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Aviva PLC (AV.)

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Thursday 07 March, 2019

Aviva PLC

Final Results part 4 of 4

RNS Number : 0971S
Aviva PLC
07 March 2019
 

Start part 4 of 4

Page 92

 

Analysis of assets

In this section

Page

C Analysis of assets

 

C1

Summary of total assets - by fund

93

C2

Summary of total assets by valuation bases

94

C3

Summary of financial investments by fund

96

C4

Analysis of debt securities

97

C5

Analysis of loans

102

C6

Analysis of equity securities

104

C7

Analysis of investment property

104

C8

Analysis of other financial investments

105

C9

Analysis of available for sale investments

106

C10

Exposures to peripheral countries

106

C11

Exposures to worldwide bank debt securities

106

C12

Reinsurance assets

107

 

 

Page 93

 

As an insurance business, the Group holds a variety of assets to match the characteristics and duration of its insurance liabilities. Appropriate and effective asset liability matching (on an economic basis) is the principal way in which Aviva manages its investments. To support this, we use a variety of hedging and other risk management strategies to mitigate any residual mismatch risk that is outside of our risk appetite.

C1 - Summary of total assets by fund

2018

Policyholder assets
£m

Participating fund assets
£m

Shareholder assets
£m

Total assets analysed
£m

Less assets of operations classified as held for sale
£m

Balance sheet total
£m

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

-

-

5,733

5,733

(660)

5,073

Interests in joint ventures and associates

-

999

519

1,518

-

1,518

Property and equipment

-

194

359

553

(5)

548

Investment property

6,868

3,884

730

11,482

-

11,482

Loans

9

3,128

25,648

28,785

-

28,785

Financial investments

 

 

 

 

 

 

Debt securities

29,472

91,469

48,745

169,686

(397)

169,289

Equity securities

67,152

14,117

1,069

82,338

(210)

82,128

Other investments

41,954

7,225

3,633

52,812

(6,644)

46,168

Reinsurance assets

4,099

534

7,167

11,800

(45)

11,755

Deferred tax assets

-

-

185

185

-

185

Current tax assets

-

-

76

76

-

76

Receivables and other financial assets

813

1,442

6,635

8,890

(11)

8,879

Deferred acquisition costs and other assets

66

591

5,840

6,497

(191)

6,306

Prepayments and accrued income

296

1,149

1,506

2,951

(4)

2,947

Cash and cash equivalents

14,455

18,737

13,980

47,172

(688)

46,484

Assets of operations classified as held for sale

-

-

-

-

8,855

8,855

Total

165,184

143,469

121,825

430,478

-

430,478

Total %

38.4%

33.3%

28.3%

100.0%

-

100.0%

2017 Total

172,635

148,839

121,211

442,685

-

442,685

2017 Total %

39.0%

33.6%

27.4%

100.0%

-

100.0%

 

 

 

 

 

 

 

 

 

Page 94

 

C2 - Summary of total assets by valuation bases

Total assets - 2018

Fair value
£m

Amortised cost
£m

Equity accounted/

tax assets1

£m

Total
£m

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

-

5,733

-

5,733

Interests in joint ventures and associates

-

-

1,518

1,518

Property and equipment

427

126

-

553

Investment property

11,482

-

-

11,482

Loans

25,526

3,259

-

28,785

Financial Investments

 

 

 

 

Debt securities

169,686

-

-

169,686

Equity securities

82,338

-

-

82,338

Other investments

52,812

-

-

52,812

Reinsurance assets

4,008

7,792

-

11,800

Deferred tax assets

-

-

185

185

Current tax assets

-

-

76

76

Receivables and other financial assets

-

8,890

-

8,890

Deferred acquisition costs and other assets

-

6,497

-

6,497

Prepayments and accrued income

-

2,951

-

2,951

Cash and cash equivalents

47,172

-

-

47,172

Total

393,451

35,248

1,779

430,478

Total %

91.4%

8.2%

0.4%

100.0%

Assets of operations classified as held for sale

7,952

903

-

8,855

Total (excluding assets held for sale)

385,499

34,345

1,779

421,623

Total % (excluding assets held for sale)

91.4%

8.2%

0.4%

100.0%

2017 Total

405,152

35,651

1,882

442,685

2017 Total %

91.5%

8.1%

0.4%

100.0%

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

Total assets - Participating fund assets 2018

Fair value
£m

Amortised cost
£m

Equity accounted/

tax assets1

£m

Total
£m

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

-

-

-

-

Interests in joint ventures and associates

-

-

999

999

Property and equipment

187

7

-

194

Investment property

3,884

-

-

3,884

Loans

52

3,076

-

3,128

Financial Investments

 

 

 

 

Debt securities

91,469

-

-

91,469

Equity securities

14,117

-

-

14,117

Other investments

7,225

-

-

7,225

Reinsurance assets

-

534

-

534

Deferred tax assets

-

-

-

-

Current tax assets

-

-

-

-

Receivables and other financial assets

-

1,442

-

1,442

Deferred acquisition costs and other assets

-

591

-

591

Prepayments and accrued income

-

1,149

-

1,149

Cash and cash equivalents

18,737

-

-

18,737

Total

135,671

6,799

999

143,469

Total %

94.6%

4.7%

0.7%

100.0%

Assets of operations classified as held for sale

-

-

-

-

Total (excluding assets held for sale)

135,671

6,799

999

143,469

Total % (excluding assets held for sale)

94.6%

4.7%

0.7%

100.0%

2017 Total

140,937

6,769

1,133

148,839

2017 Total %

94.7%

4.5%

0.8%

100.0%

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

 

 

Page 95

 

C2 - Summary of total assets by valuation bases continued

Total assets - Shareholders assets 2018

Fair value
£m

Amortised
cost
£m

Equity accounted/

tax assets1

£m

Total
£m

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

-

5,733

-

5,733

Interests in joint ventures and associates

-

-

519

519

Property and equipment

240

119

-

359

Investment property

730

-

-

730

Loans

25,474

174

-

25,648

Financial Investments

 

 

 

 

Debt securities

48,745

-

-

48,745

Equity securities

1,069

-

-

1,069

Other investments

3,633

-

-

3,633

Reinsurance assets

9

7,158

-

7,167

Deferred tax assets

-

-

185

185

Current tax assets

-

-

76

76

Receivables and other financial assets

-

6,635

-

6,635

Deferred acquisition costs and other assets

-

5,840

-

5,840

Prepayments and accrued income

-

1,506

-

1,506

Cash and cash equivalents

13,980

-

-

13,980

Total

93,880

27,165

780

121,825

Total %

77.1%

22.3%

0.6%

100.0%

Assets of operations classified as held for sale

184

887

-

1,071

Total (excluding assets held for sale)

93,696

26,278

780

120,754

Total % (excluding assets held for sale)

77.6%

21.8%

0.6%

100.0%

2017 Total

92,403

28,061

747

121,211

2017 Total %

76.2%

23.2%

0.6%

100.0%

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

 

 

 

Page 96

 

C3 - Analysis of financial investments by fund

The asset allocation as at 31 December 2018 across the Group, split according to the type of the liability the assets are backing, is shown in the table below.

 

Shareholder business assets

 

 

Participating fund assets

 

 

 

Carrying value in the statement of financial position

General Insurance &

health & other1

£m

Annuity and non-profit
£m

Total Shareholder assets

Policyholder (unit linked assets)
£m

UK style with profits
£m

Continental European-style Participating funds
£m

Total assets analysed
£m

Less assets of operation classified as held for sale
£m

Carrying value in the statement of financial position
£m

Debt securities (note C4)

 

 

 

 

 

 

 

 

 

Government bonds

6,123

16,148

22,271

14,711

14,488

30,472

81,942

(19)

81,923

Corporate bonds

3,404

20,784

24,188

12,236

12,966

26,855

76,245

(378)

75,867

Other

264

2,022

2,286

2,525

722

5,966

11,499

-

11,499

 

9,791

38,954

48,745

29,472

28,176

63,293

169,686

(397)

169,289

Loans (note C5)

 

 

 

 

 

 

 

 

 

Mortgage loans

-

19,813

19,813

-

51

-

19,864

-

19,864

Other loans

165

5,670

5,835

9

2,367

710

8,921

-

8,921

 

165

25,483

25,648

9

2,418

710

28,785

-

28,785

Equity securities (note C6)

909

160

1,069

67,152

11,713

2,404

82,338

(210)

82,128

Investment property

487

243

730

6,868

2,157

1,727

11,482

-

11,482

Other investments (note C8)

1,449

2,184

3,633

41,954

1,941

5,284

52,812

(6,644)

46,168

Total as at 31 December 2018

12,801

67,024

79,825

145,455

46,405

73,418

345,103

(7,251)

337,852

Total as at 31 December 2017

13,581

65,576

79,157

153,729

54,813

70,349

358,048

(8,312)

349,736

1    Of the £12.8 billion of assets 6% relates to other shareholder business assets.

 

 

Page 97

 

C4 - Analysis of debt securities

C4.1 Fair value hierarchy

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

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

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

· Inputs to Level 3 fair values are unobservable inputs for the asset. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset. Unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset. Examples are investment property and commercial and equity release mortgage loans.

 

 

Fair value hierarchy

 

Debt securities - Total 2018

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

25,207

2,128

521

27,856

Non-UK government

37,705

12,617

3,764

54,086

Europe

31,996

6,403

3,175

41,574

North America

1,003

3,626

291

4,920

Asia Pacific & Other

4,706

2,588

298

7,592

Corporate bonds - Public utilities

3,735

5,620

1,448

10,803

Other corporate bonds

32,253

23,250

9,939

65,442

Other

4,098

5,136

2,265

11,499

Total

102,998

48,751

17,937

169,686

Total %

60.7%

28.7%

10.6%

100.0%

Assets of operations classified as held for sale

19

19

359

397

Total (excluding assets held for sale)

102,979

48,732

17,578

169,289

Total % (excluding assets held for sale)

60.8%

28.8%

10.4%

100.0%

2017 Total

108,535

51,921

15,492

175,948

2017 Total %

61.7%

29.5%

8.8%

100.0%

 

 

Fair value hierarchy

 

Debt securities - Policyholders assets 2018

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

9,826

1

-

9,827

Non-UK government

4,242

637

5

4,884

Europe

1,401

354

-

1,755

North America

588

249

5

842

Asia Pacific & Other

2,253

34

-

2,287

Corporate bonds - Public utilities

806

131

4

941

Other corporate bonds

9,635

1,043

617

11,295

Other

1,382

1,143

-

2,525

Total

25,891

2,955

626

29,472

Total %

87.9%

10.0%

2.1%

100.0%

Assets of operations classified as held for sale

18

19

359

396

Total (excluding assets held for sale)

25,873

2,936

267

29,076

Total % (excluding assets held for sale)

89.0%

10.1%

0.9%

100.0%

2017 Total

26,377

4,044

566

30,987

2017 Total %

85.1%

13.1%

1.8%

100.0%

 

 

 

Page 98

 

C4 - Analysis of debt securities continued

C4.1 Fair value hierarchy continued

 

Fair value hierarchy

 

Debt securities - Participating fund assets 2018

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

6,790

822

133

7,745

Non-UK government

30,324

4,989

1,902

37,215

Europe

27,656

3,049

1,873

32,578

North America

367

16

29

412

Asia Pacific & Other

2,301

1,924

-

4,225

Corporate bonds - Public utilities

2,822

798

164

3,784

Other corporate bonds

21,653

8,017

6,367

36,037

Other

2,461

2,287

1,940

6,688

Total

64,050

16,913

10,506

91,469

Total %

70.0%

18.5%

11.5%

100.0%

Assets of operations classified as held for sale

-

-

-

-

Total (excluding assets held for sale)

64,050

16,913

10,506

91,469

Total % (excluding assets held for sale)

70.0%

18.5%

11.5%

100.0%

2017 Total

67,713

18,439

9,623

95,775

2017 Total %

70.7%

19.3%

10.0%

100.0%

 

 

Fair value hierarchy

 

Debt securities - Shareholder assets 2018

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

UK Government

8,591

1,305

388

10,284

Non-UK government

3,139

6,991

1,857

11,987

Europe

2,939

3,000

1,302

7,241

North America

48

3,361

257

3,666

Asia Pacific & Other

152

630

298

1,080

Corporate bonds - Public utilities

107

4,691

1,280

6,078

Other corporate bonds

965

14,190

2,955

18,110

Other

255

1,706

325

2,286

Total

13,057

28,883

6,805

48,745

Total %

26.8%

59.2%

14.0%

100.0%

Assets of operations classified as held for sale

1

-

-

1

Total (excluding assets held for sale)

13,056

28,883

6,805

48,744

Total % (excluding assets held for sale)

26.8%

59.2%

14.0%

100.0%

2017 Total

14,445

29,438

5,303

49,186

2017 Total %

29.3%

59.9%

10.8%

100.0%

 

 

Page 99

 

C4 - Analysis of debt securities continued

C4.2 External ratings

 

External ratings

 

 

Debt securities - Total 2018

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

-

27,106

117

-

-

442

27,665

UK local authorities

-

137

-

-

-

54

191

Non-UK Government

10,396

21,768

5,747

12,710

2,015

1,450

54,086

 

10,396

49,011

5,864

12,710

2,015

1,946

81,942

Corporate

 

 

 

 

 

 

 

Public utilities

1

633

3,300

5,242

432

1,195

10,803

Other corporate bonds

6,474

6,017

19,589

20,840

6,402

6,120

65,442

 

6,475

6,650

22,889

26,082

6,834

7,315

76,245

Certificates of deposit

-

389

497

-

19

303

1,208

Structured

 

 

 

 

 

 

 

Residential Mortgage Backed Security non-agency prime

12

3

29

27

4

28

103

 

12

3

29

27

4

28

103

Commercial Mortgage Backed Security

300

60

116

54

-

26

556

Asset Backed Security

-

404

401

49

54

-

908

Collateralised Debt Obligation (including Collateralised Loan Obligation)

-

-

-

-

-

335

335

Asset Backed Commercial Paper

-

6

-

-

-

-

6

 

300

470

517

103

54

361

1,805

Wrapped credit

-

14

498

76

5

40

633

Other

213

513

608

3,566

2,173

677

7,750

Total

17,396

57,050

30,902

42,564

11,104

10,670

169,686

Total %

10.3%

33.6%

18.2%

25.1%

6.5%

6.3%

100.0%

Assets of operations classified as held for sale

11

9

2

358

3

14

397

Total (excluding assets held for sale)

17,385

57,041

30,900

42,206

11,101

10,656

169,289

Total % (excluding assets held for sale)

10.2%

33.7%

18.3%

24.9%

6.6%

6.3%

100.0%

2017 Total

18,718

57,240

35,192

40,947

13,740

10,111

175,948

2017 Total %

10.6%

32.5%

20.0%

23.3%

7.8%

5.8%

100.0%

 

 

External ratings

 

 

Debt securities - Policyholders assets 2018

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

-

9,696

-

-

-

130

9,826

UK local authorities

-

1

-

-

-

-

1

Non-UK Government

1,179

189

1,232

1,005

898

381

4,884

 

1,179

9,886

1,232

1,005

898

511

14,711

Corporate

 

 

 

 

 

 

 

Public utilities

1

17

334

325

256

8

941

Other corporate bonds

427

667

3,407

2,656

2,497

1,641

11,295

 

428

684

3,741

2,981

2,753

1,649

12,236

Certificates of deposit

-

389

497

-

19

217

1,122

Structured

 

 

 

 

 

 

 

Residential Mortgage Backed Security non-agency prime

-

2

-

-

-

-

2

 

-

2

-

-

-

-

2

Commercial Mortgage Backed Security

-

-

3

-

-

-

3

Asset Backed Security

-

-

8

-

-

-

8

Collateralised Debt Obligation (including Collateralised Loan Obligation)

-

-

-

-

-

-

-

Asset Backed Commercial Paper

-

6

-

-

-

-

6

 

-

6

11

-

-

-

17

Wrapped credit

-

-

-

4

-

-

4

Other

38

91

108

635

387

121

1,380

Total

1,645

11,058

5,589

4,625

4,057

2,498

29,472

Total %

5.6%

37.5%

19.0%

15.7%

13.7%

8.5%

100.0%

Assets of operations classified as held for sale

10

9

2

358

3

14

396

Total (excluding assets held for sale)

1,635

11,049

5,587

4,267

4,054

2,484

29,076

Total % (excluding assets held for sale)

5.6%

38.0%

19.2%

14.7%

14.0%

8.5%

100.0%

2017 Total

2,337

9,900

6,557

4,692

5,012

2,489

30,987

2017 Total %

7.6%

31.9%

21.2%

15.1%

16.2%

8.0%

100.0%

 

 

 

Page 100

 

C4 - Analysis of debt securities continued

C4.2 External ratings continued

 

External ratings

 

 

Debt securities - Participating fund assets 2018

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

-

7,602

3

-

-

133

7,738

UK local authorities

-

7

-

-

-

-

7

Non-UK Government

3,944

17,593

3,489

10,844

1,117

228

37,215

 

3,944

25,202

3,492

10,844

1,117

361

44,960

Corporate

 

 

 

 

 

 

 

Public utilities

-

131

944

2,412

105

192

3,784

Other corporate bonds

3,972

3,059

9,429

13,347

3,781

2,449

36,037

 

3,972

3,190

10,373

15,759

3,886

2,641

39,821

Certificates of deposit

-

-

-

-

-

-

-

Structured

 

 

 

 

 

 

 

Residential Mortgage Backed Security non-agency prime

11

1

9

24

2

-

47

 

11

1

9

24

2

-

47

Commercial Mortgage Backed Security

48

18

34

-

-

10

110

Asset Backed Security

-

53

125

20

17

-

215

Collateralised Debt Obligation (including Collateralised Loan Obligation)

-

-

-

-

-

335

335

Asset Backed Commercial Paper

-

-

-

-

-

-

-

 

48

71

159

20

17

345

660

Wrapped credit

-

-

34

4

-

2

40

Other

163

394

466

2,733

1,666

519

5,941

Total

8,138

28,858

14,533

29,384

6,688

3,868

91,469

Total %

8.9%

31.5%

15.9%

32.1%

7.3%

4.3%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

Total (excluding assets held for sale)

8,138

28,858

14,533

29,384

6,688

3,868

91,469

Total % (excluding assets held for sale)

8.9%

31.5%

15.9%

32.1%

7.3%

4.3%

100.0%

2017 Total

9,342

29,946

15,703

27,618

8,202

4,964

95,775

2017 Total %

9.7%

31.3%

16.4%

28.8%

8.6%

5.2%

100.0%

 

 

 

Page 101

 

C4 - Analysis of debt securities continued

C4.2 External ratings continued

 

External ratings

 

 

Debt securities - Shareholder assets 2018

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Non-rated
£m

Total
£m

Government

 

 

 

 

 

 

 

UK Government

-

9,808

114

-

-

179

10,101

UK local authorities

-

129

-

-

-

54

183

Non-UK Government

5,273

3,986

1,026

861

-

841

11,987

 

5,273

13,923

1,140

861

-

1,074

22,271

Corporate

 

 

 

 

 

 

 

Public utilities

-

485

2,022

2,505

71

995

6,078

Other corporate bonds

2,075

2,291

6,753

4,837

124

2,030

18,110

 

2,075

2,776

8,775

7,342

195

3,025

24,188

Certificates of deposit

-

-

-

-

-

86

86

Structured

 

 

 

 

 

 

 

Residential Mortgage Backed Security non-agency prime

1

-

20

3

2

28

54

 

1

-

20

3

2

28

54

Commercial Mortgage Backed Security

252

42

79

54

-

16

443

Asset Backed Security

-

351

268

29

37

-

685

Collateralised Debt Obligation (including Collateralised Loan Obligation)

-

-

-

-

-

-

-

Asset Backed Commercial Paper

-

-

-

-

-

-

-

 

252

393

347

83

37

16

1,128

Wrapped credit

-

14

464

68

5

38

589

Other

12

28

34

198

120

37

429

Total

7,613

17,134

10,780

8,555

359

4,304

48,745

Total %

15.6%

35.2%

22.1%

17.6%

0.7%

8.8%

100.0%

Assets of operations classified as held for sale

1

-

-

-

-

-

1

Total (excluding assets held for sale)

7,612

17,134

10,780

8,555

359

4,304

48,744

Total % (excluding assets held for sale)

15.6%

35.2%

22.1%

17.6%

0.7%

8.8%

100.0%

2017 Total

7,039

17,394

12,932

8,637

526

2,658

49,186

2017 Total %

14.2%

35.4%

26.3%

17.6%

1.1%

5.4%

100.0%

Within shareholder assets debt securities, 46% of exposure is in government holdings (2017: 46%). Our corporate debt securities portfolio represents 50% of total shareholder debt securities (2017: 50%). At 31 December 2018, the proportion of our shareholder debt securities that are investment grade is 90.4% (2017: 93.5%). The remaining 9.6% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows:

· 0.8% are debt securities that are rated as below investment grade;

· 8.8% are not rated by the major rating agencies.

The majority of non-rated corporate bonds are held by our businesses in the UK. Of the securities not rated by an external rating agency most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £3.0 billion (2017: £2.0 billion) of debt securities held in our UK life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.

 

 

 

Page 102

 

C5 - Analysis of loans

(a)  Overview

The Group's loan portfolio of £28.8 billion (2017: £27.9 billion) is principally made up of the following:

· Policy loans of £0.8 billion (2017: £0.8 billion), which are generally collateralised by a lien or charge over the underlying policy;

· Loans and advances to banks of £1.9 billion (2017: £2.5 billion), which primarily relate to loans of cash collateral received in stock lending transactions and are fully collateralised by other securities;

· Mortgage loans collateralised by property assets of £19.9 billion (2017: £20.3 billion); and

· Healthcare, infrastructure and private financial initiative (PFI) loans of £5.4 billion (2017: £3.6 billion).

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

For certain mortgage loans, the Group has taken advantage of the fair value option under IAS 39 Financial Instruments: Recognition Measurement to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. These mortgage loans are not traded in active markets and are classified within level 3 of the fair value hierarchy as the significant valuation assumptions and inputs are not deemed to be market observable. Of the Group's total loan portfolio, 69% (2017: 73%) is invested in mortgage loans. The shareholder risk relating to these loans is discussed further below.

Primary healthcare, infrastructure and PFI loans included within shareholder assets are £5.4 billion (2017: £3.6 billion). These loans are secured against the income from healthcare and education premises and as such are not considered further in this section.

Loans - Shareholder assets 2018

United Kingdom
£m

Canada
£m

Europe
£m

Asia
£m

Total
£m

Policy loans

5

-

2

2

9

Loans and advances to banks

303

-

-

-

303

Healthcare, Infrastructure and PFI other loans

5,109

-

249

-

5,358

Mortgage loans

19,813

-

-

-

19,813

Other loans

-

164

1

-

165

Total

25,230

164

252

2

25,648

Total %

98.4%

0.6%

1.0%

-

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

Total (excluding assets held for sale)

25,230

164

252

2

25,648

Total % (excluding assets held for sale)

98.4%

0.6%

1.0%

-

100.0%

2017 Total

24,120

180

213

2

24,515

2017 Total %

98.4%

0.7%

0.9%

-

100.0%

(b)  Analysis of shareholder mortgage loans

Mortgage loans included within shareholder assets are £19.8 billion (2017: £20.2 billion) and are almost entirely held in the UK. The narrative below focuses on explaining the risks arising as a result of these exposures.

2018

Total
£m

Non-securitised mortgage loans

 

- Residential (Equity release)

7,315

- Commercial

7,232

- Healthcare, Infrastructure and PFI mortgage loans

2,829

 

17,376

Securitised mortgage loans

2,437

Total

19,813

Assets of operations classified as held for sale

-

Total (excluding assets held for sale)

19,813

2017 Total

20,189

Non-securitised mortgage loans

Residential

The UK non-securitised residential mortgage portfolio has a total value as at 31 December 2018 of £7.3 billion (2017: £6.8 billion). The movement in the year is due to £0.7 billion of new lending and a decrease in the fair value of £0.2 billion. Additional accrued interest in the year offsets with the value of redemptions. These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the structure of equity release mortgages, whereby interest amounts due are not paid in cash but instead rolled into the amount outstanding, they predominantly have a current Loan to Value (LTV) of below 70%. The average LTV across the portfolio is 26.8% (2017: 24.6%).

Commercial

Gross exposure by loan to value and arrears of UK non-securitised commercial mortgages is shown in the table below.

2018

>120%
£m

115-120%
£m

110-115%
£m

105-110%
£m

100-105%
£m

95-100%
£m

90-95%
£m

80-90%
£m

70-80%
£m

<70%
£m

Total
£m

Not in arrears

-

-

-

-

-

-

328

149

164

6,591

7,232

Total

-

-

-

-

-

-

328

149

164

6,591

7,232

 

 

Page 103

 

C5 - Analysis of loans continued

(b)  Analysis of shareholder mortgage loans continued

Non-securitised mortgage loans continued

Commercial continued

Of the £7.2 billion (2017: £7.5 billion) of mortgage loans in the shareholder fund, £6.7 billion are used to back annuity liabilities and are stated on a fair value basis. The UK loan exposures are calculated on a discounted cash flow basis, and include a risk adjustment through the use of a Credit Risk Adjusted Value (CRAV).

For commercial mortgages, loan service collection ratios, a key indicator of mortgage portfolio performance, improved to 2.43x (2017: 2.23x). Loan Interest Cover (LIC), which is defined as the annual net rental income (including rental deposits less ground rent) divided by the annual loan interest service, also improved to 2.75x (2017: 2.51x). Average mortgage LTV decreased by 1pp compared to 2017 from 56% to 55%. There are no loans in arrears (2017: nil).

Commercial mortgages and Healthcare, Infrastructure and PFI loans are held at fair value on the asset side of the statement of financial position. The related insurance liabilities are valued using a discount rate derived from the gross yield on assets, with adjustments to allow for risk. £14.4 billion of shareholder loan assets are backing annuity liabilities and comprise of commercial mortgage loans (£6.7 billion), Healthcare, Infrastructure and PFI mortgage loans (£2.8 billion) and Primary Healthcare, Infrastructure and PFI other loans (£4.9 billion). The Group carries a valuation allowance within insurance liabilities against the risk of default of commercial mortgages of £0.5 billion which equates to 41 bps at 31 December 2018 (2017: 40 bps).

The total valuation allowance held on business transferred in from Aviva Annuity UK Limited in respect of corporate bonds and mortgages is £1.3 billion (2017: £1.3 billion) over the remaining term of the UK corporate bond and mortgage portfolio.

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

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

Healthcare, Infrastructure and PFI

Primary Healthcare, Infrastructure and PFI mortgage loans included within shareholder assets of £2.8 billion (2017: £3.4 billion) are secured against primary health care premises (including General Practitioner surgeries), education, social housing and emergency services related premises. For all such loans, Government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses provides considerable comfort of an ongoing business model and low risk of default.

On a market value basis, we estimate the average LTV of these mortgages to be 72% (2017: 76%), although this is not considered to be a key risk indicator due to the Government support noted above and the social need for these premises. We therefore consider these loans to be lower risk relative to other mortgage loans.

Securitised mortgage loans

As at 31 December 2018, the Group has £2.4 billion (2017: £2.5 billion) of securitised mortgage loans within shareholder assets. Funding for the securitised residential mortgage assets was obtained by issuing loan note securities. Of these loan notes approximately £239 million (2017: £231 million) are held by Group companies. The remainder is held by third parties external to Aviva. As any cash shortfall arising once all mortgages have been redeemed is borne by the loan note holders, the majority of the credit risk of these mortgages is borne by third parties rather than by shareholders. The average LTV across the securitised mortgage loans is 45.2%.

 

 

Page 104

 

C6 - Analysis of equity securities

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Total assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

2,383

-

-

2,383

2,402

-

-

2,402

Banks, trusts and insurance companies1

17,868

-

172

18,040

18,645

-

208

18,853

Industrial miscellaneous and all other1

61,450

-

269

61,719

68,022

-

642

68,664

Non-redeemable preferred shares

196

-

-

196

244

-

-

244

Total

81,897

-

441

82,338

89,313

-

850

90,163

Total %

99.5%

-

0.5%

100.0%

99.1%

-

0.9%

100.0%

Assets of operations classified as held for sale

183

-

27

210

121

-

74

195

Total (excluding assets held for sale)

81,714

-

414

82,128

89,192

-

776

89,968

Total % (excluding assets held for sale)

99.5%

-

0.5%

100.0%

99.1%

-

0.9%

100.0%

 

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Policyholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

2,073

-

-

2,073

2,042

-

-

2,042

Banks, trusts and insurance companies1

14,526

-

6

14,532

15,802

-

13

15,815

Industrial miscellaneous and all other1

50,361

-

167

50,528

56,161

-

64

56,225

Non-redeemable preferred shares

19

-

-

19

28

-

-

28

Total

66,979

-

173

67,152

74,033

-

77

74,110

Total %

99.7%

-

0.3%

100.0%

99.9%

-

0.1%

100.0%

Assets of operations classified as held for sale

183

-

26

209

115

-

74

189

Total (excluding assets held for sale)

66,796

-

147

66,943

73,918

-

3

73,921

Total % (excluding assets held for sale)

99.8%

-

0.2%

100.0%

100.0%

-

-

100.0%

 

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Participating fund assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

306

-

-

306

356

-

-

356

Banks, trusts and insurance companies1

3,327

-

65

3,392

2,809

-

89

2,898

Industrial miscellaneous and all other1

10,324

-

95

10,419

11,237

-

563

11,800

Non-redeemable preferred shares

-

-

-

-

4

-

-

4

Total

13,957

-

160

14,117

14,406

-

652

15,058

Total %

98.9%

-

1.1%

100.0%

95.7%

-

4.3%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

-

Total (excluding assets held for sale)

13,957

-

160

14,117

14,406

-

652

15,058

Total % (excluding assets held for sale)

98.9%

-

1.1%

100.0%

95.7%

-

4.3%

100.0%

 

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Equity securities - Shareholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Public utilities

4

-

-

4

4

-

-

4

Banks, trusts and insurance companies

15

-

101

116

34

-

106

140

Industrial miscellaneous and all other

765

-

7

772

624

-

15

639

Non-redeemable preferred shares

177

-

-

177

212

-

-

212

Total

961

-

108

1,069

874

-

121

995

Total %

89.9%

-

10.1%

100.0%

87.8%

-

12.2%

100.0%

Assets of operations classified as held for sale

-

-

1

1

6

-

-

6

Total (excluding assets held for sale)

961

-

107

1,068

868

-

121

989

Total % (excluding assets held for sale)

90.0%

-

10.0%

100.0%

87.8%

-

12.2%

100.0%

1    Following a review of the Group's investment classifications, comparative amounts in the table have been revised. This review has resulted in a reclassification of £5,443 million in Equity securities previously classified as Banks, trusts and insurance companies to Industrial miscellaneous and all other. There is no impact on total Equity securities.

C7 - Analysis of investment property

Within total investment properties by value 93.6% (2017: 94.7%) are held in policyholder or participating fund assets. Shareholder exposure to investment properties is principally through investments in UK and French commercial property.

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

Within total investment properties by value 97.3% (2017: 97.4%) are leased to third parties under operating leases, with the remainder either being vacant or held for capital appreciation.

Within shareholder investment properties by value 100% (2017: 97.6%) are leased to third parties under operating leases.

 

 

Page 105

 

C8 - Analysis of other financial investments

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Total

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

41,613

365

3,234

45,212

42,518

437

2,711

45,666

Derivative financial instruments

574

3,888

532

4,994

370

4,730

407

5,507

Deposits with credit institutions

155

-

-

155

161

-

-

161

Minority holdings in property management undertakings

-

28

1,947

1,975

-

27

1,408

1,435

Other

476

-

-

476

507

-

1

508

Total

42,818

4,281

5,713

52,812

43,556

5,194

4,527

53,277

Total %

81.1%

8.1%

10.8%

100.0%

81.8%

9.7%

8.5%

100.0%

Assets of operations classified as held for sale

5,038

-

1,606

6,644

5,307

-

1,664

6,971

Total (excluding assets held for sale)

37,780

4,281

4,107

46,168

38,249

5,194

2,863

46,306

Total % (excluding assets held for sale)

81.8%

9.3%

8.9%

100.0%

82.6%

11.2%

6.2%

100.0%

 

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Policyholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

38,945

259

1,611

40,815

39,550

260

1,670

41,480

Derivative financial instruments

166

16

2

184

108

13

-

121

Deposits with credit institutions

125

-

-

125

147

-

-

147

Minority holdings in property management undertakings

-

-

370

370

-

-

183

183

Other

460

-

-

460

437

-

-

437

Total

39,696

275

1,983

41,954

40,242

273

1,853

42,368

Total %

94.6%

0.7%

4.7%

100.0%

95.0%

0.6%

4.4%

100.0%

Assets of operations classified as held for sale

5,022

-

1,606

6,628

5,231

-

1,660

6,891

Total (excluding assets held for sale)

34,674

275

377

35,326

35,011

273

193

35,477

Total % (excluding assets held for sale)

98.1%

0.8%

1.1%

100.0%

98.7%

0.8%

0.5%

100.0%

 

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Participating fund assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

1,408

105

1,557

3,070

1,697

177

996

2,870

Derivative financial instruments

252

2,451

69

2,772

216

2,873

34

3,123

Deposits with credit institutions

17

-

-

17

10

-

-

10

Minority holdings in property management undertakings

-

-

1,366

1,366

-

-

1,020

1,020

Other

-

-

-

-

-

-

-

-

Total

1,677

2,556

2,992

7,225

1,923

3,050

2,050

7,023

Total %

23.2%

35.4%

41.4%

100.0%

27.4%

43.4%

29.2%

100.0%

Assets of operations classified as held for sale

-

-

-

-

-

-

-

-

Total (excluding assets held for sale)

1,677

2,556

2,992

7,225

1,923

3,050

2,050

7,023

Total % (excluding assets held for sale)

23.2%

35.4%

41.4%

100.0%

27.4%

43.4%

29.2%

100.0%

 

 

 

 

 

2018

 

 

 

2017

 

Fair value hierarchy

 

Fair value hierarchy

 

Other investments - Shareholder assets

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Unit trusts and other investment vehicles

1,260

1

66

1,327

1,271

-

45

1,316

Derivative financial instruments

156

1,421

461

2,038

46

1,844

373

2,263

Deposits with credit institutions

13

-

-

13

4

-

-

4

Minority holdings in property management undertakings

-

28

211

239

-

27

205

232

Other

16

-

-

16

70

-

1

71

Total

1,445

1,450

738

3,633

1,391

1,871

624

3,886

Total %

39.8%

39.9%

20.3%

100.0%

35.8%

48.1%

16.1%

100.0%

Assets of operations classified as held for sale

16

-

-

16

76

-

4

80

Total (excluding assets held for sale)

1,429

1,450

738

3,617

1,315

1,871

620

3,806

Total % (excluding assets held for sale)

39.5%

40.1%

20.4%

100.0%

34.5%

49.2%

16.3%

100.0%

 

 

 

Page 106

 

C9 - Analysis of available for sale investments

There were no impairment expenses during 2018 relating to AFS debt securities and other investments.

Total unrealised losses on AFS debt securities at 31 December 2018 were £5 million (2017:£1 million). There were no other unrealised losses on AFS investments.

C10 - Summary of exposure to peripheral European countries

The Group's direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets) is summarised below:

 

 

Participating

 

Shareholder

 

Total

 

2018
£bn

2017
 £bn

2018
 £bn

2017
 £bn

2018
 £bn

2017
 £bn

Greece

-

-

-

-

-

-

Ireland

0.8

0.7

0.2

0.1

1.0

0.8

Portugal

0.1

0.1

-

-

0.1

0.1

Italy

6.8

6.0

0.6

0.6

7.4

6.6

Spain

0.6

0.3

0.1

-

0.7

0.3

Total Greece, Ireland, Portugal, Italy and Spain

8.3

7.1

0.9

0.7

9.2

7.8

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

C11 - Summary of exposure to worldwide bank debt securities

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

 

Shareholder assets

Participating fund assets

2018

Total senior debt
 £bn

Total subordinated debt
 £bn

Total debt
£bn

Total senior debt
 £bn

Total subordinated debt
 £bn

Total debt
 £bn

Australia

0.2

-

0.2

0.8

0.2

1.0

Denmark

-

-

-

0.5

-

0.5

France

0.5

0.1

0.6

2.6

0.4

3.0

Germany

-

-

-

0.6

0.2

0.8

Italy

-

-

-

0.1

-

0.1

Netherlands

0.3

0.2

0.5

1.4

0.2

1.6

Spain

0.4

-

0.4

0.5

0.1

0.6

Sweden

0.1

-

0.1

0.3

0.1

0.4

Switzerland

-

-

-

0.7

-

0.7

United Kingdom

1.3

0.4

1.7

1.1

0.5

1.6

United States

1.0

0.2

1.2

1.5

0.1

1.6

Other

0.4

0.1

0.5

1.8

0.2

2.0

Total

4.2

1.0

5.2

11.9

2.0

13.9

Assets of operations classified as held for sale

-

-

-

-

-

-

Total (excluding assets held for sale)

4.2

1.0

5.2

11.9

2.0

13.9

2017 Total

4.4

1.0

5.4

12.1

2.5

14.6

Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.2 billion (2017: £5.4 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (33%), US (23%), French (12%) and Dutch (10%) banks.

Net of non-controlling interest, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £13.9 billion (2017: £14.6 billion). The majority of the exposure (86%) is in senior debt. Participating funds are most exposed to French (22%), UK (12%), Dutch (12%) and US (12%) banks

 

 

Page 107

 

C12 - Reinsurance assets

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

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

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

 

 

 

 

 

Ratings

 

 

2018

AAA
£m

AA
£m

A
£m

BBB
£m

Less than BBB
£m

Not rated
£m

Total
£m

Policyholders assets

-

3,164

267

317

-

351

4,099

Participating fund assets

-

225

307

2

-

-

534

Shareholder assets

-

6,407

609

3

1

147

7,167

Total

-

9,796

1,183

322

1

498

11,800

Total %

-

83.1%

10.0%

2.7%

-

4.2%

100.0%

Assets of operations classified as held for sale

-

9

36

-

-

-

45

Total (excluding assets held for sale)

-

9,787

1,147

322

1

498

11,755

Total % (excluding assets held for sale)

-

83.3%

9.8%

2.7%

-

4.2%

100.0%

2017 Total

-

11,880

1,113

264

3

355

13,615

2017 Total %

-

87.3%

8.2%

1.9%

-

2.6%

100.0%

 

 

Page 108

 

Alternative Performance Measures

In order to fully explain the performance of our business, we discuss and analyse our results in terms of financial measures which include a number of alternative performance measures (APMs). APMs are non-GAAP measures which are used to supplement the disclosures prepared in accordance with other regulations such as International Financial Reporting Standards (IFRS) and Solvency II. We believe these measures provide useful information to enhance the understanding of our financial performance. However, APMs should be viewed as complementary to, rather than as a substitute for, the figures determined according to other regulations.

The APMs utilised by Aviva may not be the same as those used by other insurers and may change over time. These metrics are reviewed annually and updated as appropriate to ensure they remain an effective measurement that underpins the objectives for the Group.

This section includes a definition of each APM and additional information, including a reconciliation to the relevant amounts in the IFRS Financial Statements and, where appropriate, commentary on the material reconciling items.

There are no new APMs or changes to existing APMs in 2018.

Annual Premium Equivalent (APE)

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

Assets under management (AUM) and assets under administration (AUA)

Assets under management (AUM) represent all assets managed or administered by or on behalf of the Group, including those assets managed by third parties. AUM include managed assets that are reported within the Group's statement of financial position and those assets belonging to external clients outside the Aviva Group which are therefore not included in the Group's statement of financial position.

Consistent with previous years, assets under administration (AUA) comprise AUM plus assets managed by third parties on platforms administered by Aviva Investors.

Both AUM and AUA are monitored as they reflect the potential earnings arising from investment returns and fee and commission income and measure the size and scale of the Group's fund management business.

A reconciliation of AUM to amounts appearing in the Group's statement of financial position is shown below.

 

2018
£bn

2017
£bn

AUM managed on behalf of Group companies

 

 

Assets included in statement of financial position1

 

 

Financial investments

305

319

Investment properties

11

11

Loans

29

28

Cash and cash equivalents

47

44

Other

1

1

 

393

403

Less: third party funds included above

(19)

(19)

 

374

384

AUM managed on behalf of third parties2

 

 

Aviva Investors3

64

72

UK Platform4

23

20

Other

9

11

 

96

103

Total AUM

470

487

1    Includes assets classified as held for sale.

2    AUM managed on behalf of third parties cannot be directly reconciled to the financial statements.

3    Following a review of AUM managed on behalf of third parties, comparative amounts for Aviva Investors 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 total AUM by £2.5 billion at 31 December 2017.

4    UK Platform relates to the assets under management in the UK long-term savings business.

Cash remittances‡ #

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

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

Combined operating ratio (COR)

A financial measure of general insurance underwriting profitability calculated as total underwriting costs in our insurance entities expressed as a percentage of net earned premiums. A COR below 100% indicates profitable underwriting.

The COR does not include the impact of any changes in the discount rate used for estimating lump sum payments in settlement of bodily injury claims.

The Group reported COR is shown below.

 

2018

 £m

2017

 £m

Incurred claims - GI & Health (as per B6)1

(6,400)

(6,533)

Adjusted for the following:

 

 

Incurred claims - Health

633

677

Impact of change in the discount rate used in settlement of bodily injury claims

(190)

-

Total incurred claims (included in COR)

(5,957)

(5,856)

(2,765)

(2,813)

Total underwriting costs

(8,722)

(8,669)

Net earned premiums - GI & Health (as per B6)

9,887

9,882

Adjusted for:

 

 

Net earned premiums - Health

(857)

(906)

Net earned premiums (included in COR)

9,030

8,976

Combined operating ratio

96.6%

96.6%

1    Corresponds to the sum of claims and benefits paid, net of recoveries from reinsurers and the change in insurance liabilities, net of reinsurance per note B6.

2    Commission and expenses consists of fee and commission income, fee and commission expense and other operating expenses included within the general insurance & health segmental income statement (per note B6) adjusted to an earned basis and to remove the health business.

# symbol denotes key 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 period under review.

 

 

 

Page 109

 

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

Claims ratio

A financial measure of the performance of our general insurance business which is calculated as incurred claims expressed as a percentage of net earned premiums, which can be derived from the previous COR table.

Commission and expense ratio

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

Excess centre cash flow

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

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

Group adjusted operating profit‡#

Group adjusted operating profit is a non-GAAP APM which is reported to the Group chief operating decision maker for the purpose of decision making and for internal performance management of the Group's operating segments that incorporates an expected return on investments supporting the life and non-life insurance businesses. The various items excluded from group adjusted operating profit, but included in IFRS profit before tax, are:

Investment variances, economic assumption changes and short-term fluctuation in return on investments

Group adjusted operating profit for the life insurance business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification. 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. Where such securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin.

Group adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. This would include movements in liabilities due to changes in discount rate arising from discretionary management decisions that impact on product profitability over the lifetime of products. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit.

Group adjusted operating profit for the non-life insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The longer-term return for other investments is the actual income receivable for the period.

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

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

Impairment, amortisation and profit or loss on disposal

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

Other items

These items are, in the Directors' view, required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. Other items at 2018 are disclosed in section A11. There were no Other items in 2017.

Group adjusted operating profit is presented before and after integration and restructuring costs. These costs are only reported to the extent that they are significant, and not otherwise absorbed within operating costs.

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

 

 

Page 110

 

The table below presents a reconciliation between our consolidated operating profit and profit before tax attributable to shareholders' profits.

 

2018
£m

2017
£m

United Kingdom - Life

1,909

1,764

United Kingdom - General Insurance

415

411

Canada

47

46

Europe

1,011

1,059

Asia

262

191

Aviva Investors

151

201

Other Group activities

(679)

(604)

Group adjusted operating profit before tax attributable to shareholders' profit

3,116

3,068

Integration and restructuring costs

-

(141)

Group adjusted operating profit before tax after integration and restructuring costs

3,116

2,927

Adjusted for the following:

 

 

Investment return variances and economic assumption changes on life business

(197)

34

Short-term fluctuation in return on investments on non-life business

(476)

(345)

Economic assumption changes on general insurance and health business

1

(7)

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

(13)

(49)

Amortisation and impairment of intangibles

(209)

(197)

Amortisation and impairment of acquired value of in-force business

(426)

(495)

Profit on the disposal and re-measurement of subsidiaries, joint ventures and associates

102

135

Other

231

-

Adjusting items before tax

(987)

(924)

Profit before tax attributable to shareholders' profits

2,129

2,003

Net asset value (NAV) per share

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

NAV per share is used to monitor the value generated by the Company in terms of the equity shareholders' face value per share investment and enables comparability.

Net fund flows

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

Operating expenses 

The day-to-day expenses involved in running the business are classified as operating expenses. A reconciliation of operating expenses to the IFRS consolidated income statement is set out below:

 

2018
£m

2017
£m

Other expenses (IFRS income statement)

3,843

3,537

Less: amortisation and impairment

(658)

(678)

Less: foreign exchange gains/(losses)

(28)

(49)

Other acquisition costs

954

892

Claims handling costs

336

330

Integration and restructuring costs

-

(141)

Less: Other costs

(421)

(113)

Operating expenses

4,026

3,778

 

Operating expenses exclude impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangible assets; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items relate to merger and acquisition activity which we view as strategic in nature, hence they are excluded from the operating expenses APM as this is principally used to manage the performance of our operating segments.

Other acquisition costs and claims handling costs are included as these are considered to be controllable by the operating segments and directly impact their performance.

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.

Operating expenses excludes other costs based on management's assessment of their nature or incidence that are not representative of underlying operating expenses and would distort the year on year operating expenses trend. Other costs represent a reallocation based on management's assessment of ongoing maintenance of business units and in 2018 includes movements in provisions set aside in respect of ongoing regulatory compliance as well as an increase of £175 million product governance provision relating to a historical issue over pension arrangement advised sales by Friends Provident (of which over 90% of cases relate to pre-2002).

Operating expense ratio

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

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

Operating earnings per share (EPS) ‡ #

Operating EPS is calculated based on the Group adjusted operating profit attributable to ordinary shareholders net of tax, deducting non-controlling interests, preference dividends and the direct capital instrument (DCI) and tier 1 note coupons divided by the weighted average number of ordinary shares in issue, after deducting treasury shares. Operating EPS is used by management to determine the dividend payout ratio target and hence a useful APM for users of the financial statements. A reconciliation between Operating EPS and Basic EPS can be found in note B8.

Present value of new business premiums (PVNBP)

PVNBP measures the additional value to shareholders of sales in the Group's life insurance business. PVNBP is derived from the present value of new regular premiums expected to be received over the term of the new contracts plus 100% of single premiums from new business written in the financial period and is expressed at the point of sale. The discounted value of regular premiums is calculated using the same methodology as for Value of new business on an adjusted Solvency II basis (VNB). PVNBP also includes any changes to existing contracts which were not anticipated at the outset of the contract that generate additional shareholder risk and associated premium income of the nature of a new policy.

 

 

Page 111

 

The table below presents a reconciliation of sales to IFRS net written premiums.

 

 2018
£m

 2017
£m

Present value of new business premiums

40,763

40,795

Investment sales

4,799

7,888

General insurance and health net written premiums

9,968

10,035

Long-term health and collectives business

(3,840)

(5,213)

Total sales

51,690

53,505

Effect of capitalisation factor on regular premium long-term business1

(12,726)

(11,412)

JVs and associates2

(257)

(618)

Annualisation impact of regular premium long-term business3

(247)

(281)

Deposits4

(10,329)

(10,953)

Investment sales5

(4,799)

(7,888)

IFRS gross written premiums from existing long-term business6

4,776

4,765

Long-term insurance and savings business premiums ceded to reinsurers

(1,775)

(1,741)

Total IFRS net written premiums

26,333

25,377

Analysed as:

 

 

Long-term insurance and savings net written premiums

16,365

15,342

General insurance and health net written premiums

9,968

10,035

 

26,333

25,377

1    Discounted value of regular premiums expected to be received over the term of the new contract, adjusted for expected levels of persistency.

2    Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS, premiums from these sales are excluded.

3    The impact of annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums.

4    Under IFRS, only the margin earned from non-participating investment contracts is recognised in the IFRS income statement.

5    Investment sales included in total sales represent the cash inflows received from customers investing in mutual fund type products such as unit trusts and OEICs.

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

Investment sales

This measure comprises retail sales of mutual fund-type products such as unit trusts, individual savings accounts (ISAs) and open-ended investment companies (OEICs). We earn fees on the investment and management of these funds which are recorded separately in the IFRS income statement as 'fees and commissions received' and are not included in statutory premiums.

Return on capital employed (ROCE)

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

Return on Equity (RoE)#

The RoE calculation is based on Group adjusted operating profit, after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity (excluding non-controlling interests, preference share capital and direct capital instrument and tier 1 notes) as shown in section 8iii.

Solvency II

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

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

The reconciliation from total Group equity on an IFRS basis to Solvency II own funds is presented below.

 

2018
£bn

2017
£bn

Total Group equity on an IFRS basis

18.5

19.1

Elimination of goodwill and other intangible assets1

(7.8)

(9.8)

Liability valuation differences (net of transitional deductions)2

 19.2

22.0

Inclusion of risk margin (net of transitional deductions)

(3.3)

(3.2)

Net deferred tax3

(1.1)

(1.3)

Revaluation of subordinated liabilities

(0.6)

(0.7)

Other accounting differences4

(0.3)

(0.1)

Estimated Solvency II net assets (gross of
non-controlling interests)

24.6

26.0

Difference between Solvency II net assets and own funds5

(1.0)

(1.3)

Estimated Solvency II own funds6

23.6

24.7

1    Includes £1.8 billion (2017: £1.9 billion) of goodwill and £6.0 billion (2017 £7.9 billion) of other intangible assets comprising acquired value of in-force business of £2.9 billion (2017: £3.3 billion), deferred acquisition costs (net of deferred income) of £2.8 billion (2017: £2.9 billion) and other intangibles of £0.3 billion (2017: £1.7 billion).

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

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

4     Includes valuation adjustments and the impact of the difference between consolidation methodologies under Solvency II and IFRS.

5    Regulatory adjustments to bridge from Solvency II net assets to own funds include recognition of subordinated debt capital and non-controlling interests.

6    The estimated Solvency II position represents the shareholder view only.

A number of key performance metrics relating to Solvency II are utilised to measure and monitor the Group's performance and financial strength:

· Solvency II shareholder cover ratio

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

· Operating Capital Generation (OCG)#

Definitions and additional information in respect of each of these metrics is included within this section.

Solvency II shareholder cover ratio

The estimated Solvency II shareholder cover ratio is an indicator of the Group's balance sheet strength which is derived from own funds divided by the SCR using 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 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 and staff pension schemes in surplus 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.

 

 

 

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· 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 TMTP is amortised on a straight-line basis over 16 years from 1 January 2016 in line with the Solvency II rules.

· Pro forma adjustments are made if the Solvency II shareholder cover ratio does not fully reflect the effect of transactions or capital actions that are known as at each reporting date. Such adjustments may be required in respect of planned acquisitions and disposals, group reorganisations and adjustments to the Solvency II valuation basis arising from changes to the underlying regulations or updated interpretations provided by EIOPA. These adjustments have been made in order to show a more representative view of the Group's solvency position.

A summary of the Group's Solvency II position is shown in the table below.

 

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 Shareholder Cover Ratio

204%

198%

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

VNB measures the additional value to shareholders created through the writing of new life business in the period. It 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 impact of interactions between in-force and new business, adjusted to:

i)    remove the impact of the contract boundary restrictions under Solvency II;

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

iii)  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.

These adjustments are considered to reflect a more realistic basis than the prudential Solvency II rules. The VNB is derived from the present value of projected pre-tax distributable profits generated by new business plus a risk margin.

Operating assumptions

The operating assumptions used are derived from an analysis of recent operating experience to give a best estimate of future experience. When these assumptions are updated, the year-to-date VNB will capture the impact of the assumption change on all business sold that year.

Economic assumptions

VNB is calculated using economic assumptions as at the point of sale, taken as those appropriate to the start of each quarter. For contracts that are repriced more frequently, weekly or monthly economic assumptions have been used. Dealing with each of the principal economic assumptions in turn:

· The risk-free interest rate curves used to calculate VNB reflect the basic risk-free interest rate curves (including the credit risk adjustment) published by EIOPA on their website.

· The volatility adjustment is intended to reflect temporary distortions in spreads on government bonds based on rates prescribed by EIOPA.
 

· The matching adjustment (MA) is an increase applied to the risk-free rate used to value insurance liabilities where the cash flows are relatively fixed and well matched by assets intended to be held to maturity with relatively fixed cash flows (resulting in additional yield from illiquidity risk).

Matching adjustment (MA)

A MA is applied to certain obligations based on the expected allocation of assets backing new business at each year-end date. This allocation may be different to the MA applied at the portfolio level. Aviva applies a MA to certain obligations in UK Life, using methodology which is set out in the Solvency and Financial Condition Report.

The matching adjustment used for 2018 UK new business (where applicable) was 105 bps (2017 restated1: 132 bps).

1    The 2017 matching adjustment has been restated to reflect an allowance for credit risk and investment expenses.

New business income

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

New business margin

New business margin is calculated as Value of new business on an adjusted Solvency II basis (VNB) divided by the present value of new business premiums (PVNBP), and expressed as a percentage.

Operating capital generation (OCG)#

OCG is the Solvency II surplus movement in the period due to operating items. The calculation of OCG is consistent with previous years.

For life business, OCG is split into the impact of new business, earnings from existing business and other OCG, where other OCG includes the impact of capital actions and non-economic assumption changes. OCG excludes economic variances and economic assumption changes. The expected investment returns assumed within earnings from existing business are consistent with the returns within Group adjusted operating profit.

An analysis of the components of OCG is presented below:

 

2018
£bn

2017
£bn

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

1.2

1.2

Allowance for Solvency II contract boundary rules

-

-

Differences due to change in business in scope

(0.2)

(0.2)

Tax & Other1

(0.3)

(0.3)

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

0.7
 

0.7
 

Solvency II SCR impact of new business

(0.9)

(0.8)

Solvency II surplus impact of new business

(0.2)

(0.1)

Life earnings from existing business

1.6

1.6

Life Other OCG2

1.8

0.9

Life Solvency II OCG

3.2

2.4

GI, Health, FM & Other Solvency II OCG

-

0.2

Total Solvency II OCG

3.2

2.6

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

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

 

 

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Spread margin

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

Underwriting margin

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

Unit-linked margin

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

 

End part 4 of 4

 


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