Final Results - Part 1 of 4

RNS Number : 0478H

Aviva PLC

08 March 2018

Start Part 1 of 4

News Release

8 March 2018

AVIVA PLC 2017 PRELIMINARY RESULTS ANNOUNCEMENT

Mark Wilson, Group Chief Executive Officer, said:

In 2017, Aviva delivered growth in profits, in dividends, in capital and in cash. Aviva grew operating earnings per share by 7% and our full year dividend by 18%, the fourth consecutive year of double-digit dividend growth.

Our largest market, the UK, has gone from strength to strength, growing sales, market share and profit. For Aviva, the UK is a dependable and growing business.

Aviva has broad-based growth, with six of our eight major markets delivering double-digit profit improvement. We now have a collection of strong and growing businesses.

This year, we expect to deploy £2 billion of excess cash, including £900 million in debt reduction, in excess of £500 million of capital returns to shareholders and about £600 million for bolt-on acquisitions.

We continue to invest in our businesses and in particular on priorities such as digital to make our products and services easier for our customers.

Aviva is now a simpler, stronger group and we are growing. Our strategy is paying dividends.

Profit	· Operating EPS^1,2 up 7% to 54.8 pence (2016: 51.1 pence) · Operating profit³ up 2% to £3,068 million (2016: £3,010 million) · Operating profit from eight major markets excluding divestments up 6% to £3,508 million (2016: £3,300 million) · IFRS profit after tax £1,646 million (2016: £859 million)
Dividend	· 2017 total dividend per share up 18% to 27.4 pence (2016: 23.3 pence) · Dividend payout ratio 50%, 2017 target delivered
Capital	· Solvency II capital surplus £12.2 billion (2016: £11.3 billion) · Solvency II cover ratio^1,4 198% (2016: 189%) · Operating capital generation¹ £2.6 billion (2016: £3.5 billion) · IFRS net asset value per share¹ 423 pence per share (2016: 414 pence)
Cash	· Cash remittances¹ up 33% to £2,398 million (2016: £1,805 million) · Group centre liquidity £2.0 billion (2016: £1.8 billion)
Growth	· General insurance net written premiums up 11% to £9,141 million (2016: £8,211 million) · Value of new business¹ up 25% to £1,243 million (2016: £992 million) · Aviva Investors fund management revenue up 14% to £577 million (2016: £506 million) · Total group assets under management¹ (AUM) up 9% to £490 billion (2016: £450 billion)
Combined ratio	· General insurance combined operating ratio¹ 96.6% (2016: 94.2%⁵)

1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

2 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

3 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

4 The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds of £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus of £1.5 billion (2016: £1.1 billion). These exclusions have no impact on Solvency II surplus. The estimated Solvency II position includes the pro forma impacts of the disposals of Friends Provident International Limited (£0.1 billion increase to surplus) and the Italian Avipop Assicurazioni S.p.A (£0.1 billion increase to surplus). The 31 December 2016 Solvency II position included pro forma adjustments for the impact of the announced disposal of Antarius and the future impact of changes to UK tax rules announced by the Chancellor of the Exchequer's Autumn statement, which was removed following clarification in the 13 July 2017 Finance Bill. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional provisions (TMTP) to reflect interest rates at 31 December 2016 £0.4 billion decrease to surplus.

5 2016 excludes the impact of the change in the Ogden discount rate of £475 million, which was recognised as an exceptional adjusting item. 2016 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

Key Financial Metrics

Foreword

All references to Operating profit^1,7 represent 'Group adjusted operating profit' as an Alternative Performance Measure (APM) which is not bound by IFRS. Further explanation can be found in the 'Other information' section of the Analyst Pack. All currency movements are calculated on unrounded numbers so minor rounding differences may exist.

Operating profit

	2017 £m	2016 £m	Sterling % change
Life business	2,882	2,642	9%
General insurance and health²	700	833	(16)%
Fund management	164	138	19%
Other³	(678)	(603)	(12)%
Total²	3,068	3,010	2%

Operating earnings per share^2,4,7

54.8p

51.1p

Cash remittances^5,7 and Operating Capital Generation (OCG): Solvency II basis^5,7

	2017		2016
	Cash Remittances £m	OCG £bn	Cash Remittances £m	OCG £bn
United Kingdom^5,6	1,800	2.8	1,187	2.8
Canada	55	(0.1)	130	0.3
Europe^5,6	485	0.9	449	1.0
Asia & Aviva Investors	58	0.1	39	-
Other⁸	-	(1.1)	-	(0.6)
Total	2,398	2.6	1,805	3.5

Expenses

	2017 £m	2016 £m	Sterling % change
Operating expenses⁷	3,778	3,408	11%
Integration & restructuring costs	141	212	(33)%
Expense Base	3,919	3,620	8%

Operating expense ratio⁷

52.7%

50.5%

2.2pp

Value of new business: Adjusted SII basis⁷

	2017 £m	2016 £m	Sterling % change⁶	Constant currency % change⁶
United Kingdom	527	429	23%	23%
Europe	533	429	24%	17%
Asia & Aviva Investors	183	134	37%	33%
Total	1,243	992	25%	21%

General insurance combined operating ratio^7,9

	2017	2016	Change
United Kingdom⁶	93.9%	106.3%	(12.4)pp
Canada	102.2%	93.0%	9.2pp
Europe⁶	93.3%	95.1%	(1.8)pp
Combined operating ratio	96.6%	100.1%	(3.5)pp

IFRS profit after tax

	2017 £m	2016 £m	Sterling % change
IFRS profit after tax	1,646	859	92%
Basic earnings per share	35.0p	15.3p	129%

Dividend

	2017	2016	Sterling % change
Final dividend per share	19.00p	15.88p	20%
Total dividend per share	27.40p	23.30p	18%

Capital position

	2017	2016	Sterling % change
Estimated Shareholder Solvency II cover ratio^7,10,	198%	189%	9.0pp
Estimated Solvency II surplus^7,10	£12.2bn	£11.3bn	8%
Net asset value per share⁷	423p	414p	2%

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

2 2016 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional adjusting item. 2016 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

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

4 Net of tax, non-controlling interests, preference dividends, coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax). The calculation of earnings per share uses a weighted average of 4,041 million (2016: 4,051 million) ordinary shares in issue, after deducting treasury shares.

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

6 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.

7 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

8 Other includes other Group activities and Group diversification benefit

9 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change.

10 The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds of £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus of £1.5 billion (2016: £1.1 billion). These exclusions have no impact on Solvency II surplus. The estimated Solvency II position includes the pro forma impacts of the disposals of Friends Provident International Limited (£0.1 billion increase to surplus) and the Italian Avipop Assicurazioni S.p.A (£0.1 billion increase to surplus). The 31 December 2016 Solvency II position included pro forma adjustments for the impact of the announced disposal of Antarius and the future impact of changes to UK tax rules announced by the Chancellor of the Exchequer's Autumn statement, which was removed following clarification in the 13 July 2017 Finance Bill. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional provisions (TMTP) to reflect interest rates at 31 December 2016 £0.4 billion decrease to surplus.

Group Chief Executive Officer's report

Overview

In 2017, Aviva delivered growth: in profits, in dividends, in capital and in cash.

Our headline results show broad-based growth. Operating earnings per share (EPS)^2,3 gained 7% to 54.8 pence (2016⁵: 51.1 pence), operating capital generation² remained strong at £2.6 billion (2016: £3.5 billion), Solvency II capital surplus^2,4 rose to £12.2 billion (2016: £11.3 billion) and business unit cash remittances² increased 33% to £2.4 billion (2016: £1.8 billion).

Operating profit¹ increased 2% to £3,068 million (2016: £3,010 million). Excluding the impact of divestments, our eight major markets delivered a 6% increase in operating profit, with double-digit growth contributed by the UK, Aviva Investors, France, Poland, Ireland and Singapore. Operating profits also benefitted from a net positive impact from assumption changes in the UK. However, Canada reported a disappointing result reflecting adverse changes in prior year reserve development and higher current year claims inflation. We have implemented a detailed recovery plan in Canada, raising premium rates and taking actions on underwriting, claims, distribution and expense management.

In light of our results, we have increased our total dividend 18% to 27.4 pence (2016: 23.3 pence). This marks the fourth consecutive year of double-digit growth in the total dividend and we have reached our target of paying out 50% of operating EPS.

Having successfully executed our plan to strengthen the balance sheet and focus Aviva on those businesses with the strongest fundamentals, we have increased our growth ambitions. Our 2017 results provide evidence that we are capable of delivering consistent growth in operating EPS and dividends.

Capital allocation

A key element of Aviva's strategy is allocating capital towards businesses and segments with the strongest returns and growth prospects. We made further progress on this strategic objective in 2017, announcing divestments that will result in our withdrawal from Spain, Taiwan and Friends Provident International.

We have significantly simplified and focussed our geographic footprint over recent years, halving the number of markets in which we have operations. This process is now complete and we are no longer actively seeking to reduce our geographic footprint. As a result, Aviva's core business is now comprised of eight major markets and six strategic investments.

Our major markets are the UK, France, Canada, Poland, Ireland, Italy, Singapore and Aviva Investors. These markets have structural drivers of demand underpinned by economic growth, demographics and regulation. Within these markets, Aviva has competitive strength in distribution, brand, capability and scale efficiency that allows us to deliver consistent growth and attractive returns. The major markets are currently responsible for virtually all of Aviva's operating profit and cash remittances.

Our strategic investments are businesses where we are targeting long-term growth by working with leading local partners in populous countries with strong growth characteristics. Our strategic investment markets are China, Hong Kong, India, Turkey, Vietnam and Indonesia. While in aggregate these businesses make a modest contribution to Aviva's financial performance today, they are sources of long-term upside for operating profit, cash flow and value.

Aviva's capital strength provides us with significant flexibility in terms of future capital allocation. Our Solvency II capital surplus^2,4 of £12.2 billion equates to a Solvency II cover ratio of 198%, well above our 150% to 180% working range. As a result, we have signalled plans to deploy £3 billion of excess cash in 2018 and 2019.

Our priorities for deployment remain unchanged. Our objective is to use surplus cash to deliver sustainable benefits to our shareholders. For 2018, we have outlined our intent to repay approximately £900 million of expensive hybrid debt, saving more than £60 million in annual pre-tax interest expense. We have allocated approximately £600 million for bolt-on M&A, which includes the €130 million already committed to the Friends First acquisition in Ireland. And we have indicated that in excess of £500 million will be used for capital returns, which may include liability management, share buy-back or special dividends.

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

2 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the 'Other information' section of the Analyst Pack

5 2016 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional adjusting item. 2016 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

Meeting our
customers' needs

Aviva has made significant, tangible progress in delivering our True Customer Composite strategy in 2017.

In the UK, Aviva is unique as the only large-scale composite insurer with top three positions across multiple product lines. In 2017, we moved to a unified management structure for our life, general and health insurance businesses under the leadership of Andy Briggs. This change has helped us to increase the collaboration between different product teams and improve our focus on the customer. The strength of our franchises is evident, with large mandate wins driving higher new business volumes across our major product segments. We saw continued success in our partnership channels, expanding our leading position in the bank market and delivering a significant uplift in net flows into our advisor platform. Meanwhile, we made further strong progress in our direct to consumer business, growing net written premiums by 14% and we increased the number of customers in the UK who have more than one product with Aviva by approximately 300,000.

Our strength in distribution and manufacturing is also helping to strengthen our composite position in markets outside the UK. In France, our new leadership team intends to align our high quality distribution franchises under a single Aviva brand to deepen customer relationships. In Ireland, we have maintained positive momentum in both sales volume and operating profit in 2017 and the acquisition of Friends First will move our market share to mid-teens across both life and general insurance. Italy has expanded IFA distribution and developed innovative hybrid products, which helped to underpin a doubling of value of new business and strong net fund flows. Singapore is drawing on our digital and distribution expertise to develop the Aviva Financial Advisors network, which has grown to more than 670 advisors.

Digital

Aviva seeks to play a leading role in the digital revolution of insurance and our intellectual property (IP) has had a significant impact on our business in the past 12 months. Our UK digital and direct business passed the £1 billion premium mark in 2017, delivering growth of 14%. Our digital IP also played a pivotal role in helping us to secure long-term relationships with HSBC in the UK and Tencent in Hong Kong.

In 2017, we established Aviva Quantum, our artificial intelligence and global data science group, which now has 550 data scientists. This group has developed our Ask it Never IP, which allows us to reduce the number of questions we ask customers during the underwriting process, significantly improving their quote and buy experience. We are using this IP to develop a new generation of insurance products, called Aviva Plus. This proposition takes the subscription model and applies it to insurance and is expected to be progressively rolled out to our existing UK customers.

In the next few years, we will continue to invest heavily to grow revenue and fully digitise our business. Through this, we are targeting improvements in efficiency and customer experience that we expect to lead to higher sales, better retention, expanding margins and in turn growing profit over the medium to long term.

Outlook

The streamlining of our geographic perimeter is complete and the strength of our franchises is beginning to shine through. As a result, we have upgraded and brought forward our growth ambitions, and are now targeting greater than 5% growth in operating EPS^2,3 from 2018. Together with our targets of £8 billion of cumulative remittances in 2016-2018 inclusive and increase in dividend payout ratio to 55-60% by 2020, we remain confident that we can continue to deliver cash flow plus growth for our shareholders.

Mark Wilson

Group Chief Executive Officer

3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the 'Other information' section of the Analyst Pack

Chief Financial Officer's report

Overview

In 2017, Aviva delivered growth in operating profit¹, generated increased cash flow, further strengthened our Solvency II cover ratio^2,4 and used excess cash and capital to repay debt and repurchase shares.

Operating profit increased 2% to £3,068 million (2016: £3,010 million) while operating earnings per share (EPS)^2,3,5 advanced 7% to 54.8 pence (2016: 51.1 pence). The Board of Directors has proposed a final dividend of 19.0 pence per share. This takes the full year dividend per share to 27.4 pence, an increase of 18% and meeting our 2017 dividend payout ratio target of 50% of operating EPS.

IFRS profit after tax attributable to shareholders was £1,646 million and basic earnings per share 35.0 pence (2016: £859 million and 15.3 pence respectively). The year-on-year movement in these measures reflects the one-off exceptional charge of £475 million incurred in 2016 as a result of the change in the Ogden discount rate, a reduction in integration and restructuring expenses and gains on divestitures, offset by a re-measurement loss of £118 million arising from our recent announcement to dispose of Friends Provident International, which has been measured at fair value.

In 2017, Aviva repaid debt of US$650 million and returned capital to shareholders via a £300 million share repurchase program. With our Solvency II cover ratio remaining above our working range, we have plans to reduce hybrid debt by a further £900 million in 2018 and will consider other opportunities to deploy surplus capital to strengthen our businesses and enhance long-term shareholder returns.

During 2017, Aviva announced divestments of joint ventures in France, Spain, Taiwan, and Italy as well as the sale of Friends Provident International. Aviva invested in Vietnam, where we acquired 100% ownership of our joint venture with VietinBank, and we announced the acquisition of Friends First in Ireland, strengthening our position in the Irish life insurance market. In Hong Kong, regulatory approval was recently granted for our joint venture with Tencent and Hillhouse.

In 2017, our major markets demonstrated their competitive strength by growing assets, improving net flows and increasing premium volumes. Our priority is to accelerate the performance of our businesses and translate this into attractive and dependable growth in operating profit and dividends.

Operating performance:
Major markets

Aviva currently derives virtually all of its operating profit and cash flow from eight major markets: UK, Ireland, France, Poland, Italy, Canada, Singapore and Aviva Investors. This is where Aviva believes it is currently best positioned to compete on the basis of our scale, brand and leading distribution.

The operating profit from these major markets (excluding divestitures) totalled £3,508 million (2016: £3,300 million), an increase of 6%. Growth was supported by higher operating profit from our businesses in the UK, Aviva Investors, France, Ireland, Poland and Singapore. These more than offset the reduction in operating profit from Canada.

United Kingdom

Aviva is unique as the only large-scale composite insurer in the UK market with a top three share across multiple product lines. In UK Insurance operating profit increased 13% to £2,201 million (2016: £1,946 million) due to attractive growth across most of our core product lines together with favourable development of reserves.

In long-term savings, operating profit rose 30% to £185 million (2016: £142 million) reflecting higher assets under management (AUM)², stable in-force profit margin and strict management of acquisition costs, despite increases in new business sales. Net fund flows almost doubled to £5.6 billion (2016: £2.9 billion) due to mandate wins in workplace pensions together with a sharp increase in net flows into the advisor platform, where AUM increased by 56% to £20 billion.

Operating profit from annuities and equity release grew 11% to £725 million (2016: £656 million) due to higher new business volumes and continued progress on optimising assets backing the in-force portfolio. New business volumes increased 58% to £4.3 billion (2016: £2.7 billion), mainly as a result of bulk purchase annuities, where sales more than tripled in 2017 to £2,045 million (2016: £620 million).

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the 'Other information' section of the Analyst Pack

United Kingdom
(continued)

Life protection saw a reduction in operating profit¹ to £227 million (2016: £242 million). While increased volumes and margins supported growth in new business contribution from both the consumer and group protection portfolios, the result from the existing business declined due to unfavourable claims experience in group protection.

General insurance made continued progress in 2017, increasing net written premiums by 4% while further refining product and channel mix. Operating profit grew 4% to £408 million (2016: £392 million) due to improved underwriting. Excluding the impact of the change in Ogden discount rate in the prior year, the combined operating ratio^2,6 was stable at 93.9%, helping to generate underwriting result² of £246 million (2016: £232 million). The long term investment return was consistent with the prior year at £163 million (2016: £162 million). In 2017, we announced the extension and expansion of our relationship with HSBC in the UK, which is expected to provide additional impetus for growth in in 2018.

Our legacy business of mature savings products maintained operating profit at £331 million (2016: £332 million). AUM² in the legacy portfolio remained stable, with positive investment markets offsetting net fund outflows as policies matured. We continue to expect operating profit from the legacy business to decline gradually over the medium term.

In addition to the above core product lines, we have made changes to assumptions and methodology in 2017. The net effect of these changes increased to £290 million (2016: £151 million). This included changes in relation to longevity reserves, partially offset by increased provisions in other areas including expenses.

Aviva's UK business has unrivalled strength and depth and provides a blueprint for our digital composite strategy. Looking forward, our priorities are to grow operating profit while generating significant levels of free cash-flow that can be invested or returned to deliver additional long-term benefits for shareholders.

The UK offers structural growth drivers including the shift in assets and savings flows from defined benefit (DB) pensions into defined contribution (DC), rising auto-enrolment pension contribution rates and the trend for corporates to seek insured solutions to manage (and outsource) their DB pension schemes. By leveraging the strength of our relationships with customers and partners, we are focussed on extending our track record of growth via higher net flows, increases in premium volumes and continued discipline in managing expenses.

Aviva Investors

Aviva Investors is targeting double digit growth by transforming its position and becoming a leading asset manager of both third party and Aviva assets. It is achieving this by focussing on three key areas:

· Providing solutions - where the AIMS range of funds seeks to achieve investors' desired outcomes with reduced volatility.

· Real Assets expertise - where our capability and expertise in real estate and infrastructure origination supports both the growing need of Aviva's annuity portfolio and the requirements of external investors, including defined benefit pension schemes.

· Improving investment performance - where we can capitalise on our strong fund performance track record, the strength of the Aviva brand and the acquisition of additional asset management talent to increase our presence in traditional asset classes.

In 2017, Aviva Investors achieved another year of strong growth, with fund management operating profit rising 21% to £168 million (2016: £139 million). Revenue grew 14% to £577 million (2016: £506 million) due to higher average AUM, an increase in revenue margin associated with the expansion of the third party business and greater levels of infrastructure asset origination. Operating expenses² rose slower than revenues at 11%, leading to an improvement in the operating margin to 29% (2016: 27%).

AUM rose to £353 billion (2016: £345 billion). Net inflows of £1.6 billion (2016: £1.0 billion) benefitted from higher inflows into internal core propositions while market and foreign exchange movements added £5.9 billion to AUM.

Looking forward, the priority for Aviva Investors is to continue the targeted shift toward external funds and Aviva core propositions, along with increased origination activity in infrastructure and real estate financing. This should further increase revenue margins and operating profits and more than offset the net outflow in legacy Aviva life products that are no longer actively marketed.

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

6 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change.

Ireland

In Ireland, Aviva is a composite insurer with a leading market position in general insurance and a top four position in life insurance. Our strategy in Ireland is to leverage the strong capabilities of the Aviva group, bringing together leading digital propositions and a large-scale composite business model to capitalise on Aviva's strong brand recognition.

In 2017, Aviva Ireland delivered operating profit¹ of £86 million (2016: £80 million) an increase of 18% after adjusting out the contribution from the health insurance business divested in 2016. In general insurance, net written premiums increased 8% to £436 million (2016: £378 million) and the combined operating ratio^2,6 improved by one percentage point to 91.4%. This underpinned growth in general insurance operating profit to £53 million (2016: £48 million). In life insurance, operating profit was £33 million (2016: £32 million) with a modest increase in sales volumes offset by higher investment management charges.

Looking forward, the priority in Ireland is to maintain underwriting discipline and continue to develop our composite, multi-product franchise with brokers, partners and customers. We recently announced the acquisition of Friends First for €130 million (subject to regulatory approval), increasing the scale of our life insurance business.

France

In France, Aviva has strong distribution and a composite footprint, with increased brand recognition providing an opportunity to expand our presence with customers.

France operating profit was flat in local currency terms at £529 million (2016: £499 million). However, this reflected a partial year contribution from Antarius, which was sold to Societe Generale in April 2017. Excluding Antarius, operating profit increased 13% in local currency terms to £507 million (2016: £421 million).

In life insurance, operating profit excluding Antarius increased 8% in local currency to £403 million (2016: £351 million). Fee revenues benefitted from higher average AUM² and our results were further supported by the continued evolution of business mix towards protection and unit-linked products.

In general insurance, operating profit gained 37% to £104 million (2016: £70 million). Net written premiums increased 3% to £1,053 million (2016: £957 million) due to growth in direct personal lines, while lower weather related claims helped the combined operating ratio⁶ improve to 94.5% (2016: 97.0%).

In France, we intend to consolidate our distribution into four key channels under a single Aviva brand. This targets improved alignment and efficiency within the distribution network, strengthening Aviva's ability to develop relationships with customers in the French market across our composite product offering.

Canada

Aviva is a scale player in the Canadian general insurance market, with a circa 10% market share. We have a leading position in the broker channel and, following our recent acquisition of RBC General Insurance (RBCGI), have expanded our presence into the direct and bank channels. Canada has provided attractive returns on capital in most years and our current positioning provides a long-term opportunity to be a leader in the general insurance market while seeking to develop elements of a composite footprint for the benefit of customers.

In 2017, Canada had a very challenging year, with operating profit falling to £46 million (2016: £269 million). Net written premiums grew 15% to £3,028 million (2016: £2,453 million) due to a full 12 month contribution from RBCGI (acquired in July 2016) and long term investment return rose to £115 million (2016: £105 million). However, the underwriting result deteriorated from a profit of £168 million in 2016 to a loss of £64 million in 2017.

The increase in the combined operating ratio⁶ to 102.2% (2016: 93.0%) was attributable to adverse prior year reserve development across auto and property insurance portfolios together with weaker accident year profitability in the auto insurance market, where bodily injury claims inflation rose sharply. In 2016, prior year reserve releases added £130 million to operating profit, while in 2017, reserves were strengthened by £37 million. The underwriting result in Canada also suffered from heightened levels of large losses in the commercial insurance portfolio, while weather and natural catastrophe claims remained at elevated levels.

Looking forward, the priority in Canada is to restore operating profit to historical levels. We have undertaken a number of remedial actions, including increasing premium rates across a number of product classes. Our medium term objective is to return our combined operating ratio to a 94-96% target range. However, the impact of these actions may take time to be reflected in our results, and our combined operating ratio is likely to remain above our target range in 2018 and 2019.

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

6 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change.

Poland	Aviva is one of the leading composite insurers in Poland, with a number two position in life insurance underpinned by strong multi-channel distribution. Aviva Poland increased operating profit¹ by 12% in local currency to £177 million (2016: £140 million). In life insurance, operating profit rose 8% to £156 million (2016: £132 million) while general insurance operating profit was £21 million (2016: £8 million). Growth was supported by higher average AUM² in life insurance helped by improved productivity in our direct sales force and higher retention. In general insurance, increased volumes in direct retail and commercial lines together with lower motor claims frequency helped to support growth. Operating profit from both the life insurance and general insurance businesses also benefitted from consolidating the joint venture with Bank Zachodni WBK SA for the first time in 2017. The emphasis in Poland is maintaining positive momentum in the life insurance business and continuing to build scale across the composite.
Italy	Aviva has a composite position in the Italian market supported by joint ventures and distribution relationships with leading banks and a growing franchise among independent financial advisors. We have an opportunity to deploy our digital expertise in Italy to further strengthen our propositions for customers and distribution partners. Aviva Italy has generated strong growth in life new business volumes and delivered £2.3 billion of net fund inflows reflecting the success of their hybrid product and expansion of the distribution footprint. However, this also gave rise to short-term strain in profitability against what was a record result in 2016. As a result operating profit from Aviva's Italian business was stable in 2017 at £213 million (2016: £212 million), despite a 7% benefit from foreign exchange translation. In life insurance, operating profit of £168 million (2016: £170 million) represented an 8% decline in local currency terms. General insurance operating profit was stable at £45 million (2016: £42 million), reflecting an increase in net written premiums to £412 million (2016: £395 million) and a slight deterioration in combined operating ratio^2,6 to 94.2% (2016: 92.5%). Aviva Italy is a leader in the market in terms of product design and this is translating into attractive new business volumes and net inflows. We remain focussed on strengthening our strategic positioning in Italy by expanding distribution and increasing emphasis on our composite business model.
Singapore	We are a major player in the Singapore life and health insurance market and our strategy is to encourage the evolution of distribution in the market towards financial advisors. We believe this will benefit customers, providing greater convenience, increased choice and superior value for money. Aviva Financial Advisors now has more than 670 financial advisors, to whom we provide technology, compliance and administrative support. Our ambition is the further expand this channel, where Aviva is a leading provider of long-term savings and protection products. In 2017, Singapore delivered operating profit of £110 million (2016: £100 million), an increase of 5% in local currency terms. Life insurance operating profit of £118 million (2016: £112 million) was stable in local currency terms. Aviva's financial advisor network began to build momentum in new business production, increasing value of new business² by 24% to £123 million. In general insurance and health, operating losses narrowed to £8 million (2016: £12 million).
Strategic investments	In addition to its major markets, Aviva has strategic investments which are managed to produce long-term growth in operating profit and value. These strategic investments are in China, Hong Kong, Turkey, India, Vietnam and Indonesia. Within this, we are currently delivering attractive and growing profits in our joint ventures in China and Turkey, however these are offset by losses from less mature businesses in Indonesia and Vietnam, coupled with our acceleration of investment into Digital.

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

6 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change.

Capital & cash

At 31 December 2017, Aviva's Solvency II capital surplus^2,4 was £12.2 billion (2016: £11.3 billion), equivalent to a cover ratio^2,4 of 198% (2016: 189%). We increased our Solvency II cover ratio by 9 percentage points, whilst also paying off approximately £500 million of subordinated debt and completing a £300 million share repurchase programme during 2017. Operating capital generation² of £2.6 billion (2016: £3.5 billion) remained well above underlying levels due to benefits associated with merging legal entities in the UK and other actions as we continue to adapt to the Solvency II regime. Underlying capital generation remained stable at £1.7 billion (2016: £1.7 billion), despite higher premium volumes in general insurance, increased new business sales in life insurance, lower profitability from our Canadian business and the impact of divestitures. Cash remittances² from our business units were £2,398 million (2016: £1,805 million). The increase in remittances was mainly attributable to the UK, which contributed £1,800 million (2016: £1,187 million). Remittances from the UK general insurance business increased and special remittances from the life business arising from the Friends Life integration doubled to £500 million. Remittances from Europe of £485 million (2016: £449 million) and Aviva Investors of £58 million (2016: £39 million) both grew in conjunction with operating profit progression while Canada's weaker results led to a decline in remittances to £55 million (2016: £130 million).

At our Capital Markets Day event in Poland in November 2017, we upgraded our target for total cash remittances to Group centre over the three year period from 2016 to 2018 inclusive to £8 billion (previously £7 billion). With cumulative remittances inclusive of announced divestiture proceeds at £5.4 billion, we remain on track to deliver this target.

Aviva's Group centre cash resources are £2.0 billion (February 2017: £1.8 billion). Our intention is to maintain this in a range of £1.0 billion to £1.5 billion over time. In view of our surplus capital and liquidity position and expected level of Group centre cash receipts over the coming year, we anticipate having £3 billion available for deployment in 2018 and 2019.

Our priorities for deployment of surplus cash and capital remain unchanged. We prioritise profitable organic growth in our existing businesses. After allowing for this, we will look to reduce debt balances, consider bolt-on acquisitions and provide additional capital returns.

In 2018, we have signalled our intention to reduce hybrid debt by £900 million. We are targeting more than £500 million in additional capital returns, incorporating liability management and returns to shareholders. In this regard, we have the ability to cancel preference shares at par value⁷ through a reduction of capital, subject to shareholder vote and court approval. The preference shares carry high coupons that are not tax-deductible and they will not count as regulatory capital from 2026. As we evaluate the alternatives, one of the things we are considering is how to balance the interests of ordinary and preferred shareholders. We have committed €130 million to acquire Friends First in Ireland and have further appetite for bolt-on acquisitions in our major markets. Any unused M&A budget will be diverted to further reduce debt balances or fund additional returns.

Outlook

Having strengthened our balance sheet and streamlined our business, Aviva is now at a turning point in terms of our capacity for growth. Our eight major markets are Aviva's strongest businesses, with leading distribution, brand strength, scale efficiency and underwriting expertise driving attractive growth potential.

We continue to invest in our businesses to build on Aviva's competitive advantage. We are strengthening our capabilities in data science and digital innovation to deliver leading propositions for customers. This is already providing tangible results in terms of engagement with customers and distribution partners. We have increased our investment in talent to support growth across the group, with notable examples being Aviva Investors, bulk-purchase annuity origination and Global Corporate and Specialty insurance. We also continue to develop our strategic partnerships in emerging markets.

This investment requires us to prioritise and reallocate resources. We are initiating a zero-based budgeting programme and are seeking improvements in efficiency by reorganising functional processes through global shared services. We have also chosen to exit markets or product segments, with proceeds from these divestitures, together with special remittances from UK Insurance, providing capacity for investment.

7 Par value includes accrued interest, arrears and in the case of the General Accident plc preference shares, issue premium.

Outlook
(continued)

We have outlined an ambition to maintain higher growth in operating EPS^2,3. Aviva is now a more focussed business, with operations in countries that have attractive economic prospects and segments where there are sustainable and growing demand dynamics. Turning specifically to the drivers of our results and other large or notable items, we highlight the following factors for our 2018 results:

· Organic growth - we are targeting greater than 5% growth in operating profit¹ from our major markets;

· Canada - we expect a partial recovery in operating profit to provide an approximately 1-2% incremental benefit for Group operating profit in 2018;

· Capital management - the debt retirement and share repurchase undertaken in 2017 are expected to support operating EPS growth by approximately 2% in 2018. Additional actions in 2018, including additional planned debt retirement, are expected to provide a further 1% to 1.5% benefit to operating EPS in 2018.

· Divestitures - the expected completion of disposals in Spain, Italy and Friends Provident International are expected to reduce operating EPS by approximately 4% in 2018, depending upon the timing of completion;

· Tax rate - our operating tax rate, which was 21% in 2017, may be higher in 2018, depending on business mix of actual profitability. This may reduce operating EPS growth by approximately 1-2%.

With positive and negative items largely offsetting, we expect fundamental business performance in our major markets to drive our 2018 results. We are targeting greater than 5% growth in operating EPS subject to the impacts from foreign exchange, weather and other items.

Thomas D. Stoddard

Chief Financial Officer

1 Group adjusted operating profit is a non-GAAP Alternative Performance Measure (APM) which is not bound by the requirements of IFRS.

3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

Notes to editors

All comparators are for the full year 2016 position unless otherwise stated.

Income and expenses of foreign entities are translated at average exchange rates while their assets and liabilities are translated at the closing rates on 31 December 2017. The average rates employed in this announcement are 1 euro = £0.88 (2016: 1 euro = £0. 82) and CAD$1 = £0.60 (2016: CAD$1 = £0.56).

Growth rates in the press release have been provided in sterling terms unless stated otherwise. The following supplement presents this information on both a sterling and constant currency basis.

Cautionary statements:

This should be read in conjunction with the documents distributed by Aviva plc (the "Company" or "Aviva") through the Regulatory News Service (RNS). This announcement contains, and we may make other verbal or written "forward-looking statements" with respect to certain of Aviva's plans and current goals and expectations relating to future financial condition, performance, results, strategic initiatives and objectives. Statements containing the words "believes", "intends", "expects", "projects", "plans", "will," "seeks", "aims", "may", "could", "outlook", "likely", "target", "goal", "guidance", "trends", "future", "estimates", "potential" and "anticipates", and words of similar meaning, are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. Aviva believes factors that could cause actual results to differ materially from those indicated in forward-looking statements in the announcement include, but are not limited to: the impact of ongoing difficult conditions in the global financial markets and the economy generally; the impact of simplifying our operating structure and activities; the impact of various local and international political, regulatory and economic conditions; market developments and government actions (including those arising from the referendum on UK membership of the European Union); the effect of credit spread volatility on the net unrealised value of the investment portfolio; the effect of losses due to defaults by counterparties, including potential sovereign debt defaults or restructurings, on the value of our investments; changes in interest rates that may cause policyholders to surrender their contracts, reduce the value of our portfolio and impact our asset and liability matching; the impact of changes in short or long-term inflation; the impact of changes in equity or property prices on our investment portfolio; fluctuations in currency exchange rates; the effect of market fluctuations on the value of options and guarantees embedded in some of our life insurance products and the value of the assets backing their reserves; the amount of allowances and impairments taken on our investments; the effect of adverse capital and credit market conditions on our ability to meet liquidity needs and our access to capital; changes in, or restrictions on, our ability to initiate capital management initiatives; changes in or inaccuracy of assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, lapse rates and policy renewal rates), longevity and endowments; a cyclical downturn of the insurance industry; the impact of natural and man-made catastrophic events on our business activities and results of operations; our reliance on information and technology and third-party service providers for our operations and systems; the inability of reinsurers to meet obligations or unavailability of reinsurance coverage; increased competition in the UK and in other countries where we have significant operations; regulatory approval of extension of use of the Group's internal model for calculation of regulatory capital under the European Union's Solvency II rules; the impact of actual experience differing from estimates used in valuing and amortising deferred acquisition costs ("DAC") and acquired value of in-force business ("AVIF"); the impact of recognising an impairment of our goodwill or intangibles with indefinite lives; changes in valuation methodologies, estimates and assumptions used in the valuation of investment securities; the effect of legal proceedings and regulatory investigations; the impact of operational risks, including inadequate or failed internal and external processes, systems and human error or from external events (including cyber attack); risks associated with arrangements with third parties, including joint ventures; our reliance on third-party distribution channels to deliver our products; funding risks associated with our participation in defined benefit staff pension schemes; the failure to attract or retain the necessary key personnel; the effect of systems errors or regulatory changes on the calculation of unit prices or deduction of charges for our unit-linked products that may require retrospective compensation to our customers; the effect of fluctuations in share price as a result of general market conditions or otherwise; the effect of simplifying our operating structure and activities; the effect of a decline in any of our ratings by rating agencies on our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products and services; changes to our brand and reputation; changes in government regulations or tax laws in jurisdictions where we conduct business, including decreased demand for annuities in the UK due to changes in UK law; the inability to protect our intellectual property; the effect of undisclosed liabilities, integration issues and other risks associated with our acquisitions; and the timing/regulatory approval impact, integration risk and other uncertainties, such as non-realisation of expected benefits or diversion of management attention and other resources, relating to announced acquisitions and pending disposals and relating to future acquisitions, combinations or disposals within relevant industries; the policies, decisions and actions of government or regulatory authorities in the UK, the EU, the US or elsewhere, including the implementation of key legislation and regulation. For a more detailed description of these risks, uncertainties and other factors, please see 'Other information - Shareholder Information - Risks relating to our business' in Aviva's most recent Annual Report. Aviva undertakes no obligation to update the forward looking statements in this announcement or any other forward-looking statements we may make. Forward-looking statements in this presentation are current only as of the date on which such statements are made.

Aviva plc is a company registered in England No. 2468686.

Registered office

St Helen's

1 Undershaft

London

EC3P 3DQ

Contacts

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Chris Esson
+44 (0)20 7662 8115

Diane Michelberger
+44 (0)20 7662 0911

Helen Driver

+44 (0)20 76623070

Nigel Prideaux
+44 (0)20 7662 0215

Andrew Reid
+44 (0)20 7662 3131

Presentation slides: 08:30 hrs GMT
www.aviva.com

Real time media conference call: 07:45 hrs GMT

Analyst presentation: 09:00 hrs GMT

Live webcast: 09:00 hrs GMT
http://www.avivawebcast.com/results2017/

This information is provided by RNS

The company news service from the London Stock Exchange

END

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