FY14 part 2 of 5

RNS Number : 5911G
Aviva PLC
05 March 2015
 



Start of part 2 of 5

 

 

 

Page 1

Contents

 

 

In this section

Page

Overview


Key financial metrics

2



1    Cash

3

i     Cash remitted to Group

3

ii    Excess centre cash flow

3

iii   Operating capital generation

3

iv   Free surplus emergence

5



2    Operating profit: IFRS basis

6



3    Expenses

7



4    Value of new business

8



5    Combined operating ratio

9



6    Business unit performance

10

i     United Kingdom and Ireland Life

10

ii    United Kingdom and Ireland general insurance & health

11

iii   Europe

12

iv   Canada

13

v    Asia

14

vi   Fund management

15



7    Profit drivers: IFRS basis

16

i     Life business

16

ii    General insurance and health

19

iii   Fund flows

21



8    Capital & assets summary

22

i     Summary of assets

22

ii    External leverage

23

iii   Net asset value

24

iv   Return on equity

25

v    European Insurance Groups Directive (IGD)

26

vi   Economic capital

27



Financial supplement

29

Income & expenses

30



IFRS financial statements

35



Capital & assets

89

Capital & liquidity

90

Analysis of assets

99



VNB & Sales analysis

121



MCEV financial statements

127



Other information

167

 

 

 

Page 2

Key financial metrics

 

 

 

Cash

Cash remitted to Group

Operating capital generation

Continuing operations

2014
£m

2013
£m

Sterling% change

2014
£m

2013
£m

Sterling% change

United Kingdom & Ireland Life

437

370

18%

888

586

52%

United Kingdom & Ireland General Insurance & Health1

294

347

(15)%

425

374

14%

Europe

454

388

17%

499

558

(11)%

Canada

138

130

6%

136

177

(23)%

Asia and Other

89

34

n/a

(8)

63

n/a

Total

1,412

1,269

11%

1,940

1,758

10%

Operating profit: IFRS basis

 

*    Includes other operations, corporate centre costs and group debt and other interest costs.

**  Net of tax, non-controlling interests, preference dividends, coupon payments in respect of direct capital instruments (DCI) and fixed rate tier 1 notes (net of tax).

Expenses

Continuing operations

2014
£m

2013
£m

Sterling% change

Operating expenses

2,795

3,006

(7)%

Integration & restructuring costs

140

363

(61)%

Expense base

2,935

3,369

(13)%

 

Value of new business

Continuing operations

2014
£m

2013
£m

Sterling %
change

Constant
currency %
change2

United Kingdom & Ireland

482

477

1%

1%

France

205

172

19%

25%

Poland3

64

51

25%

31%

Italy3, Spain3, Turkey & Other

123

106

16%

28%

Asia3

127

103

23%

30%

Aviva Investors

9

-

-

-

Value of new business - excluding Eurovita, Aseval, CxG & Malaysia

1,010

909

11%

15%

Eurovita, Aseval, CxG & Malaysia

(1)

(5)

-

-

Value of new business

1,009

904

12%

15%

General insurance combined operating ratio

Continuing operations

2014

2013

Change

United Kingdom & Ireland

94.9%

97.2%

(2.3)pp

Europe

97.7%

98.1%

(0.4)pp

Canada

96.1%

94.6%

1.5pp

General insurance combined operating ratio

95.7%

97.3%

(1.6)pp

IFRS profit after tax

2014
£m

2013
£m

Sterling%
change

IFRS profit after tax - continuing operations

1,680

878

91%

IFRS profit after tax - total

1,738

2,151

(19)%

Dividend

Capital position

1    Cash remittances include amounts of £273 million received from UK General Insurance (UKGI) in February 2015 in respect of 2014 activity and £347 million received in January 2014 in respect of 2013 activity.

2    Currency movements are calculated using unrounded numbers so minor rounding differences may exist.

3    Poland includes Lithuania, Italy excludes Eurovita, Spain excludes Aseval and CxG and Asia excludes Malaysia.

4    The economic capital and IGD solvency surpluses represent an estimated position. The economic capital requirement is based on Aviva's own internal assessment and capital management policies. The term 'economic capital' does not imply capital as required by regulators or other third parties. Following the announcement that the Group made an offer to acquire Friends Life Group Limited on 2 December 2014, the directors have proposed a final dividend for 2014 of 12.25 pence per share, amounting to £0.4 billion in total. Although subject to approval by shareholders at the AGM, the dividend is considered foreseeable and is therefore deducted from FY14 economic capital and IGD surpluses. In contrast, 2013 final dividend of 9.40 pence per share amounting to £0.3 billion was not foreseeable as at 31 December 2013 and was not deducted from FY13 economic capital and IGD surpluses.

5    In preparing the MCEV information, the directors have done so in accordance with the European Insurance CFO Forum MCEV Principles with the exception of stating held for sale operations at their expected fair value, as represented by expected sale proceeds, less cost to sell.

 

 

 

Page 3

 

Cash

 

 

1.i - Cash remitted to Group

The flow of sustainable cash remittances from the Group's businesses is a key financial priority. The cash remittances for FY14 from continuing operations were £1,412 million (FY13: £1,269 million). The 2014 totals include amounts received from Aviva Insurance Limited in February 2015 in respect of 2014 activity in that business and its subsidiaries.

 

1    Cash remittances include amounts of £273 million received from UKGI in February 2015 in respect of 2014 activity and £347 million received in January 2014 in respect of 2013 activity.

2    Other includes Aviva Investors and Group Reinsurance.

 

Cash remitted to Group has increased, with improvements across the majority of businesses, giving an overall remittance ratio relative to OCG of 73% (FY13: 72%).

1.ii - Excess centre cash flow

Excess centre cash flow represents cash remitted by business units to the Group centre less central operating expenses and debt financing costs. It is an important measure of the cash that is available to pay dividends, reduce debt, pay exceptional charges or invest back into our business units. It does not include non-operating cash movements such as disposal proceeds or capital injections.

 

2014
£m

2013
£m

Dividends received

1,412

1,269

External interest paid

(425)

(445)

Internal interest paid

(151)

(202)

Central spend

(199)

(233)

Other operating cash flows1

55

31

Excess centre cash flow2

692

420

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

2    Before non-operating items and capital injections.

 

The increase of £272 million in excess centre cash flow is primarily driven by higher remittances across the majority of businesses, a decrease in internal interest from the reduction of the intercompany loan and lower expenses.

1.iii - Operating capital generation

 

Operating cash generation is a historic measure of underlying capital generation. OCG currently includes the surplus emerging under the Solvency I regime, which will be replaced by Solvency II in 2016.

 

1    Operating capital generation comprises the following components:

-    Operating free surplus emergence, including release of required capital, for the life in-force business (net of tax and non-controlling interests);

-    Operating profits for the general insurance and other non-life businesses net of tax and non-controlling interests from non-covered business only, where non-covered business represents business which is outside the scope of Life MCEV methodology.

-    Capital invested in new business. For life business this is the impact of initial and required capital on free surplus. For general insurance business this reflects the movement in required capital, which has been assumed to equal the regulatory minimum multiplied by the local management target level. Where appropriate movements in capital requirements exclude the impact of foreign exchange and other movements deemed to be non-operating in nature.

-    At FY13 the United States business (including its life, fund management and non-insurance segments whose sale was completed on 2 October 2013) was included in OCG on an IFRS basis (net of taxation).

The amount of operating capital remitted to Group depends on a number of factors including non-operating items and local regulatory requirements.

2    During 2014, internal reinsurance arrangements were undertaken by the UK Annuity business to reinsure an additional 10% to Aviva International Insurance Limited and an additional 12.5% to UK Life & Pensions. These arrangements have had an adverse impact on Group MCEV free surplus of £204 million (MCEV Note F12). On an economic capital basis these transactions improve the UK Life position and as a result the adverse impact on MCEV Free Surplus has therefore been excluded from OCG to reflect the economic substance of the management action.

 

 

Page 4

 

 

1.iii - Operating capital generation continued

The analysis of OCG by market and product and service is set out below.

 

 

1    During 2014, internal reinsurance arrangements were undertaken by the UK Annuity business to reinsure an additional 10% to Aviva International Insurance Limited and an additional 12.5% to UK Life & Pensions. These arrangements have had an adverse impact on Group MCEV free surplus of £204 million (MCEV Note F12). On an economic capital basis these transactions improve the UK Life position and as a result the adverse impact on MCEV free surplus has therefore been excluded from OCG to reflect the economic substance of the management action.

2    Operating profit net of tax and non-controlling interests from non-covered businesses only, where non-covered business is that which is outside the scope of life MCEV methodology.

3    This reflects the movement in required capital, which has been assumed to equal the regulatory minimum multiplied by the local management target level. Where appropriate movements in capital requirements exclude the impact of foreign exchange and other movements deemed to be non-operating in nature.

 

Operating capital generation (OCG) on a continuing basis is £1,940 million, an increase of 10% compared to prior year (FY13: £1,758 million).

      In our UK and Ireland Life business OCG has increased to £888 million (FY13: £586 million). During 2014, UK Life implemented a management action that enables certain shareholder assets to be reflected on the regulatory balance sheet and the economic risk to be hedged more efficiently. As a result of this action, future shareholder transfers that arise as bonuses are paid, will now emerge in the New With Profits Sub Fund rather than the Non Profit Sub Fund (NPSF). This reduces the present value of future profits and increases free surplus in the NPSF, and has benefitted OCG by £199 million in the year. This amount, together with the benefit of longevity and expense assumption changes primarily in the UK Annuity business, makes up total management actions of £441 million in this business. 

      In our UK and Ireland General Insurance business OCG has increased by 14% to £425 million (FY13: £374 million) reflecting the increase in operating profit and a lower capital requirement. In Canada, OCG has been adversely impacted by higher large losses and lower prior year reserve releases as well as weakening of the Canadian dollar. In Europe, there is a lower level of benefits from management actions, particularly the reduction of guarantees in France in 2013, and a weakening of the Euro which has adversely impacted OCG. In Asia, 2013 benefitted from a financial reinsurance transaction in Singapore and 2014 has been adversely impacted by an increase in required capital in the retail health business.

      The expected free surplus emergence in future years is shown in note 1.iv.

 

 

 

 

Page 5

 

 

1.iv - Free surplus emergence

Maturity profile of undiscounted free surplus emergence equivalent embedded value cash flows

Total in-force business

 

Release of future profits and required capital

2014
 £m

2013
£m

Year 1

1,137

1,268

Year 2

1,059

1,180

Year 3

1,071

1,126

Year 4

1,204

1,094

Year 5

1,169

1,191

Year 6

1,157

1,145

Year 7

1,088

1,065

Year 8

1,060

1,047

Year 9

981

960

Year 10

922

936

Years 11-15

4,232

4,278

Years 16-20

3,547

3,749

Years 20+

7,583

9,130

Total net of non-controlling interests1

26,210

28,169

1    Cash flow profiles exclude held for sale operations.

 

The table above shows the expected future emergence of profits from the existing business implicit in the equivalent embedded value calculation for life covered in-force business. The cash flows have been split for the first ten years followed by five year tranches depending on the date when the profit is expected to emerge. These profits, which arise from the release of margins in the regulatory reserves as the business runs-off over time, are expected to emerge through operating capital generation (OCG) in future years. The cash flows are real world cash flows, i.e. they are based on the non-economic assumptions used in the MCEV and normalised investment returns. Normalised investment returns are equal to the MCEV risk free rates in addition to a risk premium to allow for the actual return expected to be achieved in the market.

      For existing business, the cash flows will generally reduce over time due to lapses, maturities and other benefit payments. Each year new business will increase these profits, following the initial strain at point of sale. This table only includes the business currently in-force.

      The expected free surplus emergence in the OCG of £1,267 million (see note 1.iii) is broadly equal to the year 1 cash flow from 31 December 2013 of £1,268 million. The 2014 total of £1,267 million includes the expected transfers from the value of in-force (VIF) and required capital to free surplus of £1,221 million (MCEV - Note F11) and also the free surplus component of the expected return on net worth which equals £46 million.

      The total real world cash flows have decreased by £1,959 million over 2014, largely reflecting lower real world expected returns as interest rates have declined and adverse foreign exchange movements.

      The free surplus emergence in the table above only includes business written in the RIEESA when conditions for its release to shareholders are expected to have been met, which is currently in year 3. The 31 December 2014 cash flows reflect the capital management actions undertaken by the UK business in 2014, which have accelerated the release of the RIEESA.

 

 

Page 6

 

 

2 - Operating Profit: IFRS basis

Group operating profit from continuing operations: IFRS basis

For the year ended 31 December 2014

 

1    The UK Retail fund management business was transferred from UK Life to Aviva Investors on 9 May 2014 and hence is included in Aviva Investors from 9 May 2014 onwards.

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

3    Net of tax, non-controlling interests, preference dividends, coupon payments in respect of direct capital instruments (DCI) and fixed rate tier 1 notes (net of tax). The calculation of basic earnings per share uses a weighted average of 2,943 million (FY13: 2,940 million) ordinary shares in issue, after deducting shares owned by the employee share trusts.

 

Overall, operating profit has increased by £124 million to £2,173 million (FY13: £2,049 million) with the improvement principally driven by operating expense savings of £211 million (FY13: £228 million).

      During the year there have been significant foreign exchange movements which have reduced income and benefitted expenses on a sterling basis. On a constant currency basis costs have reduced by £113 million in the year and there has been a net adverse impact on operating profit from foreign exchange movements of £87 million.

      Within the overall result, UK Life includes a net additional benefit to operating profit of £282 million (FY13: £116 million), mainly from longevity assumption changes and expense reserve releases, which are partially offset by increased DAC amortisation charges on pension business, the adverse impact of reduced annuity trading and lower expected returns as a result of de-risking activity. In France, FY13 life operating profit included a non-recurring benefit of £42 million relating to management actions taken to reduce the cost of guaranteed death benefits.

      In the general insurance and health business result, higher positive prior year development benefitted operating profit by £131 million (FY13: £77 million benefit to operating profit).

      These improvements were partly offset by a charge of £18 million relating to Aviva Investors' settlement with the FCA for certain systems and controls failings that happened between August 2005 to June 2013. Provision for this expected cost was made at the year end and is fully reflected within the 'Other operations' FY14 result (note A1).

      Within the UK and Ireland general insurance business, the lower balance on the internal loan with Aviva Group Holdings (AGH) has reduced the interest received on this loan (and included within long term investment return) by £65 million in the year. The impact of this is neutral at a consolidated Group level.

      Operating earnings per share increased by 10% to 47.0p (FY13: 42.6p), driven by operating profit growth and lower non-controlling interests mainly reflecting the disposals of Eurovita and Aseval.

 

 

Page 7

 

 

3 - Expenses

a) Expenses - continuing operations

 

 

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

 

1    As reported within net claims and benefits paid from continuing operations of £19,474 million (FY13: £22,093 million).

2    As reported within fee and commission expense from continuing operations of £3,389 million (FY13: £3,975 million).

 

Overall operating expenses for the period reduced by £211 million to £2,795 million (FY13: £3,006 million). Of this, £98 million is due to favourable foreign exchange movements giving an underlying reduction of £113 million. Compared with the 2011 base-line for the Group-wide expense reduction target of £3,366 million, there has been an overall reduction of £571 million.

      Significant cost reductions have been made in the United Kingdom and Ireland. Both the life and general insurance businesses have achieved savings by reducing headcount for both permanent staff and contractor positions, lowering levels of property spend through renegotiation of leases or exiting property and reducing consultancy spend. In addition, the UK retail fund management business was transferred from UK Life to Aviva Investors in May 2014.

      Total operating expenses of our European markets have reduced by 7% compared to prior year (2% on a constant currency basis). This reflects improvements across all markets with the exception of Poland where costs have risen as a result of higher investment in distribution channels in this market.

      In Canada, operating expenses have reduced by 16% (6% on a constant currency basis) reflecting the ongoing focus on expense management. Total operating expenses for Asia have decreased by 7% compared to 2013 but remained stable on a constant currency basis as the increased costs of developing our distribution network in Singapore were offset by cost savings in other markets. Aviva Investors operating expenses have increased by 3% compared to prior year (5% on a constant currency basis) mainly due to increased expenses incurred to support the further development of the business and inclusion of the UK retail fund management business (transferred from UK Life).

      Other Group activities, which include Group centre costs, has remained broadly stable with head office cost efficiencies offsetting the inclusion of Aviva staff pension scheme administration costs, which were borne by our UK markets in 2013.

      Integration and restructuring costs from continuing operations were £140 million (FY13: £363 million) and mainly include £94 million of expenses associated with the Solvency II programme (FY13: £79 million). Compared to the prior period, integration and restructuring costs have reduced by £223 million principally driven by a significant reduction in transformation spend.

b) Operating expense ratios - continuing operations

2014

 2013

Life1

30.1%

33.3%

General insurance2

14.8%

15.1%

Health2

15.7%

15.8%

Fund management3

12bps

12bps

Group total4

51.5%

54.1%

1    Life non-commission acquisition and administration expenses gross of DAC on new business expressed as a percentage of Life operating income.

2    Written expenses including claims handling costs expressed as a percentage of net written premiums.

3    Aviva Investors' operating expenses expressed as a percentage of average funds under management (excluding River Road).

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

 

 

 

 

Page 8

 

 

4 - Value of new business by market

 

Gross of tax and non-controlling interests - continuing operations

2014
 £m

 2013
£m

United Kingdom

473

469

Ireland

9

8

United Kingdom & Ireland

482

477

France

205

172

Poland

64

51

Italy - excluding Eurovita

63

43

Spain - excluding Aseval & CxG

30

25

Turkey

30

37

Other Europe

-

1

Europe

392

329

Asia - excluding Malaysia

127

103

Aviva Investors1

9

-

Value of new business - excluding Eurovita, Aseval, CxG & Malaysia

1,010

909

Eurovita, Aseval, CxG & Malaysia

(1)

(5)

Total value of new business

1,009

904

1    UK Retail fund management business was transferred from UK Life to Aviva Investors on 9 May 2014 and hence is included in Aviva Investors from 9 May 2014 onwards.

 

The Group's value of new business2,3 (VNB) increased by 11% to £1,010 million (FY13: £909 million), a 15% increase in constant currency with improvements across all markets with the exception of Turkey. The growth was primarily driven by strong performances in France, Italy, Poland and Asia.

      In the UK, VNB returned to growth in the second half of the year, reflecting strong trading and improved margins on equity release products as well as increased sales of bulk purchase annuities and protection products. This increase was partially offset by the significant decline in individual annuity volumes following the announcements made in the 2014 UK budget and a general market decline as increasingly customers are choosing to defer taking their pension, as well as lower pensions VNB mainly following the Department for Work and Pensions announcement to cap pension charges. This means that overall VNB in the UK was in line with the 2013 total. Ireland's VNB improved by 30%4 reflecting a strategic shift in business mix towards higher value products, in particular protection business.

      In Europe, improvements were largely driven by growth in France, Poland and Italy, slightly offset by a reduction in Turkey. VNB in France increased 25%4 driven by increased volumes and a continued shift in product mix towards more profitable unit-linked investments. Poland's VNB improved by 31%4 reflecting a one-off benefit from higher pension contributions in Lithuania as a result of regulatory changes and an increase in sales of higher margin protection products. In Italy, VNB increased by 55%3,4 due to a 32%3,4 increase in volumes and improved margins on with-profits products following management actions to reduce the costs of guarantees. Spain's VNB increased 27%3,4 due to improved margins on with-profits business following management action to reduce guarantees, together with overall expense reductions. The 3%4 decline in Turkey was mainly driven by a reduction in our share of the business following the partial IPO.

      VNB in Asia increased 30%3,4 reflecting a continued focus on sales of higher margin products, particularly protection products in China, as well as the inclusion of the Singapore retail health business as covered business with effect from July 2013.

     

 

 

 

2    The trend analysis of VNB and present value of new business premiums (PVNBP) are included in Financial supplement, section E: VNB & sales analysis.

3    Poland includes Lithuania, Italy excludes Eurovita, Spain excludes Aseval and CxG (sold at the end of December 2014) and Asia excludes Malaysia.

4    On a constant currency basis.

 

 

 

Page 9

 

 

5 - General insurance combined operating ratio (COR)

 

1    United Kingdom excluding Aviva Re and agencies in run-off.

2    Claims ratio: Incurred claims expressed as a percentage of net earned premiums.

3    Commission and Expense ratio: Written commissions and expenses expressed as a percentage of net written premiums.

4    Combined operating ratio: Aggregate of claims ratio and commission and expense ratio.

5    Other includes Aviva Re.

 

Group combined operating ratio (COR) for the period is 95.7% (FY13: 97.3%) with improvements in the UK, Ireland and Europe more than offsetting the adverse movement in Canada.

      In the UK and Ireland, GI COR has improved by 2.3pp to 94.9% (FY13: 97.2%) reflecting an improvement in the overall claims and commission and expenses ratios. In the UK, the claims ratio has improved to 61.0% (FY13: 61.9%) mainly reflecting favourable prior year claims development and underwriting actions. Although marginally worse than 2013, UK weather experience in FY14 remained better than the long term average. The lower commission and expense ratio of 33.8% (FY13: 35.1%) is due to expense savings and management actions taken to mitigate reduced volumes. In Ireland the COR has improved to 96.6% (FY13: 99.2%), due to improvements in the commission and expense ratio partially offset by the non recurrence of the favourable weather experienced in 2013.

      Europe's GI COR has improved by 0.4pp to 97.7% (FY13: 98.1%) mostly reflecting a lower expense ratio. Excluding the Turkish general insurance business disposed of in December 2014, Europe's GI COR was 96.0% (FY13: 96.4%). Improvements in the commission and expense ratio were largely driven by expense efficiencies and business growth in France and Italy. The claims ratio was primarily impacted by adverse weather events in France partly offset by improved prior year claims development mainly in Italy.

      In Canada GI COR has deteriorated by 1.5pp to 96.1% (FY13: 94.6%), driven by an increase in the claims ratio which was partly offset by improvements in the commission and expense ratio. The claims ratio has worsened by 2.3pp to 65.5% (FY13: 63.2%) due to higher large losses and lower prior year releases compared with 2013. Although more favourable than 2013, Canada weather experience in FY14 remained higher than the long term average reflecting the severe winter in the first quarter of the year followed by hailstorms in Alberta in August. This compares with the adverse impact from the Canadian floods in FY13, of which £62 million was included in the results of Canada, while the remaining £67 million was included in the results of our internal reinsurance company.

      We continue to apply our reserving policy consistently and to focus on understanding the true cost of claims to ensure that reserves are maintained at an appropriate level. Prior year reserve movements will vary year to year but our business is predominantly short tail in nature and the loss development experience is generally stable. In FY14 we have had a positive prior year development in our GI & Health business, benefitting operating profit by £131 million (FY13: £77 million benefit to operating profit) mainly in Canada, the UK and Ireland.

Underlying combined operating ratio

 

UK & Ireland

Europe

Canada

Total


2014
%

2013
%

2014
%

2013
%

2014
%

2013
%

2014
%

2013
%

Underlying claims ratio1

64.2

63.3

67.2

67.6

67.0

66.4

65.4

64.7

Prior year reserve strengthening/(release)2

(1.4)

0.7

0.3

1.1

(3.5)

(5.6)

(1.6)

(0.9)

Weather over/(under) long term average3

(1.4)

(1.9)

2.2

0.9

2.0

2.4

0.2

0.7

Claims ratio

61.4

62.1

69.7

69.6

65.5

63.2

64.0

64.5

Commission and expense ratio4

33.5

35.1

28.0

28.5

30.6

31.4

31.7

32.8

Combined operating ratio

94.9

97.2

97.7

98.1

96.1

94.6

95.7

97.3

1    Underlying claims ratio represents the claims ratio adjusted to exclude prior year claims development and weather variations vs. expectations, gross of the impact of profit sharing arrangements.

2    Prior year reserve strengthening/(release)represents the changes in the ultimate cost of the claims incurred in prior years, gross of the impact of profit sharing arrangements.

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

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

 

Group underlying claims ratio for the period has deteriorated by 0.7pp to 65.4% (FY13: 64.7%) with an overall improvement in Europe being offset by Canada and UKGI. The deterioration in Canada is mainly due to higher large losses in FY14 compared to FY13. In UKGI, underwriting actions to improve profitability in a challenging rating environment were more than offset by the fact that FY14 large loss experience was back in line with long-term average while FY13 benefitted from benign experience. The commission and expense ratio for the period has improved by 1.1pp to 31.7% (FY13: 32.8%).

 

 

Page 10

 

6.i - United Kingdom and Ireland Life

 

2014
£m

2013
£m

Cash remitted to Group

437

370

Life Operating profit: IFRS basis

1,039

952

Expenses



Operating expenses

565

607

Integration and restructuring costs

28

59


593

666

Value of new business

482

477

Cash

During the year total cash remitted to Group was £437 million, up 18% from 2013. The UK Life business paid a dividend of £390 million, a 30% increase from £300 million in 2013. Ireland paid a dividend to Group of £47 million (FY13: £70 million).

Operating profit: IFRS basis

UK & Ireland life operating profit increased by 9% to £1,039 million (FY13: £952 million). Within this total, UK life operating profit increased by 9% to £1,016 million (FY13: £930 million). 2014 results saw a net additional benefit to profit from non-recurring items of £282 million (FY13: £116 million), mainly from longevity assumption changes and expense reserve releases, which are partially offset by increased DAC amortisation charges on pension business. Excluding these items, profits have decreased 10%, with the benefits of cost savings offset by the impact of reduced annuity trading and lower expected returns as a result of de-risking activity.

      In Ireland, life operating profit was broadly stable at £23 million (FY13: £22 million).

Expenses

UK operating expenses reduced by 7% to £529 million (FY13: £569 million) reflecting cost savings within the business including reducing headcount and lower levels of property spend. UK integration and restructuring costs were £21 million (FY13: £44 million) and include the costs of Solvency II implementation.

      Ireland operating expenses reduced to £36 million (FY13: £38 million) as cost savings were partly offset by the costs of the planned portfolio transfer to UK Life. Integration and restructuring costs decreased to £7 million (FY13: £15 million).

Value of new business

Value of new business (VNB) increased to £482 million (FY13: £477 million).

      In the UK, VNB improved to £473 million (FY13: £469 million) following a good performance in the second half of the year. This reflects strong trading and improved margins on equity release products together with increased sales of bulk purchase annuities and protection products. This increase was partially offset by the significant decline in individual annuity volumes following the announcements made in the 2014 UK budget and a general market decline as increasingly customers are choosing to defer taking their pension, as well as lower pensions VNB mainly following the Department for Work and Pensions announcement to cap pension charges.

      In Ireland, VNB improved to £9 million (FY13: £8 million), a 30% increase on a constant currency basis as a result of a strategic shift in business mix towards higher margin products, in particular protection business.

 

 

Page 11

 

 

6.ii - United Kingdom and Ireland general insurance & health

 

1    Cash remittances include amounts of £273 million received from UKGI in February 2015 in respect of 2014 activity and £347 million received in January 2014 in respect of 2013 activity.

2    General insurance business only.

Cash

Total cash remitted to Group was £294 million (FY13: £347 million), a reduction driven by the lower interest received following reductions in the intercompany loan during the year. Total 2014 remittances include amounts received from Aviva Insurance Limited in February 2015 in respect of 2014 activity in that business and its subsidiaries.

Operating profit: IFRS basis

UK and Ireland general insurance and health operating profit increased to £499 million (FY13: £489 million).

      In UK general insurance, operating profit increased 6% to £455 million (FY13: £431 million). Within this, the underwriting result improved to £199 million (FY13: £117 million) driven by expense savings, favourable prior year claims development and underwriting actions to improve profitability in a challenging rating environment, partly offset by the fact that 2013 benefitted from benign large loss experience. Our personal lines underwriting result declined to £96 million (FY13: £161 million), primarily due to higher weather-related claims experienced in 2014 compared to the prior period. The underwriting result in commercial lines continues to show an improvement at £103 million (FY13: £(44) million), mainly reflecting the reserve strengthening in FY13 which has not repeated in 2014, as well as the benefits from our reduced exposure to unprofitable commercial business. UKGI net written premium (NWP) declined 4% to £3,663 million (FY13: £3,823 million) mainly as a result of our disciplined underwriting approach in a continuing softening personal lines market and selected exits in some lines of commercial business. This compared with a 6% decline at the half year, with a gradual improvement in the second half of the year primarily driven by personal motor and commercial liability products.

      In UK Health, operating profit was down £7 million to £11 million (FY13: £18 million) due to adverse claims experience.

      In Ireland, general insurance and health operating profit decreased to £33 million (FY13: £40 million) mainly driven by higher claims costs in the Health business and the non recurrence of the favourable weather experienced in 2013, partly offset by cost savings.

      UK and Ireland general insurance longer term investment return was £278 million (FY13: £336 million), a £58 million net decline, with a £65 million reduction as a result of the lower intercompany loan balance partially offset by a change in investment portfolio mix in UKGI.

Expenses

UK general insurance operating expenses have reduced by 7% to £658 million (FY13: £704 million) reflecting the impact of a reduction in headcount and focus on cost control. In Ireland, operating expenses reduced by 15% to £97 million (FY13: £114 million), reflecting cost saving initiatives to deliver the turnaround.

      UK and Ireland's integration and restructuring costs reduced to £11 million (FY13: £24 million) as a result of non-recurring transformation costs in the prior period in Ireland partly offset by higher Solvency II spend in the UK in 2014.

Combined operating ratio3

 

Claims ratio

Commission and
expense ratio

Combined
operating ratio

United Kingdom & Ireland

2014
%

2013
%

2014
%

2013
%

2014
%

2013
%

Personal

62.4

57.7

33.9

35.4

96.3

93.1

Commercial

59.9

68.2

32.9

34.8

92.8

103.0

Total

61.4

62.1

33.5

35.1

94.9

97.2

3    General insurance business only.

 

The UK & Ireland general insurance combined operating ratio (COR) has improved by 2.3pp to 94.9% (FY13: 97.2%), reflecting an improvement in the overall claims and commission and expenses ratios.

 

 

 

Page 12

 

 

6.iii - Europe1

 

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

2    General insurance business only.

 

There has been a weakening of the Euro, the Polish Zloty and the Turkish Lira by 5%, 5% and 20% respectively (average rate) over the period which has had an impact across a number of metrics.

Cash                                                                                                                                                                                 

Total cash remitted to Group increased to £454 million (FY13: £388 million), due to higher remittances from France (up 4% to £245 million), Poland (up 25% to £106 million), Italy (up 167% to £32 million) and Spain (up 33% to £68 million). Within this total, Spain benefitted from a £19 million one-off dividend in 2014 driven by remittance of surplus capital.

Life operating profit: IFRS basis

Life operating profit remained broadly in line with FY13 at £852 million (FY13: £851 million) but improved by 5% on a constant currency basis. In France, operating profit increased to £394 million (FY13: £385 million). Excluding adverse foreign exchange movements in 2014 and the positive impact from reducing the cost of guaranteed death benefits in 2013, operating profit was 19% higher than FY13. This was mainly from increased sales of unit-linked products and higher returns from improved asset mix. Operating profit4 in Poland improved to £180 million (FY13: £164 million), with a £39 million one-off benefit from regulatory pension changes partly offset by lower asset management charges. Italy's operating profit4 increased to £129 million (FY13: £114 million) due to higher sales and improved margins on with-profits business. In Spain, operating profit4 was stable at £101 million.

General insurance & health operating profit: IFRS basis

Operating profits of £113 million (FY13: £112 million) were largely in line with 2013 but increased by 4% on a constant currency basis. Italy's operating profit improved to £39 million (FY13: £35 million), a 21% increase in constant currency, primarily as a result of the reserve strengthening in FY13 which has not repeated in 2014. Operating profit in France was £78 million (FY13: £84 million) and was impacted by adverse weather events and higher healthcare claims costs reflecting a market wide trend. Operating profit in Poland was broadly stable, while operating losses continued in Turkey GI which was disposed of in December 2014.

Expenses

Operating expenses improved to £596 million (FY13: £644 million), a 2% improvement on a constant currency basis. This reflected reductions across all markets other than Poland, where costs increased by £9 million due to higher investment in distribution channels. Integration and restructuring costs of £17 million (FY13: £34 million) relate largely to Solvency II costs in France.

Value of new business

Europe's value of new business (VNB) increased by 19%4 to £392 million (FY13: £329 million), a 27% increase in constant currency. VNB in France increased by 25%5 due to sustained volume growth and a continued shift in product mix towards more profitable unit-linked investments. In Poland, VNB improved by 31%5 benefitting from regulatory pension changes in Lithuania and an increase in sales of higher margin protection products. VNB in Italy increased by 55%4,5 with higher volumes and improved margins on with-profits products following management actions to reduce the costs of guarantees. In Spain, VNB increased by 27%4,5 due to expense reductions and improved margins on with-profits business following management action to reduce guarantees. The 3%5 decline in Turkey was mainly driven by a reduction in our share of the business following the partial IPO.

Combined operating ratio3

 

Claims ratio

Commission and
expense ratio

Combined
operating ratio

Europe

2014
%

2013
%

2014
%

2013
%

2014
%

2013
%

France

70.1

69.5

26.8

27.6

96.9

97.1

Poland

57.6

61.9

38.4

33.3

96.0

95.2

Italy

66.6

67.6

27.4

27.6

94.0

95.2

Turkey

101.5

84.5

45.4

39.4

146.9

123.9

Total

69.7

69.6

28.0

28.5

97.7

98.1

3    General Insurance business only.

 

Combined operating ratio (COR) has improved to 97.7% (FY13: 98.1%), reflecting the general insurance business performance as described above.

 

4    Poland includes Lithuania, Italy excludes Eurovita and Spain excludes Aseval and CxG (sold at the end of December 2014).

5    On a constant currency basis.

 

 

 

 

Page  13

 

 

6.iv - Canada

 

2014
£m

2013
£m

Cash remitted to Group

138

130

General Insurance operating profit: IFRS basis

189

246

Expenses



Operating expenses

316

378

Integration and restructuring costs

4

9


320

387

Combined operating ratio

96.1%

94.6%

 

There has been a weakening of the Canadian dollar against sterling by 13% (average rate) over the period which has had a significant impact across a number of metrics.

Cash

Cash remitted to Group increased by 6% to £138 million (FY13: £130 million), a 15% increase on a local currency basis.

Operating profit: IFRS basis

General insurance operating profit was £189 million (FY13: £246 million), a 23% reduction compared with the prior year (13% reduction on a constant currency basis). During the period, Canada experienced higher large losses and lower prior year reserve releases. These adverse factors were partially offset by an underwriting improvement in commercial lines and overall expense savings, but resulted in a lower underwriting result of £83 million (FY13: £117 million). Longer term investment return reduced 17% to £112 million (FY13: £135 million), down 7% on a constant currency basis, as a result of lower reinvestment yields.

Expenses

Operating expenses reduced by 16% to £316 million (FY13: £378 million), a 6% improvement on a constant currency basis, reflecting the continued focus on expense management. Integration and restructuring costs were lower than prior year at £4 million (FY13: £9 million).

Combined operating ratio

 

Claims ratio

Commission and
expense ratio

Combined
operating ratio

Canada

2014
%

2013
%

2014
%

2013
%

2014
%

2013
%

Personal

68.1

64.0

28.3

29.3

96.4

93.3

Commercial

61.1

61.8

34.4

35.1

95.5

96.9

Total

65.5

63.2

30.6

31.4

96.1

94.6

 

Combined operating ratio was 96.1% (FY13: 94.6%) with the deterioration driven mainly by the higher large losses and less favourable prior year development compared with the prior period. Although more favourable than 2013, Canada weather experience in FY14 remained higher than the long term average reflecting the severe winter in the first quarter of the year followed by hailstorms in Alberta in August. This compares with the adverse impact from the Canadian floods in FY13, of which £62 million was included in the results of Canada, while the remaining £67 million was included in the results of our internal reinsurance company. The commission and expense ratio has improved by 0.8pp reflecting the ongoing focus on expense and commission management.

      Net written premiums were 6% lower at £2,104 million (FY13: £2,250 million), but up 6% on a constant currency basis. The increase predominantly reflects new business growth in Western Canada along with rate hardening on personal property, rating increases on commercial lines and improved retention on personal lines reflecting pricing competitiveness.

 

 

 

 

Page 14

 

 

6.v - Asia

 

1    General insurance business only.

Cash

Total cash remitted to Group was £23 million (FY13: £20 million) from the Singapore life and fund management businesses.

Operating profit: IFRS basis

Overall operating profit from life and general insurance and health business reduced by 12% to £85 million (FY13: £97 million), a 7% reduction on a constant currency basis mainly driven by the investment in our start-up Indonesian joint venture as well as the disposal of our South Korean business.

Expenses

Operating expenses have decreased 7% to £80 million (FY13: £86 million) but remained stable on a constant currency basis, as the increased costs of developing our distribution network in Singapore were offset by lower spend in other markets. Integration and restructuring costs were lower than prior year at £1 million (FY13: £7 million).

Value of New Business

Value of new business2 (VNB) increased 23% (30% in constant currency) to £127 million (FY13: £103 million) with the growth driven by Singapore and China. Excluding our South Korean business which was disposed of in the first half of the year, VNB in Asia was £122 million (FY13: £93 million), a 40% increase in constant currency. Singapore's VNB increased £11 million to £87 million (FY13: £76 million), principally due to the inclusion of the retail health business as covered business (included from the second half of 2013). VNB in China increased £15 million to £31 million (FY13: £16 million) driven by a shift towards higher margin protection products.

Combined Operating Ratio

Combined operating ratio for the general insurance business improved to 97.8% (FY13: 108.1%), with the prior year impacted by a one-off increase in reserve margin in Singapore while 2014 benefitted from favourable experience. 

      Overall net written premium for the general insurance and health business reduced 13% (5% in constant currency) to £87 million (FY13: £100 million) primarily due to a change in shareholding of our Indonesian health business, partly offset by growth in the Singapore health business.

 

 

2    Asia excludes Malaysia.

 

 

 

 

Page 15

6.vi - Fund management

 

1    Only includes Aviva Investors.

Cash

During 2014 a dividend of £16 million was paid to Group, compared with a dividend of £14 million in 2013, primarily reflecting an increased remittance by Aviva Investors France.

Operating profit: IFRS basis

Operating profit generated by Aviva Investors was £79 million (FY13: £68 million), an increase of £11 million compared with the prior year. This is mainly due to a £12 million contribution from the UK retail fund management business which has transferred from UK Life, as well as higher performance fees. This was partially offset by the adverse impact of the disposal of the River Road business in the first half of the year.

      In 2013 we found evidence of improper allocation of trades in fixed income securities in Aviva Investors. In the 2013 result, there was a total adverse impact on operating profit from this activity of £96 million, reflecting the compensation expected to be claimed in respect of these breaches and associated costs. These client compensation costs were recognised within the 'Other operations' result.

      In February 2015, Aviva Investors reached a settlement with the FCA for certain systems and controls failings that happened between August 2005 to June 2013 and agreed to pay a fine of £17.6 million. Provision for this expected cost was made at the year end and is fully reflected within the 'Other operations' FY14 result (note A1).

Expenses

Operating expenses in Aviva Investors have increased by £8 million to £298 million (FY13: £290 million), primarily due to the transfer of the UK retail fund management business (£14 million) and an increase in expenses incurred to support the further development of the business. This was partly offset by staff cost savings following the strategic review of the business at the end of 2013, together with savings arising from the River Road disposal.

      Integration and restructuring costs reduced to £4 million (FY13: £41 million), with the prior year total reflecting the restructuring activity required as part of the 2013 strategic review.

Value of New Business

Value of new business in Aviva Investors was £9 million for the period following the transfer of the UK retail fund management business from UK Life.

Net flows and funds under management - Aviva Investors

 

 

Aviva Investors funds under management have increased by £5.4 billion to £245.9 billion (FY13: £240.5 billion) during the year. This was driven by favourable market movements partly offset by net redemptions as well as adverse impacts from foreign exchange movements and the River Road disposal.

      While we have seen strong external sales in 2014, primarily driven by real estate and fixed income funds, these have been more than offset by outflows in the year. The first two funds in our Aviva Investors multi strategy (AIMS) range were launched during 2014 and we expect to see steady inflows into these funds in 2015. 

      Within internal assets we have seen overall net outflows in our UK business.

 

 

 

Page 16

 

7.i - Life business profit drivers

Life business operating profit before shareholder tax for continuing operations increased by 4% to £1,979 million (FY13: £1,901 million).

      Total income reduced by 5% to £3,179 million (FY13: £3,358 million), while total expenses fell by 5% to £1,504 million (FY13: £1,588 million). There has been an adverse foreign exchange impact on the life business result of £51 million during the year largely driven by the weakening of the euro (adverse impact on total income of £96 million, partly offset by a benefit of £43 million on total expenses and £2 million benefit on DAC, AVIF and other items).

 

United Kingdom
& Ireland

Europe

Asia

Total Continuing Operations


2014
£m

Restated 2013
 £m

2014
£m

Restated 2013
£m

2014
£m

2013
£m

2014
£m

Restated 2013
£m

462

486

227

234

126

116

815

836

Underwriting margin

175

198

230

305

58

52

463

555

Investment return

738

782

1,113

1,122

50

63

1,901

1,967

1,375

1,466

1,570

1,661

234

231

3,179

3,358

Acquisition expenses

(278)

(284)

(263)

(300)

(96)

(94)

(637)

(678)

Administration expenses

(364)

(390)

(467)

(482)

(36)

(38)

(867)

(910)

(642)

(674)

(730)

(782)

(132)

(132)

(1,504)

(1,588)

DAC, AVIF and other

306

160

12

(28)

(15)

(3)

303

129

1,039

952

852

851

87

96

1,978

1,899

Other business1







1

2

Total - continuing operations







1,979

1,901

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

Income: New business income and underwriting margin

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

(a) New business income

New business income reduced to £815 million (FY13: £836 million) mainly due to the impact of lower annuity trading in the UK following the budget announcement in March 2014 partly offset by an increase in Asia. Europe was broadly stable.

      The net contribution from new business is the new business income less associated acquisition expenses (see (g) below). This increased to £178 million profit (FY13: £158 million profit), largely driven by cost efficiencies across Europe and higher margins on new business in Asia, offset by a decrease in the UK.

      In the UK & Ireland, net contribution from new business decreased to £184 million profit (FY13: £202 million profit). Volumes based on APE increased by 1% largely due to an increase in pensions, protection, bulk purchase annuities and equity release business partly offset by a reduction in individual annuities. The reduction in margin on APE to 33% (FY13: 35%) is mainly as a result of the change in business mix.

      In Europe, net contribution improved to a loss of £36 million (FY13: loss of £66 million). Volumes based on APE increased by 5%, (11% on a constant currency basis), largely driven by higher sales in France, Italy and Poland. New business margin on APE reduced to 21% (FY13: 23%) largely due to changes in product mix.

      In Asia, net contribution increased to a profit of £30 million (FY13: £22 million profit).

(b) Underwriting margin

The underwriting margin reduced to £463 million (FY13: £555 million). In the UK & Ireland, underwriting margin reduced to £175 million (FY13: £198 million) driven by lower positive mortality margins and a non-recurring release in 2013 of the cost of guarantees on a tranche of maturing bonds. In Europe, underwriting margin decreased to £230 million (FY13: £305 million) largely driven by France where management actions taken to reduce the cost of guaranteed death benefits created a non-recurring benefit of £42 million in 2013. The underwriting margin in Spain decreased mainly due to the sale of Aseval. In Asia, underwriting margin increased to £58 million (FY13: £52 million) mainly due to a favourable impact from mortality assumption changes in Singapore.

 

 

Page 17

 

7.i - Life business profit drivers continued

Income: Investment return

 

(c) Unit-linked margin

The unit-linked margin was stable at £886 million (FY13: £885 million). This result included an adverse foreign exchange impact of £26 million, predominantly in Europe. The margin as a proportion of average unit-linked reserves was 103 bps (FY13: 102 bps), on average reserves of £86 billion (FY13: £86 billion).

      An improved unit linked margin in the UK was due to higher average reserves. In Europe, unit linked income increased on a constant currency basis. Average reserves were lower, driven by regulatory changes in Poland where over half of the pension assets were transferred to the Polish State in 2014, partly offset by higher average reserves in France including the benefit of improved sales. Unit linked margin on a constant currency basis improved as a result of higher profitability, particularly in Italy. Lower unit linked income in Asia was driven by lower margins during the year mainly in China.

(d) Participating business

Income from participating business increased to £624 million (FY13: £611 million). In the UK & Ireland, the shareholder transfer from with-profit funds increased to £94 million (FY13: £86 million), reflecting an increase in bonus rates. In Europe, income remained stable at £531 million (FY13: £531 million), but increased on a constant currency basis driven by improvements in profitability, mainly in Italy. The majority of participating income is earned in France.

(e) Spread margin

Spread business income, which mainly relates to UK immediate annuity and equity release business, was £187 million (FY13: £207 million). The spread margin on average reserves reduced to 39 bps (FY13: 45 bps), on average reserves of £47 billion (FY13: £46 billion). In Europe, the fall in spread margin was mainly as a result of worsened asset yields in Italy. In Asia, the majority of spread business income was generated in Korea which was sold in June 2014.

(f) Expected return on shareholder assets

Expected returns, representing investment income on surplus funds, reduced to £204 million (FY13: £264 million). The reduction in income mainly relates to the UK, where there have been lower expected returns as a result of de-risking activity. In Europe, the increase in expected return was largely as a result of a change in asset mix in France.

 

 

Page 18

 

 

7.i - Life business profit drivers continued

Expenses

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

(g) Acquisition expenses

Acquisition expenses reduced to £637 million (FY13: £678 million), reflecting changes in business mix particularly in the UK and cost savings on new business across Europe. The overall group-wide ratio of acquisition expenses to APE improved to 23% (FY13: 25%).

(h) Administration expenses

Administration expenses reduced to £867 million (FY13: £910 million), mainly driven by cost efficiencies in the UK and beneficial exchange rate movements in Europe. The expense ratio was stable at 38 bps (FY13: 39 bps) on average reserves of £229 billion (FY13: £233 billion). The overall reduction in life business acquisition and administration expenses was £84 million.

(i) DAC, AVIF and other

DAC, AVIF and other items amounted to an overall positive contribution of £303 million (FY13: £129 million), which was mainly driven by the UK. In the UK, there has been a net additional benefit to profit from non-recurring items of £282 million (FY13: £116 million), mainly from longevity assumption changes and expense reserve releases, which are partially offset by increased DAC amortisation charges on pension business. The movement in other items compared to the prior year also reflects a £39 million one-off benefit in Poland from a regulatory pension change.

 

 

 

Page 19

 

 

7.ii -  General insurance and health

 

1.   Asia & Other includes Aviva Re

2.   Operating expenses shown in note 3 includes claims handling costs and written expenses included in general insurance COR above, plus operating expenses of other (non-insurance) operations.

3    The UK & Ireland LTIR includes benefit of £156 million (FY13: £221 million) return on the internal loan. This is lower than 2013 primarily as a result of a reduction in the loan balance during 2014.

4.   Includes unwind of discount and pension scheme net finance costs.

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

6.   Includes loans and other financial investments.

7.   Restated following the adoption of amendments to 'IAS 32: Financial Instruments: Presentation'. Refer to note B1 for further information.

 

 

 

 

Page 20

 

7.ii -  General insurance and health continued

 

1.   Asia & Other includes Aviva Re

2.   Operating expenses shown in note 3 includes claims handling costs and written expenses included in general insurance COR above, plus operating expenses of other (non-insurance) operations.

3.   The UK LTIR includes benefit of £221 million (FY12: £299 million) relating to the internal loan. This is lower than 2012 primarily as a result of a reorganisation of this loan during 2013.

4.   Includes unwind of discount and pension scheme net finance costs.

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

6.   Includes loans and other financial investments.

7.   Restated following the adoption of amendments to 'IAS 32: Financial Instruments: Presentation'. Refer to note B1 for further information.

 

Page 21

 

7.iii - Fund flows

 

1    Restated following the inclusion of UK and Asia platform business and the adoption of amendments to IAS 32: Financial instruments: Presentation. Refer to note B1 for further information. Managed assets reflect financial investments, loans, investment property and cash and cash equivalents.

2    Life business net flows in the table above are net of reinsurance and exclude flows related to UK equity release products.

United Kingdom & Ireland (excluding UK with-profits)

During 2014, net inflows in UK Life (non-profit including platform) were £1,504 million.  The UK Life Platform managed assets increased by 88% over the period driven by new business volumes. Other non-profit outflows were £833 million, including a group personal pension transfer out of around £500 million. The UK non-profit other movements of £5,682 million principally reflect fair value gains in the period, driven by the fall in interest rates.

      In Ireland, net outflows were £232 million reflecting reduced new business inflows due to the strategic withdrawal from unprofitable product lines and the impact of surrenders on the unit linked pension business. In addition, claims exceeded premiums in the Irish with-profit fund which is closed to new business.

Europe

Net inflows were £1,211 million. In France this reflects increased volumes of unit linked sales and lower levels of redemptions. In Italy, increased sales of with-profits products have benefited net inflows. Other movements in Europe include fair value gains in the period offset by the disposal of our Italian and Spanish businesses, Eurovita and CxG respectively, and unfavourable foreign exchange movements.

Asia and other

Net inflows in Asia were £375 million and arise principally in Singapore. Other business net outflows of £151 million relate to Aviva Investors' Pooled Pensions business.

 

Page 22

 

8.i - Summary of assets

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

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

      The Group seeks to diversify its asset portfolio in order to reduce risk and provide more attractive risk-adjusted returns. In order to achieve this there is a comprehensive risk limit framework in place. There is an allowance for diversification in our economic capital model, actions have been taken to reduce our exposure to the Eurozone periphery, and we are broadening the investment portfolio in individual businesses.

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

      The asset allocation as at 31 December 2014 across the Group, split according to the type of liability the assets are covering, is shown in the table below. Further information on these assets is given in the analysis of assets section.

 

1.  Of the £12.5 billion of assets 5% relates to other shareholder business assets.

2.  The statement of financial position has been restated following the adoption of amendments to IAS 32. There is no impact on the result or the total equity for any period presented as a result of this restatement.

 

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

General insurance and health

All the investment risk is borne by shareholders and the portfolio held to cover these liabilities contains a high proportion of fixed and variable income securities, of which 87% are rated A or above. The assets are relatively short duration reflecting the short average duration of the liabilities. Liquidity, interest rate and FX risks are maintained at a low level.

Annuity and other non-profit

All the investment risk is borne by shareholders. The annuity liabilities have a long duration but are also illiquid as customers cannot surrender their policies. The assets are chosen to provide stable income with a good cash flow, FX and interest rate match to the liabilities. We are able to invest part of the portfolio in less liquid assets in order to improve risk-adjusted returns given the illiquid nature of the liabilities. The asset portfolio is principally comprised of long maturity bonds and loans including a material book of commercial mortgage loans. As at 31 December 2014, unrealised losses and impairments on the bond portfolio of £24.5 billion amounted to £0.1 billion or 0.3% of the portfolio. The equivalent figure for 31 December 2013 was 1%. Unrealised gains on the portfolio were £4.1 billion as at 31 December 2014 or 17% of the portfolio. The equivalent unrealised gains figure for 31 December 2013 was 10%. The other non-profit business assets are a smaller proportion of this portfolio and are generally shorter in duration and have a high proportion invested in fixed income.

 

 

 

Page 23

 

8.i - Summary of assets continued

The current asset value of the commercial mortgage portfolio (including Healthcare and PFI mortgages) backing the UK Annuity book is £12.0 billion. While these commercial mortgages are held at fair value on the asset side of the statement of financial position, we also carry an allowance against the risk of default on our riskier mortgages of £0.9 billion (FY13: £1.3 billion). Since FY13, £0.5 billion of the allowance has been utilised to take action on certain riskier mortgages, partly offset by a £0.1 billion increase in the cost of replacing lost cash flows on future defaults, caused by lower interest rates and lower spreads on new commercial mortgages. The valuation allowance (including supplementary allowances) for commercial mortgages, including Healthcare and PFI mortgages of £0.9 billion equates to 87bps at 31 December 2014 (FY13: 124bps).

Policyholder assets

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

UK style with profits (WP)

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

Continental European style participating funds

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

8.ii - External leverage

 

1.   The definition of tangible capital employed has been adjusted in 2014 to deduct only goodwill from "tangible capital". Goodwill includes £1,302 million (FY13: £1,480 million including £4 million within assets held for sale) of goodwill in subsidiaries and £25 million (FY13: £30 million) of goodwill in joint ventures. AVIF and other intangibles are maintained within the capital base. As at FY14, AVIF and other intangibles comprise £1,028 million (FY13: £1,068 million) of intangibles in subsidiaries and £62 million (FY13: £30 million) of intangibles in joint ventures, net of deferred tax liabilities of £(180) million (FY13: £(189) million) and the non-controlling interest share of intangibles of £(198) million (FY13: £(215) million).

2.   Tangible capital employed is total IFRS equity (including DCI, fixed rate Tier 1 Rate Notes, preference shares and non-controlling interests) and non equity items such as core structural borrowings.

 

At FY14 the debt leverage ratio was 41% (FY13: 48%) mainly as a result of a £1.6 billion increase in tangible capital employed, driven by current year operating profits and positive movements in the UK staff pension scheme, together with a £0.3 billion decrease in external debt.

 

 

 

Page 24

 

8.iii - Net asset value

At the end of 2014, IFRS net asset value per share was 340 pence (FY13: 270 pence). This increase was driven by operating profits and profit on the disposal of subsidiaries and associates, positive investment variances, and a benefit on remeasurement of the pension schemes, partially offset by the dividend payment to shareholders and adverse foreign exchange movements.

      Total investment variances and economic assumption changes were £188 million positive. This included £116 million positive variance in the non-life businesses, reflecting positive short-term fluctuations in investment values offset by adverse economic assumption changes. This was driven by a decrease in risk-free rates increasing fixed income security market values in the UK, Canada and France, together with other market and foreign exchange movements benefitting the Group centre investments offset by the adverse impact of lower discount rates on latent claims reserves.

      In the life businesses, investment return variances were £72 million positive mainly driven by lower risk free rates and narrowing credit spreads on government and corporate bonds in Italy and Spain. Adverse variances in the UK were due to the adverse impact of falling reinvestment yields net of improved underlying property values on commercial mortgages partly offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities that they back.

      The positive movement on the Group's staff pension schemes of £1,315 million post tax is principally due to the main UK staff pension scheme. The surplus has increased over the period largely as a result of positive asset performance driven by a fall in interest rates. This was partially offset by an increase in the defined benefit obligation.

      The adverse foreign exchange movement of £317 million is due to the strengthening of sterling, particularly compared with the Euro and Canadian dollar.

 

1    Excluding preference shares

2    Number of shares as at 31 December 2014: 2,950 million (31 December 2013: 2,947 million).

3    Other net equity movements per share includes the dilution effect of the increase in number of shares during the period.

 

MCEV net asset value per share increased to 527 pence (FY13: 463 pence). This movement has been driven by operating profits and a positive benefit on remeasurement of the pension schemes which have been partially offset by adverse foreign exchange movements and the dividend payment to shareholders.

      Total MCEV investment variances were £36 million adverse, with adverse variance of £152 million in the group's life businesses, partially offset by positive investment variances in the non-life businesses of £116 million.

      The adverse life investment variances were largely driven by lower risk-free rates and increased volatility increasing the cost of guarantees in France partially offset by net positive variances in the UK, Spain and Poland. In the UK positive variances are due to the benefit of falling risk-free rates and changes in corporate bond and mortgage spreads net of the change in liquidity premium, partially offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities that they back. In Spain and Poland investment variances have been positive as falling risk-free rates have increased the discounted value of future profits.

 

1    Number of shares as at 31 December 2014: 2,950 million (31 December 2013: 2,947 million).

2    In preparing the MCEV information, the directors have done so in accordance with the European Insurance CFO Forum MCEV Principles with the exception of stating held for sale operations at their expected fair value, as represented by expected sale proceeds, less cost to sell at those dates.

3    Excluding preference shares

4    Other net equity movements per share includes the dilution effect of the increase in number of shares during the period.

 

 

 

 

Page 25

 

8.iv - Return on equity

Return on equity shareholder funds is calculated as operating return (IFRS basis) net of tax expressed as a percentage of opening shareholders equity. This has decreased to 17.4% (FY13:17.8%) for FY14. Excluding the United States, the FY13 return on equity shareholders' fund was 15.3%.

      The FY14 return on equity shareholders' funds has benefited from a lower opening capital position by £240 million, as profits in 2013 were more than offset by other movements including the remeasurement of pension schemes and foreign exchange movements.

 

2014
%

2013
%

United Kingdom & Ireland Life

15.7%

16.0%

United Kingdom & Ireland General Insurance and Health

8.9%

8.0%

Europe

11.7%

10.9%

Canada

15.0%

17.4%

Asia

10.0%

10.1%

Fund management

24.5%

32.1%

Corporate and Other Business

n/a

n/a

Return on total capital employed (excluding United States)1

11.5%

11.0%

United States1

-

56.5%

Return on total capital employed

11.5%

12.0%

Subordinated debt

5.2%

5.4%

Senior debt

2.1%

2.2%

Return on total equity

14.6%

15.2%

Less: Non-controlling interest

9.7%

11.1%

Direct capital instruments and fixed rate tier 1 notes

5.0%

5.1%

Preference capital

8.5%

8.5%

Return on equity shareholders' funds

17.4%

17.8%

Return on equity shareholders' funds (excluding United States)1

17.4%

15.3%

1    The sale of the United States business completed on 2 October 2013.

 

Page 26

8.v - European Insurance Groups Directive (IGD)

 

UK life funds £bn

Other business
£bn

 31 December 2014
£bn

31 December 2013
£bn

Insurance Groups Directive (IGD) capital resources

6.0

8.4

14.4

14.4

Less: capital resources requirement

(6.0)

(5.2)

(11.2)

(10.8)

Insurance Group Directive (IGD) excess solvency

-

3.2

3.2

3.6

Cover over EU minimum (calculated excluding UK life funds)



1.6 times

1.7 times

 

The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has decreased by £0.4 billion since FY13 to £3.2 billion. This total includes an adverse impact of £0.4 billion from recognising the proposed final dividend for 2014 that was announced on 2 December 2014 as part of the announcement of the Group's offer to acquire Friends Life Group Limited. The dividend is subject to approval by shareholders at the AGM, but is considered foreseeable and is therefore deducted from the 31 December 2014 IGD surplus. In contrast, the 2013 final dividend of £0.3 billion was not foreseeable as at 31 December 2013, and was not deducted from the 2013 year-end IGD surplus.

 

The key movements over the period are set out in the following table:

 

1    Market movements include the impact of equity, credit spread, interest rate and foreign exchange movements net of the effect of hedging instruments. In the period market movements also include positive variances in the UK due to the recent revaluation of the equity release business, offset by the higher cost of replacing mortgages after a fall in the risk free interest rate.

 

Group IGD sensitivity

 

 

The Group proactively manages its balance sheet risk through monitoring, stress analysis and our hedging programme.

      The Group's IGD surplus is resilient to global equity market falls or a 1% global interest rate rise. The Group's IGD surplus would be approximately £3.2 billion in the event of a 40% fall in equity markets from the 31 December 2014 position reflecting the hedging that the Group currently has in place.

      The impact of a 1% rise in global interest rates is calculated with reference to the regulatory value of debt securities in continental Europe being capped to local minimum capital requirements in participating funds. This provides protection to the Group's IGD surplus from immediate market losses on debt securities.

 

 

Page 27

 

8.vi - Economic capital

The estimated economic capital surplus represents the excess of Available Economic Capital over Required Economic Capital. Available Economic Capital is based on MCEV net assets, adjusted for items to convert to an economic basis. Required Economic Capital is based on Aviva's own internal assessment and capital management policies. The term 'economic capital' does not imply capital as required by regulators or other third parties.

Summary of estimated economic capital position

 

2014
£bn

2013
£bn

Available economic capital

18.6

18.4

Standalone required economic capital

(16.1)

(15.9)

Diversification benefit

5.9

5.8

Diversified required economic capital

(10.2)

(10.1)

Estimated economic capital position at 31 December before foreseeable dividend accrual

8.4

8.3

Cover Ratio

182%

182%

Foreseeable dividend accrual

(0.4)

-

Estimated economic capital position at 31 December

8.0

8.3

Cover Ratio

178%

182%

Analysis of change in economic capital

 

2014
£bn

2013
£bn

Economic capital surplus position at 1 January

8.3

5.3

MCEV operating earnings

1.6

1.4

Economic variances

(0.5)

0.7

Exceptional and other non-operating items

(0.4)

(0.9)

Dividend and appropriations, and shares issued in lieu of dividends

(0.5)

(0.5)

Repayment of subordinated debt

(0.3)

-

Available capital benefits from disposals

0.2

1.3

Economic capital staff pension scheme

0.3

0.3

Other (including change in commercial mortgage default allowance)

(0.2)

(0.5)

Change in available economic capital

0.2

1.8

Impact of trading operations and other

0.4

0.7

Economic capital staff pension scheme

(0.1)

(0.7)

Other changes in methodology

(0.6)

-

Impact of changes in Group hedging

-

(0.2)

Capital requirement benefits from acquisitions and disposals

0.2

1.4

Change in diversified required economic capital

(0.1)

1.2

Estimated economic capital surplus position at 31 December before foreseeable dividend accrual

8.4

8.3

Foreseeable dividend accrual

(0.4)

-

Estimated economic capital surplus position at 31 December

8.0

8.3

 

The estimated economic capital position (before allowing for the accrual of the foreseeable dividend) has increased by £0.1 billion to £8.4 billion at 31 December 2014 with a cover ratio of 182%. The change in available economic capital position is driven by underlying operating profits, beneficial movements to the staff pension schemes and benefits from acquisitions and disposals, offset by dividend payment, subordinated debt repayment, economic variances and other non-operating items. The change in required Economic Capital reflects changes in methodology and other items offset by the benefit from acquisitions and disposals.

      The impact of accruing for the foreseeable dividend proposed by the Aviva Board on 2 December 2014 is to reduce the group economic capital position by £0.4 billion to £8.0 billion with a corresponding cover ratio of 178%

 

 

Page 28

 

8.vi - Economic capital continued

Summary analysis of diversified required economic capital

 

2014
£bn

2013
£bn

Credit risk1

2.4

2.5

Equity risk2

1.5

2.1

Interest rate risk3

0.6

0.2

Other market risk4

1.4

1.4

Life insurance risk5

1.3

1.0

General insurance risk6

0.8

0.8

Other risk7

2.2

2.1

Total

10.2

10.1

1    Capital held in respect of credit risk recognises the Group's shareholder exposure to changes in the market value of assets and defaults. Assets captured within this category include corporate bonds and non-domestic sovereigns and domestic sovereigns.

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

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

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

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

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

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

 

 

 

END OF Part 2 of 5

 


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