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Aviva PLC (AV.)

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Thursday 07 March, 2019

Aviva PLC

Final Results part 2 of 4

RNS Number : 0966S
Aviva PLC
07 March 2019
 

Start part 2 of 4

Page 1

Contents

In this section

Page

Overview

 

Key financial metrics

2

1   Operating profit

3

2   Cash

4

i    Cash remittances

4

ii   Excess centre cash flow

4

iii  Operating capital generation: Solvency II (SII) basis

5

iv  Solvency II future surplus emergence

6

3   Expenses

7

4   New business

8

i    Value of new business on an adjusted Solvency II basis

8

ii   Sales, VNB and new business margin analysis

8

5   Combined operating ratio

9

6   Business unit performance

10

i    United Kingdom

10

ii   International

13

iii  Asia

16

iv  Aviva Investors

18

7   Profit drivers

19

i    Life business

19

ii   General insurance and health

21

iii  Life business fund flows

23

8   Capital & assets summary

24

i    Solvency II

24

ii   Net asset value

26

iii  Analysis of return on equity

27

iv  Group capital under IFRS basis

28

Financial supplement

29

A  Income & expenses

30

B  IFRS financial statements and notes

35

C  Analysis of assets

92

Other information

108

Alternative Performance Measures

108

 

 

 

 

 

 

As a reminder

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

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

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

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

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

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

 

 

Page 2

 

Operating profit‡#

 

2018
£m

2017
£m

Sterling % change

Life business1

2,999

2,852

5%

General insurance and health1

704

704

-

Fund management

146

164

(11)%

Other1,2

(733)

(652)

(12)%

Total

3,116

3,068

2%

 

Operating earnings per share‡#

58.4p

54.8p

7%

Cash remittances3,‡# 

 

2018
£m

2017
£m

Sterling % change

United Kingdom3

2,549

1,800

42%

Canada

28

55

(49)%

Europe3

447

485

(8)%

Asia, Aviva Investors and Other

113

58

95%

Total

3,137

2,398

31%

Operating capital generation (OCG): Solvency II basis3#

 

2018
£bn

2017
£bn

Sterling % change

United Kingdom3

2.2

2.8

(21)%

Canada

0.1

(0.1)

200%

Europe3

0.9

0.9

-

Asia & Aviva Investors

0.1

0.1

-

Other4

(0.1)

(1.1)

91%

Total

3.2

2.6

23%

Expenses

 

2018
£m

2017
£m

Sterling % change

Operating expenses

4,026

3,778

7%

Integration & restructuring costs

-

141

(100)%

Expense base

4,026

3,919

3%

 

Operating expense ratio

54.2%

52.7%

1.5pp

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

 

 

 

VNB

 

 

PVNBP

 

 2018
£m

 2017
£m

Sterling % change

 2018
£m

 2017
£m

Sterling % change

United Kingdom

481

527

(9)%

23,946

23,764

1%

Europe

517

533

(3)%

12,641

12,065

5%

Asia & Aviva Investors

204

183

11%

4,176

4,966

(16)%

Total

1,202

1,243

(3)%

40,763

40,795

-

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

 

COR

 

 

NWP

 

 

 

2018

2017

Change

2018
£m

2017
£m

Change

United Kingdom

93.8%

93.9%

(0.1)pp

4,193

4,078

3%

Canada

102.4%

102.2%

0.2pp

2,928

3,028

(3)%

Europe

93.4%

93.3%

0.1pp

1,985

2,018

(2)%

Asia & Other

122.1%

123.2%

(1.1)pp

8

17

(52)%

Total

96.6%

96.6%

-

9,114

9,141

-

Profit after tax

 

2018
£m

2017
£m

Sterling % change

IFRS profit after tax

1,687

1,646

2%

Basic earnings per share

38.2p

35.0p

9%

Dividend

 

2018

2017

Sterling % change

Final dividend per share

20.75p

19.00p

9%

Total dividend per share

30.00p

27.40p

9%

Capital position

 

2018

2017

Sterling % change

Estimated shareholder Solvency II cover ratio‡ ,5

204%

198%

6.0pp

Estimated Solvency II surplus

£12.0bn

£12.2bn

(2)%

Net asset value per share

424p

423p

1p

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. The impact of this change was to reduce UK Life operating profit by £80 million (2017: £30 million); UK General Insurance operating profit increased by £2 million (2017: £3 million) and UK Health increased by £2 million (2017: £1 million).

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

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

4    Other includes Group activities and the Group SCR diversification benefit.

5    The estimated Solvency II position represents the shareholder view only. See Section 8i for more details.

 

 

Page 3

 

1 - Operating profit‡#

For the year ended 31 December 2018

 

2018
£m

2017
£m

Operating profit before tax attributable to shareholders' profits

 

 

Life business

 

 

United Kingdom1

1,871

1,728

Europe

831

873

Asia

300

235

Other

(3)

16

Total life business

2,999

2,852

General insurance and health

 

 

United Kingdom1

453

447

Canada

46

46

Europe

220

223

Asia

(16)

(8)

Other

1

(4)

Total general insurance and health

704

704

Fund management

 

 

Aviva Investors

150

168

Asia

(4)

(4)

Total fund management

146

164

Other

 

 

Other operations1,2

(237)

(143)

Market operating profit

3,612

3,577

Corporate centre

(216)

(184)

Group debt costs and other interest

(280)

(325)

Operating profit before tax attributable to shareholders' profits

3,116

3,068

Tax attributable to shareholders' profit

(647)

(639)

Non-controlling interests

(100)

(134)

Preference dividends and other3

(53)

(82)

Operating profit attributable to ordinary shareholders

2,316

2,213

 

 

 

Operating earnings per share‡#

58.4p

54.8p

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. The impact of this change was to reduce UK Life operating profit by £80 million (2017: £30 million); UK General Insurance operating profit increased by £2 million (2017: £3 million) and UK Health increased by £2 million (2017: £1 million).

2    Other operations relate to non-insurance activities and include costs associated with our Group and regional head offices, pension scheme expenses, as well as non-insurance income.

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

 

Operating profit increased by 2% to £3,116 million (2017: £3,068 million). The life business operating profit increased to £2,999 million (2017: £2,852 million). In the UK, operating profit increased by 8% to £1,871 million (2017: £1,728 million) due to continued growth of long-term savings and bulk purchase annuities (BPAs) and further benefits from changes in longevity assumptions. In Europe, operating profit decreased by 5% to £831 million (2017: £873 million), after allowing for the impact of disposals, operating profit increased by 10% to £816 million (2017: £740 million). Growth was driven by the increase in new business volumes of our hybrid savings products in Italy and unit-linked savings product in France. In Asia, operating profit increased to £300 million (2017: £235 million) driven by Singapore primarily due to the higher contribution from the financial advisory channel.

The general insurance and health business operating profit remained stable at £704 million (2017: £704 million). In the UK, operating profit increased by 1% to £453 million (2017: £447 million) which included a 3% increase in underwriting profit as the business has grown while maintaining a stable COR. In Canada, operating profit remained stable at £46 million (2017: £46 million) as elevated weather and large loss experience as well as persistent challenges in the Canadian motor market were offset by an improvement in prior year development.

Fund management operating profit decreased to £146 million (2017: £164 million) mainly as a result of Aviva Investors where we continued to invest in capabilities (equities and real assets), expanded our global distribution reach and absorbed regulatory costs (particularly MiFID II) which we did not pass on to our clients.

Other operations relate to non-insurance activities and include costs associated with our Group and regional head offices, pension scheme expenses as well as non-insurance business. Total costs in relation to non-insurance activities were £237 million (2017: £143 million) reflecting an increased investment in the development of our digital business.

Operating earnings per share increased by 3.6p to 58.4p (2017: 54.8p) due to the increase in operating profit, repayment of debt, reduction in minority interest due to disposals and decrease in the weighted average number of shares as a result of the share buy-back.

 

 

Page 4

 

2.i - Cash remittances‡#

Sustainable cash remittances from the Group's businesses are a key financial priority. We use a wholly-owned, UK domiciled reinsurance subsidiary for internal capital and cash management purposes. Some remittances otherwise attributable to the operating businesses arise from this internal reinsurance vehicle.

The table below reflects actual remittances received by the Group, comprising dividends and interest on internal loans paid by our operating segments. Cash remittances are eliminated on consolidation and hence are not directly reconcilable to the Group's IFRS statement of cash flows.

 

2018
£m

2017
£m

United Kingdom1,2

2,549

1,800

Canada

28

55

Europe2

447

485

Asia, Aviva Investors & Other

113

58

Total

3,137

2,398

1    Full year 2018 cash remittances include £331 million (2017: £337 million) received from UK General Insurance in February 2019 in respect of 2018 activity.

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

2.ii - Excess centre cash flow

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

 

2018
£m

2017
£m

Dividends received

2,944

2,213

Internal interest received

193

185

Cash remitted to Group

3,137

2,398

External interest paid

(507)

(549)

Internal interest paid

(47)

(66)

Central spend

(258)

(183)

Other operating cash flows1

112

56

Excess centre cash flow2

2,437

1,656

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

2    Before non-adjusting items and capital injections.

The increase of £781 million in excess centre cash flow is primarily driven by higher cash remittances to the Group Centre, together with reduced interest costs on a lower debt base. Central spend increased mainly due to project expenses. Other operating cash inflows increased mainly due to collateral returned on the expiry of cross-currency swaps offset by lower group tax relief receipts from UK businesses.

Group Centre liquidity consists of cash and liquid assets. Holding company liquidity at 28 February 2019 was £1.6 billion
(28 February 2018: £2.0 billion).

 

 

Page 5

 

2.iii - Operating capital generation: Solvency II (SII) basis# 

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

Solvency II Operating Capital Generation (OCG) measures the amount of Solvency II capital the Group generates from operating activities. Capital generated enhances Solvency II surplus which can be used to fund business unit remittances and, in turn, the Group dividend as well as for investment in initiatives that provide potential future growth.

 

Life business SII operating capital generation

Non-life SII operating capital generation

 

2018 £bn

Impact of new business

Earnings from existing business

Other1

Life SII operating capital generation

GI, Health, FM & Other SII operating capital generation

Total SII operating capital generation

United Kingdom & Ireland Life2

(0.1)

1.0

0.9

1.8

-

1.8

United Kingdom & Ireland General Insurance and Health2

 

 

 

 

0.4

0.4

Canada

 

 

 

 

0.1

0.1

Europe2

(0.1)

0.5

0.3

0.7

0.2

0.9

Asia & Aviva Investors3

-

0.1

-

0.1

-

0.1

Group centre costs and Other4

-

-

0.6

0.6

(0.7)

(0.1)

Total Group Solvency II operating capital generation

(0.2)

1.6

1.8

3.2

-

3.2

 

 

Life business SII operating capital generation

Non-life SII operating capital generation

 

2017 £bn

Impact of new business

Earnings from existing business

Other1

Life SII operating capital generation

GI, Health, FM & Other SII operating capital generation

Total SII operating capital generation

United Kingdom & Ireland Life2

(0.1)

0.9

1.6

2.4

-

2.4

United Kingdom & Ireland General Insurance and Health2

 

 

 

 

0.4

0.4

Canada

 

 

 

 

(0.1)

(0.1)

Europe2

-

0.6

0.1

0.7

0.2

0.9

Asia & Aviva Investors3

-

0.1

-

0.1

-

0.1

Group centre costs and Other

-

-

(0.8)

(0.8)

(0.3)

(1.1)

Total Group Solvency II operating capital generation

(0.1)

1.6

0.9

2.4

0.2

2.6

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

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

3    The methodology used to calculate OCG for our UK Fund Management business, Aviva Investors, has been changed such that profit is now recognised as it is earned (in line with the insurance businesses) rather than at the point which profits can be recognised under the Solvency II regulations therefore this represents a difference to regulatory Solvency II own funds. There is no impact on reported OCG at 2017 as a result of this change.

4    Included in GI, Health, FM & other is £0.1 billion of project expenses in 2018 which are excluded from underlying OCG of £1.5 billion (2017: £1.7 billion). Underlying excludes other OCG.

Solvency II OCG was £3.2 billion during 2018 (2017: £2.6 billion).

The life business OCG has increased by £0.8 billion from £2.4 billion to £3.2 billion. In the UK & Ireland Life, OCG has decreased by £0.6 billion predominantly due to a reduction in Other OCG. In 2018, Other OCG includes the benefit of non-economic assumption changes, including longevity, while 2017 included both the impact of non-economic assumption changes as well as the Friends Life Part VII transfer.

In Europe, OCG on life business is unchanged at £0.7 billion as slightly lower earnings from existing business, partly due to disposals, was offset by an increase in Other OCG due to assumption changes and a benefit arising from the transfer of pensions business into a supplementary occupational pension fund (FRPS) in France.

The £0.6 billion OCG in Group centre costs and other life business includes the benefit of a model change to vary the volatility adjustment (VA) on France business in the Group Solvency Capital requirement (SCR). The VA is a stabilising measure that avoids excessive short-term volatility on the Solvency II balance sheet and is implemented as an increase in the discount rate. In 2017, this model change was recognised in the France solo SCR but not at Group level and was reversed in Group centre costs and other, largely contributing to the £(0.8) billion adverse impact.

The general insurance, health, fund management and other business OCG reduced by £0.2 billion to nil at 2018. In Canada, OCG has increased by £0.2 billion primarily as a result of rate increases which has led to a reduction in expected loss ratios. This is offset by a reduction due to increased project expenses on continued targeted investment in simplification and growth initiatives as well as costs that typically relate to mandatory requirements like IFRS 17 and GDPR, as well as slightly lower Group diversification benefit.

 

 

Page 6

 

2.iv - Solvency II future surplus emergence

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

2018
£bn

2017
 £bn

Year 1

 1.4

1.5

Year 2

 1.3

1.4

Year 3

 1.1

1.2

Year 4

 1.0

1.1

Year 5

 1.0

1.0

Year 6

 0.9

1.0

Year 7

 0.8

0.9

Year 8

 0.8

0.8

Year 9

 0.7

0.8

Year 10

 0.7

0.7

Year 11-15

 3.4

3.4

Year 16-20

 3.3

3.6

Year 20+

 8.2

9.6

Total net of non-controlling interests

 24.6

27.0

The table above shows the expected future emergence of Solvency II surplus from the existing long-term in-force life business. For business subject to short contract boundaries under Solvency II, allowance has been made for the impact of renewal premiums as and when they are expected to occur. The cash flows have been split annually for the first ten years followed by five-year tranches thereafter.

The projected surplus, which is primarily expected to arise from the release of risk margin (net of transitional measures) and solvency capital requirement as the business runs off over time, is expected to emerge through OCG in future years. The cash flows are real-world cash flows, i.e. they are based on best estimate non-economic assumptions used in the Solvency II valuation and real-world investment returns rather than risk-free. The expected investment returns are consistent with the returns used in IFRS (as set out in note A4 in the financial supplement), except in the UK where a risk-free curve plus an allowance for expected real-world returns (less an adjustment for credit risk where required) is applied.

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

Total cash flows have reduced by £2.4 billion to £24.6 billion over 2018. This reduction predominantly reflects the impact of capital actions across the Group, on the emergence of future surplus. The beneficial impacts of these capital actions are recognised in OCG in 2018 (see note 2.iii).

 

 

Page 7

 

3 - Expenses

 

2018
£m

2017
£m

United Kingdom

1,613

1,493

Canada

477

478

Europe

847

820

Asia

186

207

Aviva Investors

447

409

Other Group activities

456

371

Operating expenses

4,026

3,778

Integration & restructuring costs

-

141

Expense base

4,026

3,919

Operating expense ratio

54.2%

52.7%

Operating expenses were £4,026 million (2017: £3,778 million). The increase in expenses includes the impact of continued targeted investment in simplification and growth initiatives in digital, IT and finance change as well as strengthening capabilities in Aviva Investors and the UK and project expenses that typically relate to mandatory requirements like IFRS 17 and GDPR. This was partially offset by savings from disposals referred to in note B4.

There have been no costs classified as integration and restructuring in the year. In 2017, these costs relate to integration costs in the UK and Canada, and restructuring costs in the UK and Europe. It is possible that significant integration and restructuring activity undertaken in the future may result in the related costs being excluded from operating profit.

 

 

Page 8

 

4 - New business

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

VNB reflects Solvency II assumptions and allowance for risk, and is defined as the increase in Solvency II own funds resulting from business written in the period, including the impacts of interactions between in-force and new business, adjusted to:

· Remove the impact of the contract boundary restrictions under Solvency II;

· Allow for businesses which are not within the scope of Solvency II own funds (e.g. UK and Asia Healthcare, Retail fund management and UK equity release); and

· Include the impacts of tax and 'look through profits' in service companies (where not included in Solvency II) and deduct the impacts of non-controlling interests.

The methodology underlying the calculation of VNB remains unchanged from the prior year. Further details of the methodology are included in the Other Information section.

A reconciliation between VNB and the Solvency II own funds impact of new business is provided below.

2018

UK1

£m

Europe
£m

Asia & Other
£m

Group
£m

VNB (gross of tax and non-controlling interests)

481

517

204

1,202

Allowance for Solvency II contract boundary restrictions

75

(48)

(10)

17

Allowance for businesses which are not in the scope of the Solvency II own funds

(117)

(4)

(36)

(157)

Tax & Other2

(92)

(212)

(23)

(327)

Solvency II own funds impact of new business (net of tax and non-controlling interests)

347

253

135

735

 

2017

UK1

£m

Europe
£m

Asia & Other
£m

Group
£m

VNB (gross of tax and non-controlling interests)

527

533

183

1,243

Allowance for Solvency II contract boundary restrictions

54

(64)

4

(6)

Allowance for businesses which are not in the scope of the Solvency II own funds

(167)

(45)

(34)

(246)

Tax & Other2

(105)

(184)

(25)

(314)

Solvency II own funds impact of new business (net of tax and non-controlling interests)

309

240

128

677

1    New business written since the introduction of Solvency II has been reflected in the calculation of UK Life's transitional measures (in line with the clarification issued by the PRA in 2017).

2    Other includes the impact of 'look through profits' in service companies (where not included in Solvency II) of £(63) million (2017: £(34) million) and the reduction in value when moving to a net of non-controlling interests basis of £(81) million (2017: £(91) million).

4.ii - Sales, VNB and new business margin analysis

The table below sets out the present value of new business premiums (PVNBP) written by the life and related businesses, VNB and the resulting margin, gross of tax and non-controlling interests, on an adjusted Solvency II basis. PVNBP is calculated using assumptions consistent with those used to determine VNB.

 

 

PVNBP

 

VNB

New business margin

Gross of tax and non-controlling interests

 2018
£m

 2017
£m

 2018
£m

 2017
£m

2018
%

2017
%

United Kingdom

23,946

23,764

481

527

2.0%

2.2%

Europe

12,625

10,552

514

466

4.1%

4.4%

Asia & Aviva Investors

3,728

4,341

206

182

5.5%

4.2%

Total (excl. disposals)

40,299

38,657

1,201

1,175

3.0%

3.0%

Disposals1

464

2,138

1

68

0.2%

3.2%

Total

40,763

40,795

1,202

1,243

2.9%

3.0%

1    Antarius, Avipop, Spain, FPI and Taiwan.

Total new business margin has reduced slightly to 2.9% (2017: 3.0%). In the UK, new business margin fell to 2.0% (2017: 2.2%). This reduction was primarily driven by competitive pressures in protection, platform and equity release markets, which was partially offset by improved new business margin on BPAs.

In Europe new business margins reduced to 4.1% (2017: 4.4%) primarily reflecting lower volumes of high-margin protection business in France and Italy.

The new business margin for Asia & Aviva Investors increased to 5.5% (2017: 4.2%) reflecting an improved product mix in Singapore towards higher margin protection business.

 

 

Page 9

 

5 - General insurance combined operating ratio (COR)

 

Net earned premiums

 

Claims ratio

Commission and
expense ratio

Combined operating ratio

 

2018
£m

2017
£m

2018
%

2017
%

2018
%

2017
%

2018
%

2017
%

United Kingdom

4,106

4,015

62.5

61.0

31.3

32.9

93.8

93.9

Canada

2,955

2,944

71.8

72.2

30.6

30.0

102.4

102.2

Europe

1,963

2,001

64.4

63.1

29.0

30.2

93.4

93.3

Asia & other1

6

16

81.7

85.9

40.4

37.3

122.1

123.2

Total

9,030

8,976

66.0

65.3

30.6

31.3

96.6

96.6

1    Includes Asia and Aviva Re

Normalised accident year COR

The normalised accident year combined operating ratio represents the combined operating ratio adjusted to exclude the impact of prior year reserve development and weather variations versus expectations, gross of the impact of profit sharing arrangements. Dealing with each of these adjustments in turn:

· Prior year reserve development represents the change in the ultimate cost of the claims incurred in prior years.

· Weather claims over/(under) long-term average represents the difference between the reported net incurred cost of claims that have occurred as a result of weather events and the equivalent long-term average expected net costs.

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. A reconciliation between the reported and normalised accident year COR is provided below. 

 

 

UK

 

Canada

 

Europe

 

Total

 

2018
%

2017
%

2018
%

2017
%

2018
%

2017
%

2018
%

2017
%

Normalised accident year COR

97.0

96.9

103.4

100.7

94.5

94.1

98.8

97.8

Prior year reserve development

(2.5)

(1.0)

(1.3)

1.3

(2.8)

(0.9)

(2.3)

(0.3)

Weather claims over/(under) long-term average

(0.7)

(2.0)

0.3

0.2

1.7

0.1

0.1

(0.9)

Combined operating ratio

93.8

93.9

102.4

102.2

93.4

93.3

96.6

96.6

The Group normalised COR increased to 98.8% (2017: 97.8%). This increase was mainly due to Canada, where the normalised COR deteriorated to 103.4% (2017: 100.7%) driven by adverse claims experience, predominantly on personal motor. Progress has been made in Canada on the profit remediation plan and pricing rate increases have been approved during 2018, the impact of these should come through in 2019. The normalised COR in Europe increased to 94.5% (2017: 94.1%) predominantly as a result of higher large claim costs in France, partially offset by improvements in the commission and expense ratio in Italy as a result of remediation actions. The normalised COR in the UK increased slightly to 97.0% (2017: 96.9%) against the backdrop of the softer motor market.

 

 

Page 10

 

6 - Business unit performance

6.i - United Kingdom

 

2018
£m

2017
£m

Sterling % change

Operating profit1, ‡#

 

 

 

Life

1,871

1,728

8%

General Insurance

415

411

1%

Health

38

36

6%

 

2,324

2,175

7%

 

 

 

 

Cash remitted to Group2,3, ‡#

 

 

 

Life

2,170

1,366

59%

General Insurance and Health

379

434

(13)%

 

2,549

1,800

42%

Expenses

 

 

 

Operating expenses

1,613

1,493

8%

Integration and restructuring costs

-

76

(100)%

 

1,613

1,569

3%

New business

 

 

 

PVNBP

23,946

23,764

1%

Solvency II VNB

481

527

(9)%

 

 

 

 

General Insurance

 

 

 

COR

93.8%

93.9%

(0.1)pp

Net written premium (NWP)

4,193

4,078

3%

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. The impact of this change was to reduce UK Life operating profit by £80 million (2017: £30 million); UK General Insurance operating profit increased by £2 million (2017: £3 million) and UK Health increased by £2 million (2017: £1 million).

2    In 2018 cash remittances include amounts of £331 million received from UK General Insurance in February 2019 in respect of 2018 activity.

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

Overview

UK Insurance's operating profit, increased by 7% to £2,324 million (2017: £2,175 million). Our position as the UK's leading multi-line insurer has allowed us to deliver a year on year increase in operating profit despite challenging trading conditions in some of our markets. We have benefitted from continued positive longevity developments, growth in long-term savings and annuities and, against the backdrop of the storms popularly known as the Beast from the East and the softening of rates in the motor market, delivered a strong performance in general insurance. This result was delivered while absorbing the costs of investment in growth and simplification initiatives.

Cash remittances of £2,549 million include special cash remittances of £1,250 million. £500 million of which relates to the final Friends Life integration remittance following the Friends Life Part VII transfer in 2017, taking the total Friends Life integration remittances to £1.25 billion, exceeding the targeted £1 billion. In addition, a further special remittance of £750 million has been made reflecting the strong capital position of the UK Life entities following recent longevity developments and management actions.

Operating and financial performance

Operating profit‡#

 

 

 

2018
£m

 

 

2017
£m

 

Operating profit1 ,‡ #

New business

Existing business

Total
£m

New business

Existing business

Total
£m

Sterling % change

Long-term savings2

(96)

294

198

(74)

259

185

7%

Annuities and equity release

363

416

779

335

390

725

7%

Protection

91

135

226

130

97

227

-

Legacy3

-

318

318

-

331

331

(4)%

Other4

-

350

350

-

260

260

35%

Life

358

1,513

1,871

391

1,337

1,728

8%

Underwriting result

 

 

253

 

 

246

3%

Long-term investment return

 

 

161

 

 

163

(1)%

Other5

 

 

1

 

 

2

(50)%

General Insurance

 

 

415

 

 

411

1%

Health

 

 

38

 

 

36

6%

Total operating profit

 

 

2,324

 

 

2,175

7%

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. The impact of this change was to reduce UK Life operating profit by £80 million (2017: £30 million); UK General Insurance operating profit increased by £2 million (2017: £3 million) and UK Health increased by £2 million (2017: £1 million).

2    Includes pensions and the savings Platform.

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

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

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

UK Life operating profit increased by 8% to £1,871 million (2017: £1,728 million) due to further benefits from changes in longevity assumptions and the continued growth of long-term savings and BPAs.

UK General Insurance operating profit was up 1% at £415 million (2017: £411 million), including a 3% increase in underwriting profit as the business has grown while maintaining a stable COR.

UK Health operating profit increased by 6% to £38 million (2017: £36 million) due to improved underlying margins.

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

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

 

 

Page 11

 

6.i - United Kingdom continued

Long-term savings

Long-term savings operating profit increased by 7% to £198 million (2017: £185 million) with positive net inflows of £5.0 billion (2017: £5.6 billion) while maintaining a stable in-force profit margin. Average assets under management (AUM) across the year grew to £118 billion (2017: £111 billion). However, weak investment markets towards the end of 2018 constrained growth in AUM, which ended the year at £116 billion (2017: £118 billion). Along with growth in workplace pension net flows, driven by new scheme wins with large corporates, we delivered continued positive platform net flows of £3.9 billion (2017: £6.2 billion) despite a difficult market environment and functionality problems impacting advisers and customers during the migration of the adviser platform to a new service provider. Platform assets under management grew by 12% in the year to £22.6 billion (2017: £20.2 billion). The increase in new business strain reflects our workplace pensions growth and the continued investment in the Aviva Financial Advisers network.

Annuities and Equity Release

Annuities and equity release operating profit increased by 7% to £779 million (2017: £725 million). BPA trading drove a 12% increase in volumes to £4,784 million (2017: £4,287 million), including Aviva's largest BPA deal to date of £925 million with Marks and Spencer, leading to an 8% increase in new business profits to £363 million (2017: £335 million). Existing business operating profit increased by £26 million to £416 million (2017: £390 million) due to favourable longevity experience partly offset by a reduction to £24 million (2017: £86 million) in the benefit from the optimisation of the asset mix by increasing the proportion of illiquid assets backing the in-force portfolio.

Protection

Protection operating profit remained stable at £226 million (2017: £227 million). The benefit of improved claims experience in Group Protection following actions taken to mitigate 2017 adverse experience was offset by an 8% reduction in new business volumes to £1,799 million PVNBP (2017: £1,964 million) and fall in new business profits in a competitive individual protection market including the impact of hardening reinsurance rates.

Legacy

Legacy contributed operating profit of £318 million (2017: £331 million). The expected reduction in assets under management as policies mature was partly offset by favourable market movements in 2017 that drove higher opening 2018 assets under management. We continue to expect operating profit from the legacy business to decline by approximately 10% per annum over the medium term.

Other (Life)

Other of £350 million includes the benefit of continued positive longevity developments where recent experience has led to a positive change to base mortality for individual annuities of £345 million. Updates to the rate of mortality improvements, including CMI 2017, had a benefit of £251 million and a refinement to BPA modelling together with changes to base mortality and improvements had a benefit of £132 million. Longevity benefits were partly offset by the recognition of an additional £175 million provision relating to potential redress for advised sales by Friends Provident (of which over 90% of cases relate to pre-2002) and a £119 million adverse impact in respect of the settlement of certain legacy reinsurance arrangements.

In 2017, Other of £260 million mainly related to assumption changes. We recognised benefits from changes in longevity assumptions, including the impact of completing our review of the allowance for anti-selection risk of £170 million, updates reflecting recent experience of £200 million and updates to the rate of historic and future mortality improvements, including CMI 2016, of £340 million. These were partly offset by the impact of strengthening maintenance expense reserves by £89 million from harmonising the UK expense basis following the Friends Life Part VII transfer in 2017, recognition of future costs reserves of £125 million and a £75 million product governance provision along with various other reserve and modelling impacts totalling £131 million.

General insurance

UK General Insurance operating profit was up 1% at £415 million (2017: £411 million).

The underwriting result increased 3% to £253 million (2017: £246 million), reflecting an improved underlying performance, as we maintained a disciplined approach to underwriting and distribution. The impact of less favourable weather compared to 2017, (although weather remained favourable to the long-term average), was offset by higher prior year reserve releases.

Long-term investment return (LTIR) declined by £2 million to £161 million (2017: £163 million), with the reduction in the internal loan return (net neutral to Group) broadly offset by the impact of an updated investment mix.

In December 2018, the Civil Liability Bill became an Act of Parliament, which includes a change in the way the discount rate used to calculate lump sum compensation in personal injury cases (the 'Ogden rate') is set. Although the rate remains uncertain, it is anticipated that the Government will set a discount rate which is higher than the current -0.75% rate. At this stage, following a review of a range of outcomes, Aviva has adopted a rate of 0.0% within the full year 2018 reserves. The positive impact of this reserve change (£190 million) has been excluded from the 2018 operating result, a consistent treatment with the previous rate change in 2016.

Cash‡#

Cash remitted to Group was £2,549 million (2017: £1,800 million). 2018 includes an additional £500 million (2017: £500 million) of Friends Life integration remittance taking the total Friends Life integration remittances to £1.25 billion, exceeding the target of £1 billion, along with further special remittances of £750 million, reflecting the strong capital position of UK Life following recent positive longevity developments and management actions.

 

 

Page 12

 

6.i - United Kingdom continued

Expenses

Total expenses increased 3% year on year to £1,613 million (2017: £1,569 million) as we continue to focus on operational efficiency and invest in growth and simplification initiatives including building our BPA capability, updating our IT infrastructure, improvements to customer experience while also implementing mandatory requirements such as IFRS 17 and GDPR. Excluding these initiatives, expenses were broadly flat. 

New business

 

PVNBP

Solvency II VNB

New Business Margin

Gross of tax and non-controlling interests

 2018
£m

 2017
£m

Sterling % change

 2018
£m

 2017
£m

Sterling % change

2018
%

2017
%

Long term savings

16,829

16,813

-

111

153

(27)%

0.7%

0.9%

Annuities and equity release

4,784

4,287

12%

196

157

25%

4.1%

3.7%

Protection

1,799

1,964

(8)%

140

183

(23)%

7.8%

9.3%

Health and Other

534

700

(24)%

34

34

-

6.4%

4.9%

Total

23,946

23,764

1%

481

527

(9)%

2.0%

2.2%

PVNBP increased 1% to £23,946 million (2017: £23,764 million) as the growth in BPA and workplace pensions was offset by lower Platform, Protection and Health volumes. However, VNB decreased by 9% to £481 million (2017: £527 million). The increase in PVNBP is primarily due to BPA growth, including Aviva's largest BPA deal to date of £925 million with Marks and Spencer, while the overall reduction in VNB reflects falls in protection and long-term savings.

Long-term savings VNB reduction is mainly driven by lower Savings Platform volumes during and after service provider transition. It also reflects a reduction in workplace pension VNB, as an increase in volumes has been offset by a change in mix towards lower margin, larger pension schemes.

Annuities and equity release VNB increased 25% to £196 million (2017: £157 million) driven by growth in BPA volumes with improved margins as we continued to participate in the market on a selective basis. Annuity SII VNB includes an £85 million (2017: £96 million) impact of new business on the calculation of UK Life's transitional measures.

Protection VNB reduced by 23% to £140 million (2017: £183 million) driven by an 8% reduction in sales to £1,799 million (2017: £1,964 million) in a competitive individual protection market and the impact of hardening reinsurance rates.

Health and Other VNB was stable at £34 million (2017: £34 million) with a fall in volumes, as we exited the International PMI market, offset by increased margins.

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

 

Net written premiums

Combined operating ratio

United Kingdom General insurance

2018
£m

2017
£m

Sterling % change

2018
 %

2017
%

Change

Personal motor

1,125

1,142

(1)%

 

 

 

Personal non-motor

1,369

1,359

1%

 

 

 

UK Personal lines

2,494

2,501

-

92.4%

92.0%

0.4pp

 

 

 

 

 

 

 

Commercial motor

532

514

4%

 

 

 

Commercial non-motor

1,167

1,063

10%

 

 

 

UK Commercial lines

1,699

1,577

8%

96.1%

96.7%

(0.6)pp

Total

4,193

4,078

3%

93.8%

93.9%

(0.1)pp

NWP

NWP increased 3% to £4,193 million (2017: £4,078 million), the fourth consecutive year of growth, as we continue to focus on our preferred products and channels.

UK Personal lines was broadly in line with the prior year with a 1% fall in motor reflecting lower average premiums in the softer market, while non-motor increased 1% driven by growth in home.

UK Commercial lines increased 8%, driven by a 10% increase in Commercial non-motor, with solid growth in SME and Global Corporate Specialty (GCS) while commercial motor increased 4%.

COR

UK General Insurance COR of 93.8% is a 0.1pp improvement on prior year against the backdrop of the Beast from the East and the softer motor market. Improved underlying performance and higher prior year reserve releases, primarily from favourable experience in attritional and large injury claims, was partly offset by less favourable weather experience compared to prior year, although this was still favourable to the long term average.

UK Personal lines COR of 92.4% was 0.4pp higher year on year, reflecting higher weather costs partly offset by higher prior year reserve releases and improved business mix.

UK Commercial lines COR of 96.1% improved 0.6pp year on year, as our underlying performance improved from the continued disciplined underwriting and growth combined with higher prior year reserve releases, partly offset by higher weather costs.

 

 

Page 13

 

6.ii - International

(a)  Canada

 

2018
£m

2017
£m

Sterling % change

Constant currency %

Operating profit‡#

46

46

(2)%

1%

Cash remitted to Group‡#

28

55

(49)%

(48)%

Expenses

 

 

 

 

Operating expenses

477

478

-

3%

Integration and restructuring costs

-

15

(100)%

(100)%

 

477

493

(3)%

-

COR

102.4%

102.2%

0.2pp

0.2pp

NWP

2,928

3,028

(3)%

-

Overview

In 2018, operating profit remained flat compared to the prior year at £46 million (2017: £46 million). The business also continued to experience challenges in the Canadian motor market and adverse weather conditions. Towards the end of 2017, an extensive profit remediation plan was put in place with ongoing actions around pricing, indemnity management and risk selection. The impact of these actions are starting to flow through our results. In the second half of the year, our COR for the 6 months to December 2018 improved to 100.2% (HY18: 104.6%).

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

Operating and financial performance

Profit

Operating profit‡#

2018
£m

2017
£m

Sterling % change

Constant currency %

Underwriting result

(70)

(64)

(11)%

(14)%

Long-term investment return

121

115

5%

8%

Other1

(5)

(5)

3%

-

Total

46

46

(2)%

1%

1    Includes unwind of discount and pension scheme net finance costs

In 2018, the underwriting result was a loss of £70 million (2017: loss of £64 million), mainly driven by increased claims frequency and severity in our personal motor business, slightly adverse weather conditions compared to the long-term average and the inclusion of RBC GI integration costs within operating expenses, partially offset by favourable prior year reserve development.

Cash‡#

Cash remittances during the period decreased to £28 million (2017: £55 million), reflective of our underwriting performance.

Expenses

Operating expenses remained broadly flat at £477 million (2017: £478 million), which includes costs of £11 million related to the completion of RBC GI systems migration and staff relocation. These costs were reported within integration and restructuring costs in 2017.

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

 

Net written premiums

Combined operating ratio

 

2018
£m

2017
£m

Sterling % change

Constant currency %

2018
%

2017
 %

Change

Personal lines

2,107

2,171

(3)%

-

104.2%

102.5%

1.7pp

Commercial lines

821

857

(4)%

(1)%

97.8%

101.2%

(3.4)pp

Total

2,928

3,028

(3)%

-

102.4%

102.2%

0.2pp

NWP

Net written premiums were down 3% to £2,928 million (2017: £3,028 million) but flat on a constant currency basis. In personal lines, lower new business sales were offset by rate increases. Commercial lines premiums reduced slightly over the prior year as rate increases were offset by lower new business sales and retention as we tightened our underwriting risk appetite.

COR

The COR increased slightly to 102.4% (2017: 102.2%) due to elevated claims frequency and severity, particularly in motor, partially offset by favourable prior year reserve development. This is an improvement on the half year 2018 result of 104.6%.

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

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

 

 

Page 14

 

6.ii - International continued

(b)  Europe

 

2018
£m

2017
£m

Sterling % change

Constant currency %

Operating profit‡#

 

 

 

 

Life

831

873

(5)%

(5)%

General insurance & health

220

223

(1)%

(2)%

 

1,051

1,096

(4)%

(5)%

 

 

 

 

 

Cash remitted to Group‡#,1

447

485

(8)%

(9)%

Expenses

 

 

 

 

Operating expenses

847

820

3%

2%

Integration and restructuring costs

-

36

(100)%

(100)%

 

847

856

(1)%

(2)%

New business

 

 

 

 

PVNBP

12,641

12,065

5%

5%

Solvency II VNB

517

533

(3)%

(3)%

 

 

 

 

 

General Insurance

 

 

 

 

COR

93.4%

93.3%

0.1pp

0.1pp

NWP

1,985

2,018

(2)%

(3)%

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

Overview

Overall operating profit in Europe was down by 5% to £1,051 million (2017: £1,096 million). However excluding disposals, operating profit grew 10% to £1,034 million (2017: £944 million), driven primarily by our life businesses which continue to grow revenue, improve product mix and focus on expense efficiencies.

In 2018, we completed the sale of our shareholdings in Caja Murcia Vida, Caja Granada Vida and Pelayo Vida, concluding the exit of our Spanish businesses. In Italy, we completed the sale of our shareholdings in Avipop Assicurazioni S.p.A and Avipop Vita S.p.A. (collectively known as Avipop) in March 2018. In Ireland, we completed our acquisition of Friends First Life Assurance Company in June 2018.

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

Operating and financial performance

Operating profit‡#

 

 

 

 

Life

General insurance & health

Operating profit‡#

2018
£m

2017
£m

Sterling % change

Constant currency %

2018
£m

2017
£m

Sterling % change

Constant currency %

France (excl. Antarius)1

436

403

8%

7%

110

104

6%

5%

Poland

170

156

9%

8%

20

21

(3)%

(5)%

Italy (excl. Avipop)

156

136

15%

14%

32

26

26%

25%

Ireland

44

33

32%

31%

56

53

4%

3%

Other Europe (excl. Spain)2

10

12

(21)%

8%

-

-

-

-

Total (excl. Antarius, Avipop, Spain)

816

740

10%

10%

218

204

7%

6%

Disposals

 

 

 

 

 

 

 

 

Antarius1

-

22

(100)%

(100)%

-

-

-

-

Avipop

6

32

(81)%

(81)%

2

19

(89)%

(90)%

Spain

9

79

(88)%

(88)%

-

-

-

-

Total

831

873

(5)%

(5)%

220

223

(1)%

(2)%

1    In April 2017, Aviva sold its 50% shareholding in Antarius. The Antarius figures shown represent up to completion of the disposal in 2017.

2    Other Europe includes Turkey.

Life operating profit

Excluding the impact of disposals, the operating profit of our life businesses grew by 10% to £816 million (2017: £740 million). Dealing with each of the markets in turn:

· In France, operating profit was up 7% to £436 million (2017: £403 million), due to an increase in new business volumes of our unit-linked savings products.

· In Poland, operating profit was £170 million (2017: £156 million), an increase of 8% as a result of the favourable impact of equity market movements on opening assets under management increasing fee income and an improved mix towards protection business.

· In Italy, operating profit was £156 million (2017: £136 million), an increase of 14% with significant net inflows of £3.6 billion mainly driven by an increase in new business volumes of our hybrid product.

· In Ireland, operating profit increased to £44 million (2017: £33 million), an increase of 31% mainly driven by the acquisition of Friends First, longevity releases and asset mix optimisation on the annuity book partially offset by lower sales of annuity products.

· In Turkey, operating profit was lower at £10 million (2017: £12 million), due to adverse FX movements. However on a constant currency basis, operating profit was up 8% due to growth in protection products.

 

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

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

 

 

Page 15

 

6.ii - International continued

General insurance operating profit

Excluding disposals, the operating profit of our general insurance businesses grew by 6% to £218 million (2017: £204 million). Dealing with each of the markets in turn:

· In France, operating profit was £110 million (2017: £104 million), an increase of 5%, due to growth, particularly in commercial lines, turnaround of the health business and expense efficiencies, partially offset by higher large losses and weather-related claims.

· In Poland, operating profit was £20 million (2017: £21 million) with the slight decrease mainly due to motor business with improved performance in other lines of business.

· In Italy, operating profit increased to £32 million (2017: £26 million) mainly driven by claims management actions on the motor book.

· In Ireland, operating profit increased to £56 million (2017: £53 million) driven by improvements to product mix and higher earned premiums, partially offset by an increase in large claims.

Cash‡#

Cash remitted to the Group was £447 million (2017: £485 million). Higher dividends from France and Poland were offset by Italy, where the dividend was withheld to withstand the volatile market conditions experienced in the year.

Expenses

Operating expenses were up 2% to £847 million (2017: £820 million) due to the inclusion of the Friends First business in Ireland for the first time and the absorption of integration costs into operating expenses in 2018, partly offset by a reduction due to the disposal of our Spanish businesses. Excluding these items, expenses are flat year on year.

New business

 

PVNBP

Solvency II VNB

New Business Margin

Gross of tax and non-controlling interests

 2018
£m

 2017
£m

Sterling % change

Constant currency % change

 2018
£m

 2017
£m

Sterling % change

Constant currency % change

2018
%

2017
 %

France (excl. Antarius)

4,335

4,042

7%

6%

210

216

(3)%

(4)%

4.8%

5.3%

Poland

486

468

4%

3%

58

57

2%

1%

11.9%

12.1%

Italy (excl. Avipop)

6,263

4,519

39%

37%

222

162

37%

36%

3.5%

3.6%

Ireland

1,208

1,050

15%

14%

11

11

(8)%

(9)%

0.9%

1.1%

Other Europe (excl. Spain)1

333

473

(30)%

(4)%

13

20

(31)%

(6)%

3.9%

4.2%

Total (excl. Antarius, Avipop, Spain)

12,625

10,552

20%

20%

514

466

12%

13%

4.1%

4.4%

Antarius

-

411

(100)%

(100)%

-

12

(100)%

(100)%

-

2.9%

Avipop

16

98

(84)%

(84)%

3

17

(85)%

(85)%

18.8%

16.9%

Spain

-

1,004

(100)%

(100)%

-

38

(100)%

(100)%

-

3.8%

Total

12,641

12,065

5%

5%

517

533

(3)%

(3)%

4.1%

4.4%

1    Other Europe includes Turkey.

Excluding disposals, PVNBP was up by 20% to £12,625 million (2017: £10,552 million) and VNB increased by 13%. In Italy VNB growth of 36% was mainly due to continued growth in sales of our hybrid savings product. In France, PVNBP was up 6% reflecting growth in sales of savings products, although VNB was down 4% primarily due to reduced protection volumes and new business margin reflecting increased competition in this market.

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

 

 

Net written premiums

Combined operating ratio

 

2018
£m

2017
£m

Sterling % change

Constant currency %

2018
 %

2017
 %

Change

France

1,118

1,053

6%

5%

94.5%

94.5%

-

Poland

106

117

(9)%

(10)%

87.0%

86.7%

0.3pp

Italy (excl. Avipop)

317

337

(6)%

(7)%

95.1%

98.1%

(3.0)pp

Ireland

430

436

(2)%

(2)%

91.5%

91.4%

0.1pp

Total (excl. Avipop)

1,971

1,943

1%

-

93.5%

93.9%

(0.4)pp

Avipop

14

75

(81)%

(81)%

87.8%

72.4%

15.4pp

Total

1,985

2,018

(2)%

(3)%

93.4%

93.3%

0.1pp

NWP

Excluding Avipop, NWP was broadly flat with growth in France offset by decreases in Poland, Italy and Ireland, as we maintained strong underwriting discipline. In France, NWP grew to £1,118 million (2017: £1,053 million) with growth mainly in commercial lines. In Poland, NWP decreased by 10% to £106 million (2017: £117 million) reflecting a change in product mix from bancassurance business. In Italy, NWP decreased by 7% due to continued underwriting action taken on segments of the motor book. In Ireland, NWP was down 2% mainly due to rate reductions in a softening motor market.

COR

Excluding Avipop, COR in Europe has improved by 0.4pp to 93.5% primarily reflecting an improved performance in Italy as underwriting action on the motor book takes effect.

 

 

Page 16

 

6.iii - Asia

 

2018
£m

2017
£m

Sterling % change

Constant currency %

Operating profit‡#

 

 

 

 

Life

300

235

28%

28%

General insurance & health

(16)

(8)

(100)%

(103)%

 

284

227

26%

26%

 

 

 

 

 

Cash remitted to Group

6

-

-

-

Expenses

 

 

 

 

Operating expenses1

186

207

(10)%

(9)%

Integration and restructuring costs

-

-

-

-

 

186

207

(10)%

(9)%

New business

 

 

 

 

PVNBP

2,656

2,719

(2)%

(1)%

Solvency II VNB

189

162

17%

18%

 

 

 

 

 

General Insurance

 

 

 

 

COR

122.1%

123.2%

(1.1)pp

NWP

13

13

4%

5%

1    Operating expenses relate to subsidiaries and exclude joint ventures.

Overview

Investment in Asia's distribution, digital and analytics capabilities continued throughout 2018. Singapore continues to grow its distribution network, including our financial adviser subsidiaries Aviva Financial Advisers with 816 (2017: 673) advisers and Professional Investment Advisory Services with 724 (2017: 593) advisers on board. Aviva-COFCO, our joint venture in China, posted a modest growth in operating profit amid regulatory tightening and an economic slowdown. In Hong Kong, we launched Blue, our new digital life joint venture with Tencent and Hillhouse in September 2018, which is expected to disrupt the insurance market. Aviva Vietnam, which is now a wholly owned subsidiary, is accelerating its business via a stronger partnership with Vietinbank. In 2018, we also completed the sale of our entire 49% shareholding in a joint venture in Taiwan.

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

Operating and financial performance

Operating profit‡#

Operating profit‡#

2018
£m

2017
£m

Sterling % change

Constant currency %

Life operating profit

 

 

 

 

Singapore

141

118

20%

21%

Other Asia (excl. Friends Provident International Limited (FPI), Taiwan)

8

(3)

338%

429%

Total life (excl. FPI, Taiwan)

149

115

30%

31%

General insurance & health operating profit

(16)

(8)

(100)%

(103)%

Total operating profit (excl. FPI, Taiwan)

133

107

25%

25%

FPI1

151

119

28%

28%

Taiwan2

-

1

(100)%

(100)%

Total operating profit

284

227

26%

26%

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

2    In 2018 Aviva completed the sale of its entire 49% shareholding in a joint venture in Taiwan.

Operating profit from our life and general insurance and health businesses was £284 million (2017: £227 million). Excluding FPI and Taiwan, life operating profit increased by 31% to £149 million (2017: £115 million). Within this, Singapore's operating profit increased by 21% to £141 million (2017: £118 million), which was mainly due to a higher contribution from the financial advisory channel. Improved results in China, Indonesia and Vietnam were partly offset by the initial set up costs of Blue in Hong Kong. Life operating profit for FPI improved from £119 million to £151 million as a result of improved operational performance and cost reductions.

The general insurance and health business reported a £16 million operating loss (2017: £8 million loss) mainly as a result of higher claims experience in our health business in Singapore. Management has identified a number of actions, including re-pricing, product design changes and cost containment measures to improve the portfolio performance. These remediation actions have commenced in 2018 and will continue throughout 2019.

Cash‡#

Cash remitted to Group in 2018 was £6 million (2017: £nil) as the successful progress of our business in Singapore has allowed the business to resume paying a dividend.

Expenses

Total operating expenses for Asia were £186 million (2017: £207 million). Excluding FPI, operating expenses were £143 million (2017: £150 million). The decrease is mainly as a result of cost saving initiatives as well as lower project development and IT costs.

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

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

 

 

Page 17

 

6.iii - Asia continued

New business

 

PVNBP

Solvency II VNB

New Business Margin

Gross of tax and non-controlling interests

 2018
£m

 2017
£m

Sterling % change

Constant currency % change

 2018
£m

 2017
£m

Sterling % change

Constant currency % change

2018
%

2017
%

Singapore

1,279

1,164

10%

11%

152

123

24%

25%

11.9%

10.6%

Other Asia

929

930

(0)%

3%

39

38

4%

10%

4.2%

4.0%

2,208

2,094

5%

7%

191

161

19%

22%

8.6%

7.7%

FPI1

448

467

(4)%

(4)%

(2)

(6)

73%

73%

(0.3)%

(1.2)%

Taiwan2

-

158

(100)%

(100)%

-

7

(100)%

(100)%

-

4.4%

2,656

2,719

(2)%

(1)%

189

162

17%

18%

7.1%

6.0%

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

2    In 2018 Aviva completed the sale of its entire 49% shareholding in a joint venture in Taiwan.

Whilst PVNBP has remained stable at £2,656 million in 2018, VNB increased by 18% to £189 million (2017: £162 million). Excluding FPI and Taiwan, VNB increased 22% to £191 million (2017: £161 million), primarily driven by Singapore where higher new business volumes from the financial advisory channel and an improved product mix towards protection products improved VNB to £152 million (2017: £123 million).

COR

The general insurance COR improved by 1.1pp to 122.1% (2017: 123.2%) as a result of improved claims experience.

NWP

General insurance net written premiums remained stable at £13 million (2017: £13 million).

 

 

Page 18

 

6.iv - Aviva Investors

 

2018
£m

2017
£m

Sterling % change

Revenue: Fee income

597

577

4%

Expenses

 

 

 

Operating expenses

447

409

10%

Integration and restructuring costs

-

3

(100)%

 

447

412

9%

Operating profit‡#

 

 

 

Fund management

150

168

(10)%

Other operations

-

32

(100)%

 

150

200

(25)%

Cash remitted to Group‡#

92

58

59%

Overview

We continue to invest in growing our investment capabilities, particularly in Equities. During the year, we created a new Real Assets division, focused on direct real estate and infrastructure investing. We also further expanded our distribution capability, particularly in the US. As a result, we have experienced new business wins across a broader range of products, creating a more diversified client base.

Operating and financial performance

Revenue

Revenue increased by 4% to £597 million (2017: £577 million), driven by sales across the business and a transfer of £2.3 billion in respect of Stewardship fund assets in the first half of the year which were previously externally managed.

Expenses

Operating expenses in Aviva Investors were £447 million (2017: £409 million). The year-on-year increase reflects investment in our front office capabilities and expanded distribution reach. It also reflects increased costs due to regulatory changes.

Operating profit‡#

Fund management operating profit decreased by £18 million to £150 million (2017: £168 million) due to continued investment in capabilities (Equities and Real Assets), expansion of our global distribution reach and absorption of regulatory costs (particularly MiFID II) which we did not pass on to our clients. Operating profit from other operations in 2017 of £32 million related to insurance recoveries.

Cash‡#

Cash remitted to Group was £92 million in 2018, an increase of £34 million from 2017 (2017: £58 million).

Net flows and assets under management and assets under administration

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

Assets under administration comprise assets managed by Aviva Investors and by third parties on platforms administered by Aviva Investors.

 

Internal legacy
£m

Internal core
£m

External

£m1

Total

£m1

Aviva Investors

 

 

 

 

Assets under management at 1 January 2018

90,939

187,542

72,246

350,727

Total inflows

9,432

37,782

7,682

54,896

Total outflows

(15,643)

(38,545)

(7,747)

(61,935)

Net flows

(6,211)

(763)

(65)

(7,039)

Net flows into liquidity funds and cash

42

925

2,730

3,697

Transfers in from external managers

-

2,329

-

2,329

Transfers out to external managers

(367)

-

-

(367)

Disposals2

-

-

(6,289)

(6,289)

Market and foreign exchange movements

(788)

(7,022)

(4,542)

(12,352)

Assets under management at 31 December 2018

83,615

183,011

64,080

330,706

Externally managed assets under administration at 1 January 2018

 

 

 

30,483

Externally managed assets under administration net flows and other movements

 

 

 

(1,379)

Externally managed assets under administration at 31 December 2018

 

 

 

29,104

Assets under management and administration at 1 January 2018

 

 

 

381,210

Assets under management and administration at 31 December 2018

 

 

 

359,810

1    Following a review of external funds under management, comparative amounts have been amended from those previously reported to reflect the fact that certain crossholdings had not been correctly eliminated on consolidation. The effect of this change is to reduce external funds under management previously reported at 1 January 2018 by £2.5 billion.

2    On 5 November 2018, Aviva Investors completed the sale of an indirect Real Estate Multi-Manager business and our interest in the management of a pan-European commercial property fund to another leading real estate global asset manager.

Assets under management decreased by £20.0 billion to £330.7 billion (2017: £350.7 billion). This is due to £6.3 billion of disposals, £12.4 billion adverse market and foreign exchange movements and £1.3 billion net outflows. Assets under management and administration at 31 December 2018 were £359.8 billion (2017: £381.2 billion).

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

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

 

 

 

Page 19

 

7.i - Life business profit drivers

Life business operating profit before shareholder tax increased by 5% to £2,999 million (2017: £2,852 million), up by 6% on a constant currency basis.

Overall, total income increased by 2% to £4,832 million (2017: £4,757 million) and total expenses increased by 3% to £2,398 million (2017: £2,336 million). Operating profit increased £147 million to £2,999 million (2017: £2,852 million). This was partly due to a higher benefit from 'Other' items of £568 million (2017: £415 million), which includes the impact of continued positive longevity developments in the UK.

 

United Kingdom1

Europe

Asia

Total

 

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

New business income

772

868

309

335

300

252

1,381

1,455

Underwriting margin

382

280

196

215

103

85

681

580

Investment return

1,406

1,324

1,131

1,171

233

227

2,770

2,722

Total income

2,560

2,472

1,636

1,721

636

564

4,832

4,757

Acquisition expenses

(425)

(473)

(335)

(326)

(217)

(191)

(977)

(990)

Administration expenses

(798)

(689)

(523)

(558)

(100)

(99)

(1,421)

(1,346)

Total expenses

(1,223)

(1,162)

(858)

(884)

(317)

(290)

(2,398)

(2,336)

Other2

534

418

53

36

(19)

(39)

568

415

 

1,871

1,728

831

873

300

235

3,002

2,836

Other business3

 

 

 

 

 

 

(3)

16

Total life business operating profit

 

 

 

 

 

 

2,999

2,852

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6.

2    Other represents DAC, changes in assumptions and modelling, non-recurring items and non-product specific items.

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

Income: New business income and underwriting margin

 

United Kingdom1

Europe

Asia

Total

 

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

New business income (£m) (A)

772

868

309

335

300

252

1,381

1,455

APE (£m)2

3,444

3,140

1,381

1,327

359

358

5,184

4,825

As margin on APE (%)

22%

28%

22%

25%

84%

70%

27%

30%

Acquisition expenses (£m) (B)

(425)

(473)

(335)

(326)

(217)

(191)

(977)

(990)

As acquisition expense ratio on APE (%)

12%

15%

24%

25%

60%

53%

19%

21%

Net contribution (A-B)

347

395

(26)

9

83

61

404

465

Underwriting margin (£m)

382

280

196

215

103

85

681

580

Analysed by:

 

 

 

 

 

 

 

 

Expenses

63

63

67

65

75

65

205

193

Mortality and longevity

319

217

122

157

30

21

471

395

Persistency

-

-

7

(7)

(2)

(1)

5

(8)

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6.

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

(a)  Net contribution from new business

The net contribution from new business decreased by 13% to a profit of £404 million (2017: profit of £465 million). In the UK, the net contribution decreased to a profit of £347 million (2017: profit of £395 million) mainly as a result of lower protection volumes in a competitive market. New business margin on APE decreased to 22% (2017: 28%) due to lower protection, platform and equity release margins. In Europe, the net contribution decreased to a loss of £26 million (2017: profit of £9 million) as growth in Italy and France was more than offset by the impact of disposals. New business margin on APE decreased to 22% (2017: 25%). In Asia, the net contribution increased to a profit of £83 million (2017: profit of £61 million) as a result of higher sales in Singapore through its financial advisory channel and a favourable shift in product mix towards higher margin protection products. New business margin on APE increased to 84% (2017: 70%) due to the favourable impact of changes in product mix partially offset by increased acquisition expenses.

(b)  Underwriting margin

The overall increase in the underwriting margin was primarily driven by the UK, which increased to £382 million (2017: £280 million) mainly due to improvement in protection claims experience and favourable annuity experience. In Europe, the underwriting margin decreased to a profit of £196 million (2017: £215 million) due to adverse mortality in Italy and the impact of disposals in Spain. In Asia, the underwriting margin increased to £103 million (2017: £85 million) due to favourable margins on in-force business in China.

(c)  Other

Other made a positive contribution of £568 million (2017: £415 million), primarily as a result of the benefit of longevity assumption changes partially offset by an increase in provisions in the UK.

 

 

Page 20

 

 

7.i - Life business profit drivers continued

Income: Investment return

 

United Kingdom1

Europe

Asia

Total

 

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

Unit-linked margin (£m)

903

891

581

585

204

202

1,688

1,678

As annual management charge on average reserves (bps)

66

68

136

138

217

213

89

92

Average reserves (£bn)2

137.6

130.1

42.8

42.3

9.4

9.5

189.8

181.9

Participating business (£m)3

165

164

461

487

4

(4)

630

647

As bonus on average reserves (bps)

39

34

68

73

10

(10)

55

55

Average reserves (£bn)2

42.4

48.1

67.5

66.4

4.1

3.9

114.0

118.4

Spread margin (£m)

266

271

2

6

7

12

275

289

As spread margin on average reserves (bps)

40

42

4

13

37

80

38

41

Average reserves (£bn)2

65.8

64.2

4.5

4.5

1.9

1.5

72.2

70.2

Expected return on shareholder assets (£m)4

72

(2)

87

93

18

17

177

108

Total (£m)

1,406

1,324

1,131

1,171

233

227

2,770

2,722

Total Average reserves (£bn)2

245.8

242.4

114.8

113.2

15.4

14.9

376.0

370.5

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6.

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

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

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

(d)  Unit-linked margin

The unit-linked margin increased slightly to £1,688 million (2017: £1,678 million) and the margin as a proportion of average reserves decreased to 89 bps (2017: 92 bps). In the UK, the unit-linked margin has increased mainly due to increased average assets under management compared to 2017 driven by growth in the sales of workplace pensions. At the same time, the margin on average reserves decreased to 66 bps (2017: 68 bps) due to a change in product mix with the expected run-off of the higher margin back book being replaced with lower unit-linked margin, and lower administration cost, workplace pensions and Savings Platform business. In Europe, the unit-linked margin decreased slightly to £581 million (2017: £585 million) due to growth in France more than offsetting a decrease as a result of the disposal of Spain. In Asia, the margin remained stable at £204 million (2017: £202 million).

(e)  Participating business

Income from participating business decreased to £630 million (2017: £647 million). Participating business average reserves have decreased to £114 billion (2017: £118 billion). In the UK, income from participating business was broadly flat at £165 million (2017: £164 million), as expected run-off was offset by an increase in terminal bonuses as a result of maturing endowments. In Europe, income decreased to £461 million (2017: £487 million) due to lower income as a result of the disposal of Spain.

(f)  Spread margin

Spread business income mainly relates to UK in-force immediate annuity and equity release business. The decrease during the period to £275 million (2017: £289 million) is mainly due to the disposals of Spain and Taiwan, with the UK remaining broadly stable.

(g)  Expected return on shareholder assets

Expected returns, representing investment income on surplus funds, increased to £177 million (2017: £108 million) due mainly to the impact of asset liability matching activity.

Expenses

 

United Kingdom1

Europe

Asia

Total

 

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

2018
£m

2017
£m

Acquisition expenses (£m)

(425)

(473)

(335)

(326)

(217)

(191)

(977)

(990)

APE (£m)2

3,444

3,140

1,381

1,327

359

358

5,184

4,825

As acquisition expense ratio on APE (%)

12%

15%

24%

25%

60%

53%

19%

21%

Administration expenses (£m)

(798)

(689)

(523)

(558)

(100)

(99)

(1,421)

(1,346)

As existing business expense ratio on average reserves (bps)

32

28

46

49

65

66

38

36

Total Average reserves (£bn)3

245.8

242.4

114.8

113.2

15.4

14.9

376.0

370.5

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6.

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

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

(h)  Acquisition expenses

Acquisition expenses decreased to £977 million (2017: £990 million). The decrease was driven by the UK, due to lower protection volumes and increased volumes of BPAs, which have a lower acquisition expenses rate to APE, as well as the impact of disposals in Europe. This was offset by an overall increase in Europe due to the acquisition of Friends First in Ireland and an increase in new business volumes in Italy and France, and Asia due to an increase in new business volumes in Singapore.

(i)   Administration expenses

The overall expense ratio remained broadly stable at 38 bps (2017: 36 bps) on average reserves of £376 billion (2017: £371 billion) with offsetting movements across markets. The increase in the UK is driven by targeted investment in simplification and growth initiatives as well as costs that typically relate to mandatory requirements such as IFRS 17 and GDPR. The decrease in Europe is due to a fall in commission and expenses as a result of the impact of disposals and an improved mix of protection products in Poland. Asia remains flat due to a focus on cost control.

 

 

 

Page 21

 

7.ii - General insurance and health

2018

UK Personal
£m

UK Commercial
£m

Total UK
£m

Canada Personal
£m

Canada Commercial
£m

Total Canada
£m

Europe
£m

Asia & Other1

£m

Total
£m

General insurance

 

 

 

 

 

 

 

 

 

Gross written premiums

2,562

1,942

4,504

2,143

904

3,047

2,075

14

9,640

Net written premiums

2,494

1,699

4,193

2,107

821

2,928

1,985

8

9,114

Net earned premiums

2,493

1,613

4,106

2,116

839

2,955

1,963

6

9,030

Net claims incurred

(1,546)

(1,019)

(2,565)

(1,609)

(513)

(2,122)

(1,264)

(6)

(5,957)

Of which claims handling costs

 

 

(159)

 

 

(110)

(60)

(1)

(330)

Earned commission

(601)

(336)

(937)

(377)

(172)

(549)

(368)

1

(1,853)

Earned expenses

(156)

(195)

(351)

(218)

(136)

(354)

(203)

(4)

(912)

Underwriting result

190

63

253

(88)

18

(70)

128

(3)

308

Longer-term investment return (LTIR)2

 

 

161

 

 

120

82

-

363

Other3, 4

 

 

1

 

 

(4)

-

1

(2)

Operating profit (GI)

 

 

415

 

 

46

210

(2)

669

Health insurance

 

 

 

 

 

 

 

 

 

Gross written premiums

 

 

485

 

 

-

204

190

879

Net written premiums

 

 

485

 

 

-

204

165

854

Underwriting result

 

 

33

 

 

-

9

(14)

28

Longer-term investment return (LTIR)

 

 

5

 

 

-

1

1

7

Operating profit (Health)

 

 

38

 

 

-

10

(13)

35

Total operating profit (GI and Health)

 

 

453

 

 

46

220

(15)

704

Total gross written premiums

 

 

4,989

 

 

3,047

2,279

204

10,519

Total net written premiums

 

 

4,678

 

 

2,928

2,189

173

9,968

General insurance combined operating ratio

 

 

 

 

 

 

 

 

 

Claims ratio

62.0%

63.2%

62.5%

76.1%

61.1%

71.8%

64.4%

 

66.0%

Commission ratio

24.1%

20.8%

22.8%

17.8%

20.5%

18.6%

18.7%

 

20.5%

Expense ratio

6.3%

12.1%

8.5%

10.3%

16.2%

12.0%

10.3%

 

10.1%

Combined operating ratio

92.4%

96.1%

93.8%

104.2%

97.8%

102.4%

93.4%

 

96.6%

Assets supporting general insurance and health business

 

 

 

 

 

 

 

 

 

Debt securities

 

 

2,367

 

 

4,445

2,387

72

9,271

Equity securities

 

 

568

 

 

208

90

-

866

Investment property

 

 

436

 

 

-

148

-

584

Cash and cash equivalents

 

 

700

 

 

130

371

93

1,294

Other5

 

 

1,735

 

 

207

407

-

2,349

Assets at 31 December 2018

 

 

5,806

 

 

4,990

3,403

165

14,364

Debt securities

 

 

3,020

 

 

4,273

2,592

169

10,054

Equity securities

 

 

492

 

 

247

33

-

772

Investment property

 

 

323

 

 

-

176

-

499

Cash and cash equivalents

 

 

546

 

 

140

399

30

1,115

Other5

 

 

1,763

 

 

252

481

2

2,498

Assets at 31 December 2017

 

 

6,144

 

 

4,912

3,681

201

14,938

Average assets

 

 

5,975

 

 

4,951

3,542

183

14,651

LTIR as % of average assets

 

 

2.8%

 

 

2.4%

2.3%

0.5%

2.5%

1    Asia & Other includes Aviva Re.

2    LTIR includes UK £41 million (2017: £52 million) and Ireland £5 million (2017: £6 million) relating to the internal loan.

3    Includes the result of non-insurance operations, unwind of discount rate and pension scheme net finance costs.

4    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. The impact of this change was UK General Insurance operating profit increased by £2 million and UK Health increased by £2 million.

5    Includes loans and other financial investments.

 

 

Page 22

 

 

7.ii - General insurance and health continued

2017

UK Personal
£m

UK Commercial
£m

Total UK
£m

Canada Personal
£m

Canada Commercial
£m

Total Canada
£m

Europe
£m

Asia & Other1

£m

Total
£m

General insurance

 

 

 

 

 

 

 

 

 

Gross written premiums

2,567

1,788

4,355

2,209

929

3,138

2,104

13

9,610

Net written premiums

2,501

1,577

4,078

2,171

857

3,028

2,018

17

9,141

Net earned premiums

2,461

1,554

4,015

2,103

841

2,944

2,001

16

8,976

Net claims incurred

(1,457)

(992)

(2,449)

(1,583)

(543)

(2,126)

(1,262)

(19)

(5,856)

Of which claims handling costs

 

 

(149)

 

 

(119)

(59)

-

(327)

Earned commission

(647)

(324)

(971)

(372)

(178)

(550)

(390)

(1)

(1,912)

Earned expenses

(161)

(188)

(349)

(201)

(132)

(333)

(213)

(6)

(901)

Underwriting result

196

50

246

(53)

(12)

(65)

136

(10)

307

Longer-term investment return (LTIR)2

 

 

163

 

 

115

79

3

360

Other3,4

 

 

2

 

 

(4)

-

-

(2)

Operating profit (GI)

 

 

411

 

 

46

215

(7)

665

Health insurance

 

 

 

 

 

 

 

 

 

Gross written premiums

 

 

509

 

 

-

240

164

913

Net written premiums

 

 

509

 

 

-

240

145

894

Underwriting result

 

 

33

 

 

-

7

(5)

35

Longer-term investment return (LTIR)

 

 

3

 

 

-

1

-

4

Operating profit (Health)

 

 

36

 

 

-

8

(5)

39

Total operating profit (GI and Health)

 

 

447

 

 

46

223

(12)

704

Total gross written premiums

 

 

4,864

 

 

3,138

2,344

177

10,523

Total net written premiums

 

 

4,587

 

 

3,028

2,258

162

10,035

General insurance combined operating ratio

 

 

 

 

 

 

 

 

 

Claims ratio

59.2%

63.8%

61.0%

75.3%

64.5%

72.2%

63.1%

 

65.3%

Commission ratio

26.3%

20.8%

24.2%

17.7%

21.1%

18.7%

19.5%

 

21.3%

Expense ratio

6.5%

12.1%

8.7%

9.5%

15.6%

11.3%

10.7%

 

10.0%

Combined operating ratio

92.0%

96.7%

93.9%

102.5%

101.2%

102.2%

93.3%

 

96.6%

Assets supporting general insurance and health business

 

 

 

 

 

 

 

 

 

Debt securities

 

 

3,020

 

 

4,273

2,592

169

10,054

Equity securities

 

 

492

 

 

247

33

-

772

Investment property

 

 

323

 

 

-

176

-

499

Cash and cash equivalents

 

 

546

 

 

140

399

30

1,115

Other5

 

 

1,763

 

 

252

481

2

2,498

Assets at 31 December 2017

 

 

6,144

 

 

4,912

3,681

201

14,938

Debt securities

 

 

3,718

 

 

4,349

2,535

197

10,799

Equity securities

 

 

7

 

 

235

25

-

267

Investment property

 

 

208

 

 

-

133

-

341

Cash and cash equivalents

 

 

757

 

 

115

267

23

1,162

Other5

 

 

1,464

 

 

256

309

3

2,032

Assets at 31 December 2016

 

 

6,154

 

 

4,955

3,269

223

14,601

Average assets

 

 

6,149

 

 

4,934

3,475

212

14,770

LTIR as % of average assets

 

 

2.7%

 

 

2.3%

2.3%

1.4%

2.5%

1    Asia & Other includes Aviva Re.

2    LTIR includes UK £52 million (2016: £62 million) and Ireland £6 million (2016: £7 million) relating to the internal loan.

3    Includes the result of non-insurance operations, unwind of discount rate and pension scheme net finance costs.

4    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. The impact of this change was UK General Insurance operating profit increased by £3 million and UK Health increased by £1 million.

5    Includes loans and other financial investments.

 

 

Page 23

 

7.iii - Life business fund flows

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

The table shown below sets out the life and platform business managed assets of the Group and excludes managed assets relating to our general insurance and health businesses. It includes managed assets of £19.5 billion (2017: £17.5 billion) which are excluded from the Group's statement of financial position which mainly relates to the platform business. For these reasons, the amounts disclosed are not directly reconcilable to the Aviva Investors assets under management and administration set out in section 6.iv.

 

Managed assets at
1 January 2018
£m

Premiums and deposits, net of reinsurance
£m

Claims and redemptions, net of reinsurance
£m

Net flows1,2

£m  

Market and other movements
£m

Managed assets at
31 December 2018
£m

Life and platform business

 

 

 

 

 

 

UK - non-profit:

 

 

 

 

 

 

- platform

20,238

5,719

(1,840)

3,879 

(1,474)

22,643

- pensions and other long-term savings

97,970

8,258

(7,088)

1,170 

(6,080)

93,060

- long-term savings3

118,208

13,977

(8,928)

5,049 

(7,554)

115,703

- annuities and equity release

60,797

3,144

(2,586)

558 

199

61,554

- other

24,727

1,376

(2,522)

(1,146) 

(757)

22,824

United Kingdom (excluding UK with-profits)

203,732

18,497

(14,036)

4,461 

  (8,112)

200,081

Europe

114,068

11,746

(7,547)

4,199 

251

118,518

Asia

14,526

898

(431)

467 

(218)

14,775

Other

1,290

18

(248)

(230) 

20

1,080

 

333,616

31,159

(22,262)

8,897 

(8,059)

334,454

UK - with-profits and other

58,200

 

 

 

 

48,920

Total life and platform business

391,816

 

 

 

 

383,374

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

2    For the period to 31 December 2018, net flows of £8.9 billion (2017: £7.0 billion) includes net flows of £3.0 billion (2017: £3.4 billion) that are included in the IFRS income statement within net written premiums and net paid claims.

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

United Kingdom (excluding UK with-profits)

UK long-term savings managed assets have decreased to £115.7 billion (2017: £118.2 billion) during the period. Within this, net inflows were £1.2 billion (2017: £0.6 billion net outflows) for pensions and other long-term savings and £3.9 billion (2017: £6.2 billion) for the platform business. Platform assets under management grew by 12% in the year to £22.6 billion (2017: £20.2 billion).

UK annuities and equity release net inflows were £0.6 billion (2017: £0.1 billion), reflecting increased BPA volumes in 2018. Other non-profit net outflows were £1.1 billion (2017: £1.4 billion) driven by bonds & savings as the book continues to run off as expected. Market and other movements include the adverse impact of widening spreads and increasing interest rates.

Europe

Net inflows in Europe of £4.2 billion (2017: £2.8 billion) were mainly driven by the growth in sales of our new hybrid savings product in Italy. Market and other movements in Europe includes £4.0 billion of investment assets added during the year following the acquisition of Friends First, offset by the disposal of £0.8 billion of investment assets following the sale of Avipop in Italy and Spain, and £2.9 billion attributable to adverse investment market movements mainly in Italy and France.

Asia and other

Net inflows in Asia were £0.5 billion (2017: £0.3 billion) arising mainly in Singapore. Other business net outflows of £0.2 billion (2017: £0.5 billion) primarily relate to Aviva Investors' Pooled Pensions business.

 

 

Page 24

 

8.i - Solvency II

The estimated Solvency II shareholder cover ratio is 204% at 31 December 2018. The Solvency II position disclosed is based on a 'shareholder view'. The shareholder view is considered by management to be more representative of the shareholders' risk exposure and the Group's ability to cover the Solvency Capital Requirement (SCR) with eligible own funds and aligns with management's approach to dynamically manage its capital position. In arriving at the shareholder position, the following adjustments are typically made to the regulatory Solvency II position:

· The contribution to the Group's SCR and own funds of the most material fully ring fenced with-profits funds of £2.6 billion at 31 December 2018 (2017: £3.3 billion) and staff pension schemes in surplus of £1.1 billion at 31 December 2018 (2017: £1.5 billion) are excluded. These exclusions have no impact on Solvency II surplus as these funds are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised. 

· A notional reset of the transitional measure on technical provisions (TMTP), calculated using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The 31 December 2018 Solvency II position includes a notional reset (£0.1 billion decrease in surplus) while the 31 December 2017 Solvency II position included a formal, rather than notional, reset of the TMTP in line with the regulatory requirement to reset the TMTP at least every two years or in the event of a material change in the risk profile. The TMTP is amortised on a straight-line basis over 16 years from 1 January 2016 in line with the Solvency II rules.

· The 31 December 2018 Solvency II position includes two pro forma adjustments to reflect known or highly likely events that could materially impact the Group's solvency position post 31 December 2018. These pro forma adjustments relate to the disposal of FPI (£0.1 billion increase in surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion reduction in surplus as a result of an increase in SCR). Note there is no expected impact on own funds from this expected change to Solvency II regulations and uncertainty remains around the final regulations for determining the SCR. These adjustments have been made in order to show a more representative view of the Group's solvency position. The 31 December 2017 Solvency II position includes the pro forma impact of the disposals of FPI (£0.1 billion increase in surplus) and Avipop in Italy (£0.1 billion increase in surplus).

Summary of Solvency II position

 

2018
£bn

2017
£bn

Own funds

23.6

24.7

Solvency capital requirement

(11.6)

(12.5)

Estimated Solvency II surplus at 31 December

12.0

12.2

Estimated Solvency II shareholder cover ratio

204%

198%

Movement in Group Solvency II surplus

 

2018
£bn

2017
£bn

Group Solvency II surplus at 1 January

12.2

11.3

Operating capital generation

3.2

2.6

Non-operating capital generation

(0.9)

(0.3)

Dividends

(1.2)

(1.1)

Share buy-back

(0.6)

(0.3)

Foreign exchange variances

-

0.1

Hybrid debt repayments

(0.9)

(0.5)

Acquired/divested business

0.2

0.4

Estimated Solvency II surplus at 31 December

12.0

12.2

The estimated Solvency II surplus is £12.0 billion at 31 December 2018, with a shareholder cover ratio of 204%. During 2018 the surplus has reduced as the beneficial impact from operating capital generation and the impact of disposals were offset by the buy-back of ordinary shares of £(0.6) billion, hybrid debt repayments of £(0.9) billion, the payment of the Aviva plc dividend of £(1.2) billion and non-operating capital generation of £(0.9) billion. Non-operating capital generation is primarily due to the impact of widening sovereign and corporate bond spreads in Italy, adverse global equity market conditions, SCR impact of an expected change to Solvency II regulations on the treatment of equity release mortgages and a further £0.1 billion reduction in surplus due to the capital requirement on surplus assets originated in 2018 to back new business in 2019 that would otherwise be invested in cash.

 

 

Page 25

 

8.i - Solvency II continued

Summary of analysis of diversified Solvency Capital Requirement1

 

2018
£bn

2017
£bn

Credit risk

3.0

3.2

Equity risk

1.2

1.7

Interest rate risk

1.0

0.5

Other market risk

1.4

1.4

Life insurance risk

2.5

3.2

General insurance risk

0.8

0.8

Operational risk

1.1

1.1

Other risk2

0.6

0.6

Total

11.6

12.5

1    The methodology to allocate capital to risks has been updated in 2018. The change does not impact total SCR. The 2017 allocation has been restated to reflect the updated methodology. This allocation has resulted in a change to individual risks mainly due to the reallocation of "Other risk".

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

The SCR has reduced by £0.9 billion since 31 December 2017 primarily due to a reduction in equity and life insurance risk which is partially offset by an increase in interest rate risk. The reduction in equity risk is due to a lower exposure to equities following adverse market conditions and further equity and equity volatility hedging in 2018. The longevity assumption changes in the UK and the transfer of pensions business into a supplementary occupational pension fund (FRPS) in France resulted in a reduction in life insurance risk. The increase in interest rate risk is due to increased exposure in the UK, including the impact from surplus assets originated in 2018 to back new business in 2019 that would otherwise be invested in cash.

Sensitivity analysis of Solvency II surplus

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

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

The table below shows the absolute change in cover ratio under each sensitivity, e.g. a 3% positive impact would result in a cover ratio of 207%.

Sensitivities

Impact on
cover ratio
%

Changes in economic assumptions

25 bps increase in interest rate

3%

 

50 bps increase in interest rate

5%

 

100 bps increase in interest rate

8%

 

25 bps decrease in interest rate

(4%)

 

50 bps decrease in interest rate

(10%)

 

50 bps increase in corporate bond spread1

(4%)

 

100 bps increase in corporate bond spread1

(8%)

 

50 bps decrease in corporate bond spread1

2%

 

Credit downgrade on annuity portfolio2

(4%)

 

10% increase in market value of equity

1%

 

25% increase in market value of equity

3%

 

10% decrease in market value of equity

(1%)

 

25% decrease in market value of equity

(5%)

Changes in non-economic assumptions

10% increase in maintenance and investment expenses

(8%)

 

10% increase in lapse rates

(3%)

 

5% increase in mortality/morbidity rates - life assurance

(2%)

 

5% decrease in mortality rates - annuity business

(11%)

 

5% increase in gross loss ratios

(3%)

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

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

The Group has kept under review the allowance in our long-term assumptions for future property prices and rental income for the possible adverse impact of the decision for the UK to leave the European Union. This allowance has been determined in line with previous periods and is £0.4 billion as at 31 December 2018, an increase of £0.1 billion from 31 December 2017. This allowance is already incorporated in our Solvency II surplus at 31 December 2018 and is equivalent to decreases in property values prevailing at 31 December 2018 of 12% for properties backing equity release mortgages and 14% for properties backing commercial mortgages, as a result the shareholder cover ratio is 5pp lower.

Limitations of sensitivity analysis

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

 

 

Page 26

 

8.i - Solvency II continued

 

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

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

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

 

8.ii - Net asset value

 

2018
£m

pence per

share2

2017
£m

pence per

share2

Equity attributable to shareholders of Aviva plc at 1 January1

16,969

423p

16,803

414p

Group adjusted operating profit

3,116

80p

3,068

76p

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

(672)

(17)p

(318)

(8)p

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

102

2p

135

3p

Goodwill impairment and amortisation of intangibles

(222)

(6)p

(246)

(6)p

Amortisation and impairment of acquired value of in-force business

(426)

(11)p

(495)

(12)p

Integration and restructuring costs

-

-

(141)

(3)p

Other3

231

6p

-

-

Tax on operating profit and on other activities

(442)

(11)p

(357)

(9)p

Non-controlling interests

(119)

(3)p

(149)

(4)p

Profit after tax attributable to shareholders of Aviva plc

1,568

40p

1,497

37p

AFS securities fair value and other reserve movements

(24)

(1)p

7

-

Ordinary dividends

(1,128)

(29)p

(983)

(25)p

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

(53)

(1)p

(82)

(2)p

Foreign exchange rate movements

(2)

-

33

1p

Remeasurements of pension schemes

(236)

(6)p

(2)

-

Shares purchased in buy-back

(600)

(15)p

(300)

(7)p

Other net equity movements4

64

13p

(4)

5p

Equity attributable to shareholders of Aviva plc at 31 December1

16,558

424p

16,969

423p

1    Excluding preference shares of £200 million (2017: £200 million).

2    Number of shares as at 31 December 2018: 3,902 million (2017: 4,013 million).

3    Other includes a gain of £190 million due to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims, a gain of £78 million provision release relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First, a charge of £63 million relating to the UK defined pension scheme as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs. For more information see note A11.

4    Other net equity movements per share includes the effect of the reduction of the number of shares in issue by 119,491,188 in respect of shares acquired and cancelled under the share buy-back programme.

On 1 May 2018 Aviva announced a buy-back of ordinary shares for an aggregate purchase price of £600 million under its share buy-back programme which was successfully completed on 18 September 2018. In 2017, a £300 million buy-back was completed on 19 September 2017.

At the end of 2018, IFRS net asset value per share was 424 pence (2017: 423 pence). The slight increase was due to higher operating profit partially offset by adverse investment return variances, remeasurement of pension schemes, dividend payments to shareholders and the cost of ordinary shares purchased in the buy-back programme. Net asset value per share also benefitted from the impact of the reduction in the number of shares as a result of the buy-back programme. Further details of the investment return variances are shown in sections A4 and A5.

 

 

Page 27

 

8.iii - Analysis of return on equity

 

Operating return

 

 

2018

Before tax
£m

After tax
£m

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

Return on equity
%

United Kingdom1

2,324

1,899

12,209

15.6%

Canada

46

34

1,306

2.6%

Europe

1,051

752

5,406

13.9%

Asia

284

263

1,627

16.2%

Fund management

146

100

533

18.8%

Corporate and other business1,2

(367)

(281)

5,656

n/a

Return on total capital employed

3,484

2,767

26,737

10.3%

Subordinated debt

(364)

(295)

(6,767)

4.4%

Senior debt

(4)

(3)

(1,403)

0.2%

Return on total equity

3,116

2,469

18,567

13.3%

Less: Non-controlling interests

 

(100)

(1,074)

9.3%

Direct capital instrument and tier 1 notes

 

(36)

(730)

4.9%

Preference capital

 

(17)

(200)

8.5%

Return on equity shareholders' funds

 

2,316

16,563

14.0%

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6, resulting in a reclassification of operating return before tax of £76 million from other business to the UK reporting segment.

2    The Corporate and other business loss before tax of £367 million comprises corporate costs of £216 million, other business operating loss of £239 million, partially offset by interest on internal lending arrangements of £13 million and finance income on the main UK pension scheme of £75 million.

 

Operating return

 

 

2017

Before tax
£m

After tax
£m

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

Return on equity
 %

United Kingdom1

2,175

1,767

13,000

13.6%

Canada

46

34

1,442

2.4%

Europe

1,096

787

5,890

13.4%

Asia

227

212

1,638

12.9%

Fund management

164

127

495

25.7%

Corporate and other business1,2

(247)

(181)

5,497

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    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6, resulting in a reclassification of operating return before tax of £26 million from other business to the UK reporting segment.

2    The Corporate and other business loss before tax of £247 million comprises corporate costs of £184 million, interest on internal lending arrangements of £7 million, other business operating loss (net of investment return) of £131 million, partly offset by finance income on the main UK pension scheme of £75 million.

 

 

Page 28

 

8.iv - Group capital under IFRS basis

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

 

2018
Capital employed
£m

2017
Capital employed
£m

Life business

 

 

United Kingdom1

10,266

11,493

France

2,885

2,704

Poland

319

352

Italy

686

954

Other Europe

380

422

Europe

4,270

4,432

Asia

1,691

1,558

 

16,227

17,483

General insurance & health

 

 

United Kingdom General Insurance1,2

1,509

1,872

United Kingdom Health1

122

106

Canada

1,290

1,364

France

585

589

Poland

131

140

Italy

148

319

Other Europe

185

203

Europe

1,049

1,251

Asia

-

10

 

3,970

4,603

Fund management

545

520

Corporate and other business1,2,3

5,412

5,169

Total capital employed

26,154

27,775

Financed by

 

 

Equity shareholders' funds

16,558

16,969

Non-controlling interests

966

1,235

Direct capital instrument and tier 1 notes

731

731

Preference shares

200

200

Subordinated debt4

6,335

7,221

Senior debt

1,364

1,419

Total capital employed5

26,154

27,775

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6.

2    Capital employed for United Kingdom General Insurance excludes c.£0.9 billion (2017: 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 £5 million (2017: £9 million).

5    Goodwill, AVIF and other intangibles are maintained within the capital base. Goodwill includes goodwill in subsidiaries of £1,872 million (2017: £1,876 million), goodwill in joint ventures of £13 million (2017: £17 million) and goodwill in associates of £nil (2017: £nil). AVIF and other intangibles comprise £3,201 million (2017: £3,455 million) of intangibles in subsidiaries, £33 million (2017: £40 million) of intangibles in joint ventures and £nil (2017: £nil) of intangibles in associates, net of deferred tax liabilities of £(475) million (2017: £(721) million) and the non-controlling interest share of intangibles of £(31) million (2017: £(254) million).

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and other borrowings. At 31 December 2018, the Group had £26.2 billion (2017: £27.8 billion) of total capital employed in our trading operations measured on an IFRS basis.

During 2018, Aviva has undertaken a number of actions to deploy its excess capital.

On 1 May 2018, the Group announced a share buy-back of ordinary shares, which was completed for an aggregate purchase price of £600 million. Shares totalling 119,491,188 (2017: 57,724,500 shares) were purchased and subsequently cancelled bringing the total cancelled under the programme to 177,215,688 shares, completing the share buy-back programme for an aggregate price of £900 million.

During the year, the Group also redeemed two subordinated debt instruments in full at their first call date, reduced the outstanding commercial paper balance and issued one senior debt. Further details are set out below:

· On 22 May 2018, the Group redeemed its €500 million 6.875% subordinated notes in full at first call date

· On 8 November 2018, the Group redeemed its $575 million 7.875% undated subordinated notes in full at first call date

· On 13 November 2018, Aviva plc issued €750 million of senior notes at 1.875% which mature in 2027

· On 13 December 2018, the Group's €350 million 0.100% senior notes matured

· The outstanding commercial paper balance was reduced to £251 million (2017: £668 million)

At 31 December 2018, the market value of our external debt (subordinated debt and senior debt), preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million), and direct capital instrument and tier 1 notes was £9,278 million (2017: £11,311 million).

 

 

Page 29

 

Financial
supplement

 

 

Page

A

Income & expenses

30

B

IFRS financial statements and notes

35

C

Analysis of assets

92

 

 

 

 

In this section

 

A

Income & expenses

 

Reconciliation of Group adjusted operating profit to profit for the year

30

A1

Other operations

31

A2

Corporate centre

31

A3

Group debt costs and other interest

31

A4

Life business: Investment variances
and economic assumption changes

32

A5

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

33

A6

General insurance and health business:
Economic assumption changes

34

A7

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

34

A8

Amortisation and impairment of intangibles

34

A9

Amortisation and impairment of acquired
value of in-force business

34

A10

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

34

A11

Other

34

 

 

Page 30

 

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

For the year ended 31 December 2018

 

2018
£m

2017
£m

Group adjusted operating profit before tax attributable to shareholders' profits

 

 

Life business

 

 

United Kingdom1

1,871

1,728

Europe

831

873

Asia

300

235

Other

(3)

16

Total life business

2,999

2,852

General insurance and health

 

 

United Kingdom General insurance1

415

411

United Kingdom Health

38

36

Canada

46

46

Europe

220

223

Asia

(16)

(8)

Other

1

(4)

Total general insurance and health

704

704

Fund management

 

 

Aviva Investors

150

168

Asia

(4)

(4)

Total fund management

146

164

Other

 

 

Other operations1 (note A1)

(237)

(143)

Market adjusted operating profit

3,612

3,577

Corporate centre (note A2)

(216)

(184)

Group debt costs and other interest (note A3)

(280)

(325)

Group adjusted operating profit before tax attributable to shareholders' profits

3,116

3,068

Integration and restructuring costs

-

(141)

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

3,116

2,927

Adjusted for the following:

 

 

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

(197)

34

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

(476)

(345)

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

1

(7)

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

(13)

(49)

Amortisation and impairment of intangibles (note A8)

(209)

(197)

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

(426)

(495)

Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates (note A10)

102

135

Other (note A11)

231

-

Adjusting items before tax

(987)

(924)

Profit before tax attributable to shareholders' profits

2,129

2,003

Tax on Group adjusted operating profit

(647)

(639)

Tax on other activities

205

282

 

(442)

(357)

Profit for the year

1,687

1,646

1    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. The impact of this change was to reduce UK Life operating profit by £80 million (2017: £30 million); UK General Insurance operating profit increased by £2 million (2017: £3 million) and UK Health increased by £2 million (2017: £1 million).

 

 

 

Page 31

 

Other Group adjusted operating profit Items

A1 - Other operations

 

2018
£m

2017
£m

Europe

(40)

(37)

Asia

(18)

(32)

Other Group operations1

(179)

(74)

Total2

(237)

(143)

1    Other Group operations include Group and head office costs and expenditure on UK digital business.

2    Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note B6. This resulted in a loss before tax of £30 million and profit before tax of £4 million in 2017 being transferred from the 'Other' products and services segment to the 'Long-term business' and 'General insurance and health' segments respectively.

Other operations relate to non-insurance activities and include costs associated with our Group and regional head offices, pension scheme expenses, as well as non-insurance business. Total costs in relation to non-insurance activities were £237 million (2017: £143 million).

Other Group operations includes net expenses of £99 million (2017: £48 million) in relation to supporting the development of the Group's digital business through its UK insurance intermediary which places business primarily on behalf of UK General Insurance.

A2 - Corporate centre

 

2018
£m

2017
£m

Project spend

(80)

(29)

Central spend and share award costs

(136)

(155)

Total

(216)

(184)

Corporate centre costs of £216 million (2017: £184 million) increased by £32 million mainly due to higher Group led project costs offset by a decrease in central spend and share award costs. The project spend increase relates to expenditure on continued targeted investment in simplification and growth initiatives in digital, IT and finance change as well as strengthening capabilities in Aviva Investors and project expenses that typically relate to mandatory requirements like IFRS 17 and GDPR.

A3 - Group debt costs and other interest

 

2018
£m

2017
£m

External debt

 

 

Subordinated debt

(364)

(391)

Other

(4)

(2)

Total external debt

(368)

(393)

Internal lending arrangements

13

(7)

Net finance income on main UK pension scheme

75

75

Total

(280)

(325)

The reduction in subordinated debt costs is due to the redemption of two subordinated debt instruments in full at their first call date
(see note 8.iv).

 

 

Page 32

 

Non-operating profit items

A4 - Life business: Investment variances and economic assumption changes

(a)  Definitions

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

(b)  Economic volatility

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

Life business

2018
£m

2017
£m

Investment variances and economic assumptions

(197)

34

Investment variances and economic assumption changes were £197 million negative (2017: £34 million positive), primarily due to negative variances in the UK and Italy. In the UK, these variances were mainly due to an increase in yields, the widening of corporate bond spreads and an increase in the allowance for the possible adverse impact of the decision for the UK to leave the European Union, partially offset by the beneficial impact of our equity hedges. The negative variance in Italy was primarily driven by a widening of sovereign credit spreads and a fall in equity markets.

The Group has kept under review the allowance in our long-term assumptions for future property prices and rental income for the possible adverse impact of the decision for the UK to leave the European Union. This allowance has been determined in line with previous periods and is £395 million as at 31 December 2018, an increase of £109 million from 31 December 2017.

The variance in 2017 was driven by positive variances in the UK, partially offset by negative variances in France. Positive variances in the UK were mainly due to economic modelling developments implemented in 2017. These included developments to align the approach to calculating valuation interest rates across the heritage Aviva and Friends Life portfolios and also a development to the approach to calculating the valuation interest rate for certain deferred annuity business. The negative variance in France was primarily due to an increase in life annuity pension reserves, resulting from a reduction to the discount rate cap used in the calculation of these reserves.

(c)  Assumptions

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

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

 

 

Equity

 

Property

 

2018

2017

2018

2017

United Kingdom

4.8%

4.8%

3.3%

3.3%

Eurozone

4.4%

4.2%

2.9%

2.7%

The expected return on equity and property has been calculated by reference to the 10 year mid-price swap rate for an AA rated bank in the relevant currency plus a risk premium. The use of risk premium reflects management's long-term expectations of asset return in excess of the swap yield from investing in different asset classes. The asset risk premiums are set out in the table below:

All territories

2018

2017

Equity risk premium

3.5%

3.5%

Property risk premium

2.0%

2.0%

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

Territories

2018

2017

United Kingdom

1.3%

1.3%

Eurozone

0.9%

0.7%

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

 

 

Page 33

 

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

Non-life business

2018
£m

2017
£m

Analysis of investment income:

 

 

- Net investment income

63

331

- Foreign exchange losses and other charges

(8)

(24)

 

55

307

Analysed between:

 

 

- Long-term investment return, reported within operating profit

370

364

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

(315)

(57)

 

55

307

Short-term fluctuations:

 

 

- General insurance and health

(315)

(57)

- Other operations1

(161)

(288)

Total short-term fluctuations

(476)

(345)

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

The long-term investment return is calculated separately for each principal non-life market. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the long-term rate of investment return. It is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated long-term return for other investments is the actual income receivable for the period. Actual income and long-term investment return both contain the amortisation of the discount/premium arising on the acquisition of fixed income securities.

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

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

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

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

 

2018
£m

2017
£m

Debt securities

9,271

10,054

Equity securities

866

772

Properties

584

499

Cash and cash equivalents

1,294

1,115

Other1

2,349

2,498

Assets supporting general insurance and health business

14,364

14,938

Assets supporting other non-life business2

812

685

Total assets supporting non-life business

15,176

15,623

1    Includes the internal loan to Group from UK Insurance.

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

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

 

Long-term rate of
return on equities

Long-term rate
 of return on property

 

2018

2017

2018

2017

United Kingdom

4.8%

4.8%

3.3%

3.3%

Eurozone

4.4%

4.2%

2.9%

2.7%

Canada

5.9%

5.5%

4.4%

4.0%

The long-term rates of return on equities and properties have been calculated by reference to the 10-year mid-price swap rate for an AA rated bank in the relevant currency plus a risk premium. The underlying reference rates and risk premiums are shown in note A4(c).

 

 

Page 34

 

A6 - General insurance and health business: Economic assumption changes

In the general insurance and health business, there is a positive impact of £1 million (2017: £7 million adverse) as a result of a slight increase in interest rates used to value periodic payment orders (PPOs) and latent claims. 

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

Impairment of goodwill, associates and joint ventures expensed in the period totalled £13 million (2017: £49 million), comprising impairments of goodwill relating to businesses in the UK, Asia and Poland. Negative goodwill of £36 million has arisen relating to the acquisition of Friends First Life Assurance Company DAC (Friends First) on 1 June 2018. This has been recognised in Other items (see note A11).

A8 - Amortisation and impairment of intangibles

The amortisation and impairment of intangible assets increased to £209 million (2017: £197 million) mainly due to an increase in the amortisation charge on software costs relating to software capitalised in the second half of 2017 and during 2018.

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

Amortisation and impairment of acquired value of in-force business (AVIF) is a charge of £426 million (2017: £495 million charge), which relates solely to amortisation in respect of the Group's subsidiaries and joint ventures. Impairment charges of £13 million in relation to Friends Provident International Limited (FPI) remeasurement losses are recorded within profit on disposal and remeasurement of subsidiaries, joint ventures and associates (see note A10).

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

The total Group profit on disposal and remeasurement of subsidiaries, joint ventures and associates is £102 million (2017: £135 million profit). This consists of £113 million profit on the disposals of Italy - Avipop, Spain, Taiwan and other small operations, a remeasurement gain of £2 million in relation to Hong Kong; offset by £13 million remeasurement loss in relation to FPI. Further details of these items are provided in note B5.

A11 - Other

Other items are those items that, in the directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. At 31 December 2018, other items is a net gain of £231 million (2017: £nil), which comprises the following:

· A gain of £190 million due to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims. Such payments are determined by the UK courts in accordance with the Ogden tables and discount rate. In December 2018, the Civil Liability Bill became an Act of Parliament, which will result in a new Ogden discount rate being set by the Lord Chancellor in 2019. Although the value of the final rate remains uncertain, for 2018 the claim reserves in the UK have been calculated using a discount rate of 0.00% (2017: -0.75%).

· A gain of £78 million arising from the release of a provision in relation to the sale of Aviva USA in 2013.

· A gain of £36 million relating to negative goodwill arising on the acquisition of Friends First (refer to note B4), which arose primarily due to differences between the valuation of the pension scheme liability used to determine the transaction price and the recognition and measurement principles defined by IAS 19 Employee Benefits.

· A charge of £63 million relating to the estimated additional liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension (GMP). This additional liability has arisen following the High Court judgement in October 2018 in the case involving Lloyds Banking Group.

· A charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs, to those preference shareholders who were adversely affected by the sale of shares between 8 March and 22 March 2018.

End part 2 of 4


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