Final Results - Part 4 of 4

RNS Number : 0469H
Aviva PLC
08 March 2018
 

Start part 4 of 4

Page 95

Capital & liquidity

In this section

Page

Capital and liquidity

 

C1

Analysis of return on equity

96

C2

Group capital structure - IFRS basis

97

C3

Equity sensitivity analysis - IFRS basis

98

 

 

 

 

 

Page 96

 

C1 - Analysis of return on equity

 

Operating return1

 

 

2017

Before tax
£m

After tax
£m

Weighted average shareholders' funds including non-controlling

interests2

£m

Return on

equity2

%

United Kingdom

2,201

1,782

12,828

13.9%

Canada

46

34

1,442

2.4%

Europe3

1,096

787

5,890

13.4%

Asia

227

212

1,638

12.9%

Fund management

164

127

495

25.7%

Corporate and Other Business4

(273)

(196)

5,669

n/a

Return on total capital employed

3,461

2,746

27,962

9.8%

Subordinated debt

(389)

(314)

(7,224)

4.3%

Senior debt

(4)

(3)

(1,398)

0.2%

Return on total equity

3,068

2,429

19,340

12.6%

Less: Non-controlling interests

 

(134)

(1,325)

10.1%

Direct capital instrument and tier 1 notes

 

(65)

(1,025)

6.3%

Preference capital

 

(17)

(200)

8.5%

Return on equity shareholders' funds

 

2,213

16,790

13.2%

1    The operating return is based upon Group operating profit. Refer to section 1.

2    Return on equity is based on an annualised operating return after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity.

3    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.

4    The 'Corporate' and 'Other Business' loss before tax of £273 million comprises corporate costs of £184 million, interest on internal lending arrangements of £7 million, other business operating loss (net of investment return) of £157 million, partly offset by finance income on the main UK pension scheme of £75 million.

 

Operating return1

 

 

2016

Before tax
£m

After tax
£m

Weighted average shareholders' funds
including non-controlling

 interests2

£m

Return on

equity2

%

United Kingdom

1,946

1,573

13,289

11.8%

Canada

269

197

1,256

15.7%

Europe3

1,044

743

5,520

13.5%

Asia

228

216

1,548

14.0%

Fund management

138

104

426

24.4%

Corporate and Other Business4

(227)

(219)

4,850

n/a

Return on total capital employed

3,398

2,614

26,889

9.7%

Subordinated debt

(387)

(309)

(6,907)

4.5%

Senior debt

(1)

(1)

(869)

0.1%

Return on total equity

3,010

2,304

19,113

12.1%

Less: Non-controlling interests

 

(147)

(1,279)

11.5%

Direct capital instrument and tier 1 notes

 

(68)

(1,123)

6.1%

Preference capital

 

(17)

(200)

8.5%

Return on equity shareholders' funds

 

2,072

16,511

12.5%

1    The operating return is based upon Group operating profit. Refer to section 1.

2    Return on equity is based on an annualised operating return after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity.

3    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.

4    The 'Corporate' and 'Other Business' loss before tax of £227 million comprises corporate costs of £184 million, interest on internal lending arrangements of £23 million, other business operating loss (net of investment return) of £106 million, partly offset by finance income on the main UK pension scheme of £86 million.

 

 

 

 

 

 

Page 97

 

 

C2 - Group capital structure - IFRS basis

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

 

2017 Capital employed
£m

2016 Capital employed
£m

Life business

 

 

United Kingdom1

11,517

11,670

France

2,704

2,756

Poland

352

296

Italy

954

947

Other Europe1

422

759

Europe

4,432

4,758

Asia

1,558

1,643

 

17,507

18,071

General insurance & health

 

 

United Kingdom general insurance1,2

1,721

1,450

United Kingdom health

93

66

Canada

1,364

1,471

France

589

462

Italy

319

282

Other Europe1

343

315

Europe

1,251

1,059

Asia

10

16

 

4,439

4,062

Fund management

520

462

Corporate and Other Business2,3

5,309

5,533

Total capital employed

27,775

28,128

Financed by

 

 

Equity shareholders' funds

16,969

16,803

Non-controlling interests

1,235

1,425

Direct capital instrument and tier 1 notes

731

1,123

Preference shares

200

200

Subordinated debt4

7,221

7,213

Senior debt

1,419

1,364

Total capital employed5

27,775

28,128

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 Other Europe. As a result, comparative balances have been restated. For the Life business, Other Europe also includes Spain and Turkey and for General insurance & health includes Poland.

2    Capital employed for United Kingdom General Insurance excludes c.£0.9 billion of goodwill which does not support the general insurance business for capital purposes and is included in 'Corporate and Other Business'.

3    'Corporate and Other Business' includes centrally held tangible net assets, the main UK staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance Limited.

4    Subordinated debt excludes amounts held by Group companies of £9 million (2016: £9 million).

5    Goodwill, AVIF and other intangibles are maintained within the capital base. Goodwill includes goodwill in subsidiaries of £1,876 million (2016: £2,045 million), goodwill in joint ventures of £17 million (2016: £20 million) and goodwill in associates of £nil (2016: £47 million). AVIF and other intangibles comprise £3,456 million (2016: £5,468 million) of intangibles in subsidiaries, £40 million (2016: £72 million) of intangibles in joint ventures and £nil million (2016: £18 million) of intangibles in associates, net of deferred tax liabilities of £(721) million (2016: £(783) million) and the non-controlling interest share of intangibles of £(222) million (2016: £(226) million).

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and other borrowings. At the end of 2017 the Group had £27.8 billion (2016: £28.1 billion) of total capital employed in our trading operations measured on an IFRS basis. In 2017 the Group redeemed the $650 million fixed rate tier 1 notes in full at the first call date on 3 November and completed a share buy-back of ordinary shares for an aggregate purchase price of £300 million. The number of shares in issue has reduced by 57,724,500 in respect of shares acquired and cancelled under the buy-back programme.

At the end of 2017 the market value of our external debt (subordinated debt and senior debt), preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million), and direct capital instrument and tier 1 notes was £11,311 million (2016: £11,006 million).

 

 

 

 

 

 

Page 98

 

 

 

C3 - Equity sensitivity analysis - IFRS basis

The sensitivity of the Group's total equity on an IFRS basis at 31 December 2017 to a 10% fall in global equity markets, a rise of 1% in global interest rates or a 0.5% increase in credit spreads is as follows:

31 December 2016
£bn

IFRS basis

31 December 2017
£bn

Equities down 10%
£bn

Interest rates up 1%
£bn

0.5% increased credit spread
£bn

18.1

Long-term savings

17.5

-

(0.7)

(0.4)

10.1

General insurance and other

10.3

(0.1)

(0.5)

0.6

(8.6)

Borrowings

(8.6)

-

-

-

19.6

Total equity

19.2

(0.1)

(1.2)

0.2

These sensitivities assume a full tax charge/credit on market value assumptions. The interest rate sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and therefore incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the real interest rate has the effect of reducing the pension scheme liability in the main UK pension scheme by £1.9 billion (before any associated tax impact).

The 0.5% increased credit spread sensitivity does not make an allowance for any adjustment to risk-free interest rates. The long-term business sensitivities provide for any impact of credit spread movements on liability valuations. The sensitivities also include the allocation of staff pension scheme sensitivities, which assume inflation rates and government bond yields remain constant. In practice, the sensitivity of the business to changes in credit spreads is subject to a number of complex interactions. The impact of the credit spread movements will be related to individual portfolio composition and may be driven by changes in credit or liquidity risk; hence, the actual impact may differ substantially from applying spread movements implied by various published credit spread indices to these sensitivities.

 

 

 

 

 

 

Page 99

 

 

Analysis of assets

In this section

Page

Analysis of assets

 

D1

Total assets

100

D2

Total assets - Valuation bases/fair value hierarchy

101

D3

Analysis of asset quality

103

D4

Pension fund assets

120

D5

Available funds

121

D6

Guarantees

121

 

 

 

 

 

 

Page 100

 

 

 

D1 - Total assets

As an insurance business, Aviva Group holds a variety of assets to match the characteristics and duration of its insurance liabilities. Appropriate and effective asset liability matching (on an economic basis) is the principal way in which Aviva manages its investments. In addition, to support this, Aviva also uses a variety of hedging and other risk management strategies to diversify away any residual mismatch risk that is outside of the Group's risk appetite.

2017

Policyholder assets
£m

Participating fund assets
£m

Shareholder assets
£m

Total assets analysed
£m

Less assets of operations classified as held for sale
£m

Balance sheet total
£m

Goodwill and acquired value of in-force business and intangible assets

-

-

6,798

6,798

(1,467)

5,331

2

1,133

507

1,642

-

1,642

-

175

339

514

(5)

509

6,256

3,966

575

10,797

-

10,797

8

3,340

24,515

27,863

(6)

27,857

 

 

 

 

 

 

30,987

95,775

49,186

175,948

(1,140)

174,808

74,110

15,058

995

90,163

(195)

89,968

42,368

7,023

3,886

53,277

(6,971)

46,306

Reinsurance assets

6,103

235

7,277

13,615

(123)

13,492

-

-

146

146

(2)

144

-

-

94

94

-

94

488

1,484

6,351

8,323

(38)

8,285

27

565

5,952

6,544

(170)

6,374

286

1,230

1,359

2,875

(15)

2,860

12,000

18,855

13,231

44,086

(739)

43,347

Assets of operations classified as held for sale

-

-

-

-

10,871

10,871

Total

172,635

148,839

121,211

442,685

-

442,685

Total %

39.0%

33.6%

27.4%

100.0%

-

100.0%

2016 Total

161,128

157,775

121,516

440,419

-

440,419

2016 Total %

36.6%

35.8%

27.6%

100.0%

-

100.0%

As at 31 December 2017, 27.4% of Aviva's total asset base was shareholder assets, 33.6% participating fund assets where Aviva shareholders have partial exposure, and 39.0% policyholder assets where Aviva shareholders have no exposure. Of the total assets (excluding held for sale), investment property, loans and financial investments comprise £349.7 billion, compared to £335.4 billion at 31 December 2016.

D2 - Total assets - Valuation bases/fair value hierarchy

Total assets - 2017

Fair value
£m

Amortised cost
£m

Equity accounted/

 tax assets1

£m

Total
£m

Goodwill and acquired value of in-force business and intangible assets

-

6,798

-

6,798

Interests in joint ventures and associates

-

-

1,642

1,642

Property and equipment

389

125

-

514

Investment property

10,797

-

-

10,797

Loans

24,398

3,465

-

27,863

Financial Investments

 

 

 

 

Debt securities

175,948

-

-

175,948

Equity securities

90,163

-

-

90,163

Other investments

53,277

-

-

53,277

Reinsurance assets

6,094

7,521

-

13,615

Deferred tax assets

-

-

146

146

Current tax assets

-

-

94

94

Receivables and other financial assets

-

8,323

-

8,323

Deferred acquisition costs and other assets

-

6,544

-

6,544

Prepayments and accrued income

-

2,875

-

2,875

Cash and cash equivalents

44,086

-

-

44,086

Total

405,152

35,651

1,882

442,685

Total %

91.5%

8.1%

0.4%

100.0%

Assets of operations classified as held for sale

9,059

1,810

2

10,871

Total (excluding assets held for sale)

396,093

33,841

1,880

431,814

Total % (excluding assets held for sale)

91.8%

7.8%

0.4%

100.0%

2016 Total

400,358

37,674

2,387

440,419

2016 Total %

90.9%

8.6%

0.5%

100.0%

1    Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted items within the analysis of the Group's assets.

 

 

 

 

 

 

Page 101

 

 

 

D2 - Total assets - Valuation bases/fair value hierarchy continued

Total assets - Policyholder assets 2017

Fair value
£m

Amortised cost
£m

Equity accounted/

 tax assets1

£m

Total
£m

Goodwill and acquired value of in-force business and intangible assets

-

-

-

-

Interests in joint ventures and associates

-

-

2

2

Property and equipment

-

-

-

-

Investment property

6,256

-

-

6,256

Loans

-

8

-

8

Financial Investments

 

 

 

 

Debt securities

30,987

-

-

30,987

Equity securities

74,110

-

-

74,110

Other investments

42,368

-

-

42,368

Reinsurance assets

6,091

12

-

6,103

Deferred tax assets

-

-

-

-

Current tax assets

-

-

-

-

Receivables and other financial assets

-

488

-

488

Deferred acquisition costs and other assets

-

27

-

27

Prepayments and accrued income

-

286

-

286

Cash and cash equivalents

12,000

-

-

12,000

Total

171,812

821

2

172,635

Total %

99.5%

0.5%

-

100.0%

Assets of operations classified as held for sale

8,007

6

-

8,013

Total (excluding assets held for sale)

163,805

815

2

164,622

Total % (excluding assets held for sale)

99.5%

0.5%

-

100.0%

2016 Total

159,107

1,932

89

161,128

2016 Total %

98.7%

1.2%

0.1%

100.0%

1    Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted items within the analysis of the Group's assets.

Total assets - Participating fund assets 2017

Fair value
£m

Amortised cost
£m

Equity accounted/

 tax assets1

£m

Total
£m

Goodwill and acquired value of in-force business and intangible assets

-

-

-

-

Interests in joint ventures and associates

-

-

1,133

1,133

Property and equipment

168

7

-

175

Investment property

3,966

-

-

3,966

Loans

92

3,248

-

3,340

Financial Investments

 

 

 

 

Debt securities

95,775

-

-

95,775

Equity securities

15,058

-

-

15,058

Other investments

7,023

-

-

7,023

Reinsurance assets

-

235

-

235

Deferred tax assets

-

-

-

-

Current tax assets

-

-

-

-

Receivables and other financial assets

-

1,484

-

1,484

Deferred acquisition costs and other assets

-

565

-

565

Prepayments and accrued income

-

1,230

-

1,230

Cash and cash equivalents

18,855

-

-

18,855

Total

140,937

6,769

1,133

148,839

Total %

94.7%

4.5%

0.8%

100.0%

Assets of operations classified as held for sale

-

-

-

-

Total (excluding assets held for sale)

140,937

6,769

1,133

148,839

Total % (excluding assets held for sale)

94.7%

4.5%

0.8%

100.0%

2016 Total

149,146

7,273

1,356

157,775

2016 Total %

94.5%

4.6%

0.9%

100.0%

1    Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted items within the analysis of the Group's assets.

 

 

 

 

 

Page 102

 

 

D2 - Total assets - Valuation bases/fair value hierarchy continued

Total assets - Shareholder assets 2017

Fair value
£m

Amortised cost
£m

Equity accounted/

 tax assets1

£m

Total
£m

Goodwill and acquired value of in-force business and intangible assets

-

6,798

-

6,798

Interests in joint ventures and associates

-

-

507

507

Property and equipment

221

118

-

339

Investment property

575

-

-

575

Loans

24,306

209

-

24,515

Financial Investments

 

 

 

 

Debt securities

49,186

-

-

49,186

Equity securities

995

-

-

995

Other investments

3,886

-

-

3,886

Reinsurance assets

3

7,274

-

7,277

Deferred tax assets

-

-

146

146

Current tax assets

-

-

94

94

Receivables and other financial assets

-

6,351

-

6,351

Deferred acquisition costs and other assets

-

5,952

-

5,952

Prepayments and accrued income

-

1,359

-

1,359

Cash and cash equivalents

13,231

-

-

13,231

Total

92,403

28,061

747

121,211

Total %

76.2%

23.2%

0.6%

100.0%

Assets of operations classified as held for sale

1,052

1,804

2

2,858

Total (excluding assets held for sale)

91,351

26,257

745

118,353

Total % (excluding assets held for sale)

77.2%

22.2%

0.6%

100.0%

2016 Total

92,105

28,469

942

121,516

2016 Total %

75.8%

23.4%

0.8%

100.0%

1    Within the Group's statement of financial position, assets are recognised for deferred tax and current tax. The valuation basis of these assets does not directly fall within any of the categories outlined above. As such, these assets have been reported together with equity accounted items within the analysis of the Group's assets.

Fair value hierarchy

To provide further information on the valuation techniques we use to measure assets carried at fair value, we have categorised the measurement basis for assets carried at fair value into a 'fair value hierarchy' described as follows, based on the lowest level input that is significant to the valuation as a whole:

· Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets.

· Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset.

· Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such unobservable inputs reflect the assumption the business unit considers that market participants would use in pricing the asset. Examples are investment property, certain private equity investment and private placements.

 

Fair value hierarchy

 

 

 

 

Investment property and financial assets - Total 2017

Level 1
£m

Level 2
£m

Level 3
£m

Sub-total
fair value
£m

Amortised cost
£m

Less: Assets of operations classified as held for sale
£m

Balance sheet total
£m

Investment property

-

-

10,797

10,797

-

-

10,797

Loans

-

449

23,949

24,398

3,465

(6)

27,857

Debt securities

108,535

51,921

15,492

175,948

-

(1,140)

174,808

Equity securities

89,313

-

850

90,163

-

(195)

89,968

Other investments (including derivatives)

43,556

5,194

4,527

53,277

-

(6,971)

46,306

Assets of operations classified as held for sale

-

-

-

-

-

8,312

8,312

Total

241,404

57,564

55,615

354,583

3,465

-

358,048

Total %

67.4%

16.1%

15.5%

99.0%

1.0%

-

100.0%

Assets of operations classified as held for sale

6,192

27

2,093

8,312

-

-

8,312

Total (excluding assets held for sale)

235,212

57,537

53,522

346,271

3,465

-

349,736

Total % (excluding assets held for sale)

67.3%

16.4%

15.3%

99.0%

1.0%

-

100.0%

2016 Total1

215,221

73,387

54,032

342,640

3,576

-

346,216

2016 Total %

62.2%

21.2%

15.6%

99.0%

1.0%

-

100.0%

1    Following a review of the Group's investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note D3.3 for further details of this adjustment and the financial statement impact arising.

At 31 December 2017, the proportion of total financial assets classified as Level 1 in the fair value hierarchy increased to 67.4% (2016: 62.2%). The proportion of Level 2 loans and financial assets was 16.1% (2016: 21.2%) and investment properties, loans and financial assets classified as Level 3 was 15.5% (2016: 15.6%).

 

 

 

 

 

 

Page 103

 

D3 - Analysis of asset quality

The analysis of assets that follows provides a breakdown of information about the assets held by the Group.

D3.1 - Investment property

 

 

 

 

2017

 

 

 

2016

 

Fair value hierarchy

 

Fair value hierarchy

 

Investment property - Total

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Lease to third parties under operating leases

-

-

10,514

10,514

-

-

10,754

10,754

Vacant investment property/held for capital appreciation

-

-

283

283

-

-

62

62

Total

-

-

10,797

10,797

-

-

10,816

10,816

Total %

-

-

100.0%

100.0%

-

-

100.0%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

48

48

Total (excluding assets held for sale)

-

-

10,797

10,797

-

-

10,768

10,768

Total % (excluding assets held for sale)

-

-

100.0%

100.0%

-

-

100.0%

100.0%

 

 

 

 

 

2017

 

 

 

2016

 

Fair value hierarchy

 

Fair value hierarchy

 

Investment property - Policyholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Lease to third parties under operating leases

-

-

6,082

6,082

-

-

6,612

6,612

Vacant investment property/held for capital appreciation

-

-

174

174

-

-

13

13

Total

-

-

6,256

6,256

-

-

6,625

6,625

Total %

-

-

100.0%

100.0%

-

-

100.0%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

-

Total (excluding assets held for sale)

-

-

6,256

6,256

-

-

6,625

6,625

Total % (excluding assets held for sale)

-

-

100.0%

100.0%

-

-

100.0%

100.0%

 

 

 

 

 

2017

 

 

 

2016

 

Fair value hierarchy

 

Fair value hierarchy

 

Investment property - Participating fund assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Lease to third parties under operating leases

-

-

3,871

3,871

-

-

3,616

3,616

Vacant investment property/held for capital appreciation

-

-

95

95

-

-

48

48

Total

-

-

3,966

3,966

-

-

3,664

3,664

Total %

-

-

100.0%

100.0%

-

-

100.0%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

48

48

Total (excluding assets held for sale)

-

-

3,966

3,966

-

-

3,616

3,616

Total % (excluding assets held for sale)

-

-

100.0%

100.0%

-

-

100.0%

100.0%

 

 

 

 

 

2017

 

 

 

2016

 

Fair value hierarchy

 

Fair value hierarchy

 

Investment property - Shareholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Lease to third parties under operating leases

-

-

561

561

-

-

526

526

Vacant investment property/held for capital appreciation

-

-

14

14

-

-

1

1

Total

-

-

575

575

-

-

527

527

Total %

-

-

100.0%

100.0%

-

-

100.0%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

-

Total (excluding assets held for sale)

-

-

575

575

-

-

527

527

Total % (excluding assets held for sale)

-

-

100.0%

100.0%

-

-

100.0%

100.0%

Within total investment properties by value 94.7% (2016: 95.1%) are held in policyholder or participating fund assets. Shareholder exposure to investment properties is principally through investments in UK and French commercial property.

Investment properties are stated at their market values as assessed by qualified external independent valuers. The investment properties are valued on an income basis that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar property. These inputs are deemed unobservable.

Within total investment properties by value 97.4% (2016: 99.4%) are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation.

 

 

 

 

 

 

Page 104

 

D3 - Analysis of asset quality continued

D3.2 - Loans 

The Group loan portfolio is principally made up of:

· Policy loans which are generally collateralised by a lien or charge over the underlying policy;

· Loans and advances to banks, which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities;

· Mortgage loans collateralised by property assets;

· Healthcare, Infrastructure & Private Finance Initiative ('PFI') other loans; and

· Other loans, which include loans to brokers and intermediaries.

Loans with fixed maturities, including policy loans, mortgage loans (at amortised cost) and loans and advances to banks, are recognised when cash is advanced to borrowers. These loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method.

For certain mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. The mortgage loans are not traded in active markets. These investments are classified as level 3 as the assumptions used to derive the credit risk, liquidity premium and property risk are not deemed to be market observable.

Loans - Total 2017

United Kingdom
 £m

Canada
£m

Europe
£m

Asia
£m

Total
£m

Policy loans

21

-

738

34

793

Loans and advances to banks

2,524

-

-

-

2,524

Healthcare, Infrastructure & PFI other loans

3,367

-

196

-

3,563

Mortgage loans

20,279

-

1

-

20,280

Other loans

509

180

14

-

703

Total

26,700

180

949

34

27,863

Total %

95.9%

0.6%

3.4%

0.1%

100.0%

Assets of operations classified as held for sale

-

-

6

-

6

Total (excluding assets held for sale)

26,700

180

943

34

27,857

Total % (excluding assets held for sale)

95.9%

0.6%

3.4%

0.1%

100.0%

2016 Total

23,699

170

953

37

24,859

2016 Total %

95.4%

0.7%

3.8%

0.1%

100.0%

 

Loans - Policyholders assets 2017

United Kingdom
£m

Canada
£m

Europe
£m

Asia
£m

Total
£m

Policy loans

-

-

-

8

8

Loans and advances to banks

-

-

-

-

-

Healthcare, Infrastructure & PFI other loans

-

-

-

-

-

Mortgage loans

-

-

-

-

-

Other loans

-

-

-

-

-

Total

-

-

-

8

8

Total %

-

-

-

100.0%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

Total (excluding assets held for sale)

-

-

-

8

8

Total % (excluding assets held for sale)

-

-

-

100.0%

100.0%

2016 Total

1,019

-

-

8

1,027

2016 Total %

99.2%

-

-

0.8%

100.0%

 

Loans - Participating fund assets 2017

United Kingdom
£m

Canada
£m

Europe
£m

Asia
£m

Total
£m

Policy loans

16

-

735

24

775

Loans and advances to banks

1,970

-

-

-

1,970

Healthcare, Infrastructure & PFI other loans

-

-

-

-

-

Mortgage loans

90

-

1

-

91

Other loans

504

-

-

-

504

Total

2,580

-

736

24

3,340

Total %

77.3%

-

22.0%

0.7%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

Total (excluding assets held for sale)

2,580

-

736

24

3,340

Total % (excluding assets held for sale)

77.3%

-

22.0%

0.7%

100.0%

2016 Total

1,613

-

830

27

2,470

2016 Total %

65.3%

-

33.6%

1.1%

100.0%

 

 

 

 

 

 

Page 105

 

 

D3 - Analysis of asset quality continued

D3.2 - Loans continued

Loans - Shareholder assets 2017

United Kingdom
£m

Canada
£m

Europe
£m

Asia
£m

Total
£m

Policy loans

5

-

3

2

10

Loans and advances to banks

554

-

-

-

554

Healthcare, Infrastructure & PFI other loans

3,367

-

196

-

3,563

Mortgage loans

20,189

-

-

-

20,189

Other loans

5

180

14

-

199

Total

24,120

180

213

2

24,515

Total %

98.4%

0.7%

0.9%

-

100.0%

Assets of operations classified as held for sale

-

-

6

-

6

Total (excluding assets held for sale)

24,120

180

207

2

24,509

Total % (excluding assets held for sale)

98.5%

0.7%

0.8%

-

100.0%

2016 Total

21,067

170

123

2

21,362

2016 Total %

98.6%

0.8%

0.6%

-

100.0%

The value of the Group's loan portfolio (including Policyholder, Participating Fund and Shareholder assets) excluding assets held for sale at 31 December 2017 stood at £27.9 billion (2016: £24.8 billion), an increase of £3.1 billion.

The total shareholder exposure to loans was £24.5 billion (2016: £21.4 billion) and represented 87.8% of the total loan portfolio, with the remaining 12.2% mainly held in participating funds (£3.3 billion (2016: £2.4 billion)) with £8 million (2016: £1.0 billion) in policyholder assets.

Of the Group's total loan portfolio excluding assets held for sale (including Policyholder, Participating Fund and Shareholder assets), 73% (2016: 74%) is invested in mortgage loans.

Primary Healthcare, Infrastructure and PFI other loans included within shareholder assets are £3.6 billion (2016: £2.5 billion) and are secured against the income from healthcare and educational premises.

Mortgage loans - Shareholder assets

2017

Total
£m

Non-securitised mortgage loans

 

- Residential (Equity release)

6,799

- Commercial

7,547

- Healthcare, Infrastructure & PFI mortgage loans

3,380

 

17,726

Securitised mortgage loans

2,463

Total

20,189

Assets of operations classified as held for sale

-

Total (excluding assets held for sale)

20,189

2016 Total

18,133

The Group's mortgage loan portfolio is mainly focussed in the UK, across various sectors, including residential loans, commercial loans and government supported healthcare loans. Aviva's shareholder exposure to mortgage loans accounts for 82% of total shareholder asset loans. This section focuses on explaining the shareholder risk within these exposures.

United Kingdom

(Non-securitised mortgage loans)

Residential

The UK non-securitised residential mortgage portfolio has a total value at the end of 2017 of £6.8 billion (2016: £5.7 billion).

The movement in the year is due to £0.7 billion of net new loans and £0.1 billion of accrued interest (net of redemptions). Fair value movements were £0.3 billion.

These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the structure of equity release mortgages, whereby interest amounts due are not paid in cash but instead rolled into the amount outstanding, they predominantly have a current Loan to Value ('LTV') of below 70%. The average LTV across the portfolio is 24.6% (2016: 24.5%). The change from prior year reflects the change in portfolio mix following the transfer, as outlined above.

 

 

 

 

 

Page 106

 

 

D3 - Analysis of asset quality continued

D3.2 - Loans continued

Commercial

Gross exposure by loan to value and arrears is shown in the table below.

 

Shareholder assets

2017

>120%
£m

115-120%
£m

110-115%
£m

105-110%
£m

100-105%
£m

95-100%
£m

90-95%
£m

80-90%
£m

70-80%
£m

<70%
£m

Total
£m

Not in arrears

-

-

-

-

-

-

333

50

684

6,480

7,547

0 - 3 months

-

-

-

-

-

-

-

-

-

-

-

3 - 6 months

-

-

-

-

-

-

-

-

-

-

-

6 - 12 months

-

-

-

-

-

-

-

-

-

-

-

> 12 months

-

-

-

-

-

-

-

-

-

-

-

Total

-

-

-

-

-

-

333

50

684

6,480

7,547

Of the £7.5 billion (2016: £6.7 billion) of UK non-securitised commercial mortgage loans in the shareholder fund held by UK Life, £7.1 billion are used to back annuity liabilities and are stated on a fair value basis. The loan exposures for UK Life are calculated on a discounted cash flow basis, and include a risk adjustment through the use of Credit Risk Adjusted Value ('CRAV') methods.

For commercial mortgages loan service collection ratios, a key indicator of mortgage portfolio performance, improved to 2.23x (2016: 1.89x). Loan Interest Cover (LIC), which is defined as the annual net rental income (including rental deposits and less ground rent) divided by the annual loan interest service, also improved to 2.51x (2016: 2.18x). Average mortgage LTV decreased by 2pp compared to 2016 from 58% to 56% (CRAV). There are no loans in arrears included within our shareholder assets (2016: £0.1 million).

Commercial mortgages and Healthcare, Infrastructure & PFI loans are held at fair value on the asset side of the statement of financial position. Insurance liabilities are valued using a discount rate derived from gross yield on assets, with adjustments to allow for risk. £13.9 billion of shareholder loan assets are backing annuity liabilities 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). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including Healthcare and PFI mortgages are £1.3 billion (2016: £1.3 billion) over the remaining term of the UK Life corporate bond and mortgage portfolio.

The UK portfolio remains well diversified in terms of property type, location and tenants as well as the spread of loans written over time. The risks in commercial mortgages are addressed through several layers of protection with the mortgage risk profile being primarily driven by the ability of the underlying tenant rental income to cover loan interest and amortisation. Should any single tenant default on their rental payment, rental from other tenants backing the same loan often ensures the loan interest cover does not fall below 1.0x. Where there are multiple loans to a single borrower further protection may be achieved through cross-charging (or pooling) such that any single loan is also supported by rents received within other pool loans. Additionally, there may be support provided by the borrower of the loan itself and further loss mitigation from any general floating charge held over assets within the borrower companies.

If the LIC cover falls below 1.0x and the borrower defaults then Aviva still retains the option of selling the security or restructuring the loans and benefiting from the protection of the collateral. A combination of these benefits and the high recovery levels afforded by property collateral (compared to corporate debt or other uncollateralised credit exposures) results in the economic exposure being significantly lower than the gross exposure reported above. We will continue to actively manage this position.

Healthcare

Primary Healthcare, Infrastructure and PFI mortgage loans included within shareholder assets of £3.4 billion (2016: £3.3 billion) are secured against primary health care premises (including General Practitioner surgeries), education, social housing and emergency services related premises. For all such loans, Government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.

On a market value basis, we estimate the average LTV of these mortgages to be 76% (2016: 74%), although as explained above, we do not consider this to be a key risk indicator. Income support from the Government bodies and the social need for these premises provide sustained income stability. Aviva therefore considers these loans to be lower risk relative to other mortgage loans.

Securitised mortgage loans

Securitised residential mortgages held are predominantly issued through vehicles in the UK.

As at 31 December 2017, the Group has £2.5 billion (2016: £2.4 billion) securitised mortgage loans. Funding for the securitised residential mortgage assets was obtained by issuing loan note securities. Of these loan notes approximately £231 million (2016: £217 million) are held by Group companies. The remainder is held by third parties external to Aviva. As any cash shortfall arising once all mortgages have redeemed is borne by the loan note holders, the majority of the credit risk of these mortgages is borne by third parties.

These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the structure of equity release mortgages, whereby interest amounts due are not paid in cash but instead rolled into the amount outstanding, they predominantly have a current Loan to Value ('LTV') of below 70%. The average LTV across the securitised mortgage loans is 37.2%.

 

 

 

 

 

 

Page 107

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments

 

 

 

 

 2017

 

 

 

2016

Financial Investments - Total

Cost/ amortised cost
£m

Unrealised gains
£m

Impairment and unrealised losses
£m

Fair value
£m

Cost/ amortised cost
£m

Unrealised gains
£m

Impairment and unrealised losses
£m

Fair value
£m

Debt securities

162,092

20,244

(6,388)

175,948

172,007

16,014

(1,313)

186,708

Equity securities

75,060

16,819

(1,716)

90,163

60,194

14,152

(1,640)

72,706

Other investments

37,570

15,930

(223)

53,277

42,341

8,491

295

51,127

Total

274,722

52,993

(8,327)

319,388

274,542

38,657

(2,658)

310,541

Assets of operations classified as held for sale

7,075

1,245

(14)

8,306

9,872

865

(31)

10,706

Total (excluding assets held for sale)

267,647

51,748

(8,313)

311,082

264,670

37,792

(2,627)

299,835

Aviva holds large quantities of debt securities in the form of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to increase returns to policyholders and partly to optimise the risk/return profile for shareholders. The risks are consistent with the products we offer and the related investment mandates, and are in line with our risk appetite.

The Group also holds equities, the majority of which are held in participating funds and policyholder funds, where they form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds. The vast majority of equity investments are valued at quoted market prices and therefore classified as Level 1. Refer to D3.3.2 for further analysis of equities.

Other investments include investments such as unit trusts, derivative financial instruments and deposits with credit institutions. For further analysis, see D3.3.3.

      Following a review of the Group's investment classifications, comparative amounts have been amended from those previously reported, reflecting the fact that equity and debt securities held indirectly through majority owned investment funds in the UK managed by third parties, which in 2016 were presented as unit trusts and other investment vehicles within other investments, are now presented as debt and equity securities. The effect of this change is to increase equity and debt securities by £3,434 million and £3,694 million respectively and decrease unit trusts and other investment vehicles within other investments by £7,128 million.

In addition, assets classified as held for sale of £10,706 million have been revised from available for sale to other than trading.

 

 

 

 

 

 

Page 108

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities

 

Fair value hierarchy

 

Debt securities - 2017

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

27,743

2,276

242

30,261

Non-UK government

37,948

11,283

3,510

52,741

Europe

30,991

6,368

2,966

40,325

North America

1,900

2,882

441

5,223

Asia Pacific & Other

5,057

2,033

103

7,193

Corporate bonds - Public utilities

4,383

6,206

540

11,129

Corporate convertible bonds

9

-

-

9

Other Corporate bonds

34,349

26,626

9,006

69,981

Other

4,103

5,530

2,194

11,827

Total

108,535

51,921

15,492

175,948

Total %

61.7%

29.5%

8.8%

100.0%

Assets of operations classified as held for sale

764

21

355

1,140

Total (excluding assets held for sale)

107,771

51,900

15,137

174,808

Total % (excluding assets held for sale)

61.6%

29.7%

8.7%

100.0%

2016 Total1

102,724

66,668

17,316

186,708

2016 Total %

55.0%

35.7%

9.3%

100.0%

 

 

Fair value hierarchy

 

Debt securities - Policyholders assets 2017

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

9,172

2

(1)

9,173

Non-UK government

4,983

726

6

5,715

Europe

1,453

385

1

1,839

North America

1,168

294

4

1,466

Asia Pacific & Other

2,362

47

1

2,410

Corporate bonds - Public utilities

810

393

5

1,208

Corporate convertible bonds

-

-

-

-

Other Corporate bonds

10,123

1,863

556

12,542

Other

1,289

1,060

-

2,349

Total

26,377

4,044

566

30,987

Total %

85.1%

13.1%

1.8%

100.0%

Assets of operations classified as held for sale

-

11

355

366

Total (excluding assets held for sale)

26,377

4,033

211

30,621

Total % (excluding assets held for sale)

86.1%

13.2%

0.7%

100.0%

2016 Total1

17,521

11,193

803

29,517

2016 Total %

59.4%

37.9%

2.7%

100.0%

1    Following a review of the Group's investment classification, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to D3.3 for further details of this adjustment and the financial statement impact arising.

 

 

 

 

 

 

 

Page 109

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

 

Fair value hierarchy

 

Debt securities - Participating fund assets 2017

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

9,269

975

77

10,321

Non-UK government

29,380

4,103

1,892

35,375

Europe

26,085

2,651

1,847

30,583

North America

691

22

1

714

Asia Pacific & Other

2,604

1,430

44

4,078

Corporate bonds - Public utilities

3,419

1,128

17

4,564

Corporate convertible bonds

9

-

-

9

Other Corporate bonds

23,027

9,544

5,792

38,363

Other

2,609

2,689

1,845

7,143

Total

67,713

18,439

9,623

95,775

Total %

70.7%

19.3%

10.0%

100.0%

Assets of operations classified as held for sale

-

-

-

-

Total (excluding assets held for sale)

67,713

18,439

9,623

95,775

Total % (excluding assets held for sale)

70.7%

19.3%

10.0%

100.0%

2016 Total1

70,161

23,256

10,280

103,697

2016 Total %

67.7%

22.4%

9.9%

100.0%

 

 

Fair value hierarchy

 

Debt securities - Shareholder assets 2017

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

9,302

1,299

166

10,767

Non-UK government

3,585

6,454

1,612

11,651

Europe

3,453

3,332

1,118

7,903

North America

41

2,566

436

3,043

Asia Pacific & Other

91

556

58

705

Corporate bonds - Public utilities

154

4,685

518

5,357

Corporate convertible bonds

-

-

-

-

Other Corporate bonds

1,199

15,219

2,658

19,076

Other

205

1,781

349

2,335

Total

14,445

29,438

5,303

49,186

Total %

29.3%

59.9%

10.8%

100.0%

Assets of operations classified as held for sale

764

10

-

774

Total (excluding assets held for sale)

13,681

29,428

5,303

48,412

Total % (excluding assets held for sale)

28.2%

60.8%

11.0%

100.0%

2016 Total1

15,042

32,219

6,233

53,494

2016 Total %

28.1%

60.2%

11.7%

100.0%

1    Following a review of the Group's investment classification, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to D3.3 for further details of this adjustment and the financial statement impact arising.

Within the shareholder assets 29.3% (2016: 28.1%) of exposure to debt securities is based on quoted prices in an active market and are therefore classified as fair value level 1.

Within the shareholder assets 59.9% (2016: 60.2%) of exposure to debt securities is based on inputs other than quoted prices and are observable for the asset or liability, either directly or indirectly and are therefore classified as fair value level 2.

Within the shareholder assets 10.8% (2016: 11.7%) of exposure to debt securities is fair valued using models with significant unobservable market parameters (classified as fair value level 3). Where estimates are used, these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible.

 

 

 

 

 

Page 110

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

 

External ratings

 

 

Debt securities - Total 2017

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

164

29,756

75

-

138

109

30,242

UK local authorities

-

1

-

-

1

17

19

Non-UK Government

10,757

20,602

6,157

12,443

1,689

1,093

52,741

 

10,921

50,359

6,232

12,443

1,828

1,219

83,002

Corporate

 

 

 

 

 

 

 

Public utilities

2

175

4,165

5,517

670

600

11,129

Convertibles and bonds with warrants

-

-

-

9

-

-

9

Other corporate bonds

6,944

5,640

22,455

20,372

7,688

6,882

69,981

 

6,946

5,815

26,620

25,898

8,358

7,482

81,119

Certificates of deposits

-

377

557

-

-

92

1,026

Structured

 

 

 

 

 

 

 

RMBS2 non-agency ALT A

-

-

-

-

-

-

-

RMBS2 non-agency prime

12

27

93

1

59

-

192

RMBS2 agency

53

-

-

-

-

-

53

 

65

27

93

1

59

-

245

CMBS3

317

35

289

-

1

1

643

ABS4

38

465

469

101

81

-

1,154

CDO (including CLO)5

377

-

-

-

-

-

377

ABCP6

-

-

-

-

-

-

-

 

732

500

758

101

82

1

2,174

Wrapped credit

-

18

485

81

43

12

639

Other

54

144

447

2,423

3,370

1,305

7,743

Total

18,718

57,240

35,192

40,947

13,740

10,111

175,948

Total %

10.6%

32.5%

20.0%

23.3%

7.8%

5.8%

100.0%

Assets of operations classified as held for sale

68

25

8

1,017

11

11

1,140

Total (excluding assets held for sale)

18,650

57,215

35,184

39,930

13,729

10,100

174,808

Total % (excluding assets held for sale)

10.7%

32.7%

20.1%

22.8%

7.9%

5.8%

100.0%

2016 Total1

22,030

62,495

35,403

44,660

11,163

10,957

186,708

2016 Total %

11.7%

33.5%

19.0%

23.9%

6.0%

5.9%

100.0%

1    Following a review of the Group's investment classification, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to D3.3 for further details of this adjustment and the financial statement impact arising.

2    RMBS - Residential Mortgage Backed Security

3    CMBS - Commercial Mortgage Backed Security

4    ABS - Asset Backed Security

5    CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6    ABCP - Asset Backed Commercial Paper

 

 

 

 

 

 

Page 111

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

 

External ratings

 

 

Debt securities - Policyholders assets 2017

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

164

8,871

-

-

138

-

9,173

UK local authorities

-

-

-

-

-

-

-

Non-UK Government

1,724

166

1,557

1,431

603

234

5,715

 

1,888

9,037

1,557

1,431

741

234

14,888

Corporate

 

 

 

 

 

 

 

Public utilities

-

17

431

392

363

5

1,208

Convertibles and bonds with warrants

-

-

-

-

-

-

-

Other corporate bonds

436

433

3,867

2,462

3,325

2,019

12,542

 

436

450

4,298

2,854

3,688

2,024

13,750

Certificates of deposits

-

377

557

-

-

13

947

Structured

 

 

 

 

 

 

 

RMBS2 non-agency ALT A

-

-

-

-

-

-

-

RMBS2 non-agency prime

-

2

12

-

-

-

14

RMBS2 agency

-

-

-

-

-

-

-

 

-

2

12

-

-

-

14

CMBS3

4

10

23

-

-

-

37

ABS4

-

-

35

2

22

-

59

CDO (including CLO)5

-

-

-

-

-

-

-

ABCP6

-

-

-

-

-

-

-

 

4

10

58

2

22

-

96

Wrapped credit

-

-

-

4

-

-

4

Other

9

24

75

401

561

218

1,288

Total

2,337

9,900

6,557

4,692

5,012

2,489

30,987

Total %

7.6%

31.9%

21.2%

15.1%

16.2%

8.0%

100.0%

Assets of operations classified as held for sale

1

-

2

346

6

11

366

Total (excluding assets held for sale)

2,336

9,900

6,555

4,346

5,006

2,478

30,621

Total % (excluding assets held for sale)

7.7%

32.3%

21.4%

14.2%

16.3%

8.1%

100.0%

2016 Total1

1,661

8,946

5,011

6,028

4,002

3,869

29,517

2016 Total %

5.6%

30.3%

17.0%

20.4%

13.6%

13.1%

100.0%

1    Following a review of the Group's investment classification, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to D3.3 for further details of this adjustment and the financial statement impact arising.

2    RMBS - Residential Mortgage Backed Security

3    CMBS - Commercial Mortgage Backed Security

4    ABS - Asset Backed Security

5    CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6    ABCP - Asset Backed Commercial Paper

 

 

 

 

 

 

Page 112

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

 

External ratings

 

 

Debt securities - Participating fund assets 2017

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

-

10,285

1

-

-

33

10,319

UK local authorities

-

1

-

-

1

-

2

Non-UK Government

4,350

16,511

3,205

9,915

1,077

317

35,375

 

4,350

26,797

3,206

9,915

1,078

350

45,696

Corporate

 

 

 

 

 

 

 

Public utilities

2

61

1,241

2,799

277

184

4,564

Convertibles and bonds with warrants

-

-

-

9

-

-

9

Other corporate bonds

4,480

2,854

10,531

12,928

4,167

3,403

38,363

 

4,482

2,915

11,772

15,736

4,444

3,587

42,936

Certificates of deposits

-

-

-

-

-

-

-

Structured

 

 

 

 

 

 

 

RMBS2 non-agency ALT A

-

-

-

-

-

-

-

RMBS2 non-agency prime

11

15

16

-

10

-

52

RMBS2 agency

-

-

-

-

-

-

-

 

11

15

16

-

10

-

52

CMBS3

80

9

117

-

1

-

207

ABS4

-

91

160

59

16

-

326

CDO (including CLO)5

377

-

-

-

-

-

377

ABCP6

-

-

-

-

-

-

-

 

457

100

277

59

17

-

910

Wrapped credit

-

5

81

10

-

-

96

Other

42

114

351

1,898

2,653

1,027

6,085

Total

9,342

29,946

15,703

27,618

8,202

4,964

95,775

Total %

9.7%

31.3%

16.4%

28.8%

8.6%

5.2%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

Total (excluding assets held for sale)

9,342

29,946

15,703

27,618

8,202

4,964

95,775

Total % (excluding assets held for sale)

9.7%

31.3%

16.4%

28.8%

8.6%

5.2%

100.0%

2016 Total1

13,070

33,782

16,508

29,533

6,586

4,218

103,697

2016 Total %

12.5%

32.6%

15.9%

28.5%

6.4%

4.1%

100.0%

1    Following a review of the Group's investment classification, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to D3.3 for further details of this adjustment and the financial statement impact arising.

2    RMBS - Residential Mortgage Backed Security

3    CMBS - Commercial Mortgage Backed Security

4    ABS - Asset Backed Security

5    CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6    ABCP - Asset Backed Commercial Paper

 

 

 

 

 

 

Page 113

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.1 - Debt securities continued

 

External ratings

 

 

Debt securities - Shareholder assets 2017

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

-

10,600

74

-

-

76

10,750

UK local authorities

-

-

-

-

-

17

17

Non-UK Government

4,683

3,925

1,395

1,097

9

542

11,651

 

4,683

14,525

1,469

1,097

9

635

22,418

Corporate

 

 

 

 

 

 

 

Public utilities

-

97

2,493

2,326

30

411

5,357

Convertibles and bonds with warrants

-

-

-

-

-

-

-

Other corporate bonds

2,028

2,353

8,057

4,982

196

1,460

19,076

 

2,028

2,450

10,550

7,308

226

1,871

24,433

Certificates of deposits

-

-

-

-

-

79

79

Structured

 

 

 

 

 

 

 

RMBS2 non-agency ALT A

-

-

-

-

-

-

-

RMBS2 non-agency prime

1

10

65

1

49

-

126

RMBS2 agency

53

-

-

-

-

-

53

 

54

10

65

1

49

-

179

CMBS3

233

16

149

-

-

1

399

ABS4

38

374

274

40

43

-

769

CDO (including CLO)5

-

-

-

-

-

-

-

ABCP6

-

-

-

-

-

-

-

 

271

390

423

40

43

1

1,168

Wrapped credit

-

13

404

67

43

12

539

Other

3

6

21

124

156

60

370

Total

7,039

17,394

12,932

8,637

526

2,658

49,186

Total %

14.2%

35.4%

26.3%

17.6%

1.1%

5.4%

100.0%

Assets of operations classified as held for sale

67

25

6

671

5

-

774

Total (excluding assets held for sale)

6,972

17,369

12,926

7,966

521

2,658

48,412

Total % (excluding assets held for sale)

14.3%

35.9%

26.7%

16.5%

1.1%

5.5%

100.0%

2016 Total1

7,299

19,767

13,884

9,099

575

2,870

53,494

2016 Total %

13.7%

36.8%

26.0%

17.0%

1.1%

5.4%

100.0%

1    Following a review of the Group's investment classification, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to D3.3 for further details of this adjustment and the financial statement impact arising.

2    RMBS - Residential Mortgage Backed Security

3    CMBS - Commercial Mortgage Backed Security

4    ABS - Asset Backed Security

5    CDO - Collateralised Debt Obligation, CLO - Collateralised Loan Obligation

6    ABCP - Asset Backed Commercial Paper

Within shareholder assets debt securities, 46% of exposure is in government holdings (2016: 43%). Our corporate debt securities portfolio represents 50% of total shareholder debt securities (2016: 52%). At 31 December 2017, the proportion of our shareholder debt securities that are investment grade is 93.5% (2016: 93.5%). The remaining 6.5% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows:

· 1.1% are debt securities that are rated as below investment grade;

· 5.4% are not rated by the major rating agencies.

The majority of non-rated corporate bonds are held by our businesses in the UK. Of the securities not rated by an external agency most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £2.0 billion (2016: £2.3 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.

The Group has limited shareholder exposure to CDOs, CLOs and 'Sub-prime' debt securities.

Out of the total asset backed securities (ABS), £713 million (2016: £948 million) are held by the UK Life business. The Group's shareholder holdings in ABS are investment grade of 94.1% (2016: 95.7%). ABS that either have a rating below BBB or are not rated, represent approximately 0.1% of shareholder exposure to debt securities (2016: 0.1%).

 

 

 

 

 

 

Page 114

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.2 - Equity securities

 

 

 

 

2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Total assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

2,402

-

-

2,402

2,188

-

-

2,188

Banks, trusts and insurance companies

24,088

-

208

24,296

16,162

-

190

16,352

Industrial miscellaneous and all other

62,579

-

642

63,221

53,138

-

723

53,861

Non-redeemable preferred shares

244

-

-

244

305

-

-

305

Total

89,313

-

850

90,163

71,793

-

913

72,706

Total %

99.1%

-

0.9%

100.0%

98.7%

-

1.3%

100.0%

Assets of operations classified as held for sale

121

-

74

195

664

-

-

664

Total (excluding assets held for sale)

89,192

-

776

89,968

71,129

-

913

72,042

Total % (excluding assets held for sale)

99.1%

-

0.9%

100.0%

98.7%

-

1.3%

100.0%

 

 

 

 

 

2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Policyholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

2,042

-

-

2,042

1,767

-

-

1,767

Banks, trusts and insurance companies

19,784

-

13

19,797

12,322

-

5

12,327

Industrial miscellaneous and all other

52,179

-

64

52,243

41,447

-

19

41,466

Non-redeemable preferred shares

28

-

-

28

91

-

-

91

Total

74,033

-

77

74,110

55,627

-

24

55,651

Total %

99.9%

-

0.1%

100.0%

100.0%

-

-

100.0%

Assets of operations classified as held for sale

115

-

74

189

8

-

-

8

Total (excluding assets held for sale)

73,918

-

3

73,921

55,619

-

24

55,643

Total % (excluding assets held for sale)

100.0%

-

-

100.0%

100.0%

-

-

100.0%

 

 

 

 

 

2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Participating fund assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

356

-

-

356

415

-

-

415

Banks, trusts and insurance companies

4,270

-

89

4,359

3,715

-

104

3,819

Industrial miscellaneous and all other

9,776

-

563

10,339

11,585

-

689

12,274

Non-redeemable preferred shares

4

-

-

4

8

-

-

8

Total

14,406

-

652

15,058

15,723

-

793

16,516

Total %

95.7%

-

4.3%

100.0%

95.2%

-

4.8%

100.0%

Assets of operations classified as held for sale

-

-

-

-

656

-

-

656

Total (excluding assets held for sale)

14,406

-

652

15,058

15,067

-

793

15,860

Total % (excluding assets held for sale)

95.7%

-

4.3%

100.0%

95.0%

-

5.0%

100.0%

 

 

 

 

 

 2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Shareholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
 £m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

4

-

-

4

6

-

-

6

Banks, trusts and insurance companies

34

-

106

140

125

-

81

206

Industrial miscellaneous and all other

624

-

15

639

106

-

15

121

Non-redeemable preferred shares

212

-

-

212

206

-

-

206

Total

874

-

121

995

443

-

96

539

Total %

87.8%

-

12.2%

100.0%

82.2%

-

17.8%

100.0%

Assets of operations classified as held for sale

6

-

-

6

-

-

-

-

Total (excluding assets held for sale)

868

-

121

989

443

-

96

539

Total % (excluding assets held for sale)

87.8%

-

12.2%

100.0%

82.2%

-

17.8%

100.0%

1    Following a review of the Group's investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note D3.3 for further details of this adjustment and the financial statement impact arising.

Within our total shareholder exposure to equity securities 87.8% is based on quoted prices in an active market and as such is classified as level 1 (2016: 82.2%).

 

 

 

 

 

Page 115

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.3 - Other investments

 

 

 

 

2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Total

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
 £m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

42,518

437

2,711

45,666

39,348

956

2,758

43,062

Derivative financial instruments

370

4,730

407

5,507

596

5,376

147

6,119

Deposits with credit institutions

161

-

-

161

325

-

-

325

Minority holdings in property management undertakings

-

27

1,408

1,435

-

27

1,159

1,186

Other

507

-

1

508

435

-

-

435

Total

43,556

5,194

4,527

53,277

40,704

6,359

4,064

51,127

Total %

81.8%

9.7%

8.5%

100.0%

79.6%

12.4%

8.0%

100.0%

Assets of operations classified as held for sale

5,307

-

1,664

6,971

2,122

119

63

2,304

Total (excluding assets held for sale)

38,249

5,194

2,863

46,306

38,582

6,240

4,001

48,823

Total % (excluding assets held for sale)

82.6%

11.2%

6.2%

100.0%

79.0%

12.8%

8.2%

100.0%

 

 

 

 

 

2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Policyholder assets

Level 1
£m

Level 2
 £m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

39,550

260

1,670

41,480

36,548

853

1,692

39,093

Derivative financial instruments

108

13

-

121

63

32

-

95

Deposits with credit institutions

147

-

-

147

294

-

-

294

Minority holdings in property management undertakings

-

-

183

183

-

-

172

172

Other

437

-

-

437

427

-

-

427

Total

40,242

273

1,853

42,368

37,332

885

1,864

40,081

Total %

95.0%

0.6%

4.4%

100.0%

93.1%

2.2%

4.7%

100.0%

Assets of operations classified as held for sale

5,231

-

1,660

6,891

1,876

85

39

2,000

Total (excluding assets held for sale)

35,011

273

193

35,477

35,456

800

1,825

38,081

Total % (excluding assets held for sale)

98.7%

0.8%

0.5%

100.0%

93.1%

2.1%

4.8%

100.0%

 

 

 

 

 

2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Participating fund assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

1,697

177

996

2,870

1,107

94

1,032

2,233

Derivative financial instruments

216

2,873

34

3,123

492

3,508

102

4,102

Deposits with credit institutions

10

-

-

10

28

-

-

28

Minority holdings in property management undertakings

-

-

1,020

1,020

-

-

825

825

Other

-

-

-

-

-

-

-

-

Total

1,923

3,050

2,050

7,023

1,627

3,602

1,959

7,188

Total %

27.4%

43.4%

29.2%

100.0%

22.6%

50.1%

27.3%

100.0%

Assets of operations classified as held for sale

-

-

-

-

246

34

24

304

Total (excluding assets held for sale)

1,923

3,050

2,050

7,023

1,381

3,568

1,935

6,884

Total % (excluding assets held for sale)

27.4%

43.4%

29.2%

100.0%

20.1%

51.8%

28.1%

100.0%

 

 

 

 

 

2017

 

 

 

20161

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Shareholders assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

1,271

-

45

1,316

1,693

9

34

1,736

Derivative financial instruments

46

1,844

373

2,263

41

1,836

45

1,922

Deposits with credit institutions

4

-

-

4

3

-

-

3

Minority holdings in property management undertakings

-

27

205

232

-

27

162

189

Other

70

-

1

71

8

-

-

8

Total

1,391

1,871

624

3,886

1,745

1,872

241

3,858

Total %

35.8%

48.1%

16.1%

100.0%

45.2%

48.5%

6.3%

100.0%

Assets of operations classified as held for sale

76

-

4

80

-

-

-

-

Total (excluding assets held for sale)

1,315

1,871

620

3,806

1,745

1,872

241

3,858

Total % (excluding assets held for sale)

34.5%

49.2%

16.3%

100.0%

45.2%

48.5%

6.3%

100.0%

1    Following a review of the Group's investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note D3.3 for further details of this adjustment and the financial statement impact arising.

 

 

 

 

 

Page 116

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.3 - Other investments continued

The unit trusts and other investment vehicles invest in a variety of assets, which can include cash equivalents, debt, equity and property securities. Total shareholder other investments classified as level 2 decreased during 2017 to 48.1% (2016: 48.5%), primarily due a decrease in Unit trusts and other investment vehicles. Total shareholder other investments classified as level 3 have increased during 2017 to 16.1% (2016: 6.3%), primarily due to disposals in minority holdings in property management undertakings.

In total 83.9% (2016: 93.7%) of total shareholder other investments are classified as level 1 or 2 in the fair value hierarchy.

D3.3.4 - Available for sale investments - Impairments and duration and amount of unrealised losses

The impairment expense during 2017 relating to AFS debt securities and other investments was £nil (2016: £nil) and £nil (2016: £nil) respectively.

Total unrealised losses on AFS debt securities, equity securities and other investments at 31 December 2017 was £1 million (2016: £2 million), £nil (2016: £nil) and £nil (2016: £nil) respectively.

 

0 - 6 months

 7 - 12 months

more than 12 months

Total

2017

Fair value1

£m

Gross unrealised
£m

Fair value1

£m

Gross unrealised
£m

Fair value1

£m

Gross unrealised
£m

Fair value1

£m

Gross unrealised
£m

Less than 20% loss position:

 

 

 

 

 

 

 

 

Debt securities

-

-

3

-

47

(1)

50

(1)

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

3

-

47

(1)

50

(1)

20%-50% loss position:

 

 

 

 

 

 

 

 

Debt securities

-

-

-

-

-

-

-

-

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Greater than 50% loss position:

 

 

 

 

 

 

 

 

Debt securities

-

-

-

-

-

-

-

-

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Total

 

 

 

 

 

 

 

 

Debt securities

-

-

3

-

47

(1)

50

(1)

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

3

-

47

(1)

50

(1)

Assets of operations classified as held for sale

-

-

-

-

-

-

-

-

Total (excluding assets held for sale)

-

-

3

-

47

(1)

50

(1)

1    Only includes AFS securities that are in unrealised loss positions.

 

0 - 6 months

7 - 12 months

more than 12 months

Total

2016

Gross unrealised
£m

Fair value1

£m

Gross unrealised
£m

Fair value1

£m

Gross unrealised
£m

Fair value1

£m

Gross unrealised
£m

Fair value1

£m

Less than 20% loss position:

 

 

 

 

 

 

 

 

Debt securities

-

-

6

-

73

(2)

79

(2)

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

6

-

73

(2)

79

(2)

20%-50% loss position:

 

 

 

 

 

 

 

 

Debt securities

-

-

-

-

-

-

-

-

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Greater than 50% loss position:

 

 

 

 

 

 

 

 

Debt securities

-

-

-

-

-

-

-

-

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Total

 

 

 

 

 

 

 

 

Debt securities

-

-

6

-

73

(2)

79

(2)

Equity securities

-

-

-

-

-

-

-

-

Other investments

-

-

-

-

-

-

-

-

 

-

-

6

-

73

(2)

79

(2)

Assets of operations classified as held for sale

-

-

-

-

-

-

-

-

Total (excluding assets held for sale)

-

-

6

-

73

(2)

79

(2)

1    Only includes AFS securities that are in unrealised loss positions.

 

 

 

 

 

 

 

Page 117

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.5 - Exposures to peripheral European countries

Included in our debt securities and other financial assets are exposures to peripheral European countries. All of these assets are valued on a mark-to-market basis under IAS 39, and therefore our statement of financial position and income statement already reflect any reduction in value between the date of purchase and the balance sheet date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.

Net of non-controlling interests, our direct shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £6.6 billion (2016: £5.8 billion).

Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets)

 

 

Participating

 

Shareholder

 

Total

 

 2017
£bn

2016
£bn

 2017
£bn

2016
£bn

 2017
£bn

2016
£bn

Greece

-

-

-

-

-

-

Ireland

0.7

0.7

0.1

0.1

0.8

0.8

Portugal

0.1

0.1

-

-

0.1

0.1

Italy

6.0

5.4

0.6

0.4

6.6

5.8

Spain

0.3

1.0

-

0.4

0.3

1.4

Total Greece, Ireland, Portugal, Italy and Spain

7.1

7.2

0.7

0.9

7.8

8.1

Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (gross of non-controlling interests, excluding policyholder assets)

 

 

Participating

 

Shareholder

 

Total

 

 2017
£bn

2016
£bn

 2017
£bn

2016
£bn

 2017
£bn

2016
£bn

Greece

-

-

-

-

-

-

0.7

0.7

0.1

0.1

0.8

0.8

0.1

0.1

-

-

0.1

0.1

8.2

7.5

0.8

0.5

9.0

8.0

Spain

0.3

1.4

0.2

0.7

0.5

2.1

Total Greece, Ireland, Portugal, Italy and Spain

9.3

9.7

1.1

1.3

10.4

11.0

D3.3.6 - Non-UK Government debt securities (gross of non-controlling interests)

 

 

Policyholder

 

Participating

 

Shareholder

 

Total

Non-UK Government Debt Securities

 2017
£m

20161

£m

 2017
£m

20161

£m

 2017
£m

20161

£m

 2017
£m

20161

£m

Austria

5

11

550

715

127

138

682

864

Belgium

22

21

967

1,273

314

357

1,303

1,651

France

133

115

13,454

13,285

2,093

1,859

15,680

15,259

Germany

127

142

1,437

1,629

615

606

2,179

2,377

Greece

-

-

-

-

-

-

-

-

Ireland

3

3

679

662

84

130

766

795

Italy

183

223

8,223

7,500

823

556

9,229

8,279

Netherlands

43

47

88

976

322

329

453

1,352

Poland

845

807

790

769

598

384

2,233

1,960

Portugal

2

2

136

118

-

-

138

120

Spain

87

88

314

1,386

233

659

634

2,133

European Supranational debt

213

174

1,841

2,404

1,777

1,821

3,831

4,399

Other European countries

176

272

2,104

1,029

917

642

3,197

1,943

Europe

1,839

1,905

30,583

31,746

7,903

7,481

40,325

41,132

Canada

23

16

53

174

2,512

2,397

2,588

2,587

United States

1,443

1,424

661

871

531

1,022

2,635

3,317

North America

1,466

1,440

714

1,045

3,043

3,419

5,223

5,904

Singapore

14

2

558

904

297

330

869

1,236

Other

2,396

2,634

3,520

2,819

408

143

6,324

5,596

Asia Pacific and other

2,410

2,636

4,078

3,723

705

473

7,193

6,832

Total

5,715

5,981

35,375

36,514

11,651

11,373

52,741

53,868

Assets of operations classified as held for sale

1

-

-

2,325

531

-

532

2,325

Total (excluding assets held for sale)

5,714

5,981

35,375

34,189

11,120

11,373

52,209

51,543

At 31 December 2017, the Group's total government (non-UK) debt securities stood at £52.7 billion (2016: £53.9 billion). The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.

Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £11.7 billion (2016: £11.4 billion). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (22%), French (18%), Italian (7%), German (5%), Polish (5%), and US (5%) government debt securities.

 

 

 

 

 

 

Page 118

 

 

 

D3 - Analysis of asset quality continued

D3.3 - Financial investments continued

D3.3.6 - Non-UK Government debt securities (gross of non-controlling interests) continued

The participating funds exposure to (non-UK) government debt amounts to £35.4 billion (2016: £36.5 billion). The primary exposures, relative to total (non-UK) government debt exposures included within our participating funds, are to the (non-UK) government debt securities of France (38%), Italy (23%), Germany (4%), Belgium (3%), Poland (2%), and Ireland (2%).

D3.3.7 - Exposure to worldwide bank debt securities

Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)

 

Shareholder assets

Participating fund assets

2017

Total senior debt
£bn

Total subordinated debt
£bn

Total debt
£bn

Total senior debt
£bn

Total subordinated debt
£bn

Total debt
£bn

Australia

0.2

-

0.2

0.6

0.2

0.8

Denmark

-

-

-

0.6

-

0.6

France

0.5

0.1

0.6

2.6

0.6

3.2

Germany

-

-

-

0.5

0.3

0.8

Ireland

-

-

-

-

-

-

Italy

-

-

-

0.1

-

0.1

Netherlands

0.4

0.2

0.6

1.4

0.2

1.6

Spain

0.4

-

0.4

0.3

0.1

0.4

Sweden

0.2

-

0.2

0.4

0.1

0.5

Switzerland

-

-

-

1.3

-

1.3

United Kingdom

1.3

0.4

1.7

1.4

0.8

2.2

United States

1.0

0.2

1.2

1.7

0.1

1.8

Other

0.4

0.1

0.5

1.2

0.1

1.3

Total

4.4

1.0

5.4

12.1

2.5

14.6

Assets of operations classified as held for sale

-

-

-

-

-

-

Total (excluding assets held for sale)

4.4

1.0

5.4

12.1

2.5

14.6

2016 Total

5.4

1.2

6.6

14.8

3.1

17.9

Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.4 billion (2016: £6.6 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (31%), US (22%), Dutch (11%), and French (11%) banks.

Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £14.6 billion (2016: £17.9 billion). The majority of the exposure (83%) is in senior debt. Participating funds are most exposed to French (22%), UK (15%) and US (12%) banks.

Direct shareholder and participating fund assets exposures to worldwide bank debt securities (gross of non-controlling interests, excluding policyholder assets)

 

Shareholder assets

Participating fund assets

2017

Total senior debt
£bn

Total subordinated debt
£bn

Total debt
£bn

Total senior debt
£bn

Total subordinated debt
£bn

Total debt
£bn

Australia

0.2

-

0.2

0.6

0.2

0.8

Denmark

-

-

-

0.6

-

0.6

France

0.5

0.1

0.6

2.7

0.6

3.3

Germany

-

-

-

0.6

0.3

0.9

Ireland

-

-

-

-

-

-

Italy

-

-

-

0.2

-

0.2

Netherlands

0.4

0.2

0.6

1.4

0.2

1.6

Spain

0.4

-

0.4

0.3

0.1

0.4

Sweden

0.2

-

0.2

0.4

0.1

0.5

Switzerland

-

-

-

1.3

-

1.3

United Kingdom

1.3

0.4

1.7

1.5

0.8

2.3

United States

1.0

0.2

1.2

1.7

0.1

1.8

Other

0.4

0.1

0.5

1.2

0.1

1.3

Total

4.4

1.0

5.4

12.5

2.5

15.0

Assets of operations classified as held for sale

-

-

-

-

-

-

Total (excluding assets held for sale)

4.4

1.0

5.4

12.5

2.5

15.0

2016 Total

5.5

1.2

6.7

16.2

3.3

19.5

Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.4 billion (2016: £6.7 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (31%), US (22%), Dutch (11%), and French (11%) banks.

      Gross of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £15.0 billion (2016: £19.5 billion). The majority of the exposure (83%) is in senior debt. Participating funds are most exposed to French (22%), UK (15%) and US (12%) banks.

 

 

 

 

 

 

Page 119

 

D3 - Analysis of asset quality continued

D3.4 - Reinsurance assets

The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.

If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.

For the table below, reinsurance asset credit ratings are stated in accordance with information from leading rating agencies.

 

 

 

 

 

Ratings

 

 

Ratings 2017

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Not rated
£m

Total
£m

Policyholders assets

-

5,335

511

-

-

257

6,103

Participating fund assets

-

218

14

3

-

-

235

Shareholder assets

-

6,327

588

261

3

98

7,277

Total

-

11,880

1,113

264

3

355

13,615

Total %

-

87.3%

8.2%

1.9%

-

2.6%

100.0%

Assets of operations classified as held for sale

-

51

70

-

-

2

123

Total (excluding assets held for sale)

-

11,829

1,043

264

3

353

13,492

Total % (excluding assets held for sale)

-

87.7%

7.7%

2.0%

-

2.6%

100.0%

2016 Total

-

24,608

1,689

14

-

443

26,754

2016 Total %

-

92.0%

6.3%

-

-

1.7%

100.0%

D3.5 - Receivables and other financial assets

The credit quality of receivables and other financial assets is managed at the local business unit level. Where assets classed as 'past due and impaired' exceed local credit limits, and are also deemed at sufficiently high risk of default, an analysis of the asset is performed and a decision is made whether to seek sufficient collateral from the counterparty or to write down the value of the asset as impaired. At 2017, 99% (2016: 99%) of the receivables and other financial assets were neither past due nor impaired.

Credit terms vary from subsidiary to subsidiary, and from country to country, and are set locally within overall credit limits prescribed by the Group credit limit framework, and in line with the Group Credit Policy. The carrying value of receivables is reviewed at each reporting period. If the carrying value of a receivable or other financial asset is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment.

D3.6 - Cash and cash equivalents

Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months maturity from the date of acquisition, and include certificates of deposit with maturities of less than three months at the date of issue.

 

 

 

 

 

Page 120

 

 

D4 - Pension fund assets

In addition to the assets recognised directly on the Group's statement of financial position outlined in the disclosures above, the Group is also exposed to the 'Scheme assets' that are shown net of the present value of scheme liabilities within the IAS 19 net pension surplus. Pension surpluses are included within other assets and pension deficits are recognised within provisions in the Group's consolidated statement of financial position. Refer to note B15 for details on the movements in the main schemes' surpluses and deficits.

Scheme assets are stated at their fair values. Total scheme assets are comprised in the UK, Ireland and Canada as follows:

 

 

 

 

2017

 

 

 

2016

 

UK
£m

Ireland
£m

Canada
 £m

Total
 £m

UK
£m

Ireland
 £m

Canada
£m

Total
£m

Bonds

 

 

 

 

 

 

 

 

Fixed interest

6,925

408

163

7,496

7,085

249

151

7,485

Index-linked

11,744

292

-

12,036

11,469

157

-

11,626

Equities

129

-

-

129

71

-

-

71

Property

365

-

-

365

338

-

-

338

Pooled investment vehicles

4,955

238

107

5,300

3,433

200

96

3,729

Derivatives

(34)

4

-

(30)

86

1

-

87

Cash and other1

(5,710)

(284)

6

(5,988)

(3,046)

3

34

(3,009)

Total fair value of scheme assets

18,374

658

276

19,308

19,436

610

281

20,327

Less: consolidation elimination for non-transferable Group insurance policy2

(630)

-

-

(630)

(633)

-

-

(633)

Total IAS 19 fair value of scheme assets

17,744

658

276

18,678

18,803

610

281

19,694

1    Cash and other assets comprise cash at bank, insurance policies, receivables, payables and repos. At 31 December 2017, cash and other assets primarily consist of repos of £5,386 million (2016: £4,666 million).

2    The Friends Provident Pension Scheme (FPPS) assets are included in the UK balances. As at 31 December 2017, the FPPS's cash and other balances includes an insurance policy of £630 million (2016: £633 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group's IAS 19 scheme assets.

Total scheme assets are analysed by those that have a quoted price in an active market and those that do not as follows:

 

 

 

2017

 

 

2016

 

Total Quoted
£m

Total Unquoted
£m

Total
£m

Total Quoted
£m

Total
Unquoted
£m

Total
£m

Bonds

 

 

 

 

 

 

4,334

3,162

7,496

3,697

3,788

7,485

11,627

409

12,036

11,141

485

11,626

35

94

129

71

-

71

-

365

365

-

338

338

167

5,133

5,300

189

3,540

3,729

4

(34)

(30)

70

17

87

Cash and other1

(1,801)

(4,187)

(5,988)

714

(3,723)

(3,009)

Total fair value of scheme assets

14,366

4,942

19,308

15,882

4,445

20,327

Less: consolidation elimination for non-transferable Group insurance policy2

-

(630)

(630)

-

(633)

(633)

Total IAS 19 fair value of scheme assets

14,366

4,312

18,678

15,882

3,812

19,694

1    Cash and other assets comprise cash at bank, insurance policies, receivables, payables and repos. At 31 December 2017, cash and other assets primarily consist of repos of £5,386 million (2016: £4,666 million).

2    The Friends Provident Pension Scheme (FPPS) assets are included in the UK balances. As at 31 December 2017, the FPPS's cash and other balances includes an insurance policy of £630 million (2016: £633 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group's IAS 19 scheme assets.

Risk management and asset allocation strategy

The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long-term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, the schemes' assets are invested in a portfolio consisting primarily of debt securities. The investment strategy will continue to evolve over time and is expected to match the liability profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched to interest rate risk relative to the funding basis.

Main UK Scheme

The Company works closely with the trustee, who is required to consult it on the investment strategy.

Interest rate and inflation risk are managed using a combination of liability-matching assets and swaps. Exposure to equity risk has been reducing over time and credit risk is managed within appetite. Currency risk is relatively small and is largely hedged. The other principal risk is longevity risk. This risk has reduced due to the Aviva Staff Pension Scheme entering into a longevity swap in 2014 covering approximately £5 billion of pensioner in payment scheme liabilities.

Other schemes

The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme. During 2015, the RAC pension scheme entered into a longevity swap covering approximately £600 million of pensioner in payment scheme liabilities.

 

 

 

 

 

 

Page 121

 

D5 - Available funds

To ensure access to liquidity as and when needed, the Group maintains £1.7 billion of undrawn committed central borrowing facilities with a range of leading international banks, all of which have investment grade credit ratings. These facilities are used to support the Group's commercial paper programme. The expiry profile of the undrawn committed central borrowing facilities is as follows:

 

2017
£m

2016
£m

Expiring within one year

-

-

Expiring beyond one year

1,650

1,650

Total

1,650

1,650

D6 - Guarantees

As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products.

For the UK Life with-profits business, provisions in respect of these guarantees and options are calculated on a market consistent basis, in which stochastic models are used to evaluate the level of risk (and additional cost) under a number of economic scenarios, which allow for the impact of volatility in both interest rates and equity prices. For UK Life non-profit business, provisions do not materially differ from those determined on a market consistent basis.

In all other businesses, provisions for guarantees and options are calculated on a local basis with sensitivity analysis undertaken where appropriate to assess the impact on provisioning levels of a movement in interest rates and equity levels (typically a 1% decrease in interest rates and 10% decline in equity markets).

 

 

 

 

 

 

Page 122

 

VNB & Sales analysis

In this section

Page

E1

Sales, VNB and new business margin analysis

123

 

by market (adjusted Solvency II basis)

 

E2

Trend analysis of adjusted Solvency II VNB - cumulative

123

E3

Trend analysis of adjusted Solvency II VNB - discrete

124

E4

Trend analysis of PVNBP - cumulative

124

E5

Trend analysis of PVNBP - discrete

124

E6

Trend analysis of PVNBP by product -

125

 

cumulative

 

E7

Trend analysis of PVNBP by product - discrete

125

E8

Geographical analysis of regular and single

126

 

premiums

 

E9

Trend analysis of Investment sales -

126

 

cumulative

 

E10

Trend analysis of Investment sales - discrete

126

E11

Trend analysis of general insurance and health net written premiums - cumulative

127

 

net written premiums - cumulative

 

E12

Trend analysis of general insurance and health net written premiums - discrete

127

 

net written premiums - discrete

 

E13

Reconciliation of sales to net written

128

 

premiums in IFRS

 

E14

Principal Assumptions underlying the

 

 

calculation of VNB (on an adjusted SII basis)

129

 

 

 

 

 

 

Page 123

 

E1 - Sales, VNB and new business margin analysis by market (adjusted Solvency II basis)

The table below sets out the present value of new business premiums (PVNBP) written by the life and related businesses, value generated by new business written during the period (VNB) and the resulting margin, gross of tax and non-controlling interests, on an adjusted Solvency II basis. Following the introduction of the Solvency II regime on 1 January 2016, MCEV (which was calculated on the expired Solvency I basis) is no longer used as an indicator of the drivers of financial performance of the Group's in-force Life and related businesses. The MCEV VNB and MCEV PVNBP were disclosed for the last time at 31 December 2016.

The VNB shown below is the present value of the projected stream of pre-tax distributable profit generated by the new business written during the period, including expected profit between point of sale and the valuation date on an adjusted Solvency II basis. It reflects the additional value to shareholders created through the activity of writing new business including the impacts of interactions between in-force and new business. The VNB and PVNBP for 2016 include £(12) million and £257 million respectively relating to the internal transfer of annuities from a with-profits fund to a non-profit fund during the second half of 2016 in the UK. The methodology underlying the calculation of adjusted Solvency II VNB remains unchanged from the prior year as set out in note 4. The demographic assumptions used are derived from an analysis of recent operating experience to give a best estimate of future experience. The demographic assumptions have been updated to reflect the position as at 31 December 2017 and produce an adjusted Solvency II VNB which is materially the same as using the assumptions used at 31 December 2016 as set out in D.2.2 of the Aviva 2016 Solvency and Financial Condition Report (SFCR). The economic assumptions have been updated to be those relevant at the point of sale which has been implemented with the assumptions being taken as those appropriate to the start of each quarter. For contracts that are re-priced more frequently, weekly or monthly economic assumptions have been used. The principal economic assumptions are set out in note E14. Adjusted Solvency II PVNBP is calculated using assumptions consistent with those used to determine the adjusted Solvency II VNB.

 

 

Present value of new business

 premiums1

 

Value of new

business2

 

New business margin2

Gross of tax and non-controlling interests

2017
£m

2016
£m

2017
£m

2016
£m

2017
£m

2016
£m

United Kingdom

23,764

18,142

527

429

2.2%

2.4%

France

4,453

5,523

228

225

5.1%

4.1%

Poland

468

421

57

54

12.2%

12.8%

Italy

4,617

3,634

179

83

3.9%

2.3%

Ireland3

1,050

710

11

12

1.0%

1.7%

Spain

1,004

935

38

34

3.8%

3.6%

Turkey

473

455

20

21

4.2%

4.6%

12,065

11,678

533

429

4.4%

3.7%

2,719

2,372

162

106

6.0%

4.5%

Aviva Investors

2,247

2,845

21

28

0.9%

1.0%

Total

40,795

35,037

1,243

992

3.0%

2.8%

1    A reconciliation to IFRS net written premiums can be found in note E13.

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

3    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 with Europe. As a result, comparative balances have been restated.

E2 - Trend analysis of adjusted Solvency II VNB - cumulative

 

 

 

 

 

Growth on 2H16

Gross of tax and non-controlling interests

1H16 YTD
£m

2H16 YTD
£m

1H17 YTD
£m

2H17 YTD
£m

Sterling
%

Constant currency
%

United Kingdom1

200

429

267

527

23%

23%

France2

101

225

120

228

1%

(5)%

Poland3

22

54

28

57

5%

(4)%

Italy

42

83

60

179

116%

102%

Ireland4

5

12

3

11

(3)%

(9)%

Spain

12

34

25

38

10%

3%

Turkey

11

21

10

20

(7)%

7%

Europe

193

429

246

533

24%

17%

Asia

43

106

71

162

52%

47%

Aviva Investors

12

28

12

21

(23)%

(23)%

Total

448

992

596

1,243

25%

21%

1    Includes £(12) million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

2    France includes Antarius up until 2H16.

3    Poland includes Lithuania.

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 with Europe. As a result, comparative balances have been restated.

 

 

 

 

 

 

Page 124

 

 

E3 - Trend analysis of adjusted Solvency II VNB - discrete

 

 

 

 

 

Growth on 2H16

Gross of tax and non-controlling interests

1H16 Discrete £m

2H16 Discrete £m

1H17 Discrete £m

2H17 Discrete £m

Sterling %

Constant currency %

United Kingdom1

200

229

267

260

13%

13%

France2

101

124

120

108

(13)%

(19)%

Poland3

22

32

28

29

(8)%

(16)%

Italy

42

41

60

119

192%

173%

Ireland4

5

7

3

8

22%

14%

Spain

12

22

25

13

(43)%

(47)%

Turkey

11

10

10

10

(13)%

-

Europe

193

236

246

287

21%

14%

Asia

43

63

71

91

45%

40%

Aviva Investors

12

16

12

9

(40)%

(40)%

Total

448

544

596

647

19%

15%

1    Includes £(12) million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

2    France includes Antarius up until 2H16.

3    Poland includes Lithuania.

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 with Europe. As a result, comparative balances have been restated.

E4 - Trend analysis of PVNBP - cumulative

 

 

 

 

 

Growth on 2H16

Present value of new business premiums1

1H16 YTD
£m

2H16 YTD
£m

1H17 YTD
£m

2H17 YTD
£m

Sterling
%

Constant currency
%

United Kingdom2

8,232

18,142

11,191

23,764

31%

31%

France3

2,898

5,523

2,405

4,453

(19)%

(25)%

Poland4

190

421

202

468

11%

1%

Italy

2,024

3,634

2,191

4,617

27%

19%

Ireland5

339

710

495

1,050

48%

38%

Spain

299

935

677

1,004

7%

-

Turkey

216

455

274

473

4%

20%

Europe

5,966

11,678

6,244

12,065

3%

(3)%

Asia

982

2,372

1,328

2,719

15%

11%

Aviva Investors

1,388

2,845

1,262

2,247

(21)%

(21)%

Total

16,568

35,037

20,025

40,795

16%

14%

1    Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2    Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3    France includes Antarius up until 2H16.

4    Poland includes Lithuania.

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 with Europe. As a result, comparative balances have been restated.

E5 - Trend analysis of PVNBP - discrete

 

 

 

 

 

Growth on 2H16

Present value of new business premiums1

1H16 Discrete
£m

2H16 Discrete
£m

1H17 Discrete
£m

2H17 Discrete
£m

Sterling
%

Constant currency
%

United Kingdom2

8,232

9,910

11,191

12,573

27%

27%

France3

2,898

2,625

2,405

2,048

(22)%

(27)%

Poland4

190

231

202

266

15%

5%

Italy

2,024

1,610

2,191

2,426

51%

41%

Ireland5

339

371

495

555

49%

40%

Spain

299

636

677

327

(48)%

(52)%

Turkey

216

239

274

199

(16)%

(3)%

Europe

5,966

5,712

6,244

5,821

2%

(4)%

Asia

982

1,390

1,328

1,391

-

(3)%

Aviva Investors

1,388

1,457

1,262

985

(32)%

(32)%

Total

16,568

18,469

20,025

20,770

12%

10%

1    Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2    Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3    France includes Antarius up until 2H16.

4    Poland includes Lithuania.

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 with Europe. As a result, comparative balances have been restated

 

 

 

 

 

 

Page 125

 

 

E6 - Trend analysis of PVNBP by product - cumulative

 

 

 

 

 

Growth on 2H16

Present value of new business premiums1

1H16 YTD
£m

2H16 YTD
£m

1H17 YTD
£m

2H17 YTD
£m

Sterling
%

Constant currency
%

Pensions

5,578

11,615

7,169

14,430

24%

24%

Annuities2

571

2,074

1,075

3,510

69%

69%

Bonds

62

141

70

284

101%

101%

Protection

887

1,770

1,006

1,964

11%

11%

Equity release

247

637

360

777

22%

22%

Other

887

1,905

1,511

2,799

47%

47%

United Kingdom

8,232

18,142

11,191

23,764

31%

31%

Savings

2,704

5,114

2,151

4,043

(21)%

(26)%

Protection

194

409

254

410

-

(6)%

France3

2,898

5,523

2,405

4,453

(19)%

(25)%

Pensions

515

1,195

721

1,372

15%

14%

Savings

2,188

4,177

2,604

5,229

25%

18%

Annuities

63

109

119

233

115%

101%

Protection

302

674

395

778

15%

9%

Poland4, Italy, Ireland5, Spain and Turkey

3,068

6,155

3,839

7,612

24%

17%

Europe

5,966

11,678

6,244

12,065

3%

(3)%

Asia

982

2,372

1,328

2,719

15%

11%

Aviva Investors

1,388

2,845

1,262

2,247

(21)%

(21)%

Total

16,568

35,037

20,025

40,795

16%

14%

1    Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2    Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3    France includes Antarius up until 2H16.

4    Poland includes Lithuania.

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 with Europe. As a result, comparative balances have been restated.

E7 - Trend analysis of PVNBP by product - discrete

 

 

 

 

 

Growth on 2H16

Present value of new business premiums1

1H16 Discrete
£m

2H16 Discrete
£m

1H17 Discrete
£m

2H17 Discrete £m

Sterling
%

Constant currency
%

Pensions

5,578

6,037

7,169

7,261

20%

20%

Annuities2

571

1,503

1,075

2,435

62%

62%

Bonds

62

79

70

214

171%

171%

Protection

887

883

1,006

958

8%

8%

Equity release

247

390

360

417

7%

7%

Other

887

1,018

1,511

1,288

27%

27%

United Kingdom

8,232

9,910

11,191

12,573

27%

27%

Savings

2,704

2,410

2,151

1,892

(22)%

(27)%

Protection

194

215

254

156

(27)%

(32)%

France3

2,898

2,625

2,405

2,048

(22)%

(27)%

Pensions

515

680

721

651

(4)%

(5)%

Savings

2,188

1,989

2,604

2,625

32%

23%

Annuities

63

46

119

114

151%

134%

Protection

302

372

395

383

3%

(3)%

Poland4, Italy, Ireland5, Spain and Turkey

3,068

3,087

3,839

3,773

22%

16%

Europe

5,966

5,712

6,244

5,821

2%

(4)%

Asia

982

1,390

1,328

1,391

-

(3)%

Aviva Investors

1,388

1,457

1,262

985

(32)%

(32)%

Total

16,568

18,469

20,025

20,770

12%

10%

1    Present value of new business premiums (PVNBP) is the present value of new regular premiums plus 100% of single premiums, calculated using assumptions consistent with those used to determine the value of new business.

2    Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund in 2H16.

3    France includes Antarius up until 2H16.

4    Poland includes Lithuania.

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 with Europe. As a result, comparative balances have been restated

 

 

 

 

 

 

Page 126

 

 

 

E8 - Geographical analysis of regular and single premiums

 

Regular premiums

Single premiums

 

2017
£m

Constant currency

 growth

WACF

Present
value
£m

2016
£m

WACF

Present
value
£m

2017
£m

2016
£m

Constant currency

growth

United Kingdom

1,807

8%

5.3

9,605

1,679

5.3

8,881

14,159

9,261

53%

France

94

(14)%

9.0

842

103

8.7

899

3,611

4,624

(27)%

Poland1

51

10%

7.3

371

42

7.7

324

97

97

(8)%

Italy

50

(28)%

7.5

375

65

3.0

194

4,242

3,440

15%

Ireland2

40

15%

7.0

281

32

6.3

203

769

507

42%

Spain

32

(15)%

6.3

202

34

6.9

236

802

699

7%

Turkey

97

14%

3.7

358

98

3.8

373

115

82

62%

Europe

364

(5)%

6.7

2,429

374

5.9

2,229

9,636

9,449

(5)%

Asia

301

28%

7.0

2,092

227

7.6

1,733

627

639

(3)%

Aviva Investors

-

-

-

-

-

-

-

2,247

2,845

(21)%

Total

2,472

8%

5.7

14,126

2,280

5.6

12,843

26,669

22,194

17%

1    Poland includes Lithuania.

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 with Europe. As a result, comparative balances have been restated.

E9 - Trend analysis of investment sales - cumulative

 

 

 

 

 

Growth on 2H16

Investment sales1

1H16 YTD
£m

2H16 YTD
£m

1H17 YTD
£m

2H17 YTD
£m

Sterling
%

Constant currency
 %

United Kingdom2

575

1,390

1,143

2,137

54%

54%

Aviva Investors3

3,587

5,765

2,949

5,510

(4)%

(8)%

Asia4

58

137

116

241

76%

67%

Total investment sales5

4,220

7,292

4,208

7,888

8%

5%

1    Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

2    UK investment sales are also reported in UK Life PVNBP, YTD investment sales of £575 million for 1H16, £1,390 million for 2H16, £1,143 million for 1H17 and £2,137 million for 2H17 are equivalent to £636 million, £1,484 million, £1,202 million and £2,258 million respectively on a PVNBP basis.

3    YTD investment sales of £1,381 million for 1H16, £2,834 million for 2H16, £1,259 million for 1H17 and £2,243 million 2H17 are also included in Aviva Investors' PVNBP.

4    Asia investment sales are also reported in Asia PVNBP.

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

E10 - Trend analysis of investment sales - discrete

 

 

 

 

 

Growth on 2H16

Investment sales1

1H16
Discrete
£m

2H16
Discrete
£m

1H17
Discrete
£m

2H17
Discrete
£m

Sterling
%

Constant currency
%

United Kingdom2

575

815

1,143

994

22%

22%

Aviva Investors3

3,587

2,178

2,949

2,561

18%

21%

Asia4

58

79

116

125

60%

58%

Total investment sales

4,220

3,072

4,208

3,680

20%

22%

1    Investment sales are calculated as new single premiums plus the annualised value of new regular premiums.

2    UK investment sales are also reported in UK Life PVNBP, YTD investment sales of £575 million for 1H16, £815 million for 2H16, £1,143 million for 1H17 and £994 million for 2H17 are equivalent to £636 million, £847 million, £1,202 million and £1,056 million respectively on a PVNBP basis.

3      Discrete investment sales of £1,381 million for 1H16, £1,453 million for 2H16, £1,259 million for 1H17 and £984 million for 2H17 are also included in Aviva Investors' PVNBP.

4      Asia investment sales are also reported in Asia PVNBP.

 

 

 

 

 

 

Page 127

 

 

E11 - Trend analysis of general insurance and health net written premiums - cumulative

 

 

 

 

 

Growth on 2H16

 

1H16 YTD
£m

2H16 YTD
£m

1H17 YTD
£m

2H17 YTD
£m

Sterling
%

Constant currency
%

General insurance

 

 

 

 

 

 

United Kingdom4

2,001

3,930

2,105

4,078

4%

4%

Canada

1,049

2,453

1,477

3,028

23%

15%

Europe4

936

1,816

1,100

2,018

11%

4%

Asia and Other

5

12

6

17

47%

40%

 

3,991

8,211

4,688

9,141

11%

7%

Health insurance

 

 

 

 

 

 

United Kingdom1

292

514

293

509

(1)%

(1)%

Europe2

198

284

165

240

(15)%

(22)%

Asia3

64

125

78

145

16%

10%

 

554

923

536

894

(3)%

(6)%

Total

4,545

9,134

5,224

10,035

10%

6%

1    These premiums are also reported in UK Life PVNBP, 1H16 YTD NWP of £292 million, 2H16 YTD NWP of £514 million, 1H17 YTD NWP of £293 million, 2H17 YTD NWP of £509 million are equivalent to £255 million, £424 million, £308 million and £540 million on a PVNBP basis respectively.

2    The sale of Ireland Health business was completed in 2016. Ireland Health businesses have been aligned to the new management structure and reported within Europe.

3    Singapore long-term health business is also reported in Asia PVNBP. For Singapore long-term health business, 1H16 YTD NWP of £30 million, 2H16 YTD NWP of £67 million, 1H17 YTD NWP of £38 million and 2H17 YTD NWP £82 million are equivalent to £97 million, £209 million, £69 million and £147million on a PVNBP basis respectively.

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.

E12 - Trend analysis of general insurance and health net written premiums - discrete

 

 

 

 

 

Growth on 2H16

 

1H16
Discrete
£m

2H16
Discrete
£m

1H17
Discrete
£m

2H17
Discrete
£m

Sterling
%

Constant currency
%

General insurance

 

 

 

 

 

 

United Kingdom4

2,001

1,929

2,105

1,973

2%

2%

Canada

1,049

1,404

1,477

1,551

10%

8%

Europe4

936

880

1,100

918

4%

3%

Asia and Other

5

7

6

11

82%

82%

 

3,991

4,220

4,688

4,453

6%

4%

Health insurance

 

 

 

 

 

 

United Kingdom1

292

222

293

216

(2)%

(2)%

Europe2

198

86

165

75

(13)%

(10)%

Asia3

64

61

78

67

9%

10%

 

554

369

536

358

(3)%

(2)%

Total

4,545

4,589

5,224

4,811

5%

4%

1    These premiums are also reported in UK Life PVNBP. 1H16 NWP of £292 million, 2H16 NWP of £222 million, 1H17 NWP of £293 million and 2H17 NWP of £216 million , are equivalent to £255 million, £255 million, £308 million and £232 million on a PVNBP basis respectively.

2    The sale of the Ireland Health business was completed in 2016. Ireland Health businesses have been aligned to the new management structure and reported within Europe.

3    Singapore long-term health business is also reported in Asia PVNBP. For Singapore long-term health business, 1H16 NWP of £30 million, 2H16 NWP of £37 million, 1H17 NWP of £38 million and 2H17 NWP of £44 million are equivalent to £97 million, £112 million, £69 million and £78 million on a PVNBP basis respectively.

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.

 

 

 

 

 

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E13 - Reconciliation of sales to net written premiums in IFRS

The table below presents our consolidated sales for the year ended 31 December 2017 and the year ended 31 December 2016 as well as the reconciliation of sales to net written premiums in IFRS.

 

2017
£m

2016
£m

Present value of new business premiums

40,795

35,037

Investment sales

7,888

7,292

General insurance and health net written premiums

10,035

9,134

Less: long-term health and collectives business1

(5,213)

(4,944)

Total sales

53,505

46,519

Less: Effect of capitalisation factor on regular premium long-term business

(11,412)

(10,563)

Share of long-term new business sales from JVs and associates

(618)

(552)

Annualisation impact of regular premium long-term business

(281)

(264)

Deposits taken on non-participating investment contracts and equity release contracts

(10,953)

(7,834)

Retail sales of mutual fund type products (investment sales)

(7,888)

(7,292)

Add: IFRS gross written premiums from existing long-term business

4,765

4,867

Less: long-term insurance and savings business premiums ceded to reinsurers

(1,741)

(1,696)

Less: Outward reinsurance premium relating to general insurance business

-

(107)

Total IFRS net written premiums

25,377

23,078

Analysed as:

 

 

Long-term insurance and savings net written premiums

15,342

14,051

General insurance and health net written premiums

10,035

9,027

 

25,377

23,078

1    Long-term health and collectives business are included as part of PVNBP.

Effect of capitalisation factor on regular premium long-term business

PVNBP is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The discounted value of regular premiums is calculated using the same methodology as for VNB (on an adjusted Solvency II basis).

The discounted value reflects the expected income streams over the life of the contract, adjusted for expected levels of persistency, discounted back to present value. The discounted value can also be expressed as annualised regular premiums multiplied by a weighted average capitalisation factor (WACF). The WACF varies over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions.

Share of long-term new business sales from joint ventures and associates

Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS reporting, premiums from these sales are excluded from our consolidated accounts, with only our share of profits or losses from such businesses being brought into the income statement separately.

Annualisation impact of regular premium long-term business

As noted above, the calculation of PVNBP includes annualised regular premiums. The impact of this annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums and will vary depending on the volume of regular premium sales during the year.

Deposits taken on non-participating investment contracts and equity release contracts

Under IFRS, non-participating investment contracts are recognised in the Statement of Financial Position by recording the cash received as a deposit and an associated liability and are not recorded as premiums received in the IFRS income statement. Only the margin earned is recognised in the IFRS income statement.

Retail sales of mutual fund type products (investment sales)

Investment sales included in the total sales number represent the cash inflows received from customers to invest in mutual fund type products such as unit trusts and OEICs. We earn fees on the investment and management of these funds which are recorded separately in the IFRS income statement as 'fees and commissions received' and are not included in statutory premiums.

IFRS gross written premiums from existing long-term business

The non-GAAP measure of long-term and savings sales focuses on new business written in the year under review while the IFRS income statement includes premiums received from all business, both new and existing.

 

 

 

 

 

Page 129

 

E14 - Principal assumptions underlying the calculation of VNB (on an adjusted SII basis)

Economic assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each reporting period.

The risk-free interest rate curves used to calculate VNB reflect the basic risk-free interest rate curves (including the credit risk adjustment), volatility adjustment and fundamental spread for the matching adjustment published by EIOPA on their website. The details on methodology are unchanged from those set out in D.2.2.3 of the Aviva 2016 Solvency and Financial Condition Report (SFCR).

 

(a)  Basic risk-free interest rates

The basic risk-free rate curves are stated in the table below, including a credit risk adjustment.

United Kingdom

4Q
2017

3Q
2017

2Q
2017

1Q
2017

4Q
2016

3Q
2017

2Q
2016

1Q
2016

Reference rate

 

 

 

 

 

 

 

 

1 year

0.6%

0.5%

0.4%

0.4%

0.4%

0.3%

0.4%

0.6%

5 years

0.9%

1.0%

0.8%

0.7%

0.7%

0.4%

0.5%

0.9%

10 years

1.2%

1.3%

1.2%

1.0%

1.1%

0.6%

0.9%

1.3%

15 years

1.3%

1.5%

1.4%

1.2%

1.3%

0.8%

1.1%

1.5%

20 years

1.4%

1.6%

1.5%

1.3%

1.3%

0.9%

1.1%

1.6%

 

Eurozone

4Q
2017

3Q
2017

2Q
2017

1Q
2017

4Q
2016

3Q
2017

2Q
2016

1Q
2016

Reference rate

 

 

 

 

 

 

 

 

1 year

(0.4)%

(0.4)%

(0.3)%

(0.3)%

(0.3)%

(0.3)%

(0.3)%

(0.2)%

5 years

0.2%

0.2%

0.2%

0.1%

-

(0.2)%

(0.2)%

(0.1)%

10 years

0.8%

0.8%

0.8%

0.7%

0.6%

0.2%

0.3%

0.5%

15 years

1.2%

1.3%

1.2%

1.1%

1.0%

0.5%

0.7%

0.8%

20 years

1.4%

1.5%

1.4%

1.3%

1.1%

0.7%

0.8%

0.9%

(b)  Matching adjustment

The matching adjustment (MA) is an increase applied to the risk-free rate used to value insurance liabilities where the cash flows are relatively fixed (e.g. no future premiums or surrender risk) and are well matched by assets that are intended to be held to maturity and have cash flows that are also relatively fixed. The intention is that, if held to maturity, the business can earn the additional yield on these assets that relate to illiquidity risk.

Aviva applies a matching adjustment to certain obligations in UK Life and Spain Life, using methodology which is set out in the SFCR Report. The matching adjustments used to value new business will reflect the characteristics of the assets allocated to back the new business. The allocation of assets to new business anticipates the expected assets chosen to back new business at the end of year closing balance sheet. These may be different to the matching adjustments applied at the portfolio level.

The matching adjustments used for new business are shown in the table below:

Matching adjustment portfolio

2H
2017

1H
2017

2H
2016

1H
2016

UK Life

116

123

171

152

Spain Life

-

19

24

30

 

A combined MA of 116 bps and 123 bps was calculated for new business at FY17 and HY17 respectively within the Friends Life UK and the Aviva UK annuity portfolios. Prior to HY17 separate MAs were calculated for these portfolios and the assumptions shown in the table above for the comparative periods relate to the Aviva UK annuity portfolio. For Friends Life UK, the MAs were 106 bps and 123 bps at 2H2016 and 1H2016 respectively. In the comparative periods, the higher MA for Aviva UK new business partly reflects the allocation to Aviva UK of a higher proportion of illiquid assets. Following the sale of the majority of the Spanish business in the second half of 2017, none of the retained entities apply a MA.

(c)  Volatility adjustment

The volatility adjustment (VA) is intended to reflect temporary distortions in spreads caused by illiquidity in the market or extreme widening of credit spreads, in particular in relation to government bonds. VAs are prescribed by EIOPA and published along with the basic risk-free interest rate curves on their website. Where applicable the VA is applied to all those liabilities where a MA is not applied, with the exception of unit-linked business in UK Life where, in line with the approved applications, no allowance for the VA is made.

The volatility adjustments used are shown in the table below:

Volatility Adjustment (bps)

2H
2017

1H
2017

2H
2016

1H
2016

United Kingdom

18

21

30

38

Eurozone

4

9

13

16

 

 

 

 

 

 

 

Page 130

 

 

Glossary  

This glossary to the Analyst Pack contains the definitions of non-GAAP financial Alternative Performance Measures (APMs) which are not bound by the requirements of IFRS.

 

Annual Premium Equivalent (APE)

Annual Premium Equivalent is a measure of sales in our life insurance businesses. APE is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. Whilst not a key performance metric of the Group, the APE measure provides useful information on sales and new business when considered alongside other measures such as the present value of new business premiums (PVNBP) or Solvency II value of new business (VNB).

 

Assets under management (AUM)

Assets under management represent all assets managed or administered by or on behalf of the Group, including those assets managed by third parties. AUM include managed assets that are included within the Group's statement of financial position and those assets belonging to external clients outside the Aviva Group which are therefore not included in the Group's statement of financial position. AUM is monitored as this reflects the potential earnings arising from investment interest and commission and measures the size and scale of the AUM business.

 

Cash remittances

Cash remittances represent amounts paid by our operating businesses to the Group, comprise dividends and interest on internal loans. Dividend payments by operating businesses may be subject to insurance regulations that restrict the amount that can be paid. The business monitors total cash remittances at a group level and in each of its markets.

      These amounts eliminate on consolidation and hence are not directly reconcilable to the Group's IFRS consolidated statement of cash flows.

 

Claims ratio

A financial measure of the performance of our general insurance business which is derived from incurred claims as a percentage of net earned premiums.

 

Combined Operating Ratio (COR)

A financial measure of the Group's general insurance underwriting profitability which is derived from total underwriting costs - comprising of incurred claims, written commissions and expenses - expressed as a percentage of net earned premiums. A combined operating ratio below 100% indicates profitable underwriting.

 

Commission and expense ratio

A financial measure of the performance of our general insurance business which is derived from the sum of written commissions and expenses expressed as a percentage of net earned premiums.

 

Estimated Solvency II cover ratio

The Solvency II cover ratio is an indicator of the Group's balance sheet strength which is derived from 'Own funds' divided by the Solvency Capital Requirement (SCR), as calculated on a shareholder view. The shareholder view excludes the contribution to Group SCR and Group 'Own funds' of fully ring fenced with-profits funds and staff pension schemes in surplus. These exclusions have no impact on Solvency II surplus.

      The most material fully ring fenced with-profits 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 cover ratio is shown inclusive of pro forma adjustments to align it with the capital information presented to management internally. Pro forma adjustments are made when, in the opinion of the Directors, the cover ratio does not fully reflect the effect of transactions or capital actions that are known as at each reporting date. Such adjustments may be required in respect of planned acquisitions and disposals, group reorganisations and adjustments to the Solvency II valuation basis arising from changes to the underlying Regulations or updated interpretations provided by EIOPA.

 

Estimated Solvency II own funds

Available capital resources determined under Solvency II are referred to as 'Own Funds'. This includes the excess of assets over liabilities in the Solvency II balance sheet (calculated on best estimate, market consistent assumptions and net of transitional measures on technical provisions), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet Own Funds.

Estimated Solvency II Surplus

The surplus represents 'Own funds' less the SCR. Holding capital in excess of the SCR demonstrates an insurer has adequate financial resources in place to meet all its liabilities as and when they fall due and that there is sufficient capital to absorb significant losses.

 

Excess centre cash flow

This represents the cash remitted by business units to the Group centre less central operating expenses and debt financing costs. Excess centre cash flow is a measure of the cash available to pay dividends, reduce debt or invest back into our business.

      These amounts eliminate on consolidation and hence are not directly reconcilable to the Group's IFRS consolidated statement of cash flows.

 

Group adjusted operating profit (operating profit)

Operating profit is a non-GAAP APM which is reported to the Group chief operating decision maker for the purpose of decision making and internal performance management of the Group's operating segments that incorporates an expected return on investments supporting the life and non-life insurance businesses. Throughout the Preliminary Announcement, Group adjusted operating profit is referred to as operating profit.

      The various items taken out of operating profit are:

 

Investment variances and economic assumptions changes

Operating profit for the life insurance business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities.

· The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification.

 

 

 

 

 

 

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· 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 risks. Where such securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase.

· The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin.

Operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. This would include movements in liabilities due to changes in discount rate arising from management decisions that impact on product profitability over the lifetime of products. Changes due to economic items, such as market value movement 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 operating profit.

Operating profit for the non-life insurance business is based on expected investment returns on financial investments backing shareholder funds over the period.

· Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns.

· The longer-term return for other investments is the actual income receivable for the period.

Changes due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed separately outside operating profit. The impact of changes in the discount rate applied to claims provisions is also disclosed outside operating profit.

The exclusion of short-term investment variances from this APM reflects the long-term nature of much of our business. The operating profit which is used in managing the performance of our operating segments excludes the impact economic factors, to provide a comparable measure year-on-year.

Impairment, amortisation and profit/loss on disposal

      Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and re-measurement of subsidiaries, joint ventures and associates. These items principally relate to merger and acquisition activity which we view as strategic in nature, hence they are excluded from the operating profit APM as this is principally used to manage the performance of our operating segments, when reporting to the Group chief operating decision maker.

Other items

These items are, in the Directors' view, required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance.

Operating profit is presented before and after integration and restructuring costs.

The Group adjusted operating profit APM should be viewed as complementary to IFRS GAAP measures. It is important to consider Group adjusted operating profit and profit before tax together to understand the performance of the business in the period.

 

Investment sales

This measure comprises of retail sales of mutual fund-type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).

 

Net Asset Value (NAV) per share

NAV per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the consolidated statement of financial position), divided by the actual number of shares in issue as at the balance sheet date.

 

Net fund flows

Net fund flows is one of the measures of growth used by management and is a component of the movement in the 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.

 

New business income

New business income represents the impact on group adjusted operating profit of new business written in the period. New business income comprises income arising from premiums written during the period less initial reserves, expenses and commission. Expense and commission are shown net of deferred acquisition costs. Whilst not a key performance metric of the Group, new business income provides useful information on sales and new business when considered alongside other measures such as the present value of new business premiums (PVNBP) or Solvency II value of new business (VNB).

 

New business margin

New business margins are calculated as the adjusted Solvency II value of new business divided by the adjusted Solvency II present value of new business premiums (PVNBP), and expressed as a percentage.

 

Normalised accident year claims ratio

The normalised accident year claims ratio is derived from the claims ratio (as defined above) with adjustments made to exclude the impact of exceptional and non-recurring items; prior year claims development and weather variations versus expectations. These adjustments are made so that the underlying performance of the Group can be assessed excluding factors that might distort the trend in the claims ratio on a year-on-year basis. The ratio is shown gross of the impact of profit sharing arrangements.

 

Normalised accident year Combined Operating Ratio

The normalised accident year combined operating ratio is derived from the COR (as defined above) with adjustments made to exclude the impact of exceptional and non-recurring items; prior year claims development and weather variations versus expectations, gross of the impact of profit sharing arrangements. These adjustments are made so that the underlying performance of the Group can be assessed excluding factors that might distort the trend in the claims ratio on a year-on-year basis.

 

 

 

 

 

 

Page 132

 

 

Operating Capital Generation (OCG)

Operating Capital Generation represents the movement in the Solvency II surplus in the period due to the impact of new business, expected returns on existing business, operating variances, non-economic assumption changes and non-recurring capital actions.

      OCG excludes economic variances, economic assumption changes and integration and restructuring costs. The exclusion of these items from OCG reflects the long-term nature of much of the Group's business and excludes the impact of economic factors which are typically outside the control of management.

'Underlying' OCG is the component of the OCG which excludes the effect of non-recurring capital actions and non-economic assumption changes and is therefore considered to be more representative of the long-term trend.

Operating Earnings per Share (EPS)

Operating EPS is calculated based on the adjusted operating profit attributable to ordinary shareholders net of tax, deducting non-controlling interests, preference dividends, the direct capital instrument (DCI) and tier one note coupons divided by the weighted average number of ordinary shares in issue, after deducting treasury shares.

 

Operating expense ratio

The operating expense ratio expresses operating expenses as a percentage of operating income.

      Operating income is calculated as Group adjusted operating profit before Group debt costs and operating expenses.

 

Operating expenses

The day-to-day expenses involved in running the business are classified as operating expenses. These expenses include other acquisition costs and claims handling costs as these are considered to be controllable by the Group's operating segments and directly impact their performance.

      Operating expenses exclude impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and re-measurement of subsidiaries, joint ventures and associates. These items principally relate to merger and acquisition activity which we view as strategic in nature, hence they are excluded as this measure is principally used to manage segment performance. Operating expenses also exclude integration & restructuring costs and other similar expenses incurred which are considered to be non-recurring and strategic in nature.

Present value of new business premiums

The present value of new business premiums (PVNBP) is a financial measure which is used as a measure of sales in the Group's life insurance businesses. PVNBP is derived from the present value of new regular premiums plus 100% of single premiums from new business written at the point of sale. PVNBP also includes any changes to existing contracts which were not anticipated at the outset of the contract that generates additional shareholder risk and associated premium income of the nature of a new policy. An example of a change to existing contracts that is considered to generate additional PVNBP is an internal transfer of annuities from a with-profits fund to a non-profit fund.

Return on equity

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 (excluding non-controlling interests and direct capital instrument and tier 1 notes).

 

Return on capital employed (ROCE)

ROCE indicates the efficiency with which a company uses its assets to generate profits. Usually calculated as pre-tax profit divided by capital employed (total assets minus current liabilities) and expressed as a percentage.

 

Solvency Capital Requirement (SCR)

The Solvency II regime requires insurers to hold own funds in excess of the Solvency Capital Requirement. The SCR is calculated at Group level using a risk based capital model which is calibrated to reflect the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time horizon - equivalent to a 1 in 200 year event - against financial and non-financial shocks. As a number of subsidiaries utilise the standard formula rather than a risk based capital model to assess economic capital requirements, the overall Aviva Group SCR is calculated using a partial internal model, and it is shown after the impact of diversification benefit.

 

Spread margin

The spread margin represents the return made on the Group's annuity and other non-linked business, based on the expected investment return, less amounts credited to policyholders. Whilst not a key performance metric of the Group, the spread margin is a useful indicator of the expected investment return arising on this business.

 

Underwriting margin

The underwriting margin represents the release of reserves held to cover claims, surrenders and administrative expenses less the cost of actual claims and surrenders in the period. Whilst not a key performance metric of the Group; the underwriting margin is a useful measure of the financial performance of our Life insurance business when considered alongside other financial metrics.

 

Unit linked margin

The unit linked margin represents the annual management charges on unit-linked business based on expected investment return. Whilst not a key performance metric of the Group, the unit linked margin is a useful indicator of the expected investment return arising on this business.

 

Value of New Business (VNB)

The Solvency II value of new business (VNB) represents the increase in own funds arising from business written in the period, with adjustments made to i) include VNB not included in Solvency II (e.g. UK and Asia Healthcare business, retail fund management business and UK Equity Release business) ii) remove the impact of contract boundaries and iii) include a 'look through' to the value of profits arising in service companies (which would otherwise be excluded from Solvency II). These adjustments are considered to reflect a more realistic basis than the prudential Solvency II rules. The VNB is derived from the present value of projected pre-tax distributable profits generated by new business plus a risk margin. Adjusted Solvency II VNB can be reconciled to the Solvency II Own Funds impact of new business; however there is no equivalent IFRS metric.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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