Aviva plc FY20 results - part 2 of 4

RNS Number : 1058R
Aviva PLC
04 March 2021
 

START PART 2 of 4

Page 1

Contents

In this section

Page

Overview

 

 

1  Solvency II return on capital/equity

02

 

2  Solvency II capital and cash

04

 

i  Solvency II operating capital generation

04

 

ii  Solvency II future surplus emergence

05

 

iii  Cash remittances

05

 

iv  Centre liquidity

06

 

3  Solvency II position

07

 

i  Solvency II position (shareholder view)

07

 

ii  Movement in Solvency II surplus

08

 

iii  Diversified Solvency Capital Requirement (SCR) analysis

08

 

iv  Solvency II sensitivities

08

 

v  Solvency II net asset value

10

 

vi  Solvency II regulatory own funds and Solvency II debt leverage ratio

10

 

4  Controllable costs

11

 

5  Profit and earnings per share

12

 

6  Our Market performance

13

 

i  UK & Ireland Life

13

 

ii  General Insurance: UK & Ireland and Canada

17

 

iii  Aviva Investors

20

 

iv  Manage-for-value

22

 

7  Profit drivers

25

 

i  Life business profit drivers

25

 

ii  General insurance profit drivers

27

 

Financial supplement

29

 

A  Income & expenses and IFRS capital

30

 

B  IFRS financial statements and notes

38

 

C  Analysis of assets

92

 

Other information

109

 

Alternative Performance Measures

110

 

 

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 and Solvency II. 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.

 

At our 2020 interim results announcement on 6 August 2020, we announced our strategic priorities to focus on building and extending leadership in the UK, Ireland and Canada ('Core markets'), and managing other International businesses for long-term shareholder value ('Manage-for-value markets'). As a result, the financial performance of our Core markets are presented as UK & Ireland Life, General Insurance (which brings together our UK & Ireland general insurance businesses and Canada) and Aviva Investors. Our Manage-for-value markets consists of our remaining international businesses: France, Italy, Poland, Asia and Other. The 2019 comparative results have been restated from those previously published to reclassify operations on the basis described above.

 

In addition, the 2019 comparative amounts have been re-presented from those previously published to reclassify the amounts relating to Aviva Singapore, Friends Provident International Limited (FPI), Hong Kong, Indonesia and Vietnam as discontinued operations. Where relevant, these discontinued operations are presented as Manage-for-value markets.

 

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 and further information can be found in the Other Information section.

 

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

 

1 - Solvency II return on capital/equity‡#

Solvency II return on capital/equity measures return generated on shareholder capital at our market level and Group level and is used by the Group to assess performance and growth, as we look to deliver long-term value for our shareholders.

 

Solvency II operating own funds generation

 

 

2020

New
business (life)
£m

Existing business (life)
£m

Non-life
capital generation
£m

Other1

£m


Total
£m

Opening
own funds
£m

Solvency II return on capital/

equity‡#

%

UK & Ireland Life

449

273

-

335

1,057

14,241

7.4%

UK & Ireland General Insurance2

-

-

344

(15)

329

2,509

13.1%

Canada

-

-

284

3

287

1,442

19.9%

Aviva Investors

-

-

67

-

67

488

13.7%

Core markets

449

273

695

323

1,740

18,680

9.3%

Manage-for-value markets

249

443

133

(328)

497

8,010

6.2%

Group centre costs and Other2

-

5

(266)

11

(250)

(2,142)

N/A

Solvency II return on capital at 31 December

698

721

562

6

1,987

24,548

8.1%

Less: Senior debt

 

 

 

 

(12)

-

-

Less: Subordinated debt

 

 

 

 

(284)

(6,942)

-

Solvency II operating own funds generation at 31 December

 

 

 

 

1,691

 

 

Direct capital instrument

 

 

 

 

(27)

(500)

-

Preference shares3

 

 

 

 

(38)

(450)

-

Net deferred tax assets

 

 

 

 

-

(78)

-

Solvency II return on equity # at 31 December

 

 

 

 

1,626

16,578

9.8%

Less: Management actions and other1

 

 

 

 

(6)

-

-

Solvency II return on equity (excl. management actions)

 

 

 

 

1,620

16,578

9.8%

1  Other includes the impact of capital actions, non-economic assumption changes and other non-recurring items.

2  For UK General Insurance only, capital held for internal risk appetite purposes is used instead of opening shareholder Solvency II own funds to ensure consistency in measuring performance across markets. This is only applicable to UK General Insurance Solvency II return on capital and not to the aggregated Group Solvency II return on capital and Solvency II return on equity measures, with the reversal of the impact included in Group centre costs and Other opening own funds.

3  Preference shares includes £21 million of General Accident plc preference dividends and £250 million of capital in respect of General Accident plc.

 

Solvency II operating own funds generation

 

 

2019

New
business (life)
£m

Existing business (life)
£m

Non-life
capital generation
£m

Other1

£m

Total
£m

Opening
own funds
£m

Solvency II return on capital‡/

equity‡#

%

UK & Ireland Life

373

171

-

703

1,247

13,733

9.1%

UK & Ireland General Insurance2

-

-

271

62

333

2,326

14.3%

Canada

-

-

185

18

203

1,330

15.3%

Aviva Investors

-

-

70

-

70

509

13.7%

Core markets

373

171

526

783

1,853

17,898

10.4%

Manage-for-value markets

286

320

92

152

850

7,453

11.4%

Group centre costs and Other2

-

16

(187)

9

(162)

(1,800)

N/A

Solvency II return on capital at 31 December

659

507

431

944

2,541

23,551

10.8%

Less: Senior debt

 

 

 

 

(12)

-

-

Less: Subordinated debt

 

 

 

 

(272)

(6,979)

-

Solvency II operating own funds generation at 31 December

 

 

 

 

2,257

 

 

Direct capital instrument and Tier 1 notes

 

 

 

 

(34)

(731)

-

Preference shares3

 

 

 

 

(38)

(450)

-

Net deferred tax assets

 

 

 

 

-

(95)

-

Solvency II return on equity ‡# at 31 December

 

 

 

 

2,185

15,296

14.3%

Less: Management actions and other1

 

 

 

 

(944)

-

(6.2)%

Solvency II return on equity (excl. management actions)

 

 

 

 

1,241

15,296

8.1%

1  Other includes the impact of capital actions, non-economic assumption changes and other non-recurring items.

2  For UK General Insurance only, capital held for internal risk appetite purposes is used instead of opening shareholder Solvency II own funds to ensure consistency in measuring performance across markets. This is only applicable to UK General Insurance Solvency II return on capital and not to the aggregated Group Solvency II return on capital and Solvency II return on equity measures, with the reversal of the impact included in Group centre costs and Other opening own funds.

3  Preference shares includes £21 million of dividends and £250 million of capital in respect of General Accident plc.

Solvency II return on equity has decreased by 4.5pp to 9.8% over 2020 (2019: 14.3%), reflecting the following:

· In UK & Ireland Life, Solvency II return on capital has reduced by 1.7pp to 7.4% (2019: 9.1%) as a significant increase in bulk purchase annuity volumes and improved longevity experience was more than offset by a smaller longevity assumption release than in 2019 in line with expectations.

· In UK & Ireland General Insurance, Solvency II return on capital has reduced by 1.2pp to 13.1% (2019: 14.3%). Solvency II operating own funds generation has remained stable over the period as improved underlying performance is offset by modest prior year reserve strengthening (compared to a large release in 2019) and higher weather costs compared to a benign 2019. However, opening own funds has increased by £183 million since 2019.

· In Canada, Solvency II return on capital increased by 4.6pp to 19.9% (2019: 15.3%) mainly due to improved underlying performance driven by actions around pricing, indemnity management and risk selection.

 

 

Page 3

 

1 - Solvency II return on capital/equity‡# continued

· The estimated impact of the COVID-19 pandemic on operating own funds generation and Solvency II return on capital across core general insurance markets was broadly neutral, principally reflecting business interruption claims net of reinsurance, which were offset by favourable impacts of reduced economic activity in other product lines tempered by higher profit-contingent commission payments to distributors.

· In Manage-for-value markets, Solvency II return on capital has reduced by 5.2pp to 6.2% (2019: 11.4%). The reduction is primarily due to changes made to our French Life model following a management review. This included a mis-applied rule which resulted in a reduction in solvency partly offset by benefits from better modelling in a negative interest rate environment.

· In addition, Solvency II return on equity has reduced by a further 1.1pp due to the higher opening own funds for 2020 which were driven by strong own funds generation in excess of dividends and debt repayments during 2019.

 

 

Page 4

 

2 - Solvency II capital and cash

2.i - Solvency II operating capital generation‡#

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 support sustainable cash remittances from our businesses, which in turn, supports the Group's dividend as well as funding further investment to provide sustainable growth.

 

Solvency II operating capital generation‡#

 

Of which:


2020

Impact of new business (life)
£m

Earnings from existing business (life)
£m

Non-life capital generation
£m

Other

OCG1

£m

Total

OCG‡#

£m

 


Own funds
OCG
£m


SCR
OCG
£m

UK & Ireland Life

(76)

787

-

548

1,259

 

1,057

202

UK & Ireland General Insurance

-

-

310

47

357

 

329

28

Canada

-

-

289

(27)

262

 

287

(25)

Aviva Investors

-

-

70

-

70

 

67

3

Core markets

(76)

787

669

568

1,948

 

1,740

208

Manage-for-value markets

 

 

 

 

 

 

 

 

Continuing operations

(167)

568

76

(471)

6

 

263

(257)

Discontinued operations

27

104

(1)

36

166

 

234

(68)

Market Solvency II operating capital generation

(216)

1,459

744

133

2,120

 

2,237

(117)

Group centre costs and Other

-

(1)

(276)

385

108

 

(250)

358

Group external debt costs

-

-

(296)

-

(296)

 

(296)

-

Group Solvency II operating capital generation ‡#

(216)

1,458

172

518

1,932

 

1,691

241

1  Other OCG includes the impact of capital actions, non-economic assumption changes and other non-recurring items.

 

Solvency II operating capital generation‡#

 

Of which:


2019

Impact of new business (life)
£m

Earnings from existing business (life)
£m

Non-life capital generation
£m

Other

OCG1

£m

Total

OCG ‡#

£m

 


Own funds
OCG
£m

SCR
OCG
£m

UK & Ireland Life2

(73)

809

512

1,248

 

1,247

1

UK & Ireland General Insurance

319

(68)

251

 

333

(82)

Canada

233

28

261

 

203

58

Aviva Investors

  - 

90

-

90

 

70

20

Core markets

(73)

809

642

472

1,850

 

1,853

(3)

Manage-for-value markets

 

 

 

 

 

 

 

 

Continuing operations

(169)

535

63

376

805

 

706

99

Discontinued operations

1

49

12

62

 

144

(82)

Market Solvency II operating capital generation

(241)

1,393

705

860

2,717

 

2,703

14

Group centre costs and Other2

(5)

(135)

(34)

(174)

 

(162)

(12)

Group external debt costs

(284)

(284)

 

(284)

Group Solvency II operating capital generation‡#

(241)

1,388

286

826

2,259

 

2,257

2

1  Other OCG includes the impact of capital actions, non-economic assumption changes and other non-recurring items.

2  Following a review of the presentation of intercompany loan interest, comparative amounts for the 12 months ended 31 December 2019 have been amended to reclassify net interest expense from UK & Ireland Life to Group centre costs and Other of £69 million as a non-operating item. The change has no impact on the Group's operating capital generation.

Solvency II OCG was £1,932 million for the year ended 31 December 2020 (2019: £2,259 million).

UK & Ireland Life Solvency II OCG has increased slightly by £11 million to £1,259 million (2019: £1,248 million) for the year ended 31 December 2020. New business strain has remained stable despite a significant increase in bulk-purchase annuity volumes reflecting disciplined pricing and efficient use of reinsurance. In 2020, Other OCG includes the beneficial impact of longevity assumption changes and an action to change the mix of business included in our internal reinsurance vehicle.

UK & Ireland General Insurance Solvency II OCG has increased by £106 million to £357 million (2019: £251 million) for the year ended 31 December 2020. This is due to improved underlying performance partly offset by modest prior year reserve strengthening (compared to a large release in 2019), higher weather costs compared to a benign 2019 and increased SCR as a result of uncertainty associated with COVID‑19. Other OCG in 2020 includes the benefits from investment de-risking, 2019 included the one-off impact of the alignment of UK Digital costs which increased the SCR.

Canada Solvency II OCG is consistent with 2019 at £262 million (2019: £261 million) for the year ended 31 December 2020. This is mainly due to improved underlying performance driven by actions around pricing, indemnity management and risk selection partly offset by modest prior year reserve strengthening and an increase in SCR due to COVID-19.

The estimated impact of the COVID-19 pandemic on all core general insurance markets was £(88) million, principally reflecting business interruption claims net of reinsurance, which were partly offset by favourable impacts of reduced economic activity in other product lines tempered by higher profit-contingent commission payments to distributors and an increase in SCR.

In Manage-for-value markets, Solvency II OCG in respect of continuing operations reduced by £ 799 million to £ 6 million (2019: £805 million) in the year ended 31 December 2020, primarily as a result of changes made to our French Life model following a management review. This included a mis-applied rule which resulted in a reduction in solvency partly offset by benefits from better modelling in a negative interest rate environment (the impact is lower on a Group basis due to diversification which is included in Group centre costs and Other, see below). Solvency II OCG in respect of discontinued operations increased by £104 million to £166 million (2019: £62 million) primarily due to Singapore.

 

 

Page 5

 

2.i - Solvency II operating capital generation‡# continued

Group centre costs and Other Solvency II OCG has increased by £282 million to £108 million (2019: £(174) million). There has been an increase in Solvency II OCG from improved Group diversification due to an approved internal model extension to include general insurance in France and the impact of the France Life model changes being lower on a Group basis. The overall impact on Group Solvency II OCG of the France Life model change is a reduction of approximately £250 million.

2.ii - Solvency II future surplus emergence

Emergence of surplus - life business (undiscounted)

 

Core markets
2020
£bn

Manage-for-value - continuing operations
2020
£bn

Core
Markets
2019
 bn

Manage-for-value - continuing operations
2019
£bn

Year 1

 

0.9

0.6

0.9

0.5

Year 2

 

0.9

0.5

0.9

0.4

Year 3

 

0.8

0.5

0.8

0.4

Year 4

 

0.7

0.5

0.7

0.4

Year 5

 

0.6

0.5

0.7

0.4

Year 6

 

0.6

0.4

0.6

0.4

Year 7

 

0.5

0.4

0.5

0.4

Year 8

 

0.4

0.4

0.4

0.4

Year 9

 

0.4

0.3

0.4

0.3

Year 10

 

0.4

0.3

0.3

0.3

Year 11-15

 

2.6

1.2

2.1

1.3

Year 16-20

 

2.1

1.1

1.8

1.0

The table above shows the expected future emergence of Solvency II surplus from the existing long-term in-force life business. It has been determined in line with previous periods.

The projection is a static analysis as at a point in time and hence it does not include future new business or 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.

2.iii - Cash remittances‡#

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

 

2020
£m

2019
£m

UK & Ireland Life1,2

1,007

1,394

UK & Ireland General Insurance1,3

171

273

Canada1,4

131

156

Aviva Investors

50

86

Core markets

1,359

1,909

Manage-for-value markets1

127

613

Other

14

75

Total

1,500

2,597

1  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.

2  UK & Ireland Life cash remittances include £250 million (2019: £nil) received in February 2021 in respect of 2020 activity.

3  UK & Ireland General Insurance cash remittances include £74 million (2019: £83 million) received in February 2021 in respect of 2020 activity.

4  Canada General Insurance cash remittances include £115 million (2019: £141 million) received in February 2021 in respect of 2020 activity.

Cash remittances from our core markets in 2020 are lower than 2019 as 2019 included a special remittance of £500 million from UK & Ireland Life which was not repeated in 2020. In addition we have chosen to retain cash in the subsidiaries to maintain balance sheet strength given the unprecedented economic and market uncertainty related to COVID-19. Cash remittances from our Manage-for-value markets are lower mainly driven by regulatory restrictions related to COVID‑19 and a 2019 special remittance from Italy of £172 million which is not repeated in 2020. Other includes excess cash remitted to Group on the winding down of Aviva Re.

 

 

Page 6

 

2.iv - Centre liquidity

Centre liquidity comprises cash and liquid assets. Excess centre cash flow represents cash remitted by our businesses 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 or invest back into our core markets.

 

2020
£m

 2019
£m

Cash remittances‡#

1,500

2,597

External interest paid

(454)

(456)

Internal interest paid

(60)

(58)

Central spend

(241)

(115)

Other operating cash flows1

70

236

Excess centre cash flow

815

2,204

Ordinary dividend

(511)

(1,184)

Net advance/(reduction) in borrowings

105

(191)

External disposal proceeds

1,253

-

Other non-operating cash flows2

55

(35)

Movement in centre liquidity

1,717

794

 

 

 

Centre liquidity as at end of February 2021 and 2020 respectively

4,085

2,368

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

2  Other non-operating cash flows include capital injections, advances and repayments of internal debt and other investment cash flows.

The increase of £1,717 million in centre liquidity is primarily driven by disposal proceeds from the disposal of our Singapore, Hong Kong, Indonesia and FPI businesses, excess centre cash flow and net advance of borrowings partially offset by ordinary dividend payments.

 

 

Page 7

 

3 - Solvency II position

3.i - Solvency II position (shareholder view)

Shareholder view

2020
£m

2019
£m

Own funds

25,770

24,548

SCR

(12,770)

(11,910)

Estimated Solvency II surplus at 31 December

13,000

12,638

Estimated Solvency II shareholder cover ratio ‡#

202%

206%

The estimated Solvency II shareholder cover ratio is 202% at 31 December 2020. 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 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 £2.5 billion at 31 December 2020 (2019: £2.5 billion) and staff pension schemes in surplus of £1.2 billion at 31 December 2020 (2019: £1.2 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 2020 Solvency II position includes a notional reset of £0.6 billion while the 31 December 2019 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 and hence no adjustment was required.

· A change in regulations announced in December 2019 allows French insurers to place a part of the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. At December 2019 PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory and shareholder own funds, subject to confirmation of the appropriate treatment at Group level. The treatment has since been confirmed and PPE of £0.4 billion is included within Group regulatory own funds at 31 December 2020 but remains excluded from the shareholder position.

 

 

Own funds
2020
£m

SCR
2020
£m

Surplus
2020
£m

Own funds
2019
£m

SCR
2019
£m

Surplus
2019
£m

Estimated Solvency II regulatory surplus as at 31 December

29,262

(16,441)

12,821

28,347

(15,517)

12,830

Adjustments for:

 

 

 

 

 

 

Fully ring-fenced with-profit funds

(2,492)

2,492

-

(2,501)

2,501

-

Staff pension schemes in surplus

(1,179)

1,179

-

(1,181)

1,181

-

Notional reset of TMTP

564

-

564

-

-

-

PPE

(385)

-

(385)

-

-

-

Pro forma adjustments1

-

-

-

(117)

(75)

(192)

Estimated Solvency II shareholder surplus at 31 December

25,770

(12,770)

13,000

24,548

(11,910)

12,638

1  The 31 December 2019 Solvency II position includes the pro forma adjustments for the disposals of FPI (£nil impact on surplus) and Hong Kong (£nil impact on 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). The 31 December 2020 Solvency II position does not include proforma adjustments. Note that from 31 December 2020 no pro forma adjustments will be made for planned disposals.

 

 

Page 8

 

3.ii - Movement in Solvency II surplus

Shareholder view

Own funds
2020
£m

SCR
2020
£m

Surplus
2020
£m

Own funds
2019
£m

SCR
2019
£m

Surplus
2019
£m

Solvency II surplus at 1 January

24,548

(11,910)

12,638

23,551

(11,569)

11,982

Opening restatements1

78

(202)

(124)

58

6

64

Operating capital generation‡#

1,691

241

1,932

2,257

2

2,259

Non-operating capital generation

(741)

(963)

(1,704)

120

(368)

(248)

Dividends2

(549)

-

(549)

(1,222)

-

(1,222)

Hybrid debt

257

-

257

(210)

-

(210)

Acquisitions and disposals

486

64

550

(6)

19

13

Estimated Solvency II surplus at 31 December

25,770

(12,770)

13,000

24,548

(11,910)

12,638

1  Opening restatements allows for adjustments to the estimated position presented in the preliminary announcement and the final position in the Solvency and Financial Condition Report.

2  Dividends includes £17 million (2019: £17 million) of Aviva plc preference dividends and £21 million (2019: £21 million) of General Accident plc preference dividends, and £511 million for the interim dividends in respect of the 2019 and 2020 financial years.

The estimated Solvency II surplus is £13,000 million at 31 December 2020 (2019: £12,638 million), with a Solvency II shareholder cover ratio of 202% (2019: 206%). The increase in surplus since 31 December 2019 is mainly due to the beneficial impacts from Solvency II OCG, impact from disposals of subsidiaries (primarily Singapore) partially offset by the impact of the economic downturn and interim dividends in respect of the 2019 and 2020 financial years.

At 31 December 2019 we included a specific allowance for the possible adverse impacts of the UK's exit from the European Union on UK commercial and residential property, which we have now removed. Our future property growth assumptions are reviewed on a quarterly basis and as at 31 December 2020 they include a cumulative 5-year growth assumption, from 2021-25 of -1% for UK commercial property (with variation by sector) and 4% for UK residential property.

3.iii - Diversified Solvency Capital Requirement (SCR) analysis

 

31 December
2020
£bn

31 December 2019
 bn

Credit risk

3.2

2.7

Equity risk

1.6

1.4

Interest rate risk

0.0

0.4

Other market risk

1.8

1.7

Life insurance risk

3.4

3.1

General insurance risk

0.9

0.8

Operational risk

1.1

1.1

Other risk

0.8

0.7

Total

12.8

11.9

The SCR has increased by £0.9 billion to £12.8 billion since 31 December 2019 primarily due to a reduction in interest rates over the period which has increased a number of risks including credit and life insurance risks. In addition, a regulatory approved internal model change to intra-risk correlations has resulted in a reallocation of capital from interest rate risk to other risks.

3.iv - Solvency II sensitivities

Sensitivity analysis of Solvency II surplus

The following sensitivity analysis of Solvency II surplus allows for any consequential impact on the assets and liability valuations. All other assumptions remain unchanged for each sensitivity, except where these are directly affected by the revised economic conditions or where a management action that is allowed for in the 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.

 

 

Page 9

 

3.iv - Solvency II sensitivities continued

The table below shows the absolute change in Solvency II shareholder cover ratio under each sensitivity, e.g. a 2pp positive impact would result in a Solvency II shareholder cover ratio of 204%.

Sensitivities

 

Impact on
Surplus
31 December 2020
£bn

Impact on
shareholder cover ratio
31 December 2020
pp

Impact on
Surplus
31 December 2019
£bn

Impact on
shareholder cover ratio
31 December 2019
pp

Changes in economic assumptions

25 bps increase in interest rate

0.3

5pp

0.2

4pp

 

50 bps increase in interest rate

0.6

9pp

0.2

6pp

 

100 bps increase in interest rate

0.8

15pp

0.4

11pp

 

25 bps decrease in interest rate

(0.3)

(5)pp

(0.2)

(5)pp

 

50 bps decrease in interest rate

(0.8)

(11)pp

(0.6)

(11)pp

 

50 bps increase in corporate bond spread1,2

0.0

2pp

(0.5)

(4)pp

 

100 bps increase in corporate bond spread1,2

(0.1)

3pp

(1.1)

(10)pp

 

50 bps decrease in corporate bond spread1,2

(0.1)

(3)pp

0.4

3pp

 

Credit downgrade on annuity portfolio3

(0.5)

(6)pp

(0.3)

(4)pp

 

10% increase in market value of equity

0.2

1pp

0.3

2pp

 

25% increase in market value of equity

0.5

3pp

0.8

5pp

 

10% decrease in market value of equity

(0.2)

(1)pp

(0.4)

(2)pp

 

25% decrease in market value of equity

(0.6)

(5)pp

(0.9)

(7)pp

 

20% increase in value of commercial property4

0.8

8pp

0.7

7pp

 

20% decrease in value of commercial property4

(1.1)

(11)pp

(0.9)

(9)pp

 

20% increase in value of residential property4

0.6

6pp

0.4

4pp

 

20% decrease in value of residential property4

(0.7)

(7)pp

(0.6)

(6)pp

Changes in non-economic assumptions

10% increase in maintenance and investment expenses

(1.0)

(9)pp

(0.9)

(9)pp

 

10% increase in lapse rates

(0.3)

(2)pp

(0.4)

(3)pp

 

5% increase in mortality/morbidity rates - life assurance

(0.2)

(2)pp

(0.2)

(2)pp

 

5% decrease in mortality rates - annuity business

(1.6)

(16)pp

(1.3)

(13)pp

 

5% increase in gross loss ratios

(0.3)

(3)pp

(0.3)

(3)pp

1  The corporate bond spread sensitivity is applied such that even though movements vary by rating and duration consistent with the approach in the solvency capital requirement, the weighted average spread movement equals the headline sensitivity. Fundamental spreads remain unchanged. This methodology differs to the prior period. The 31 December 2019 corporate bond spread sensitivities have not been restated for the change in approach.

2  A modelling refinement was implemented to the corporate bond credit sensitivities in the UK following a review of the 31 December 2019 methodology.

3  An immediate full letter downgrade on 20% of the annuity portfolio credit assets (e.g. from AAA to AA, from AA to A). The 31 December 2020 downgrade sensitivity now includes infrastructure (except Private Finance Initiatives).

4  The property sensitivities are in addition to reduced property growth assumed over the next 5 years in the base solvency position.

Our sensitivity to assumption changes has remained stable in a tough economic environment. Key changes observed over 2020 to our sensitivities include the following:

· Increased sensitivity to interest rates which was mainly due to the impact of changes made to our French Life model following a review. This included a mis-applied solvency rule partly offset by benefits from better modelling in a negative interest rate environment.

· Reduction to corporate bond spread sensitivity due to hedging, changes in asset allocation and refinements to the corporate bond spread sensitivity methodology.

· Reduction in sensitivity to equity market movements following additional hedging and de-risking across a number of markets.

Limitations of sensitivity analysis

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

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

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

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

 

 

Page 10

 

3.v - Solvency II net asset value

 

2020
£m

2020 pence

per share1

2019
£m

2019 pence

per share1

Solvency II shareholder unrestricted Tier 1 own funds at 1 January

16,578

423p

15,296

392p

Opening restatements2

78

2p

58

1p

Operating capital generation‡#

1,691

43p

2,257

57p

Non-operating capital generation

(741)

(19)p

120

3p

Dividends3

(549)

(14)p

(1,222)

(31)p

Acquisitions and disposals

486

12p

(6)

-

Impact of changes to the value of subordinated liabilities

(167)

(4)p

58

1p

Impact of changes to the value of net deferred tax assets

(18)

(1)p

17

-

Solvency II shareholder unrestricted Tier 1 own funds at 31 December

17,358

442p

16,578

423p

1  Number of shares in issue as at 31 December 2020 was 3,928 million (2019: 3,921 million).

2  Opening restatements allows for adjustments made to the estimated position presented in the preliminary announcement and the final position in the Solvency and Financial Condition Report.

3  Dividends includes £17 million (2019: £17 million) of Aviva plc preference dividends and £21 million (2019: £21 million) of General Accident plc preference dividends, and £511 million for the interim dividends in respect of the 2019 and 2020 financial years (2019: £1,184 million in respect of the 2018 and 2019 financial years).

Solvency II net asset value per share increased by 19 pence to 442 pence per share (2019: 423 pence) mainly as a result of the beneficial impacts from operating capital generation and disposals of subsidiaries (primarily Singapore) partially offset by the impact of the economic downturn and the interim dividends in respect of the 2019 and 2020 financial years.

3.vi - Solvency II regulatory own funds and Solvency II debt leverage ratio

Regulatory view

2020
£m

2019
 m

Solvency II regulatory debt1

8,316

7,892

Senior notes

1,112

1,052

Commercial paper

108

238

Total debt

9,536

9,182

Unrestricted Tier 1

20,850

20,377

Restricted Tier 1

1,317

1,839

Tier 2

6,740

5,794

Tier 32

355

337

Total regulatory own funds3

29,262

28,347

Solvency II debt leverage ratio4, ‡

31%

31%

1  Solvency II regulatory debt consists of Restricted Tier 1 and Tier 2 regulatory own funds, and Tier 3 subordinated debt.

2  Tier 3 regulatory own funds at 31 December 2020 consists of £259 million subordinated debt (2019: £259 million) plus £96 million net deferred tax assets (2019: £78 million).

3  Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excedents (PPE) into Solvency II own funds. At December 2019 PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory own funds, subject to confirmation of the appropriate treatment at Group level. The treatment has since been confirmed and PPE is included in the estimated Group regulatory own funds at 31 December 2020.

4  Solvency II debt leverage ratio is calculated as the total debt as a proportion of total regulatory own funds plus commercial paper and senior notes.

Solvency II debt leverage ratio remains at 31% (2019: 31%). An increase in total debt was offset by an increase in Unrestricted Tier 1 own funds over 2020. The net increase in debt was driven by the issuance of 4.000% £500 million Tier 2 notes in June 2020 and 4.000% C$450 million Tier 2 notes in October 2020. These issuances were partially offset by redemption of the Group's 5.9021% £500 million direct capital instrument in July 2020 and a reduction in commercial paper over 2020.

 

 

Page 11

 

4 - Controllable costs

 

2020
£m

Restated1

2019
£m

UK & Ireland Life

1,181

1,214

UK & Ireland General Insurance

793

800

Canada

401

402

Aviva Investors

430

446

Core markets2

2,805

2,862

Corporate centre and Other Group operations3

285

276

Core markets, Corporate centre and Other Group operations

3,090

3,138

Manage-for-value markets

845

884

Controllable costs

3,935

4,022

1  Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £83 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to the Life & Health businesses from the UK, Ireland and Poland in controllable costs.

2  Controllable costs from Core markets includes £70 million (2019: £41 million) in relation to cost reduction implementation and IFRS 17 costs.

3  Controllable costs from Corporate centre and Other Group operations includes £35 million (2019: £23 million) in relation to cost reduction implementation and IFRS 17 costs.

Controllable costs have decreased by 2% to £3,935 million (2019 restated: £4,022 million) reflecting our focus on cost savings primarily driven by lower staff costs following a reduction in global headcount, partially offset by £43 million of charitable donations made by Aviva to help those most affected by COVID-19 and accelerated onerous contract costs of £50 million, reflecting the reduction in our UK property footprint .

The decrease in controllable costs in UK & Ireland Life and UK & Ireland General Insurance is mainly due to lower staff costs and lower project activity, partially offset by the costs arising from the reduction in our UK property footprint , increased operational costs related to COVID-19 and continued investment in our IT infrastructure. The decrease in Aviva Investors and Manage-for-value markets reflects careful cost control, with savings arising from lower change spend and as a result of cost saving initiatives. The increase in Other Group activities is mainly due to its share of the charitable contributions (£34 million) donated by Aviva during 2020 and its share of the costs arising from the reduction in our UK property footprint (£12 million) .

 

 

Page 12

 

5 - Profit and earnings per share

 

2020
£m

Restated
2019
£m

Core markets

 

 

UK & Ireland Life1

1,907

1,974

UK & Ireland General Insurance

213

297

Canada

287

191

Aviva Investors

85

96

Operating profit from core markets

2,492

2,558

Manage-for-value markets

 

 

Continuing operations

 

 

France

467

473

Italy

298

195

Poland

196

194

Other

38

37

Discontinued operations

312

251

 

3,803

3,708

Other Group operations (note A3)

(22)

(21)

Corporate centre (note A4)

(250)

(183)

Group debt costs and other interest1 (note A5)

(370)

(320)

Operating profit‡#

3,161

3,184

Tax attributable to shareholders' profit

(634)

(668)

Non-controlling interests

(98)

(98)

Preference dividends and other2

(44)

(51)

Operating profit attributable to ordinary shareholders

2,385

2,367

Operating earnings per share‡#

60.8p

60.5p

 

IFRS profit for the year

2,910

2,663

Basic earnings per share

70.2p

63.8p

1  The comparative amounts for the year ended 31 December 2019 have been amended to reclassify net interest expense from UK & Ireland Life to Group debt costs and other interest. The change has no impact on Group profit before tax or operating profit.

2  Other includes coupon payments in respect of the direct capital instrument (DCI) and for 2019 also includes tier 1 notes.

Core markets operating profit decreased to £2,492 million (2019: £2,558 million), with decreases across all core markets, except Canada. Our Core markets were impacted by unfavourable trading conditions as a result of the COVID-19 pandemic partially offset by positive underlying performance.

Within our Core markets UK & Ireland Life operating profit decreased to £1,907 million (2019: £1,974 million). In the UK, strong fee income growth in our Savings & Retirement business driven by a growing asset base was offset by lower operating profit in other business lines, with equity release and individual protection affected by unfavourable economic and trading conditions created by the COVID-19 pandemic, and a reduction in individual annuity volumes at historically low rates. In Ireland, there was an adverse impact from higher project costs in 2020, with the prior year including a non-recurring benefit from methodology and assumption changes.

In the UK & Ireland General Insurance businesses, operating profit decreased to £213 million (2019: £297 million). In the UK, general insurance operating profit decreased to £182 million (2019: £250 million). The improvements in underlying performance was offset by the adverse impact of one-offs, higher weather costs compared to a benign 2019, a modest prior year reserve strengthening compared to a release in 2019, and lower long-term investment returns due to lower yields. In Ireland operating profit decreased to £31 million (2019: £47 million) driven by a 4% reduction in net written premiums, one-off expenses and lower investment return.

In Canada, operating profit increased by 50% to £287 million (2019: £191 million) due to positive pricing actions, lower Personal lines claims frequency and risk selection. Personal lines performance improved significantly compared to 2019, driven by a decrease in net claims incurred. In Commercial lines, while net written premiums improved through strong new business performance and policy retention, underlying performance was impacted by COVID-19 claims. The improved 2020 operating profit result was also partially offset by unfavourable prior year reserve development, higher weather costs and a 2% reduction in long-term investment return.

Aviva Investors operating profit decreased to £85 million (2019: £96 million), mainly due to lower fee income which was impacted by market volatility, as clients took portfolio de-risking actions.

In Manage-for-value markets operating profit from continuing operations increased by 11% to £999 million (2019: £899 million). This was mainly driven by strong performance in Italy due to higher fee income from assets under management which have grown strongly in the year and an improvement of the General Insurance underwriting results driven by volume increases and favourable claims experience in 2020.

Operating profit from discontinued operations increased by 25% to £312 million (2019: £251 million). This was driven by a change to long‑term care morbidity and mortality assumptions in Singapore.

 

 

Page 13

 

6 - Our Market performance

6.i - UK & Ireland Life

£m (unless otherwise stated)

2020

2019

Sterling % change

Constant currency %

Solvency II operating own funds generation

1,057

1,247

(15)%

(15)%

Solvency II return on capital

7.4%

9.1%

(1.7)pp

(1.7)pp

 

 

 

 

 

Solvency II operating capital generation1,‡#

1,259

1,248

1%

1%

Cash remittances‡#

1,007

1,394

(28)%

(28)%

 

 

 

 

 

Operating profit1,‡#

1,907

1,974

(3)%

(3)%

Controllable costs2,‡

1,181

1,214

(3)%

(3)%

 

 

 

 

 

New business

 

 

 

 

VNB

675

600

13%

13%

PVNBP

29,258

29,159

-

-

Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts have been restated to reclassify net interest expense of £65 million from UK & Ireland Life to Group debt costs and other interest for the year ended 31 December 2019 as a non-operating item. The change has no impact on the Group's operating profit. In addition, comparative amounts for operating capital generation of £69 million for the year ended 31 December 2019 have been restated. The change has no impact on the Group's operating capital generation.

2  Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £78 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to UK & Ireland Life in controllable costs.

Overview

Aviva is the UK's largest insurer with a 23%1 share of the UK life and savings market and we are a trusted provider of a broad range of products to both individual and corporate customers covering their savings, retirement, insurance and health needs. Our strategy is to invest for growth, through which we will become the UK's leading insurer and establish Aviva as the 'go-to' customer brand for all insurance, protection, savings and retirement needs for all of our customers. We have strong relationships with our distribution partners through a variety of channels and also offer digital direct solutions to customers. Our UK Life business is well capitalised and resilient to stress, providing our customers and investors with certainty, especially in times of uncertainty and economic volatility.

UK Life incorporates our Savings & Retirement business, which is maintaining its strong asset and revenue growth through our workplace and retail platforms. We continue to expand our position in bulk purchase annuities (BPA) by offering businesses with de-risking solutions for their pension schemes. Our business lines within the UK Life insurance business continue to generate strong and sustainable cash flows.

In Ireland we are number four in the market. Having acquired Friends First Life Assurance Company DAC, we're focused on delivering a single product range to market and we are committed to making it easier for intermediaries to do business with Aviva.

Operating and financial performance

Solvency II operating own funds generation and return on capital

Solvency II return on capital reduced by 1.7pp to 7.4% (2019: 9.1%) and Solvency II own funds generation decreased to £1,057 million (2019: 1,247 million), due to the lower net positive impact of assumption changes in 2020 compared to 2019.

Solvency II Operating capital generation (OCG)‡#

Solvency II OCG was stable at £1,259 million (2019: £1,248 million) and benefitted from less adverse experience variances than in 2019. New business strain is comparable to 2019, despite higher volumes of BPA. We have optimised the capital strain of writing annuity business in 2020 through careful pricing and reinsurance actions . The net positive impact of assumption changes was lower than in 2019, however this was offset by a number of capital management actions taken both to improve the capital efficiency on our annuity business and to optimise the back book.

Cash remittances‡#

Cash remitted to Group by UK & Ireland Life was £1,007 million (2019: 1,394 million), including £250 million paid in February 2021 in respect of activity in 2020. The prior year included a special remittance of £500 million from UK & Ireland Life which was not repeated in 2020.

 

1  Association of British Insurers (ABI) - 12 months to end Q320.

 

 

Page 14

 

6.i - UK & Ireland Life continued

Operating and financial performance continued

Operating profit‡#, new business and net flows

Operating profit‡#

2020
£m

2019
£m

Sterling % change

Savings & Retirement1

119

88

35%

Annuities & Equity Release

815

866

(6)%

Protection & Health

189

201

(6)%

Heritage2

321

389

(17)%

Other3,4

469

371

26%

UK Life

1,913

1,915

-

Ireland Life

(6)

59

(110)%

Total3

1,907

1,974

(3)%

1  Includes workplace, platform, individual personal pensions.

2  Heritage represents products no longer actively marketed, including with-profits and bonds.

Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts have been restated to reclassify net interest expense from UK & Ireland Life to Group debt costs and other interest of £65 million for the year ended 31 December 2019 as a non-operating item. The change has no impact on the Group's operating profit .

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

UK & Ireland Life operating profit decreased by 3% to £1,907 million (2019: 1,974 million). UK Life operating profit was £1,913 million (2019: 1,915 million) reflecting strong growth in our Savings & Retirement business and a net benefit from assumption changes of £466 million (2019: £574 million), including a positive longevity benefit of £390 million. BPA operating profit was higher than 2019, with the impact of higher volumes being partly offset by actions taken to optimise asset allocations for improved capital efficiency. We saw a reduction in profit in equity release and individual protection which were affected by unfavourable economic and trading conditions created by the COVID-19 pandemic. Individual annuity profit decreased due to a reduction in volumes, with rates at historically low levels. The Ireland Life operating loss reflects high transformation project costs, whereas the prior year profit contained a non-recurring benefit from methodology and assumption changes.

 

VNB

PVNBP

New business margin

New business

2020
£m

2019
£m

Sterling % change

2020
£m

2019
£m

Sterling % change

2020
%

2019
%

Savings & Retirement and Other

140

140

-

17,777

19,006

(6)%

0.8%

0.7%

Annuities & Equity Release

356

284

25%

7,508

6,182

21%

4.7%

4.6%

Protection & Health

167

168

(1)%

2,439

2,382

2%

6.8%

7.1%

Ireland Life

12

8

50%

1,534

1,589

(3)%

0.8%

0.5%

Total

675

600

13%

29,258

29,159

-

2.3%

2.1%

PVNBP was stable at £29,258 million (2019: 29,159 million) and VNB increased by 13% to £675 million (2019: 600 million) with strong growth in BPA generating PVNBP of £5,955 million (2019: £4,013 million) and VNB of £278 million (2019: 208 million).

Assets under management and net flows

Platform
£m

Pensions and other savings & retirement £m

Total Savings & Retirement £m

Annuities
& Equity Release
£m

Other UK non-profit £m

UK
With profits and other
£m

Ireland Life £m

2020
Total UK & Ireland Life
£m

2019
Total UK & Ireland Life £m

Assets under management at 1 January

29,085

84,153

113,238

67,143

48,425

47,471

10,966

287,243

258,453

Premiums and deposits, net of reinsurance

5,937

9,511

15,448

5,022

1,593

249

1,299

23,611

22,084

Claims and redemptions, net of reinsurance

(2,280)

(4,621)

(6,901)

(2,791)

(4,028)

(3,621)

(1,089)

(18,430)

(20,523)

Net flows

3,657

4,890

8,547

2,231

(2,435)

(3,372)

210

5,181

1,561

Market and other movements

1,690

4,783

6,473

5,397

6

1,853

928

14,657

27,229

Assets under management at 31 December

34,432

93,826

128,258

74,771

45,996

45,952

12,104

307,081

287,243

Net flows increased to £5.2 billion (2019: £1.6 billion) reflecting increased net flows in Savings & Retirement of £8.5 billion (2019: £7.5 billion), higher BPA volumes driving Annuities & Equity Release net flows of £2.2 billion (2019: £1.2 billion) and lower levels of run-off from the Heritage back book compared to 2019.

Savings & Retirement

Our Savings & Retirement business offers workplace pensions and retail savings products, through both intermediated and retail channels. Our products are supported by guidance and advice and offer access to open architecture asset solutions including Aviva Investors who provide expertise in multi-asset and environmental, social, and governance (ESG) investing. Our new business is capital efficient, with profits being derived from asset management fees less costs. We have a competitive position in both workplace and retail markets, which have delivered diversified and resilient earnings and highly efficient customer acquisition into the group.

Savings & Retirement net flows grew by 14% to £8.5 billion (2019: £7.5 billion) with both higher group pension and platform net flows. Group pensions regular and single premiums were resilient given market volatility, and outflows were reduced as expected scheme transfers out were deferred. Despite market volatility inflows onto our platform grew to £5.9 billion (2019: £5.7 billion), and net flows increased to £3.7 billion (2019: 3.5 billion).

Operating profit increased to £119 million (2019: £88 million), driven by growing revenue from an asset base which has increased to £128.3 billion (2019: 113.2 billion).

 

 

Page 15

 

6.i - UK & Ireland Life continued

Operating and financial performance continued

Operating profit‡#, new business and net flows continued

Annuities & Equity Release

Our Annuities & Equity Release business consists of BPA, individual annuities and equity release. Our products offer customers safe and secure income in their retirement and support employers in their desire to de-risk their pension schemes. We are the UK's largest provider of individual annuities 1 , we manage the UK's largest book of equity release mortgages 2 , and in the first half of 2020 we were the third largest provider of BPAs3 . Our Annuities & Equity Release products create synergies, with equity release assets being held long-term to back longer‑term annuity liabilities, alongside assets sourced by Aviva Investors. Profits are primarily driven by yields, and our focus on capital efficiency secures significant cashflows, which has allowed us to invest in, and grow, our BPA business.

Annuities & Equity Release operating profit decreased by 6% to £815 million (2019: £866 million). Our BPA business grew strongly, both in new business volumes which grew to £5,955 million (2019: £4,013 million) and higher operating profit. Individual annuity operating profit was lower compared to 2019, due to a reduction in volumes as rates fell to historically low levels, while we optimised asset allocations and used reinsurance to improve the capital efficiency of our annuity businesses, partly offsetting the operating profit benefit of higher BPA new business volumes. Equity release operating profit was lower than in 2019 due to the impact on new business volumes from COVID-19.

Annuities & Equity Release VNB increased by 25% to £356 million (2019: £284 million) including BPA VNB of £278 million (2019: 208 million) driven by higher volumes. New business margin was slightly improved at 4.7% (2019: 4.6%).

Protection & Health

Aviva is the only provider of scale in the UK covering health, group protection and individual protection. We have number two1 positions in both protection markets and are third4 in the health market. We have developed strong relationships with our intermediary partners, including financial advisers, estate agents and other third parties. We have invested for growth in these markets, focusing on our digital proposition and bringing new health & wellbeing to market. Pricing and underwriting discipline as well as cost efficiency are key drivers for profitability in this sector .

Protection & Health PVNBP grew 2% to £2,439 million (2019: £2,382 million) due to strong group protection performance, particularly in income protection. Individual protection PVNBP decreased due to the effects of COVID-19 movement restrictions which significantly reduced the ability of our distribution partners to write new business. Health volumes were in line with 2019, reflecting a strong performance in the large corporate sector.  

Protection & Health operating profit decreased by 6% to £189 million (2019: £201 million) mainly due to lower individual protection new business margins and volumes reflecting competitiveness in the market and the impact of COVID-19 on trading. Group protection operating profit was higher than in 2019, benefitting from improved claims experience. Health operating profit increased to £43 million (2019: 35 million), benefitting from lower commission driven by the shift in new business mix and strong expense management. The increase is not attributable to claims disruption due to the pandemic, as the result includes the expected impact of the fair value pledge provided to policyholders, which reflects the extent to which claims levels were lower in 2020 as a result of the COVID-19 pandemic.

Protection & Health VNB was materially in line with prior year at £167 million (2019: £168 million).

Heritage

Aviva has one of the largest back books in the UK, with assets under management (AUM) of c.£90 billion. We manage legacy pension and savings policies for approximately 2 million customers, honouring promises made over many years. As a heritage business, we are in run-off and we manage significant product and platform complexity with multiple third party suppliers. Profit is driven by effective management of AUM run-off and cost efficiency.

Heritage operating profit decreased 17% to £321 million (2019: £389 million) and continues to run off broadly in line with our expectations.

Ireland Life

Our core lines of business Ireland Life are protection and annuity business, pre and post retirement unit-linked contracts, as well as unit‑linked savings & investments. We are leaders in the income protection and annuity market and have an ambitious target to become the overall life & pensions market leading intermediary provider.

 

1 ABI - 12 months to end Q320.

2 UK Finance data on UK mortgage lenders .

3 Lane, Clark & Peacock (LCP) pensions de-risking update, October 2020.

4 LaingBuisson.

 

 

Page 16

 

6.i - UK & Ireland Life continued

Operating and financial performance continued

Operating profit‡#, new business and net flows continued

Ireland Life continued

There was an operating loss in Ireland Life of £(6) million (2019: profit of £59 million). The prior year result included a non-recurring benefit from methodology and assumption changes, with 2020 adversely impacted by increased transformation project costs and higher claims experience on protection business.

Ireland Life PVNBP was broadly stable at £1,534 million (2019: £1,589 million) despite the market disruption caused by COVID-19, with strong sales in our unit-linked business. VNB increased by 50% to £12 million (2019: £8 million) driven primarily by improvements in annuity margins following re-pricing actions.

Other

Other operating profit increased by £98 million to £469 million (2019: £371 million) and includes a net benefit from assumption changes of £466 million (2019: £574 million). Within this, we saw a net positive longevity benefit of £390 million, expense reserve releases of £123 million reflecting our ongoing cost reduction programme and other smaller impacts.

The net impact of COVID-19 related claims for our individual and group protection businesses and expected favourable experience variances on our annuity book was £36 million. The includes our total expected net liabilities on in-force policies from the COVID-19 pandemic over the next year. During 2020, COVID-19 related individual and group protection claims amounted to £31 million, net of reinsurance.

In 2019, the net benefit from assumption changes of £574 million reflected net positive longevity and mortality developments, including adopting CMI 2018, of £751 million which was partly offset by updates to persistency (£126 million charge) and other assumptions. We also recognised a £175 million provision to allow for certain pension policyholders that may not have been adequately informed of switching options available to them.

Controllable costs

UK & Ireland Life controllable costs decreased by 3% to £1,181 million (2019: £1,214 million) driven by a reduction in project costs and other cost saving initiatives. These benefits were partially offset by accelerated onerous contract costs of £23 million, reflecting the reduction in our UK property footprint.

 

 

Page 17

 

6.ii - General Insurance: UK & Ireland and Canada

£m (unless otherwise stated)

2020

2019

Sterling % change

Constant currency %

2020

2019

Sterling % change

Constant currency %

Operating profit‡# and controllable costs

 

 

Operating profit‡#

 

 

Controllable costs

UK & Ireland

213

297

(28)%

(28)%

793

800

(1)%

(1)%

Canada

287

191

50%

52%

401

402

-

1%

 

500

488

2%

3%

1,194

1,202

(1)%

-

 

 

 

 

 

 

 

 

 

NWP and COR

 

 

 

NWP

 

 

 

COR

UK & Ireland

4,630

4,638

-

-

98.2%

97.5%

0.7pp

 

Canada

3,096

3,061

1%

2%

94.7%

97.8%

(3.1)pp

 

 

7,726

7,699

-

1%

96.8%

97.7%

(0.9)pp

 

 

 

 

 

 

 

 

 

 

Solvency II operating own funds generation and Solvency II return on capital1,‡

Solvency II operating own funds generation

Solvency II return on capital

UK & Ireland

329

333

(1)%

(1)%

13.1%

14.3%

(1.2)pp

(1.3)pp

Canada

287

203

41%

43%

19.9%

15.3%

4.6pp

5.0pp

 

 

 

 

 

 

 

 

 

Solvency II operating capital generation‡# and cash remittances‡#

Solvency II operating capital generation‡#

Cash remittances‡#

UK & Ireland

357

251

42%

42%

171

273

(37)%

(37)%

Canada

262

261

-

2%

131

156

(16)%

(15)%

1  For UK general insurance only, capital held for internal risk appetite purposes is used instead of opening shareholder Solvency II own funds to ensure consistency in measuring performance across markets. This is only applicable to UK general insurance Solvency II return on capital (unlevered) and not to the aggregated Group Solvency II return on capital (unlevered) and Solvency II return on equity measures, with the reversal of the impact included in Group centre costs and Other opening own funds.

Overview

Our strongest core general insurance businesses where we are focusing on building and extending our leadership are in the UK, Ireland and Canada. During 2020 we have focused on executing our market strategies, while dealing with the slowdown in trading activity as a result of global COVID-19 pandemic.

In the UK and Ireland, our strategy is to invest for growth and to deliver on our ambition of being the leading insurer in the UK and Ireland as measured by premium, reputation, trust, breadth of distribution and strength of digital platform.

In Canada, our strategy, aligned with Group strategic pillars, is to (1) sustain leading performance throughout execution excellence; (2) transform the service experience through digital; and (3) lead the market with customer-centric innovation.

Core general insurance total operating profit increased to £500 million (2019: £488 million), which translated to a COR of 96.8% (2019:  97.7%). The significant improvement in underlying business performance was partially offset by a £39 million prior year reserve strengthening compared to a £95 million prior year release in 2019, and weather costs were £85 million higher than the very benign 2019. The estimated impact of the COVID-19 pandemic on core general insurance markets was £(84) million, principally reflecting business interruption claims net of reinsurance, which were partly offset by favourable impacts of reduced economic activity in other product lines tempered by higher profit-contingent commission payments to distributors.

Total net written premiums increased to £7,726 million (2019: £7,699 million), reflecting volume and rate increases in Global Corporate and Speciality (GCS) Commercial lines offset by a decline in personal lines due to worldwide government-enforced lockdown measures.

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

Operating and financial performance

UK & Ireland General Insurance

Operating profit‡#

Operating profit‡#

2020
£m

2019
£m

Sterling % change

Underwriting result

63

86

(27)%

Long-term investment return

132

166

(20)%

(13)

(2)

550%

UK

182

250

(27)%

31

47

(34)%

Total

213

297

(28)%

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

Overall UK & Ireland operating profit decreased to £213 million (2019: £297 million). The UK saw significantly improved underlying performance compared to 2019, as personal lines benefited from the continued simplification of our business, including the remediation or exit of under-performing segments; and commercial lines benefited from above inflation rate increases and targeted volume growth. These underlying improvements give us confidence in the outlook for 2021.

 

 

Page 18

 

6.ii - General Insurance: UK & Ireland and Canada continued

Operating and financial performance continued

UK & Ireland General Insurance continued

Operating profit‡# continued

However, 2020 saw a modest prior year reserve strengthening whereas 2019 benefitted from a significant prior year reserve release related to favourable development on motor bodily injury claims. Weather costs, despite being £32 million favourable to our long-term average, were £66 million higher compared to a benign 2019 and there was a £34 million reduction in long-term investment return due to reduced yields. This resulted in an operating profit of £182 million (2019: £250 million).

NWP and COR

 

 

 

NWP

 

 

COR

NWP and COR

2020
£m

2019
£m

Sterling % change

2020
%

2019
%

Change

Personal lines

2,232

2,399

(7)%

92.4%

99.3%

(6.9)pp

Commercial lines

2,008

1,819

10%

105.7%

96.0%

9.7pp

UK

4,240

4,218

1%

98.5%

97.9%

0.6pp

Ireland

390

420

(7)%

95.2%

92.6%

2.6pp

Total

4,630

4,638

-

98.2%

97.5%

0.7pp

Commercial lines NWP grew 10% to £2,008 million (2019: £1,819 million), reflecting a combination of above inflation rate increases and strong growth across all channels, with a focus on our heartland UK corporates and SMEs, and standout performance in our digitally traded channels. Personal lines successfully launched the Aviva brand on price comparison websites in the fourth quarter, but COVID-19 disruption on our distribution partners' new business, and the remediation and exit of unprofitable business as we execute our simplification strategy, resulted in NWP 7% lower at £2,232 million (2019: £2,399 million). Overall UK NWP was 1% higher at £4,240 million (2019: £4,218 million).

UK GI COR improved by 4.6pp excluding the impacts of prior year reserve strengthening and weather. The impact of a 3.6pp adverse movement in prior year reserve development and 1.6pp higher weather costs resulted in a COR of 98.5% (2019: 97.9%).

Personal lines COR of 92.4% (2019: 99.3%) was 6.9pp lower year-on-year, reflecting an improvement in underlying performance as we continue to simplify our Personal lines business and remediate or exit under-performing segments. This was supplemented by one-off benefits from lower economic activity as a result of COVID-19, partly offset by higher profit-contingent commission payments, less favourable prior year development and higher weather costs. Commercial lines also saw an improvement in underlying performance driven by above inflation rate increases and targeted volume growth but the COR of 105.7% (2019: 96.0%) was 9.7pp higher year-on-year, reflecting COVID-19 claims impacts, primarily related to business interruption, prior year reserve strengthening and higher weather costs.

Ireland NWP reduced by 7% to £390 million (2019: £420 million). Personal lines is behind 2019 by 9%, mainly in the intermediated channel where price competition intensified, while the direct channel remained resilient in 2020. New business in Commercial lines has been challenging in 2020 with restrictions affecting business's customers and the adoption of a cautious underwriting stance.

Ireland GI COR of 95.2% (2019: 92.6%) was 2.6pp higher year-on-year, largely driven by one-off expenses. A decrease in NWP paired with one‑off expenses, were partially offset by favourable prior year release and weather. Personal lines COR of 90.1% (2019: 92.5%) was 2.4pp lower year‑on-year driven by benefits from lower economic activity as a result of COVID-19 and favourable prior year development. Commercial lines COR of 102.2% (2019: 92.8%) deteriorated driven by the impact of COVID-19 on the commercial property and liability books.

Controllable costs

Controllable costs in the UK decreased to £708 million (2019: £726 million), reflecting the simplification of our Personal lines business and a reduction in project spend, while continuing to invest in our IT infrastructure and support growth in our Commercial lines business. 2020 controllable costs also include accelerated onerous contract costs of £15 million, reflecting the reduction in our UK property footprint . In Ireland, controllable costs increased to £85 million (2019: £74 million) with cost saving initiatives in 2020 offset by growth-related costs.

Canada

Operating profit‡#

During 2020, operating profit increased by 50% to £287 million (2019: £191 million) due to actions around pricing, indemnity management and risk selection as well as benefits from lower economic activity as a result of COVID-19. Personal lines performance improved significantly compared to 2019, driven by a decrease in net claims incurred. In Commercial lines, while net written premiums improved through strong new business performance and policy retention , underlying performance was impacted by COVID‑19 claims.

Operating profit‡#

2020
£m

2019
£m

Sterling % change

Constant currency %

Underwriting result

162

65

151%

154%

Long-term investment return

130

133

(2)%

(1)%

Other1

(5)

(7)

38%

38%

Total

287

191

50%

52%

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

In 2020, the underwriting result was a profit of £162 million (2019: £65 million), mainly driven by premium rate increases in Commercial lines, and benefits from lower economic activity as a result of COVID-19 in our Personal lines business, partially offset by unfavourable prior year reserve development, COVID-19 claims, higher profit-contingent commission payments, increased claims severity, and marginally higher weather catastrophe losses compared to the prior year. Longer-term investment return worsened by 2% mostly due to lower short-term reinvestment yields and broker loan interest income.

 

 

Page 19

 

6.ii - General Insurance: UK & Ireland and Canada continued

Operating and financial performance continued

Canada continued

NWP and COR

 

 

 

 

NWP

 

 

COR

NWP and COR

2020
£m

2019
£m

Sterling % change

Constant currency %

2020
%

2019
%

Change

Personal lines

2,075

2,100

(1)%

-

87.2%

97.8%

(10.6)pp

Commercial lines

1,021

961

6%

7%

110.2%

97.8%

12.4pp

Total

3,096

3,061

1%

2%

94.7%

97.8%

(3.1)pp

Canada NWP was £3,096 million (2019: £3,061 million), up 2% on a constant currency basis. In Personal lines, NWP reduced to £2,075 million (2019: 2,100 million) primarily as a result of the impact of COVID-19, as we offered more consumer relief in motor insurance. Commercial lines NWP increased to £1,021 million (2019: £961 million) mostly due to hardening rates.

COR improved to 94.7% (2019: 97.8%) due to the improvement in the underwriting result. Personal lines COR of 87.2% (2019: 97.8%) was 10.6pp lower year-on-year, driven by better pricing and underwriting, and benefits from lower economic activity as a result of COVID-19, partly offset by higher profit-contingent commission payments. Commercial lines COR of 110.2% (2019: 97.8%)   was 12.4pp higher year-on-year due to increased claims, mostly as a result of COVID-19.

Controllable costs

Controllable costs were £401 million (2019: £402 million). The cost savings initiatives in 2020 were offset by investments in our claims operational capabilities, investment in our pricing capabilities and the GCS business, and continued investment in our IT infrastructure.

Solvency II and cash

Solvency II operating own funds generation and Solvency II return on capital

Solvency II operating own funds generation in the UK and Ireland has remained stable over the period at £329 million (2019: £333 million), as improved underlying performance is offset by modest prior year reserve strengthening (compared to a large release in 2019) and higher weather costs compared to a benign 2019. However, opening own funds has increased by £183 million, which translated into a Solvency II return on capital of 13.1% (2019: 14.3%).

In Canada, Solvency II operating own funds generation increased to £287 million (2019: £203 million) mainly due to improved underlying performance driven by actions around pricing, indemnity management and risk selection offset by modest offset prior year reserve strengthening and higher weather costs than the prior period , which translated into a Solvency II return on capital of 19.9% (2019: 15.3%).

The estimated impact of the COVID-19 pandemic on Solvency II operating own funds generation and Solvency II return on capital across Core general insurance markets was broadly neutral.

Solvency II operating capital generation (OCG)‡#

UK & Ireland Solvency II OCG has increased by £106 million to £357 million (2019: £251 million) reflecting the stable operating own funds described above and the non-repeat of the one-off impact of the alignment of UK Digital costs which increased the SCR in 2019.

In Canada, Solvency II OCG is broadly consistent with 2019 at £262 million (2019: £261 million). This is mainly due to increased Solvency II operating own funds generation described above offset by an increase in SCR due to COVID-19 and the growth in commercial lines.

The estimated impact of the COVID-19 pandemic on Solvency II OCG for Core general insurance markets was £(88) million, principally reflecting increases in the SCR.

Cash remittances‡#

Cash remittances to Group from the UK and Ireland were £171 million (2019: £273 million), including £74 million (2019: £83 million) received in February 2021 in respect of 2020 activity. Cash remittances to Group from Canada were £131 million (2019: £156 million), including £115 million (2019: £141 million) paid in February 2021 in respect of 2020 activity. The reduction is driven by the decision to retain cash in the subsidiaries to maintain balance sheet strength during the period of uncertainty as a result of the COVID-19 pandemic.

 

 

Page 20

 

6.iii - Aviva Investors

£m (unless otherwise stated)

2020

2019

Sterling % change

Constant currency %

Aviva Investors revenue

515

542

(5)%

(5)%

Controllable costs

430

446

(3)%

(3)%

Operating profit‡#

85

96

(11)%

(11)%

Assets under management

£366bn

£346bn

6%

6%

 

 

 

 

 

Solvency II operating own funds generation

67

70

(4)%

(4)%

Solvency II return on capital

13.7%

13.7%

-

-

 

 

 

 

 

Solvency II operating capital generation‡#

70

90

(22)%

(22)%

Cash remittances‡#

50

86

(42)%

(42)%

Overview

Aviva Investors manages £366 billion of assets across a number of international markets, with £292 billion managed on behalf of Aviva.

Our strategy is to support Aviva becoming the UK's leading insurer and the go-to customer brand. By combining our insurance heritage and DNA with our skills and experience in asset allocation, portfolio construction and risk management, we provide a range of asset management solutions to our institutional, wholesale and retail clients.

We have a highly diversified range of capabilities, with expertise in real assets, solutions, multi-assets, equities and credit.

The key drivers of our strategy are

· Customer: deliver our customers' investment needs, placing Environmental, Social and Governance (ESG) and a rigorous risk and control culture at the core of our future strategies

· Simplification: streamline our business to become more efficient and deliver better customer outcomes

· Growth: continue to grow in both our Aviva client and external businesses

· People: develop a high-performance culture, focusing on our diversity and inclusion strategy, talent and career development

Our ongoing focus on ESG creates easy ways for our customers to do good, leading by example and influencing others to act, thereby playing an active role in the fight against climate change, creating a stronger economy and society as well as generating enhanced shareholder value over the long-term.

Concerns over the economic disruption caused by COVID-19 led to significant volatility in financial markets and elevated levels of investor activity throughout 2020. Notwithstanding the challenging market conditions, we had positive momentum in our Aviva client and external client businesses throughout 2020.

For our Aviva clients, significant inflows of £5.1 billion from the Core business, primarily on the Adviser channel, Workplace and annuities in the UK, were more than offset by £6.5 billion outflows from the run-off in assets for the existing back book.

External net inflows of £1.7 billion in the period were driven by positive gross flows of £8.3 billion, with significant new business wins in Real Assets (£1.8 billion) and Credit (£3.2 billion). We continued to experience strong momentum in our Liquidity business, with £5.5 billion of net liquidity funds inflows and 80 new client accounts.

Our investment performance was not immune from the market turbulence, and at the end of December 2020 55% of our funds were ahead of benchmark over one year. Consistent delivery of strong investment performance is key to meeting our customers' investment needs and remains a key priority.

Operating and financial performance

Aviva Investors revenue

Aviva Investors revenue decreased by 5% to £515 million (2019: 542 million), with market volatility contributing to client de-risking and asset allocation decisions leading to lower margins despite positive net inflows, partially offset by a stronger outcome with performance fees across our equities and rates strategies.

Controllable costs

Controllable costs decreased by 3% to £430 million (2019: 446 million) from cost management actions to mitigate the decrease in revenue.

Operating profit‡#

Operating profit decreased by 11% to £85 million (2019: 96 million) mainly due to the lower fee income during 2020.

 

 

Page 21

 

6.iii - Aviva Investors continued

Operating and financial performance continued

Net flows and assets under management and under administration

Assets under management represent all assets managed by Aviva Investors. 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 assets are managed by Aviva Investors on behalf of Group companies. Internal legacy relates to products that are no longer actively marketed.

 

Internal legacy
£m

Internal
core
£m

External
£m

2020
Total
£m

2019
Total
£m

Assets under management at 1 January

84,927

194,693

66,512

346,132

330,706

Total inflows

12,126

38,824

8,286

59,236

63,523

Total outflows

(18,685)

(33,722)

(6,621)

(59,028)

(67,609)

Net flows

(6,559)

5,102

1,665

208

(4,086)

Net flows into liquidity funds and cash

400

2,114

5,799

8,313

1,299

Transfers out to external managers

-

-

-

-

(3,223)

Market and foreign exchange movements

10,199

810

110

11,119

21,436

Assets under management at 31 December

88,967

202,719

74,086

365,772

346,132

Externally managed assets under administration at 1 January

 

 

 

36,292

29,104

Externally managed assets under administration net flows and other movements

 

 

 

3,874

7,188

Externally managed assets under administration at 31 December

 

 

 

40,166

36,292

Assets under management and administration at 1 January

 

 

 

382,424

359,810

Assets under management and administration at 31 December

 

 

 

405,938

382,424

Assets under management increased by £19.7 billion to £365.8 billion (2019: 346.1 billion). This is due to £1.7 billion of external net flows, £8.3 billion of net flows into liquidity funds and cash and £11.1 billion of positive market and foreign exchange movements, offset by £(1.4) billion of net flows on our internal client business. Assets under management and administration at 31 December 2020 were £405.9 billion (2019: 382.4 billion).

Solvency II operating own funds generation and Solvency II return on capital

Solvency II operating own funds generation decreased by 4% to £67 million (2019: £70 million) as a result of lower operating profit as discussed above. Solvency II return on capital was 13.7% (2019: 13.7%) despite the lower Solvency II operating own funds generation.

Solvency II operating capital generation (OCG)‡#

Solvency II OCG decreased by 22% to £70 million (2019: £90 million) mainly as a result of lower operating profit as discussed above.

Cash remittances‡#

Cash remitted to Group reduced to £50 million (2019: 86 million), as remittances from Aviva Investors' operations in Manage-for-value markets were affected by regulatory restrictions related to COVID‑19.

 

 

Page 22

 

6.iv - Manage-for-value

£m (unless otherwise stated)

2020

2019

Sterling % change

Constant currency %

Solvency II operating own funds generation

497

850

(42)%

(39)%

Solvency II return on capital

6.2%

11.4%

(5.2)pp

(5.0)pp

 

 

 

 

 

Solvency II operating capital generation‡#

172

867

(80)%

(79)%

Cash remittances‡#

127

613

(79)%

(78)%

 

 

 

 

 

Operating profit‡#

1,311

1,150

14%

14%

Controllable costs

845

884

(4)%

(4)%

 

 

 

 

 

New business - Life Insurance

 

 

 

 

VNB

576

612

(6)%

(5)%

PVNBP

12,834

15,240

(16)%

(16)%

 

 

 

 

 

General Insurance

 

 

 

 

NWP

1,687

1,610

5%

4%

COR

93.5%

96.6%

(3.1)pp

 

Overview

Manage-for-value comprises our continuing operations in France, Italy, Poland and Other (our joint ventures in Turkey, India, China, and Aviva Singlife) and our discontinued operations in Asia (Friends Provident International, Aviva Singapore, Hong Kong, Indonesia and Vietnam). These businesses are managed for long-term shareholder value. We will build on the good work our teams are doing to grow and optimise their businesses, but where we cannot meet our strategic objectives, we will be decisive and withdraw capital.

During 2020, we completed disposals of Friends Provident International, Aviva Singapore, Hong Kong and Indonesia. We have also announced the disposal of our Italian joint venture, Aviva Vita, and our entire business in Vietnam. In 2021, we announced the disposal of our entire shareholdings in Aviva France, our joint venture in Aviva Turkey and our remaining Life and General Insurance businesses in Aviva Italy. Please see note B5 for further information.

The volatility in financial markets adversely impacted financial performance in the year either directly through reduced trading activity or indirectly as a result of the balance sheet de-risking actions taken in most markets which has reduced investment return. All percentage movements are quoted in constant currency unless otherwise stated.

Operating and financial performance

Solvency II operating own fund generation and Solvency II return on capital

Solvency II return on capital has decreased by 5.2pp to 6.2% (2019: 11.4%) on a sterling basis and Solvency II operating own funds generation has reduced by £353 million to £497 million (2019: £850 million). This reduction is primarily due to changes made to our French Life model following a management review. This included a mis-applied rule which resulted in a reduction in solvency partly offset by benefits from better modelling in a negative interest rate environment.

Solvency II operating capital generation (OCG)‡#

Solvency II OCG in respect of continuing operations reduced by £799 million to £6 million (2019: £805 million) in the year ended 31 December 2020 largely as a result of changes to our French Life model as noted above. This impact was partially offset by diversification benefit at a Group level. Solvency II OCG in respect of discontinued operations increased by £104 million to £166 million (2019: £62 million) primarily due to Singapore.

Cash remittances‡#

Cash remitted to Group was £127 million (2019: £613 million). The decrease from prior year is mainly driven by regulatory restrictions related to COVID-19 and a 2019 special remittance from Italy of £172 million which was not repeated in 2020.

Operating profit ‡#

 

2020
£m

2019
£m

Sterling % change

Constant currency %

France

467

473

(1)%

(2)%

Italy

298

195

53%

52%

Poland

196

194

1%

3%

Other1

38

37

3%

8%

Total from continuing operations

999

899

11%

11%

Contribution from discontinued operations2

312

251

25%

26%

Total

1,311

1,150

14%

14%

1 Other includes Turkey, China, India and our 26% shareholding in Aviva SingLife.

2 At 31 December 2020, FPI, Aviva Singapore, Hong Kong, Indonesia and Vietnam are classified as discontinued operations. Aviva Vita is held for sale and classified as a continuing operation.

The operating profit of our Manage-for-value operations increased by 14% to £1,311 million (2019: 1,150 million). Operating profit from continuing operations of £999 million (2019: £899 million) includes contribution of £844 million (2019: £792 million) from our life operations and £155 million (2019: 107 million) from our general insurance operations.

· In France, operating profit decreased by 2% to £467 million (2019: £473 million) with improved product mix during the year offsetting adverse protection claims experience. This was supported by lower claims experience in the France General Insurance business during extended periods of lockdown .

 

 

Page 23

 

6.iv - Manage-for-value continued

Operating and financial performance continued

Operating profit ‡# continued

· In Italy, operating profit increased by 52% to £298 million (2019: £195 million). This was driven by higher fee income from assets under management that had grown strongly in previous periods with c.£2.2 billion of positive net flows in 2020. We have also seen an improvement in the General Insurance underwriting result driven by volume increases and favourable claims experience as a result of claims management actions and lower motor frequency due to COVID-19.

· In Poland, operating profit increased by 3% to £196 million(2019: 194 million) driven by improved underwriting results. Our underlying performance benefitted from a strategic move towards protection offerings in the life business and actions taken to reduce expenses to offset trading disruption arising from lockdown restrictions that particularly affected our bancassurance channels.

· Within Other markets, operating profit increased by 8% to £38 million (2019: £37 million).

· Operating profit from discontinued operations increased by 26% to £312 million (2019: £251 million). This was driven by a change to long-term care morbidity and mortality assumptions in Singapore.

Controllable costs

Controllable costs have reduced by 4% in 2020 to £845 million (2019: £884 million), as a result of cost saving initiatives.

New business - Life Insurance

 

2020
£m

2019
£m

Sterling % change

Constant currency %

2020
£m

2019
£m

Sterling % change

Constant currency %

2020
%

2019
%

 

 

 

 

VNB

 

 

 

PVNBP

New business margin

France

164

168

(3)%

(4)%

4,477

5,702

(21)%

(22)%

3.7%

2.9%

Italy

100

147

(32)%

(32)%

4,645

5,537

(16)%

(17)%

2.2%

2.7%

Poland

61

64

(4)%

(2)%

548

624

(12)%

(10)%

11.1%

10.3%

Other1

44

59

(27)%

(20)%

922

1,100

(16)%

(11)%

4.8%

5.4%

Total from continuing operations

369

438

(16)%

(15)%

10,592

12,963

(18)%

(18)%

3.5%

3.4%

Contribution from discontinued operations2

207

174

19%

21%

2,242

2,277

(2)%

-

9.2%

7.6%

Total

576

612

(6)%

(5)%

12,834

15,240

(16)%

(16)%

4.5%

4.0%

1 Other includes Turkey, China, India and our 26% shareholding in Aviva SingLife.

2 At 31 December 2020, FPI, Aviva Singapore, Hong Kong, Indonesia and Vietnam are classified as discontinued operations. Aviva Vita is held for sale and classified as a continuing operation.

PVNBP decreased by 16% to £12,834 million (2019: £15,240 million) and VNB decreased by 5% to £576 million (2019: 612 million). New business performance for each market is explained below:

· In France, PVNBP reduced by 22% to £4,477 million (2019: £5,702 million) reflecting managed reductions in with-profit volumes and lower volumes due to trading disruptions caused by the lockdown in France from April 2020 onwards, which partially offsets strong growth in our unit-linked pension product. VNB decreased by 4% to £164 million (2019: £168 million) with an improvement in margin driven by a higher mix of more profitable unit-linked inflows partly offset by the adverse effect of negative interest rates.

· In Italy, PVNBP reduced by 17% to £4,645 million (2019: £5,537 million) due to a managed reduction in standalone with-profits volumes together with lower volume due to trading disruption as a result of COVID-19. VNB margins were lower due to the impact of unfavourable interest rates movements partially offset by the introduction of our higher margin Formula 5 savings product.

· In Poland PVNBP reduced by 10% to £548 million (2019: £624 million) driven by a lower volume due to the trading disruption in our distribution channels arising from movement restrictions and the closure of branches by our bancassurance partners. VNB margins improved in 2020 as a result of favourable mix of business.

· Within Other markets, PVNBP decreased by 11% to £922 million (2019: £1,100 million) largely driven by lower protection volumes in China resulting from COVID-19. VNB margins have reduced as a result of a less favourable new business mix and investments in distribution.

· PVNBP from discontinued operations reduced by 2% on a sterling basis to £2,242 million (2019: £2,277 million) and broadly flat in constant currency terms. VNB increased by 21% to £207 million (2019: £174 million).

Assets under management and net flows - Life Insurance

 

2020
£m

2019
£m

Assets under management at 1 January

114,615

108,287

Premiums and deposits, net of reinsurance

9,049

11,314

Claims and redemptions, net of reinsurance

(7,332)

(6,852)

Net flows

1,717

4,462

Market and other movements

10,516

1,866

Assets under management at 31 December

126,848

114,615

Net flows of £1.7 billion (2019: £4.5 billion) decreased mainly due to lower trading volumes as a result of the movement restrictions imposed in all markets from early March and actions taken to reduce with-profit inflows in France and Italy. Assets under management have benefitted from positive market and other movements of £10.5 billion (2019: £1.9 billion).

 

 

Page 24

 

6.iv - Manage-for-value continued

Operating and financial performance continued

General Insurance

 

2020
£m

2019
£m

Sterling % change

Constant currency
%

2020

2019

Change

 

 

 

 

NWP

 

 

COR

France

1,229

1,166

5%

5%

96.4%

97.2%

(0.8)pp

Italy

333

319

4%

3%

86.3%

97.7%

(11.4)pp

Poland

112

112

-

2%

83.7%

85.9%

(2.2)pp

Total from continuing operations

1,674

1,597

5%

4%

93.5%

96.5%

(3.0)pp

Contribution from discontinued operations1

13

13

(1)%

1%

98.2%

112.8%

(14.6)pp

Total

1,687

1,610

5%

4%

93.5%

96.6%

(3.1)pp

1  At 31 December 2020, Aviva Singapore is classified as a discontinued operation.

NWP increased by 4% to £1,687 million (2019: £1,610 million) driven by growth in France and Italy, across personal and commercial lines. COR improved by 3.1pp to 93.5% (2019: 96.6%). This was largely due to strong underwriting performance in Italy alongside motor frequency benefits outweighing claims experience in Italy and France.

 

 

Page 25

 

7 - Profit drivers

7.i - Life business profit drivers

 

UK & Ireland Life

Manage-for-value

Total continuing operations

 

2020
£m

2019
£m

2020
£m

2019
£m

2020
£m

2019
£m

New business income

857

960

348

360

1,205

1,320

Underwriting margin

412

418

194

188

606

606

Investment return1

1,472

1,368

1,370

1,220

2,842

2,588

Total income

2,741

2,746

1,912

1,768

4,653

4,514

Acquisition expenses

(424)

(436)

(365)

(392)

(789)

(828)

Administration expenses1

(946)

(967)

(631)

(558)

(1,577)

(1,525)

Total expenses

(1,370)

(1,403)

(996)

(950)

(2,366)

(2,353)

Other1,2,3

493

596

(90)

(47)

403

549

Life business operating profit‡#

1,864

1,939

826

771

2,690

2,710

Health business operating profit‡#

43

35

18

21

61

56

Total operating profit‡#

1,907

1,974

844

792

2,751

2,766

1  Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, the comparative amount for administration expenses has been restated by £59 million for the year ended 31 December 2019 to include claims handling costs attributable to the UK & Ireland Life business. Previously these costs were included as a reduction to investment return (£25 million for the year ended 31 December 2019) and other (£34 million for the year ended 31 December 2019). Additionally, as part of this review the comparative amount for administration expenses for the year ended 31 December 2019 has been restated to include £42 million of amortisation of intangible assets, previously included in other.

2  Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, the comparative amount for the year ended 31 December 2019 has been restated to reclassify net interest expense of £65 million from UK & Ireland Life (Other) to Group debt costs and other interest as a non-operating item. The change has no impact on the Group's operating profit.

3  Other represents amortisation of deferred acquisition costs (DAC), changes in assumptions and modelling, non-recurring items and non-product specific items.

Income: New business income and underwriting margin

 

UK & Ireland Life

Manage-for-value

Total continuing operations

 

2020
£m

2019
£m

2020
£m

2019
£m

2020
£m

2019
£m

New business income

857

960

348

360

1,205

1,320

Acquisition expenses

(424)

(436)

(365)

(392)

(789)

(828)

Net contribution

433

524

(17)

(32)

416

492

Annual premium equivalent (APE) (£m)

4,034

4,234

1,222

1,473

5,256

5,707

As margin on APE (%)

11%

12%

(1)%

(2)%

8%

9%

Underwriting margin (£m)

412

418

194

188

606

606

Analysed by:

 

 

 

 

 

 

Expenses

96

109

86

81

182

190

Mortality and longevity

313

287

96

98

409

385

Persistency

3

22

12

9

15

31

Income: Investment return

 

UK & Ireland Life

Manage-for-value

Total continuing operations

 

2020
£m

2019
£m

2020
£m

2019
£m

2020
£m

2019
£m

Unit-linked margin (£m)1

979

861

648

579

1,627

1,440

As annual management charge on average reserves (bps)

59

56

170

156

80

76

Average reserves (£bn)2

165

153

38

37

203

190

Participating business (£m)3

115

135

617

541

732

676

As bonus on average reserves (bps)

28

32

84

77

63

60

Average reserves (£bn)2

41

42

74

70

115

112

Spread margin (£m)1

298

305

11

9

309

314

As spread margin on average reserves (bps)

40

43

24

24

39

42

Average reserves (£bn)2

75

70

4

4

79

74

Expected return on shareholder assets (£m)4

80

67

94

91

174

158

Total (£m)

1,472

1,368

1,370

1,220

2,842

2,588

Total average reserves (£bn)2

281

265

116

111

397

376

1  Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated to reclassify all claims handling costs attributable to UK & Ireland Life as administration expenses. For the year ended 31 December 2019, £9 million of these costs were previously included in unit-linked margin and £16 million in spread margin.

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.

 

 

Page 26

 

7.i - Life business profit drivers continued

Expenses

 

UK & Ireland Life

Manage-for-value

Total continuing operations

 

2020
£m

2019
£m

2020
£m

2019
£m

2020
£m

2019
£m

Acquisition expenses (£m)

(424)

(436)

(365)

(392)

(789)

(828)

APE (£m)

4,034

4,234

1,222

1,473

5,256

5,707

As acquisition expense ratio on APE (%)

11%

10%

30%

27%

15%

15%

Administration expenses (£m)1

(946)

(967)

(631)

(558)

(1,577)

(1,525)

As existing business expense ratio on average reserves (bps)

34

36

54

50

40

40

Total average reserves (£bn)2

281

265

116

111

397

376

Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, the comparative amount for administration expenses has been restated by £59 million for the year ended 31 December 2019 to include claims handling costs attributable to the UK & Ireland Life business. These amounts were previously included in investment return and other. Additionally, as part of this review the comparative amount for administration expenses for the year ended 31 December 2019 has been restated to include £42 million of amortisation of intangible assets, previously included in other .

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.

 

 

Page 27

 

7.ii - General insurance profit drivers

2020

UK Personal £m

UK Commercial
£m

Total
UK
£m

Ireland £m

Total
UK & Ireland £m

Canada Personal £m

Canada Commercial
£m

Total Canada £m

Total core markets
 m

Manage-for-value £m

Total continuing operation
£m

General insurance

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

2,301

2,338

4,639

412

5,051

2,118

1,153

3,271

8,322

1,768

10,090

Net written premiums

2,232

2,008

4,240

390

4,630

2,075

1,021

3,096

7,726

1,674

9,400

Net earned premiums

2,277

1,908

4,185

407

4,592

2,055

985

3,040

7,632

1,644

9,276

Net claims incurred

(1,195)

(1,388)

(2,583)

(243)

(2,826)

(1,154)

(699)

(1,853)

(4,679)

(1,058)

(5,737)

Of which claims handling costs

 

 

(139)

(14)

(153)

 

 

(122)

(275)

(51)

(326)

Earned commission

(618)

(381)

(999)

(57)

(1,056)

(411)

(236)

(647)

(1,703)

(328)

(2,031)

Earned expenses

(292)

(248)

(540)

(88)

(628)

(228)

(150)

(378)

(1,006)

(151)

(1,157)

Underwriting result

172

(109)

63

19

82

262

(100)

162

244

107

351

Long-term investment return (LTIR)

 

 

132

12

144

 

 

130

274

57

331

Other1

 

 

(13)

-

(13)

 

 

(5)

(18)

(9)

(27)

Operating profit‡#

 

 

182

31

213

 

 

287

500

155

655

General insurance combined operating ratio

 

 

 

 

 

 

 

 

 

 

 

Claims ratio

52.5%

72.7%

61.7%

59.6%

61.5%

56.1%

71.0%

61.0%

61.3%

64.4%

61.8%

Of which:

 

 

 

 

 

 

 

 

 

 

 

 Prior year reserve development (%)

 

 

1.0%

(2.5)%

0.7%

 

 

0.8%

0.7%

1.0%

0.8%

 Weather claims (under)/over long-term average (%)

 

 

(0.8)%

(2.3)%

(0.9)%

 

 

(0.2)%

(0.6)%

0.0%

(0.5)%

Commission ratio

27.1%

20.0%

23.9%

14.0%

23.0%

20.0%

24.0%

21.3%

22.3%

19.9%

21.9%

Expense ratio

12.8%

13.0%

12.9%

21.6%

13.7%

11.1%

15.2%

12.4%

13.2%

9.2%

12.5%

Combined operating ratio

92.4%

105.7%

98.5%

95.2%

98.2%

87.2%

110.2%

94.7%

96.8%

93.5%

96.2%

Assets supporting general insurance business

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

2,402

 

 

4,773

7,175

2,350

9,525

Equity securities

 

 

 

 

2

 

 

238

240

25

265

Investment property

 

 

 

 

352

 

 

-

352

183

535

Cash and cash equivalents

 

 

 

 

2,666

 

 

217

2,883

131

3,014

Other2

 

 

 

 

1,497

 

 

396

1,893

461

2,354

Assets at 31 December 2020

 

 

 

 

6,919

 

 

5,624

12,543

3,150

15,693

Debt securities

 

 

 

 

2,483

 

 

4,633

7,116

2,049

9,165

Equity securities

 

 

 

 

744

 

 

231

975

161

1,136

Investment property

 

 

 

 

414

 

 

-

414

170

584

Cash and cash equivalents

 

 

 

 

658

 

 

158

816

111

927

Other2

 

 

 

 

1,893

 

 

150

2,043

376

2,419

Assets at 31 December 2019

 

 

 

 

6,192

 

 

5,172

11,364

2,867

14,231

Average assets

 

 

 

 

6,556

 

 

5,398

11,954

3,008

14,962

LTIR as % of average assets

 

 

 

 

2.2%

 

 

2.4%

2.3%

1.9%

2.2%

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

2  Includes loans and other financial investments.

 

 

Page 28

 

7.ii - General insurance profit drivers continued

2019

UK Personal £m

UK Commercial
£m

Total
UK
£m

Ireland
£m

Total
UK & Ireland
£m

Canada Personal £m

Canada Commercial
£m

Total Canada £m

Total core markets £m

Manage-for-value £m

Total continuing operations
£m

General insurance

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

2,470

2,154

4,624

442

5,066

2,134

1,070

3,204

8,270

1,679

9,949

Net written premiums

2,399

1,819

4,218

420

4,638

2,100

961

3,061

7,699

1,597

9,296

Net earned premiums

2,440

1,721

4,161

422

4,583

2,078

884

2,962

7,545

1,560

9,105

Net claims incurred

(1,545)

(1,049)

(2,594)

(257)

(2,851)

(1,421)

(531)

(1,952)

(4,803)

(1,049)

(5,852)

Of which claims handling costs

 

 

(155)

(12)

(167)

 

 

(116)

(283)

(52)

(335)

Earned commission

(599)

(364)

(963)

(56)

(1,019)

(378)

(194)

(572)

(1,591)

(309)

(1,900)

Earned expenses

(279)

(239)

(518)

(77)

(595)

(233)

(140)

(373)

(968)

(148)

(1,116)

Underwriting result

17

69

86

32

118

46

19

65

183

54

237

Long-term investment return (LTIR)

 

 

166

15

181

 

 

133

314

61

375

Other1

 

 

(2)

-

(2)

 

 

(7)

(9)

(8)

(17)

Operating profit‡#

 

 

250

47

297

 

 

191

488

107

595

General insurance combined operating ratio

 

 

 

 

 

 

 

 

 

 

 

Claims ratio

63.3%

60.9%

62.3%

61.0%

62.2%

68.4%

60.0%

65.9%

63.7%

67.2%

64.4%

Of which:

 

 

 

 

 

 

 

 

 

 

 

 Prior year reserve development (%)

 

 

(2.6)%

0.6%

(2.3)%

 

 

(0.6)%

(1.6)%

(2.5)%

(1.7)%

 Weather claims (under)/over long-term average (%)

 

 

(2.4)%

(2.0)%

(2.3)%

 

 

(0.7)%

(1.7)%

2.0%

(1.0)%

Commission ratio

24.6%

21.2%

23.1%

13.3%

22.2%

18.2%

22.0%

19.3%

21.1%

19.8%

20.8%

Expense ratio

11.4%

13.9%

12.5%

18.3%

13.1%

11.2%

15.8%

12.6%

12.9%

9.5%

12.3%

Combined operating ratio

99.3%

96.0%

97.9%

92.6%

97.5%

97.8%

97.8%

97.8%

97.7%

96.5%

97.5%

Assets supporting general insurance business

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

 

 

2,483

 

 

4,633

7,116

2,049

9,165

Equity securities

 

 

 

 

744

 

 

231

975

161

1,136

Investment property

 

 

 

 

414

 

 

-

414

170

584

Cash and cash equivalents

 

 

 

 

658

 

 

158

816

111

927

Other2

 

 

 

 

1,893

 

 

150

2,043

376

2,419

Assets at 31 December 2019

 

 

 

 

6,192

 

 

5,172

11,364

2,867

14,231

Debt securities

 

 

 

 

2,539

 

 

4,445

6,984

2,007

8,991

Equity securities

 

 

 

 

634

 

 

208

842

24

866

Investment property

 

 

 

 

380

 

 

-

380

148

528

Cash and cash equivalents

 

 

 

 

742

 

 

130

872

323

1,195

Other2

 

 

 

 

1,872

 

 

207

2,079

525

2,604

Assets at 31 December 2018

 

 

 

 

6,167

 

 

4,990

11,157

3,027

14,184

Average assets

 

 

 

 

6,180

 

 

5,081

11,261

2,947

14,208

LTIR as % of average assets

 

 

 

 

2.9%

 

 

2.6%

2.8%

2.1%

2.6%

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

2  Includes loans and other financial investments.

 

 

Page 29

 

 

Financial supplement

 

 

Page

A

Income & expenses and IFRS capital

30

B

IFRS financial statements and notes

38

C

Analysis of assets

92

 

 

 

 

In this section

 

 

A

Income & expenses and IFRS capital

30

A1

Group adjusted operating profit

30

A2

Reconciliation of Group adjusted operating profit to profit for the year

30

A3

Other Group operations

31

A4

Corporate centre

31

A5

Group debt costs and other interest

31

A6

Life business: Investment variances
and economic assumption changes

31

A7

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

33

A8

General insurance and health business:
Economic assumption changes

34

A9

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

34

A10

Amortisation and impairment of intangibles acquired in business combinations

34

A11

Amortisation and impairment of acquired
value of in-force business

34

A12

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

34

A13

Other

34

A14

IFRS net asset value

35

A15

IFRS return on equity

36

A16

Group capital under IFRS basis

37

 

 

 

Page 30

 

A1 - Group adjusted operating profit‡#

The table below reconciles operating profit as presented in Overview section 6 Our Market performance to operating profit as presented in note B6(a) Segmental information.

 

 

General Insurance

 

Manage-for-value

 

2020

UK & Ireland Life £m

UK & Ireland GI £m

Canada
£m

Aviva Investors £m

France
£m

Italy
£m

Poland
£m

Other
£m

Total
£m

UK & Ireland Life

1,907

-

-

-

-

-

-

-

1,907

General Insurance

-

213

287

-

-

-

-

-

500

Aviva Investors

-

-

-

85

-

-

-

-

85

Manage-for-value

-

-

-

-

467

298

196

38

999

 

1,907

213

287

85

467

298

196

38

3,491

Other Group operations (note A3)

 

 

 

 

 

 

 

 

(22)

Corporate centre (note A4)

 

 

 

 

 

 

 

 

(250)

Group debt costs and other interest (note A5)

 

 

 

 

 

 

 

 

(370)

Group adjusted operating profit from continuing operations

 

 

 

 

 

 

 

 

2,849

Group adjusted operating profit from discontinued operations

 

 

 

 

 

 

 

 

312

Group adjusted operating profit before tax attributable to shareholders' profits

 

 

 

 

 

 

 

 

3,161

 

 

 

General Insurance

 

Manage-for-value

 

Restated1 2019

UK &  Ireland Life2

£m

UK &
Ireland GI
£m

Canada
£m

Aviva Investors
£m

France
£m

Italy
£m

Poland
£m

Other
£m

Total
£m

UK & Ireland Life

1,974

-

-

-

-

-

-

-

1,974

General Insurance

-

297

191

-

-

-

-

-

488

Aviva Investors

-

-

-

96

-

-

-

-

96

Manage-for-value

-

-

-

-

473

195

194

37

899

 

1,974

297

191

96

473

195

194

37

3,457

Other Group operations (note A3)

 

 

 

 

 

 

 

 

(21)

Corporate centre (note A4)

 

 

 

 

 

 

 

 

(183)

Group debt costs and other interest (note A5)

 

 

 

 

 

 

 

 

(320)

Group adjusted operating profit from continuing operations

 

 

 

 

 

 

 

 

2,933

Group adjusted operating profit from discontinued operations

 

 

 

 

 

 

 

 

251

Group adjusted operating profit before tax attributable to shareholders' profits

 

 

 

 

 

 

 

 

3,184

The 2019 comparative results have been restated from those previously published due to a change in the presentation of segmental information and to reclassify certain operations in Asia as discontinued operations as described in section B2.

2  The comparative amounts for the year ended 31 December 2019 have been amended to reclassify net interest expense from UK & Ireland Life to Group debt costs and other interest. The change has no impact on the Group's profit before tax attributable to shareholder's profits or operating profit before tax attributable to shareholders' profits.

A2 - Reconciliation of Group adjusted operating profit‡# to profit for the year

 

2020
£m

2019
£m

Group adjusted operating profit before tax attributable to shareholders' profits

3,161

3,184

Adjusted for the following:

 

 

Life business: Investment variances and economic assumption changes (note A6)

174

654

Non-life business: Short-term fluctuation in return on investments (note A7)

(64)

167

General insurance and health business: Economic assumption changes (note A8)

(104)

(54)

Impairment of goodwill, joint ventures, associates and other amounts expensed (note A9)

(30)

(15)

Amortisation and impairment of intangibles acquired in business combinations (note A10)

(76)

(87)

Amortisation and impairment of acquired value of in-force business (note A11)

(278)

(406)

Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates (note A12)

725

(22)

Other (note A13)

(34)

(47)

Adjusting items before tax

313

190

Profit before tax attributable to shareholders' profits from continuing operations and discontinued operations

3,474

3,374

Tax on group adjusted operating profit

(634)

(668)

Tax on other activities

70

(43)

 

(564)

(711)

Profit for the year

2,910

2,663

 

 

Page 31

 

Other Group adjusted operating profit items

A3 - Other Group operations

 

2020
£m

Restated1

  2019
£m

Other Group operations

(22)

(21)

Total

(22)

(21)

The 2019 comparative results have been restated from those previously published due to a change in the presentation of segmental information.

Other Group operations loss of £22 million (2019 restated: £21 million loss) includes investment return on centrally held assets, the results of our internal reinsurance businesses and the results of other operations.

A4 - Corporate centre costs

 

2020
£m

2019
£m

Project spend

(42)

(30)

Central spend and share award costs

(208)

(153)

Total

(250)

(183)

Corporate centre costs of £250 million (2019: £183 million) increased by £67 million mainly due to the centre share of Aviva's charitable donations to help those most affected by COVID-19 of £34 million and the centre share of accelerated onerous contract costs arising from the reduction in our UK property footprint of £12 million. The increase in project spend relates to continued targeted investment in IT.

A5 - Group debt costs and other interest

 

2020
£m

2019
£m

External debt

 

 

Subordinated debt

(352)

(336)

Other

(15)

(15)

Total external debt

(367)

(351)

Internal lending arrangements1

(48)

(49)

Net finance income on main UK pension scheme

45

80

Total

(370)

(320)

1  Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts have been amended to reclassify net interest expense from UK & Ireland Life to Group debt costs and other interest, of £65 million for the year ended 31 December 2019 as a non-operating item. The change has no impact on the Group's operating profit.

The increase in subordinated debt costs is due to the issue of new subordinated debt in the year (see note B17). The reduction in net finance income on the main UK pension scheme is driven by the lower opening scheme surplus arising from the bulk annuity buy-in transaction in 2019 which was recognised as an actuarial loss (see note B19).

Non-operating profit items

A6 - Life business: Investment variances and economic assumption changes

(a)  Definitions

Group adjusted operating profit for life business is based on expected long-term 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, in investment variances and economic assumption changes.

(b) Methodology

The expected investment returns and corresponding expected movements in life business liabilities are calculated separately for each principal life business unit.

The expected return on investments for both policyholders' and shareholders' funds is based on opening economic assumptions applied to the expected funds under management over the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equity and property. Expected funds under management are equal to the opening value of funds under management, adjusted for sales and purchases during the period arising from expected operating experience.

The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating experience of the life business, or management decisions to change asset mix, the effect is included in the Group adjusted operating profit. The residual difference between actual and expected investment return is included in investment variances, outside Group adjusted operating profit but included in profit before tax.

 

 

Page 32

 

A6 - Life business: Investment variances and economic assumption changes continued

(b) Methodology continued

The movement in liabilities included in Group adjusted operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. This would include movements in liabilities due to changes in the discount rate arising from discretionary management decisions that impact on product profitability over the lifetime of products.

The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside Group adjusted operating profit. For many types of life business, including unit-linked and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The profit impact of economic volatility on other life business depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.

(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

 

2020

2019

2020

2019

United Kingdom

4.5%

4.9%

3.0%

3.4%

France1

4.5%

4.3%

3.5%

2.8%

Other Eurozone

3.7%

4.3%

2.2%

2.8%

1  In light of the current unprecedented low interest rates, the expected investment return on equity and property in France have been determined taking into account local economic and market forecasts of the long-term return. The impact of this change is an increase of £12 million to the expected return on the life business over 2020.

The expected return on equity and property has been calculated by reference to the ten-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

2020

2019

Equity risk premium

3.5%

3.5%

Property risk premium

2.0%

2.0%

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

Territories

2020

2019

United Kingdom

1.0%

1.4%

Eurozone

0.2%

0.8%

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.

(d)  Investment variances and economic assumption changes

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

Life business

2020
£m

2019
£m

Investment variances and economic assumptions

174

654

Investment variances and economic assumption changes were £174 million positive (2019: £654 million positive), mainly due to a reduction in yields, partially offset by a reduction in equities in the UK and France.

At 31 December 2019 we included a specific allowance for the possible adverse impacts of the UK's exit from the European Union on UK commercial and residential property, which we have now removed. Our future property growth assumptions are reviewed on a quarterly basis and as at 31 December 2020 they include a cumulative 5-year growth assumption, from 2021-25, of -1% for UK commercial property (with variation by sector) and 4% for UK residential property.

Investment variance and economic assumption changes in 2019 was primarily due to the UK where there was a positive variance as a result of a reduction in yields, a narrowing of fixed income spreads and a consequent impact from economic assumption changes, including an alignment of methodology across the UK, partially offset by the impact of increases in equities. The impact of yields and equities reflect that we hedge on an economic rather than on an IFRS basis.

 

 

Page 33

 

A7 - Non-life business: Short-term fluctuation in return on investments

(a)  Definitions

Group adjusted operating profit for non-life business is based on an expected long-term investment return over the period. Any variance between the total investment return (including realised and unrealised gains) and the expected return over the period is disclosed separately outside Group adjusted operating profit, in short-term fluctuations.

(b)  Methodology

The long-term investment return is calculated separately for each principal non-life market. In respect of equities and investment 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.

The long-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated long-term return for other investments (including debt securities) is the actual income receivable for the year. Actual income and long-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the long-term return reflects assets backing non-life business held in Group centre investments.

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

The impact of realised and unrealised gains and losses on Group centre investments, including the centre hedging programme which is designed to economically protect the total Group's capital against adverse equity and foreign exchange movements, is included in short-term fluctuations on other operations.

(c) Assumptions

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

 

2020

2019

2020

2019

United Kingdom

4.5%

4.9%

3.0%

3.4%

France1

4.5%

4.3%

3.5%

2.8%

Other Eurozone

3.7%

4.3%

2.2%

2.8%

Canada

5.7%

6.0%

4.2%

4.5%

1  In light of the current unprecedented low interest rates, the expected investment return on equity and property in France have been determined taking into account local economic and market forecasts of the long-term return. The impact of this change is an increase of £5 million to the expected return on the general insurance business over 2020.

The long-term rates of return on equities and properties have been calculated by reference to the ten-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 for the United Kingdom and eurozone are shown in note A6(c).

(d) Analysis of investment return

The total investment income on our non-life business , including short-term fluctuations, are as follows:

General Insurance and health

2020
£m

2019
£m

Analysis of investment income:

 

 

- Net investment income

365

622

- Foreign exchange (losses)/gains and other charges

(45)

55

 

320

677

Analysed between:

 

 

- Long-term investment return, reported within Group adjusted operating profit

335

381

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

(15)

296

 

320

677

Short-term fluctuations:

 

 

- General insurance and health

(15)

296

- Other operations1

(49)

(129)

Total short-term fluctuations

(64)

167

1  Other operations represents short-term fluctuations on assets backing non-life business in Group centre investments, including the centre hedging programme.

The short-term fluctuations during 2020 of £64 million adverse is primarily due to falling equity markets and foreign exchange losses. These losses are partly offset by an increase in the value of fixed income securities as a result of falls in interest rates.

The short-term fluctuations during 2019 of £167 million favourable is primarily due to strong market conditions across all our major markets. This resulted in significant gains on equities plus gains on fixed income securities driven by interest rates falling and a narrowing of credit spreads. These gains are partly offset by losses on hedges held by the Group, including the Group centre hedging programme, and other adverse movements on centre holdings.

 

 

Page 34

 

A8 - General insurance and health business: Economic assumption changes

In the general insurance and health business, there is a negative impact of £104 million (2019: £54 million negative) primarily as a result of a decrease in the interest rates used to discount claims reserves for both periodic payment orders (PPOs) and latent claims.

A9 - Impairment of goodwill, joint ventures, associates and other amounts expensed

Impairment of goodwill, associates and joint ventures and other amounts expensed in the year is a charge of £30 million (2019: 15 million charge).

A10 - Amortisation and impairment of intangibles acquired in business combinations

The amortisation and impairment of intangible assets acquired in business combinations decreased to a charge of £76 million (2019: 87 million charge) mainly due to intangible assets which were amortised in full in 2020.

A11 - Amortisation and impairment of acquired value of in-force business

Amortisation of acquired value of in-force business (AVIF) is a charge of £278 million (2019: £406 million charge), which relates solely to amortisation in respect of the Group's subsidiaries and joint ventures. Impairment charges of £19 million (2019: £28 million charge) in relation to Friends Provident International Limited (FPI) remeasurement losses are recorded within profit/loss on disposal and remeasurement of subsidiaries, joint ventures and associates. See note A12.

A12 - 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 £725 million (2019: £22 million loss). This comprises of net gains arising on the disposals of FPI, Singapore, Indonesia and Hong Kong. Further details of these items are provided in note B5.

A13 - 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 2020, other items is a charge of £34 million (2019: 47 million charge), which comprises the following:

· A charge of £16 million in relation to costs from contracts that have become onerous following the disposals of FPI, Singapore, Indonesia and Hong Kong; and

· A charge of £18 million in relation 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) for former members.

 

At 31 December 2019, other items comprised the following:

· A charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims; and

· A charge of £2 million relating to the negative goodwill which arose on the acquisition of Friends First in 2018.

 

 

 

Page 35

 

IFRS capital
A14 - IFRS net asset value

 

2020
£m

2020 pence

per share2

2019
£m

2019 pence

per share2

Equity attributable to shareholders of Aviva plc at 1 January1

17,008

434p

16,558

424p

Adjustment at 1 January 2019 for adoption of IFRS 163

-

-

(110)

(3)p

Equity attributable to shareholders of Aviva plc at 1 January restated1

17,008

434p

16,448

421p

Group adjusted operating profit

3,161

80p

3,184

80p

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

6

-

767

19p

Amortisation and impairment of intangibles, joint ventures, associates and other amounts expensed

(106)

(3)p

(102)

(3)p

Amortisation and impairment of acquired value of in-force business

(278)

(7)p

(406)

(10)p

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

725

18p

(22)

(1)p

Other4

(34)

(1)p

(47)

(1)p

Tax on operating profit and on other activities

(564)

(14)p

(711)

(18)p

Non-controlling interests

(112)

(3)p

(115)

(3)p

Profit after tax attributable to shareholders of Aviva plc

2,798

70p

2,548

63p

Available for sale (AFS) securities fair value and other reserve movements

32

1p

41

1p

Ordinary dividends

(236)

(6)p

(1,184)

(30)p

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

(44)

(1)p

(51)

(1)p

Foreign exchange rate movements

(81)

(2)p

(170)

(4)p

Remeasurements of pension schemes (net of tax)

(171)

(4)p

(763)

(19)p

Other net equity movements

48

1p

139

3p

Equity attributable to shareholders of Aviva plc at 31 December1

19,354

493p

17,008

434p

1  Excluding preference shares of £200 million (2019: £200 million).

2  Number of shares as at 31 December 2020: 3,928 million (2019: 3,921 million).

3  The Group adopted IFRS 16 Leases from 1 January 2019. In line with the transition options available, impact of the adoption was shown as an adjustment to opening retained earnings.

4  Other in 2020 includes a charge of £16 million relating to costs on contracts that have become onerous following the disposals of FPI, Singapore, Indonesia and Hong Kong and a charge of £18 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). Other in 2019 relates to a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims and a charge of £2 million relating to negative goodwill which arose on the acquisition of Friends First.

At 31 December 2020, IFRS net asset value per share was 493 pence (2019: 434 pence). The increase of 59.0p, compared to 2019, reflects the increase in profit before tax combined with the net actuarial loss on remeasurement of pension schemes and the dividend payments in the year.

 

 

Page 36

 

A15 - IFRS return on equity ‡#

 

Operating profit

 

 

2020

Before tax
attributable to shareholders' profits
£m

After tax attributable to shareholders' profits
£m

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

Return on equity %

UK & Ireland Life

1,907

1,570

11,953

13.1%

UK & Ireland General Insurance

213

190

1,287

14.8%

Canada

287

224

1,479

15.1%

Aviva Investors

85

66

508

13.0%

Manage-for-value1

1,311

1,018

5,834

17.4%

Other Group activities2

(275)

(245)

6,994

N/A

Return on total capital employed

3,528

2,823

28,055

10.1%

Subordinated debt

(352)

(284)

(6,974)

4.1%

Senior debt

(15)

(12)

(1,375)

0.9%

Return on total equity

3,161

2,527

19,706

12.8%

Less: Non-controlling interests

 

(98)

(1,002)

9.8%

Direct capital instrument

 

(27)

(125)

21.6%

Preference shares

 

(17)

(200)

8.5%

Return on equity shareholders' funds

 

2,385

18,379

13.0%

1  The Manage-for-value operating profit before tax attributable to shareholders' profits of £1,311 million includes £312 million discontinued operations as described in note B2.

2  The other Group activities operating loss before tax of £275 million comprises corporate centre costs of £250 million, other business operating loss of £22 million, partly increased by interest on internal lending arrangements of £48 million and finance income on the main UK pension scheme of £45 million.

 

Operating profit

 

 

Restated1 2019

Before tax
attributable to
shareholders'
profits
£m

After tax
attributable to shareholders' profits
£m

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

Return on equity %

UK & Ireland Life2

1,974

1,644

10,457

15.7%

UK & Ireland General Insurance

297

243

1,477

16.5%

Canada

191

140

1,406

10.0%

Aviva Investors

96

66

515

12.8%

Manage-for-value3

1,150

834

5,893

14.2%

Other Group activities2,4

(173)

(127)

6,611

N/A

Return on total capital employed

3,535

2,800

26,359

10.6%

Subordinated debt

(336)

(272)

(6,303)

4.3%

Senior debt

(15)

(12)

(1,345)

0.9%

Return on total equity

3,184

2,516

18,711

13.4%

Less: Non-controlling interests

 

(98)

(975)

10.1%

Direct capital instrument and tier 1 notes

 

(34)

(674)

5.0%

Preference shares

 

(17)

(200)

8.5%

Return on equity shareholders' funds

 

2,367

16,862

14.0%

1  The 2019 comparative results have been restated from those previously published relating to the change in presentation of segmental information. See note B2.

2  Following a review of the presentation of intercompany loan interest, comparative amounts for the year ended 31 December 2019 have been amended to reclassify net interest expense from UK & Ireland Life to Other Group activities, of before tax £65 million (after tax £53 million) as a non-operating item. The change has no impact on the Group's operating profit.

3  The Manage-for-value operating profit before tax attributable to shareholders' profits of £1,150 million includes £251 million discontinued operations as described in note B2.

4  The other Group activities operating loss before tax of £173 million comprises corporate centre costs of £183 million, other business operating loss of £21 million (restated), partly offset by interest expense on internal lending arrangements of £49 million (restated) and finance income on the main UK pension scheme of £80 million.

 

 

Page 37

 

A16 - Group capital under IFRS basis

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

 

2020
£m

Restated1

2019
£m

UK & Ireland Life

12,654

10,962

UK & Ireland General Insurance2

1,415

1,460

Canada

1,501

1,376

Aviva Investors

498

511

Manage-for-value

5,417

5,752

Other Group activities2,3

7,328

6,120

Total capital employed

28,813

26,181

Financed by

 

 

Equity shareholders' funds

19,354

17,008

Non-controlling interests

1,006

977

Direct capital instrument

-

500

Preference shares

200

200

Subordinated debt

7,033

6,206

Senior debt

1,220

1,290

Total capital employed4

28,813

26,181

1  The 2019 comparative results have been restated from those previously published relating to the change in presentation of segmental information. See note B2.

2  Capital employed for United Kingdom General Insurance excludes £0.9 billion (2019: £0.9 billion) of goodwill which does not support the general insurance business for capital purposes and is included in other Group activities.

3  Other Group activities include centrally held tangible net assets, the main UK staff pension scheme surplus and also reflect 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  Goodwill, AVIF and other intangibles are maintained within the capital base. Goodwill includes goodwill in subsidiaries of £1,799 million (2019: £1,855 million) and goodwill in joint ventures of £9 million (2019: £11 million). AVIF and other intangibles comprise £2,434 million (2019: £2,800 million) of intangibles in subsidiaries and £3 million (2019: £27 million) of intangibles in joint ventures, net of deferred tax liabilities of £(397) million (2019: (413) million) and the non-controlling interest share of intangibles of £(25) million (2019: £(28) million).

Total capital employed is financed by a combination of equity shareholders' funds, preference capital, subordinated debt and other borrowings.

On 27 July 2020, Group redeemed its 5.9021% £500 million direct capital instrument in full.

At 31 December 2020 the market value of our external debt (subordinated debt and senior debt) and preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million) was £10,233 million. At 31 December 2019 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, with non-controlling interests, of £250 million), and direct capital instrument was £9,764 million.

END PART 2 of 4

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