviva Re.

4    Earned expenses include claims handling costs and earned expenses included in general insurance COR above, plus operating expenses of other non-insurance operations.

5    LTIR includes UK £62 million (2015: £100 million) and Ireland £7 million (2015: £15 million) relating to the internal loan. This is lower than 2015 primarily as a result of the reduction in the balance of this loan during 2016.

6    Includes unwind of discount rate and pension scheme net finance costs.

7    COR is calculated as incurred claims, earned commission and earned expenses, expressed as a percentage of net earned premiums. COR is calculated using unrounded numbers so minor rounding differences may exist.

8    Includes loans and other financial investments. 

 

 

 

 

Page 24

 

 

7.iii - Fund flows

Net flows is one of the measures of growth used by management and is a component of the movement in Life and platform business managed assets (excluding UK with-profits) during the period. It is the difference between the inflows (being IFRS net written premiums plus deposits received under investment contracts) and outflows (being IFRS net paid claims plus redemptions and surrenders under investment contracts). It excludes market and other movements.

 

Managed assets at 1 January 2017
£m

Premiums and deposits, net of reinsurance
£m

Claims and redemptions, net of reinsurance
£m

Net flows1,2  

£m   

Market and other movements
£m

Managed assets at 31 December

20173  

£m

Life and platform business

 

 

 

 

 

 

UK - non-profit:

 

 

 

 

 

 

- platform

12,963

7,701

(1,482)

6,219  

1,056

20,238

- pensions and other long-term savings

91,589

7,225

(7,837)

(612)  

6,993

97,970

- long-term savings

104,552

14,926

(9,319)

5,607  

8,049

118,208

- annuities and equity release

57,316

2,777

(2,671)

106  

3,375

60,797

- other

25,851

1,355

(2,717)

(1,362)  

238

24,727

United Kingdom(excluding UK with-profits)

187,719

19,058

(14,707)

4,351  

11,662

203,732

Europe4

119,831

11,000

(8,169)

2,831  

(8,594)

114,068

Asia

13,456

737

(419)

318  

752

14,526

Other

1,599

31

(483)

(452)  

143

1,290

 

322,605

30,826

(23,778)

7,048  

3,963

333,616

UK - with-profits and other

61,796

 

 

 

 

58,200

Total life and platform business

384,401

 

 

 

 

391,816

1    Life business net flows in the table above are net of reinsurance.

2    For the period to 31 December 2017, net flows of £7.0 billion includes net flows of £3.4 billion that are included in the IFRS income statement within net written premiums and net paid claims.

3    Life and platform business managed assets at the balance sheet date includes financial investments, loans, investment property, externally reinsured non-participating investment contracts and cash and cash equivalents included on the IFRS statement of financial position, plus assets administered by the Group that are not included on the IFRS statement of financial position. At 31 December 2017, life and platform business managed assets of £392 billion (FY16: £384 billion) includes £374 billion (2016: £373 billion) that is on the IFRS statement of financial position.

4.   Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

5.   Includes platform and pensions business and externally reinsured non-participating investment contracts        

United Kingdom & Ireland (excluding UK with-profits)

UK long-term savings managed assets have increased to £118 billion (2016: £105 billion) during the period. Within this, net inflows were £5.6 billion mainly reflecting continued growth from our platform businesses of £6.2 billion with administered assets increasing by 56% in the period to £20.2 billion (2016: £13.0 billion).

UK annuities and equity release inflows were £0.1 billion, including increased bulk purchase annuity volumes in 2017. Other non-profit outflows were £1.4 billion driven by net outflows in Bonds & Savings as the book continues to run off as expected. Market and other movements include favourable market movements driven by narrowing spreads and growth in equities.

Europe

Net inflows of £2.8 billion were mainly driven by sales of hybrid products in Italy. Market and other movements in Europe reflect the disposal of £11.4 billion of investment assets following the sale of Antarius in France and the disposal of the majority of our business in Spain (£4.9 billion). These disposals were partly offset by favourable foreign exchange movements of £4.5 billion and investment market movements of £3.2 billion.

Asia and other

Net inflows in Asia were £0.3 billion arising mainly in Singapore. Other business net outflows of £0.5 billion primarily relate to Aviva Investors' Pooled Pensions business.

 

 

 

Page 25

 

 

8.i - Summary of assets

The Group asset portfolio is invested to generate competitive investment returns for both policyholders and shareholders while remaining within the Group's appetite for market, credit and liquidity risk.

The Group has a low appetite for interest rate risk and currency risk which means that the asset portfolios are well matched by duration and currency to the liabilities they cover. The Group also runs a low level of liquidity risk which results in a high proportion of income generating assets and a preference for more liquid assets where there is the potential need to realise those assets before maturity.

The Group seeks to diversify its asset portfolio in order to reduce risk and provide more attractive risk-adjusted returns. In order to achieve this there is a comprehensive risk limit framework in place. There is an allowance for diversification in our capital model and we continue to broaden the investment portfolio in individual businesses.

Asset allocation decisions are taken at legal entity level and in many cases by fund within a legal entity in order to reflect the nature of the liabilities, customer expectations, the local accounting and regulatory treatment, and any local constraints. These asset allocation decisions are made in accordance with a group-wide framework that takes into account consensus investment views across the Group, prioritised Group objectives and metrics and Group risk limits and constraints. This framework is overseen by the Group Asset Liability Committee (ALCO) and facilitates a consistent approach to asset allocation across the business units in line with Group risk appetite and shareholder objectives.

The asset allocation as at 31 December 2017 across the Group, split according to the type of liability the assets are covering, is shown in the table below. Further information on these assets is given in the Analysis of Assets Section.

 

Shareholder business assets

 

Participating fund assets

 

 

 

Carrying value in the statement of financial position

General Insurance & health &

other1  

£m

Annuity and non-profit
£m

Policyholder (unit-linked assets)
 £m

UK style with profits
£m

Continental European-style Participating funds
£m

Total assets analysed
£m

Less assets of operation classified as held for sale
£m

Carrying value in the statement of financial position
£m

Debt securities

 

 

 

 

 

 

 

 

Government bonds

6,374

16,044

14,888

16,998

28,698

83,002

(541)

82,461

Corporate bonds

4,064

20,369

13,750

16,567

26,369

81,119

(586)

80,533

Other

343

1,992

2,349

1,041

6,102

11,827

(13)

11,814

 

10,781

38,405

30,987

34,606

61,169

175,948

(1,140)

174,808

Loans

 

 

 

 

 

 

 

 

Mortgage loans

-

20,189

-

91

-

20,280

-

20,280

Other loans

187

4,139

8

2,516

733

7,583

(6)

7,577

 

187

24,328

8

2,607

733

27,863

(6)

27,857

Equity securities

800

195

74,110

13,064

1,994

90,163

(195)

89,968

Investment property

406

169

6,256

2,357

1,609

10,797

-

10,797

Other investments

1,407

2,479

42,368

2,179

4,844

53,277

(6,971)

46,306

Total as at 31 December 2017

13,581

65,576

153,729

54,813

70,349

358,048

(8,312)

349,736

Total as at 31 December 2016

14,152

65,628

132,901

56,672

76,863

346,216

(10,829)

335,387

1    Of the £13.6 billion of assets 6% relates to other shareholder business assets.

There is an internal loan between Aviva Insurance Limited (AIL) and Aviva Group Holdings Limited (AGH) that has a net value of zero at a consolidated level.

General insurance and health

All the investment risk is borne by shareholders and the portfolio held to cover these liabilities contains a high proportion of fixed and variable income securities, of which 82% are rated A or above. The assets are relatively short duration reflecting the short average duration of the liabilities. Liquidity, interest rate and currency risks are maintained at a low level within risk appetite.

Annuity and other non-profit

All the investment risk is borne by shareholders. The annuity liabilities have a long duration but are also illiquid as customers cannot surrender their policies. The assets are chosen to provide stable income and cash flow. Currency and interest rate exposures are closely matched to the liabilities in line with risk appetite. We are able to invest part of the portfolio in less liquid assets in order to improve risk-adjusted returns given the illiquid nature of the liabilities. The asset portfolio is principally comprised of long maturity bonds and loans including a material book of commercial mortgage loans. The other non-profit business assets are a smaller proportion of this portfolio and are generally shorter in duration and have a high proportion invested in fixed income.

£13.9 billion of Shareholder loan assets are backing annuity liabilities in our UK Life business and comprise of commercial mortgage loans (£7.1 billion), Healthcare, Infrastructure and PFI mortgage loans (£3.4 billion) and Primary Healthcare, Infrastructure and PFI other loans (£3.4 billion). The Group carries a valuation allowance within the liabilities against the risk of default of commercial mortgages, including Healthcare and PFI mortgages, of £0.4 billion which equates to 40 bps at 31 December 2017 (2016: 50 bps)

Policyholder assets

These assets are invested in line with the fund choices made by our unit-linked policyholders and the investment risk is borne by the policyholder. This results in a high allocation to growth assets such as equity and property. Aviva's shareholder exposure to these assets arises from the fact that the income we receive is a proportion of the assets under management.

 

 

 

Page 26

 

 

 

8.i - Summary of assets continued

UK style with-profits (WP)

UK style with-profits funds hold relatively long-term contracts with policyholders participating in pooled investment performance subject to some minimum guarantees. Smoothed returns are used to declare bonuses to policyholders which increase the level of the guarantees through time. The part of the portfolio to which policyholder bonuses are linked is invested in line with their expectations and includes growth assets as well as fixed income. The remainder of the portfolio is invested to protect the funds from market movements and mitigate the resultant shareholder risk. This leads us to an overall investment portfolio that holds a higher proportion of growth assets than our other business lines although there are still material allocations to fixed income assets.

Continental European style participating funds

Continental European style participating funds hold relatively long-term contracts with policyholders participating in pooled investment performance subject to some minimum guarantees. Smoothed returns are used to declare bonuses to policyholders. A certain portion of the guarantees are subject to annual discretion declared at the start of the year. Other guarantees are subject to revision downwards at contractual dates. The investment portfolio holds a higher proportion of fixed income assets than the UK style equivalent. Fixed income assets also give rise to less volatility on the local statutory balance sheet than growth assets.

8.ii - Net asset value

At the end of 2017, IFRS net asset value per share was 423 pence (2016: 414 pence). The increase was driven by operating profit and profit on the disposal and remeasurement of subsidiaries, joint ventures and associates, partially offset by dividend payments to shareholders, amortisation and impairment of intangibles and acquired value of in-force business and adverse economic variances.

Total investment variances and economic assumption changes were £318 million adverse. This included £352 million adverse variances in the non-life business, primarily reflecting unfavourable short-term fluctuations due to foreign exchange losses and adverse market movements on Group centre holdings, including the centre hedging programme.

In the life businesses, investment variances and economic assumption changes were £34 million positive. The variance in 2017 is driven by positive variances in the UK, mainly due to economic modelling developments implemented in 2017, partially offset by negative variances in France which are primarily due to an increase in life annuity pension reserves (see A4 for further details).

On 25 May 2017 Aviva announced a share buy-back of ordinary shares for an aggregate purchase price of up to £300 million, which was carried out in full during the period from 25 May 2017 to 19 September 2017. The number of shares in issue has reduced by 58 million as at 31 December 2017 in respect of shares acquired and cancelled under the buy-back programme. Net of new shares issued during the period, the number of shares in issue reduced by 49 million.

IFRS

2017
£m

pence per

share2

2016
£m

pence per

share2

Equity attributable to shareholders of Aviva plc at 1 January1

16,803

414p

15,802

390p

Operating profit

3,068

76p

3,010

73p

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

(318)

(8)p

(381)

(9)p

Profit/(loss) on the disposal and remeasurements of subsidiaries, joint ventures and associates

135

3p

(11)

-

Goodwill impairment and amortisation of intangibles

(246)

(6)p

(175)

(4)p

Amortisation and impairment of acquired value of in-force business

(495)

(12)p

(540)

(13)p

Integration and restructuring costs

(141)

(3)p

(212)

(5)p

Other3

-

-

(498)

(13)p

Tax on operating profit and on other activities

(357)

(9)p

(334)

(8)p

Non-controlling interests

(149)

(4)p

(156)

(4)p

Profit after tax attributable to shareholders of Aviva plc

1,497

37p

703

17p

AFS securities fair value & other reserve movements

7

-

4

-

Ordinary dividends

(983)

(25)p

(871)

(22)p

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

(82)

(2)p

(85)

(2)p

Foreign exchange rate movements

33

1p

945

23p

Remeasurements of pension schemes

(2)

-

242

6p

Shares purchased in buy-back

(300)

(7)p

-

-

Other net equity movements4

(4)

5p

63

2p

Equity attributable to shareholders of Aviva plc at 31 December1

16,969

423p

16,803

414p

1    Excluding preference shares of £200 million (2016: £200 million).

2    Number of shares as at 31 December 2017: 4,013 million (2016: 4,062 million).

3    Other items in 2016 include an exceptional charge of £475 million with a post tax impact of £380 million, relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017. Other items also include a loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premiums ceded, less £78 million in reinsurance recoverables recognised and £6 million claims handling provisions released.

4    Other net equity movements per share include the effect of the reduction of the number of shares in issue by 57,724,500 in respect of shares acquired and cancelled under the share buy-back programme.

 

 

 

Page 27

 

 

8.iii - Return on equity1

The return on equity calculation is based on operating return after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity.

During 2017, return on equity has increased to 13.2% (2016: 12.5%), mainly driven by the increase in operating profit net of taxation.

 

2017
%

2016
%

United Kingdom2

13.9%

11.8%

Canada

2.4%

15.7%

Europe2

13.4%

13.5%

Asia

12.9%

14.0%

Fund management

25.7%

24.4%

Corporate and Other Business

n/a

n/a

Return on total capital employed3

9.8%

9.7%

Subordinated debt

4.3%

4.5%

Senior debt

0.2%

0.1%

Return on total equity3

12.6%

12.1%

Less: Non-controlling interest

10.1%

11.5%

Direct capital instrument and tier 1 notes

6.3%

6.1%

Preference capital

8.5%

8.5%

Return on equity shareholders' funds

13.2%

12.5%

1    Please refer to note C1 for further analysis of return on equity.

2    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

3    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

 

 

 

 

Page 28

 

 

8.iv - Solvency II

The estimated pro forma shareholder cover ratio on a Solvency II basis is 198% at 31 December 2017. The Solvency II position disclosed is based on a 'shareholder view'. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds (£3.3 billion at 31 December 2017) and staff pension schemes in surplus (£1.5 billion at 31 December 2017). These exclusions have no impact on Solvency II surplus. The most material fully ring fenced with-profit funds and staff pension schemes are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised in the Group position. The shareholder view is therefore considered by management to be more representative of the shareholders' risk-exposure and the Group's ability to cover the SCR with eligible own funds.

The Solvency II risk margin is highly sensitive to movements in interest rates, which can be offset by a reset of the transitional measure on technical provisions ('TMTP'). The 31 December 2016 Solvency II position disclosed includes a notional reset of the TMTP to reflect interest rates at 31 December 2016. This presentation is in line with the Group's approach to manage its capital position assuming a dynamic TMTP in respect of the impact of interest rate movements on the risk margin, as this avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The estimated 31 December 2017 Solvency II position includes an estimated reset of the TMTP in line with the regulatory requirement to reset the TMTP every two years. This TMTP has also been amortised on a straightline basis over 16 years from 1 January 2016 in line with the Solvency II rules.

The 31 December 2017 Solvency II position disclosed includes two pro forma adjustments, to reflect known or highly likely events materially affecting the Group's solvency position post 31 December 2017. The adjustments consist of the disposals of Friends Provident International Limited and the Italian joint venture Avipop Assicurazioni S.p.A. These adjustments have been made in order to show a more representative view of the Group's solvency position.

The 31 December 2016 Solvency II Own Funds position includes the pro forma impacts of £0.1 billion in relation to the disposal of Aviva's 50% shareholding in Antarius to Sogecap, which completed on 5 April 2017, and a then anticipated future change to UK tax rules restricting the tax relief that could be claimed in respect of tax losses announced in the Chancellor of the Exchequer's Autumn statement of 23 November 2016, which was removed following clarification in the 13 July 2017 Finance Bill.

Summary of Solvency II position

 

2017
£bn

2016
£bn

Own Funds1,2,3

24.7

24.0

Solvency Capital Requirement1,2,3,4

(12.5)

(12.7)

Estimated Solvency II Surplus at 31 December2,3

12.2

11.3

Estimated Shareholder Cover Ratio1,2,3

198%

  189%

1   The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus £1.5 billion (2016: £1.1 billion) - these exclusions have no impact on Solvency II surplus.

2   The estimated Solvency II position includes the pro forma impacts of the disposals of Friends Provident International Limited (£0.1 billion increase to surplus) and the Italian joint venture Avipop Assicurazioni S.p.A (£0.1 billion increase to surplus).

3   The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva's 50% shareholding in Antarius to Sogecap, which completed on 5 April 2017 (£0.2 billion increase to surplus) and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.4 billion decrease to surplus). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact is included in the estimated 31 December 2017 Solvency II position. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates (£0.4 billion decrease to surplus).

4   The Solvency Capital Requirement above represents the Solvency Capital Requirement after the impact of diversification benefit.

Movement in Group Solvency II Surplus

 

2017
£bn

2016
£bn

Group Solvency II Surplus at 1 January

11.3

9.7

Operating Capital Generation

2.6

3.5

Non-operating Capital Generation

(0.3)

(1.8)

Dividends

(1.1)

(1.0)

Share buy-back

(0.3)

-

Foreign exchange variances

0.1

0.6

Hybrid debt issuance/repayment

(0.5)

0.4

Acquired/divested business

0.4

(0.1)

Estimated Solvency II Surplus at 31 December

12.2

11.3

The estimated Solvency II surplus at 31 December 2017 is £12.2 billion, with a shareholder cover ratio of 198%. This is an increase of £0.9 billion compared to the 31 December 2016 surplus. In 2017 the beneficial impacts of operating capital generation, disposals and foreign exchange variances have been partially offset by hybrid debt repayment, share buy-back and the impact of the Aviva plc dividend. The 2017 operating capital generation includes the beneficial impact of the transfer of the Friends Life business into the main UK life insurance fund. The beneficial impact from divested businesses in 2017 includes the disposal of the Spanish joint ventures Unicorp Vida and Caja Espana Vida and its retail life insurance business Aviva Vida y Pensiones. Also included are pro-forma impacts of the disposals of Friends Provident International Limited and the Italian joint venture Avivpop Assicurazioni S.p.A.

 

 

 

Page 29

 

 

 

8.iv - Solvency II continued

Summary of diversified Solvency Capital Requirement

 

2017
 £bn

2016
 £bn

Credit risk1

3.4

3.3

Equity risk2

1.6

1.3

Interest rate risk3

0.4

0.4

Other market risk4

1.4

1.6

Life insurance risk5

2.8

3.3

General insurance risk6

0.7

0.6

Operational risk

1.1

1.1

Other risk7

1.1

1.1

Total

12.5

12.7

1    Capital held in respect of credit risk recognises the Group's shareholder exposure to changes in the market value of assets and defaults. A range of specific stresses are applied reflecting the difference in assumed risk relative to investment grade and duration.

2    Capital held in respect of equity risk recognises the Group's shareholder exposure to changes in the market value of assets.

3    Capital held in respect of interest rate risk recognises the Group's shareholder exposure to changes in the value of net assets as a result of movements in interest rates.

4    Capital held in respect of other market risk recognises the Group's shareholder exposure to changes in the market value of commercial mortgages and property, but also captures risk in association with inflation and foreign exchange

5    Capital held in respect of life insurance risk recognises the Group's shareholder exposure to life insurance specific risks, such as longevity and lapse.

6    Capital held in respect of general insurance risk recognises the Group's shareholder exposure to general insurance specific risks, such as claims volatility and catastrophe.

7    Capital held in respect of other risk recognises the Group's shareholder exposure to specific risks unique to particular business units and other items.

Equity risk increased over 2017 due to a combination of exposure changes and market movements. Other market risk decreased due to a model change to currency risk. Life insurance risk decreased as a result of longevity assumption changes in the UK and the impact of disposals.

Sensitivity analysis of Solvency II surplus

The following table shows the sensitivity of the Group's Solvency II surplus to:

Economic assumptions:

· 25 basis point increase and decrease, 50 basis point decrease and 100 basis point increase in the risk-free rate, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

· 50 basis point increase and decrease and 100 basis point increase in credit spreads for corporate bonds with credit rating A at 10 year duration, with the other ratings and durations stressed by the same proportion relative to the stressed capital requirement;

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

· 10% increase and decrease and 25% decrease in market values of equity assets.

 

Non-Economic assumptions:

· 10% increase in maintenance and investment expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £11 p.a.);

· 10% increase in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 5.5% p.a.);

· 5% increase in both mortality and morbidity rates for life assurance;

· 5% decrease in mortality rates for annuity business;

· 5% increase in gross loss ratios for general insurance and health business.

 

 

 

 

Page 30

 

 

 

8.iv - Solvency II continued

The sensitivity 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 Solvency Capital Requirement calculation is applicable for that sensitivity. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns.

Transitional Measures on Technical Provisions is 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 4% positive impact would result in a cover ratio of 202%.

Sensitivities

 

Impact on cover ratio
%

Changes in Economic assumptions

25 bps increase in interest rate

4%

 

100 bps increase in interest rate

 15%

 

25 bps decrease in interest rate

(6%)

 

50 bps decrease in interest rate

(12%)

 

50 bps increase in corporate bond spread

1%

 

100 bps increase in corporate bond spread

(2%)

 

50 bps decrease in corporate bond spread

(1%)

 

Credit downgrade on annuity portfolio

(4%)

 

10% increase in market value of equity

2%

 

10% decrease in market value of equity

(2%)

 

25% decrease in market value of equity

(6%)

Changes in Non-Economic assumptions

10% increase in maintenance and investment expenses

(6%)

 

10% increase in lapse rates

(1%)

 

5% increase in mortality/morbidity rates - Life assurance

(1%)

 

5% decrease in mortality rates - annuity business

(11%)

 

5% increase in gross loss ratios

(3%)

 

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.

Reconciliation of IFRS total equity to Solvency II Own Funds

The reconciliation from total Group equity on an IFRS basis to Solvency II Own Funds is presented below. The valuation differences reflect moving from IFRS valuations to a Solvency II shareholder view of Own Funds. 

 

2017
£bn

2016
£bn

Total Group equity on an IFRS basis

    19.1

19.6

Elimination of goodwill and other intangible assets1

 (9.8)

(10.0)

Liability valuation differences (net of transitional deductions)2

 22.0

22.1

Inclusion of risk margin (net of transitional deductions)

(3.3)

(4.4)

Net deferred tax3

(1.3)

(1.6)

Revaluation of subordinated liabilities

(0.7)

(0.9)

Estimated Solvency II Net Assets (gross of non-controlling interests)4

            26.0

24.8

Difference between Solvency II Net Assets and Own Funds5

(1.3)

      (0.8)

Estimated Solvency II Own Funds6,7

24.7

24.0

1    Includes £1.9 billion (2016: £2.0 billion) of goodwill and £7.9 billion (2016: £8.0 billion) of other intangible assets comprising acquired value of in-force business of £3.3 billion (2016: £3.9 billion), deferred acquisition costs (net of deferred income) of £2.9 billion (2016: £2.5 billion) and other intangibles of £1.7 billion (2016: £1.6 billion).

2    Includes the adjustments required to reflect market consistent principles under Solvency II whereby non-insurance assets and liabilities are measured using market value and liabilities arising from insurance contracts are valued on a best estimate basis using market-implied assumptions.

3    Net deferred tax includes the tax effect of all other reconciling items in the table above which are shown gross of tax.

4    The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva's 50% shareholding in Antarius to Sogecap, which completed on 5 April 2017 (£0.1 billion) and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.1 billion). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact is included in the estimated 31 December 2017 Solvency II position. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates at 31 December 2016 of £0.4 billion. The net pro forma impact on Own Funds arising from disposals of Friends Provident International Limited and the Italian joint venture Avipop Assicurazioni S.p.A in 2017 is £nil.

5    Regulatory adjustments to bridge from Solvency II Net Assets to Own Funds include recognition of subordinated debt capital and non-controlling interests.

6    The estimated Solvency II position represents the shareholder view. It excludes the contribution to Group SCR and Group Own Funds of fully ring-fenced with-profits funds £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus £1.5 billion (2016: £1.1 billion) - these exclusions have no impact on Solvency II surplus.

7    This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. See the glossary for further details.

 

 

 

 

 

Page 31

 

 

Financial supplement

 

 

Page

A

Income & expenses

32

B

IFRS financial statements and notes

37

C

Capital & liquidity

95

D

Analysis of assets

99

E

VNB & Sales analysis

122

 

In this section

 

A

Income & expenses

32

Reconciliation of Group adjusted operating profit to profit for the year

32

A1

Other operations

33

A2

Corporate centre

33

A3

Group debt costs and other interest

33

A4

Life business: Investment return variances and economic assumption changes

34

A5

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

35

A6

General insurance and health business: Economic assumption changes

36

A7

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

36

A8

Amortisation and impairment of acquired value of in-force business

36

A9

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

36

A10

Other

36

 

 

 

 

Page 32

 

 

Reconciliation of Group adjusted operating profit to profit for the year

For the year ended 31 December 2017

 

 2017
£m

 2016
£m

Group adjusted operating profit before tax attributable to shareholders' profits

 

 

Life business

 

 

United Kingdom1

1,758

1,523

Europe1

873

876

Asia

235

241

Other

16

2

Total life business

2,882

2,642

General insurance and health

 

 

United Kingdom general insurance1

408

392

United Kingdom health

35

31

Canada

46

269

Europe1

223

168

Asia

(8)

(13)

Other

(4)

(14)

Total general insurance and health

700

833

Fund management

 

 

Aviva Investors

168

139

Asia

(4)

(1)

Total fund management

164

138

Other

 

 

Other operations (note A1)

(169)

(94)

Market operating profit

3,577

3,519

Corporate centre (note A2)

(184)

(184)

Group debt costs and other interest (note A3)

(325)

(325)

Group adjusted operating profit before tax attributable to shareholders' profits

3,068

3,010

Integration and restructuring costs

(141)

(212)

Group adjusted operating profit before tax attributable to shareholders' profits after integration and restructuring costs

2,927

2,798

Adjusted for the following:

 

 

Investment return variances and economic assumption changes on long-term business (note A4)

34

379

Short-term fluctuation in return on investments backing non-long-term business (note A5)

(345)

(518)

Economic assumption changes on general insurance and health business (note A6)

(7)

(242)

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

(49)

-

Amortisation and impairment of intangibles

(197)

(175)

Amortisation and impairment of acquired value of in-force business (note A8)

(495)

(540)

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates (note A9)

135

(11)

Other (note A10)

-

(498)

Adjusting items before tax

(924)

(1,605)

Profit before tax attributable to shareholders' profits

2,003

1,193

Tax on Group adjusted operating profit

(639)

(706)

Tax on other activities

282

372

 

(357)

(334)

Profit for the year

1,646

859

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparatives have been restated.

 

 

 

 

Page 33

 

 

Other Group operating profit items

A1 - Other operations

 

2017
£m

2016
£m

United Kingdom1

(26)

3

Europe1

(37)

(26)

Asia

(32)

(26)

Other Group operations2

(74)

(45)

Total

(169)

(94)

1    Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

2    Other Group operations include Group and head office costs, expenditure on UK digital business and non-insurance operating profit relating to Aviva Re.

Other operations relate to non-insurance activities and include costs associated with our Group and regional head offices, pension scheme expenses, as well as non-insurance income. Total costs in relation to non-insurance activities were £169 million (2016: £94 million).

'Other Group operations' includes increased investment in the development of the UK digital business, partly offset by income relating to insurance recoveries of £32 million (2016: £19 million).

A2 - Corporate centre

 

2017
£m

2016
£m

Project spend

(29)

(30)

Central spend and share award costs

(155)

(154)

Total

(184)

(184)

A3 - Group debt costs and other interest

 

2017
£m

2016
£m

External debt

 

 

Subordinated debt

(391)

(387)

Other

(2)

(1)

Total external debt

(393)

(388)

Internal lending arrangements

(7)

(23)

Net finance income on main UK pension scheme

75

86

Total

(325)

(325)

 

 

 

Page 34

 

 

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 investment returns on financial investments backing shareholder and policyholder 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 non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as other items. 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.

(b) Economic volatility

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

Life business

2017
£m

2016
£m

Investment variances and economic assumption changes

34

379

 

Investment variances and economic assumption changes were £34 million positive (2016: £379 million positive). The variance in 2017 is driven by positive variances in the UK, which are partially offset by negative variances in France.

      Positive variances in the UK are mainly due to economic modelling developments implemented in 2017. These include a one-off development to align the approach to calculating the valuation interest rate across the heritage Aviva and Friends Life portfolios and also a development to the approach to calculating the valuation interest rate for certain deferred annuity business. Positive variances also reflect fewer than expected defaults and downgrades on corporate bonds, better than expected experience on equity release mortgages (in terms of losses related to no negative equity guarantees) and a reduction in the default allowances for commercial mortgages.

      The negative variance in France is primarily due to an increase in life annuity pension reserves, resulting from a reduction to the discount rate cap used in the calculation of these reserves. This economic assumption change reflects the current environment of prolonged low interest rates. A further negative variance stems from losses realised in 2017 on derivative-based funds.

      During 2017 the Group has kept its long-term assumptions for future property prices and rental income under review to allow for the possible future adverse impact of the decision for the UK to leave the European Union. The aim has been to maintain the same allowance in these assumptions in 2017 as was included in 2016, as the impact of the Brexit process on the UK economy remains uncertain.

      In 2016, investment variances and economic assumption changes were £379 million positive. Positive variances in the UK reflected lower interest rates and narrowing credit spreads, which increased asset values more than liabilities. In the first half of 2016 the Group revised its expectation of future property prices and rental income in light of the UK referendum vote for the UK to leave the European Union. The adverse impact of this adjustment on the Group's equity release and commercial mortgage portfolios was broadly offset in the second half of the year as expectations for future property price and rental growth increased. In addition, in the UK the investment variance reflected a refined approach of assuming best estimate expected credit defaults on corporate bonds, with a resulting increase in Group adjusted operating profit in the period. The positive variance in the UK was partially offset by negative variances in France and Italy. The negative variance in France reflected losses on equity hedges managed on an economic basis rather than an IFRS basis and falling interest rates, while the negative variance in Italy reflected widening credit spreads.

(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 equities and properties are:

 

 

Equities

 

Properties

 

2017
%

2016
%

2017
%

2016
%

United Kingdom

4.8%

5.5%

3.3%

4.0%

Eurozone

4.2%

4.5%

2.7%

3.0%


The expected return on equities and properties has been calculated by reference to the 10 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

2017
%

2016
%

Equity risk premium

3.5%

3.5%

Property risk premium

2.0%

2.0%


The 10 year mid-price swap rates as at the start of the period are set out in the table below:

Territories

2017
%

2016
%

United Kingdom

1.3%

2.0%

Eurozone

0.7%

1.0%

 

 

 

 

Page 35

 

 

 

A4 - Life Business: Investment variances and economic assumption changes continued

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.

A5 - Non-life General insurance and health business: Short-term fluctuation in return on investments

 

2017
£m

2016
£m

Analysis of investment income:

 

 

- Net investment income

331

383

- Foreign exchange gains/losses and other charges

(24)

(35)

 

307

348

Analysed between:

 

 

- Longer-term investment return, reported within operating profit

364

343

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

(57)

5

 

307

348

Short-term fluctuations:

 

 

- General insurance and health

(57)

5

- Other operations1

(288)

(523)

Total short-term fluctuations

(345)

(518)

1    Represents short-term fluctuation on assets backing non-life business in Group centre investments, including the centre hedging programme.

The longer-term investment return is calculated separately for each principal non-life business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-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 longer-term return for other investments is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities.

Market value movements which give rise to variances between actual and longer-term investment returns are disclosed separately in short-term fluctuations outside 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.

The adverse short-term fluctuations during 2017 are mainly due to foreign exchange losses and adverse market movements on Group centre holdings, including the centre hedging programme.

Total assets supporting the general insurance and health business, which contribute towards the longer-term return, are:

 

2017
£m

2016
£m

Debt securities

10,054

10,799

Equity securities

772

267

Properties

499

341

Cash and cash equivalents

1,115

1,162

Other1

2,498

2,032

Assets supporting general insurance and health business

14,938

14,601

Assets supporting other non-long term-business2

685

724

Total assets supporting non-long term-business

15,623

15,325

1    Includes the internal loan to Group from UKI.

2    Represents assets backing non-life business in Group centre investments, including the centre hedging programme.

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

 

Longer-term rates of
 return on equities

Longer-term rates of
 return on property

 

2017
%

2016
%

2017
%

2016
%

United Kingdom

4.8%

5.5%

3.3%

4.0%

Eurozone

4.2%

4.5%

2.7%

3.0%

Canada

5.5%

5.4%

4.0%

3.9%

The longer-term rates of return on equities and properties have been calculated by reference to the 10 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 are shown in note A4(c).

 

 

 

Page 36

 

 

 

A6 - General insurance and health business: Economic assumption changes

In the general insurance and health business, an adverse impact of £7 million (2016: £242 million adverse) mainly arises as a result of a slight decrease in the estimated future inflation rate used to value periodic payment orders offset by a slight decrease in the interest rates used to discount claim reserves for periodic payment orders and latent claims. During 2016 market interest rates used to discount periodic payment orders and latent claims reduced and the estimated future inflation rate used to value periodic payment orders was increased to be consistent with market expectations. This was, in part, offset by a change in estimate for the interest rate used to discount periodic payment orders to allow for the illiquid nature of these liabilities.

 

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

Impairment of goodwill, associates and joint ventures expensed in the period comprised of £2 million in respect of an impairment of goodwill at Elite Insurance Company of Canada and £47 million in respect of the full impairment of goodwill in our investment in associate Aviva India (2016: £nil).

A8 - Amortisation and impairment of acquired value of in-force business

Amortisation and impairment of acquired value of in-force business ('AVIF') in the year is a charge of £495 million (2016: £540 million charge). The charge for the year includes £469 million of amortisation in respect of the Group's subsidiaries and joint-ventures and impairment charges of £26 million in relation to the FPI's reinsured book of business and Aviva India.

A9 - Profit/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

The total Group profit on disposal and remeasurement of subsidiaries, joint ventures and associates is £135 million (2016: £11 million loss). This consists of £23 million of remeasurement gains in respect of the joint venture operations in Poland and Aviva Vietnam; £237 million profit on the disposals of Antarius, France health, three businesses in Spain and other small operations; offset by £125 million of remeasurement losses in relation to FPI and Taiwan. Further details are provided in note B4.

A10 - 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. There were no other items during 2017 (2016: £498 million).

 


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