Half-year Report Part 2 of 4

RNS Number : 9576M
Aviva PLC
03 August 2017
 

Part 2 of 4

Page 1

 

Contents

In this section

Page

Overview

 

Key financial metrics

2

 

 

1   Operating profit

3

 

 

2   Cash

5

i       Cash remitted to Group

5

ii      Operating capital generation: Solvency II basis

6

 

 

3   Expenses

7

 

 

4   Value of new business

8

 

 

5   General insurance combined operating ratio

9

 

 

6   Business unit performance

10

i       United Kingdom and Ireland Life

10

ii      United Kingdom and Ireland General Insurance & Health

12

iii     Canada

14

iv     Europe

15

v      Asia

17

vi     Aviva Investors

18

 

 

7   Profit drivers

19

i       Life business

19

ii      General insurance and health

22

iii     Fund flows

25

 

 

8   Capital & assets summary

26

i       Summary of assets

26

ii      Net asset value

28

iii     Return on equity

29

iv     Solvency II

30

 

 

Financial supplement

33

A     Income & expenses

34

B      IFRS financial statements and notes

39

C      Capital & liquidity

87

D     Analysis of assets

93

E      VNB & sales analysis

109

 

 

Other information

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 2

 

 

Operating profit

 

6 months
2017
 £m

6 months
2016
£m

Sterling % change

Full Year
20163

£m

Life business

1,319

1,226

8%

2,642

General insurance and health

417

334

25%

833

Fund management

69

49

41%

138

Other1

(340)

(284)

(20)%

(603)

Total2

1,465

1,325

11%

3,010

 

Operating earnings per share2,4

25.8p

22.4p

15%

51.1p

Cash remittances and Operating capital generation: Solvency II basis

 

6 months 2017

6 months 2016

Full year 2016

 

Cash Remittances £m

Operating Capital Generation £bn

Cash Remittances £m

Operating Capital Generation
£bn

Cash Remittances £m

Operating Capital Generation
 £bn

United Kingdom & Ireland Life

922

0.6

577

0.7

1,096

2.5

United Kingdom & Ireland General Insurance and Health

8

0.2

-

0.1

91

0.3

Canada

13

0.1

4

0.1

130

0.3

Europe

190

0.4

169

0.6

449

1.0

Asia, Aviva Investors & Other

37

(0.2)

2

(0.3)

39

(0.6)

Total

1,170

1.1

752

1.2

1,805

3.5

Expenses

 

6 months
 2017
£m

6 months
 2016
£m

Sterling % change

Full Year
2016
 £m

Operating expenses

1,851

1,696

9%

3,408

Integration & restructuring costs

52

105

(50)%

212

Expense Base

1,903

1,801

6%

3,620

 

Operating expense ratio

53.3%

53.4%

(0.1)pp 

50.5%

Value of new business: Adjusted SII basis

 

6 months
 2017
 £m

6 months
2016
 £m

Sterling % change

Full Year
2016
£m

United Kingdom & Ireland

270

205

32%

441

Europe

243

188

29%

417

Asia & Aviva Investors

83

55

51%

134

Total

596

448

33%

992

General insurance combined operating ratio5

 

6 months
2017

6 months
2016

Change

Full Year
2016

United Kingdom & Ireland6

92.5%

93.8%

(1.3)pp 

105.2%

Canada

98.9%

95.9%

3.0pp 

93.0%

Europe

92.7%

98.9%

(6.2)pp 

95.8%

Combined operating ratio

94.5%

95.7%

(1.2)pp 

100.1%

Profit after tax

 

6 months
2017
£m

6 months
2016
£m

Sterling % change

Full Year
2016
£m

Profit after tax2

716

201

256%

859

Basic earnings per share2

14.9p

2.5p

496%

15.3p

Interim dividend

 

6 months
2017

6 months
2016

Sterling % change

Interim dividend per share

8.40p

7.42p

13%

Capital position

 

30 June
2017

31 December 2016

Sterling change

30 June
2016

Estimated Solvency II cover ratio7,8,9

193%

189%

4.0pp 

174% 

Estimated Solvency II surplus8,9

£11.4bn

£11.3bn

1%

£9.5bn

Net asset value per share

412p

414p

(0)%

412p

1    Other includes other operations, corporate centre costs and group debt and other interest costs.

2    Operating profit is a non-GAAP measure used by management. Refer to the 'Financial supplement' for the reconciliation of Group operating profit to profit after tax and refer to note B7 - Earnings per share for a reconciliation of operating earnings per share to basic earnings per share.

3    FY16 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL) and the impact of the exceptional Ogden charge.

4    Operating EPS is shown net of tax, non-controlling interests, preference dividends, and coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net of tax).

5    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

6    FY16 includes the impact of the change in the Ogden discount rate, which had an impact of 5.9pp, and excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

7    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 £3.2 billion (FY16: £2.9 billion; HY16: £2.7 billion) and staff pension schemes in surplus £1.2 billion (FY16: £1.1 billion; HY16: £0.9 billion) - these exclusions have no impact on Solvency II surplus.

8    The estimated Solvency II position includes an estimated adverse impact of a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates at 30 June 2017, £0.5 billion decrease to surplus (FY16: £0.4 billion; HY16: £nil). Also included are the pro forma impacts of the disposal of the Spanish joint ventures Unicorp Vida and Caja Espana Vida and its retail life insurance business Aviva Vida y Pensiones (£0.1 billion increase to surplus), the disposal of Friends Provident International Limited (£0.1 billion increase to surplus), and the remaining £0.2 billion of the share buy-back announced on 25 May 2017.

9    The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva's 50% shareholding in Antarius to Sogecap which completed on 5 April 2017 (£0.2 billion increase to surplus) and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.4 billion decrease to surplus). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact is included in the estimated 30 June 2017 Solvency II position. The 30 June 2016 Solvency position includes the pro forma impact of acquiring the RBC General Insurance business (£(0.3) billion).

 

 

 

 

 

Page 3

 

Overview

The Group has delivered an increase in operating profit, grown cash remittances to the Group and continued to maintain a strong Solvency II capital position. The operating result reflects improved performance in the UK & Ireland, Europe and Aviva Investors in addition to the benefits from foreign exchange movements and the contribution from RBC General Insurance Company (RBC) in Canada.

In France we completed the sale of Antarius to Sogecap, a subsidiary of Société Générale in April 2017. In Spain, we announced the sale on 10 May 2017 of our 50% shareholding in our life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as our retail life insurance business Aviva Vida y Pensiones to Santalucía. On 19 July 2017 we also announced the sale of Friends Provident International Limited (FPI) to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited.

1 - Operating profit

Group operating profit

For the six month period ended 30 June 2017

 

6 months
 2017
£m

6 months
 2016
£m

Full Year
2016
£m

Operating profit before tax attributable to shareholders' profits

 

 

 

Life business

 

 

 

United Kingdom & Ireland

756

711

1,555

France

217

212

429

Poland

77

60

132

Italy

83

74

170

Spain

51

47

107

Turkey

5

2

6

Europe

433

395

844

Asia

120

118

241

Other

10

2

2

Total life business (note 7.i)

1,319

1,226

2,642

General insurance and health

 

 

 

United Kingdom & Ireland1

259

231

471

Canada

71

88

269

Europe

85

35

120

Asia

(5)

(6)

(13)

Other

7

(14)

(14)

Total general insurance and health1 (note 7.ii)

417

334

833

Fund management

 

 

 

Aviva Investors

71

49

139

Asia

(2)

-

(1)

Total fund management

69

49

138

Other

 

 

 

Other operations (note A1)

(98)

(49)

(94)

Market operating profit1

1,707

1,560

3,519

Corporate centre (note A2)

(83)

(80)

(184)

Group debt costs and other interest (note A3)

(159)

(155)

(325)

Operating profit before tax attributable to shareholders' profits1

1,465

1,325

3,010

Tax attributable to shareholders' profit

(311)

(323)

(706)

Non-controlling interests

(73)

(67)

(147)

Preference dividends and other2

(32)

(30)

(85)

Operating profit attributable to ordinary shareholders1

1,049

905

2,072

 

 

 

 

Operating earnings per share1,3

25.8p

22.4p

51.1p

1    FY16 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional non-operating item. FY16 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

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

3    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 4,061 million (HY16: 4,046 million; FY16: 4,051 million) ordinary shares in issue, after deducting treasury shares.

 

 

 

 

Page 4

 

1 - Operating Profit continued

Operating profit was £1,465 million (HY16: £1,325 million) and includes a favourable impact from foreign exchange movements of £61 million.

The life business operating profit increased to £1,319 million (HY16: £1,226 million), mainly driven by the UK & Ireland. UK & Ireland's performance reflected increased contributions from both protection and retirement with the result underpinned by growth in long-term savings assets under management. In Europe, excluding the results of our French joint venture with Crédit du Nord ('Antarius') which was sold in April 2017, life operating profit is up on a constant currency basis. Asia's contribution remained broadly stable whilst continuing to strengthen its distribution channels.

The general insurance and health business operating profit increased to £417 million (HY16: £334 million) mainly due to improved performance and benign weather in the UK & Ireland, and favourable prior year development and weather experience in France. In Canada, favourable foreign exchange and the contribution from RBC, acquired in July 2016, was more than offset by higher claims experience and unfavourable prior year development.

Fund management operating profit of £69 million (HY16: £49 million) reflected continued growth in the AIMS range of funds, a benefit from the transfer of Friends Life assets in the second half of 2016 and increased income from the origination of infrastructure assets. 

Other operations related to non-insurance activities of the Group had total losses of £98 million (HY16: £49 million) which included further investment in the UK digital business to establish a centre of excellence for digital expertise, results from the savings platform business in the UK and investment in organisation and culture initiatives.

 

 

 

Page 5

 

 

 

2.i - Cash remitted to Group

The flow of sustainable cash remittances from the Group's businesses is a key financial priority. We use a wholly-owned, UK domiciled reinsurance subsidiary for internal capital and cash management. Some of the remittances otherwise attributable to the operating businesses arise from this internal reinsurance vehicle. The table below reflects actual remittances received by the Group.

Cash remittances increased to £1,170 million (HY16: £752 million) and includes cash paid by our operating businesses to the Group, comprising dividends and interest on internal loans. 

 

6 months
 2017
£m

6 months
 2016
£m

Full Year
2016
£m

United Kingdom & Ireland Life1,2

922

577

1,096

United Kingdom & Ireland General Insurance & Health1

8

-

91

Canada

13

4

130

Europe1

190

169

449

Aviva Investors & Other3

37

2

39

Total4

1,170

752

1,805

1    FY16 cash remittances include £100 million received from UK & Ireland Life and £83 million received from UK & Ireland GI in February 2017 in respect of 2016 activity. FY16 cash remittances also include £159 million received from France in January 2017 in respect of 2016 activity.

2    UK Life HY17 remittance includes £115 million of cash received from our internal reinsurance vehicle.

3    Other includes Group Reinsurance.

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

The increase in cash remittances to the Group was primarily driven by the UK & Ireland Life business which includes £315 million, the second instalment of the overall planned £1 billion Friends Life integration additional remittance (taking the total received to date to £565 million).

Cash remittances in France and Aviva Investors increased, as dividends were not remitted until the second half of 2016.

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

 

 

 

Page 6

 

2.ii - Operating capital generation: Solvency II basis

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

Solvency II operating capital generation (OCG) was £1.1 billion during HY17 (HY16: £1.2 billion), incorporating £1.3 billion (HY16: £1.5 billion) from our operating business units, net of £0.2 billion (HY16: £0.3 billion) of debt and corporate centre costs. The business unit OCG reduced by £0.2 billion in the period reflecting a lower benefit from non-recurring capital actions in Europe in 2017.

 

Life business SII Operating Capital Generation

Non-Life SII Operating Capital Generation

 

6 months
2016

6 months 2017

£bn

Impact of

New Business1

Earnings from Existing Business

Other

Life SII Operating Capital Generation

GI, Health, FM & Other SII Operating Capital Generation

Total SII Operating Capital Generation

Total SII Operating Capital

Generation4

United Kingdom & Ireland Life

-

0.4

0.2

0.6

-

0.6

0.7

United Kingdom & Ireland General Insurance and Health

 

 

 

 

0.2

0.2

0.1

Canada

 

 

 

 

0.1

0.1

0.1

Europe

-

0.3

-

0.3

0.1

0.4

0.6

Asia, Group centre costs and Other2

-

-

-

-

(0.2)

(0.2)

(0.3)

Total Group Solvency II operating capital generation3

-

0.7

0.2

0.9

0.2

1.1

1.2

1    Impact of new business (Life) as set out in note 4 Solvency II Surplus impact of new business.

2    Other includes changes in Group diversification benefit.

3    As reported in the movement in Group Solvency II surplus disclosure in note 8iv.

4    A split of life business OCG into the impact of new business, earnings from existing business and other is not available for HY16.

 

Life business SII Operating Capital Generation

Non-Life SII Operating Capital Generation

 

Full Year 2016

£bn

Impact of New Business1

Earnings from Existing Business

Other2

Life SII Operating Capital Generation

GI, Health, FM & Other SII Operating Capital Generation

Total SII Operating Capital Generation

United Kingdom & Ireland Life

(0.1)

1.4

1.2

2.5

-

2.5

United Kingdom & Ireland General Insurance and Health

 

 

 

 

0.3

0.3

Canada

 

 

 

 

0.3

0.3

Europe

(0.1)

0.6

0.4

0.9

0.1

1.0

Asia, Group centre costs and Other2

-

-

0.2

0.2

(0.8)

(0.6)

Total Group Solvency II operating capital generation3

(0.2)

2.0

1.8

3.6

(0.1)

3.5

1    Impact of new business (Life) as set out in note 4 Solvency II Surplus impact of new business.

2    Other includes changes in Group diversification benefit.

3    As reported in the movement in Group Solvency II surplus disclosure in note 8iv.

Solvency II OCG is the Solvency II surplus movement in the period due to operating items including the impact of new business, expected investment returns on existing business, operating variances, operating assumption changes and management actions. It excludes economic variances, economic assumption changes and integration and restructuring costs which are included in non-operating capital generation. The expected investment returns are consistent with the returns used in IFRS (as set out in notes A4 and A5 in the financial supplement), except in UK Life where a risk-free curve plus an allowance for expected real-world returns (less an adjustment for credit risk, where required) is applied. Total Group OCG is a component of the movement in Group Solvency II surplus over the period as set out in note 8.iv and is not reconcilable to IFRS.

For life business, the impact of new business is the change in Solvency II surplus resulting from new business written in the period. In the current period, the contribution from new business is neutral; however, this business is expected to generate an operating surplus through earnings from existing business in future periods.

Life business earnings from existing business is the Solvency II surplus movement in the period due to operating items excluding the impacts of New Business and Other OCG. Life business Other OCG includes non-recurring capital actions and operating assumption changes.

Our principal source of Group centre liquidity is cash remittances in the form of dividends and debt interest receipts from our businesses. OCG measures the amount of Solvency II capital the Group generates from operating activities. Capital generated enhances Solvency II surplus which can be used to fund business unit remittances and, in turn, the group dividend as well as for investment in initiatives that provide potential future growth.

 

 

 

Page 7

 

3 - Expenses

 

6 months
 2017
 £m

6 months
2016
£m

Full Year
2016
 £m

United Kingdom and Ireland Life

431

439

867

United Kingdom and Ireland General Insurance & Health

346

372

665

Canada

234

167

396

Europe

351

318

641

Asia

101

88

177

Aviva Investors

202

192

367

Other Group activities

186

120

295

Operating cost base

1,851

1,696

3,408

Integration & restructuring costs1

52

105

212

Expense base

1,903

1,801

3,620

Operating expenses ratio2

53.3%

53.4%

50.5%

1    As reported within other expenses of £1,669 million (HY16: £2,071 million; FY16: £3,853 million) in the consolidated income statement.

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

 

6 months
2017
£m

6 months
 2016
£m

Full Year
2016
£m

Claims handling costs1

163

139

290

Non-commission acquisition costs2

431

423

846

Other expenses3

1,257

1,134

2,272

Operating cost base

1,851

1,696

3,408

1    Operating expenses as reported within net claims and benefits paid of £12,501 million (HY16: £11,453 million; FY16: £23,782 million) in the consolidated income statement.

2    Operating expenses as reported within fee and commission expense of £2,200 million (HY16: £1,654 million; FY16: £3,885 million) in the consolidated income statement.

3    Operating expenses as reported within other expenses of £1,669 million (HY16: £2,071 million; FY16: £3,853 million) in the consolidated income statement.

The operating expense ratio is broadly flat despite investment in digital and other growth initiatives.

Operating expenses were £1,851 million (HY16: £1,696 million). The increase in operating expenses was primarily driven by £75 million adverse foreign exchange movements, a full six months of RBC operating costs and targeted investment.

Integration & restructuring costs halved to £52 million (HY16: £105 million) as a result of lower integration spend on the Friends Life acquisition and completion of the Solvency II project in 2016, partially offset by integration spend on the RBC acquisition.

 

 

 

 

 

Page 8

 

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

Following the introduction of Solvency II, the new prudential regulatory framework that came into force on 1 January 2016, the Group has calculated VNB on an adjusted Solvency II basis.

Adjusted Solvency II VNB reflects Solvency II assumptions and allowance for risk and is defined as the increase in Solvency II Own Funds resulting from business written in the period, adjusted to:

· Include business which is not included in the Solvency II best estimate liability (BEL) valuation (e.g. UK and Asia Healthcare business, Retail fund management business and the UK Equity release business);

· Remove the impact of contract boundaries; and

· Include look through profits in service companies (where not included in Solvency II).

A reconciliation between adjusted Solvency II VNB, Solvency II Own Funds impact of new business and Solvency II surplus impact of new business is provided below. The trend analysis of adjusted Solvency II VNB and adjusted Solvency II present value of new business premiums (PVNBP) is included in the financial supplement, section E: VNB & sales analysis.

6 months 2017

UK & Ireland
£m

Europe
£m

Asia & Other
£m

Group
£m

Adjusted Solvency II VNB (gross of tax and non-controlling interests)1

270

243

83

596

Allowance for Solvency II contract boundary rules

30

(40)

2

(8)

Differences due to change in business in scope

(85)

(22)

(14)

(121)

Tax & Other2

(49)

(85)

(12)

(146)

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

166

96

59

321

 

6 months 2016

UK & Ireland
 £m

Europe
£m

Asia & Other
 £m

Group
 £m

Adjusted Solvency II VNB (gross of tax and non-controlling interests)1,4

205

188

55

448

 

Full Year 2016

UK & Ireland
£m

Europe
£m

Asia & Other
£m

Group
£m

Adjusted Solvency II VNB (gross of tax and non-controlling interests)1,3

441

417

134

992

Allowance for Solvency II contract boundary rules

51

(55)

(9)

(13)

Differences due to change in business in scope

(131)

(41)

(51)

(223)

Tax & Other2

(78)

(146)

(13)

(237)

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

283

175

61

519

1    The principal methodologies and assumptions underlying the calculation of adjusted Solvency II VNB are set out in section E1 and E14 respectively.

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

3    UK Life VNB includes £(12) million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund during the second half of 2016.

4    A reconciliation between Adjusted Solvency II VNB and Solvency II Own Funds impact of new business is not available for HY16.

The Group's VNB increased by 33% to £596 million (HY16: £448 million). This was primarily driven by growth of new business in the UK, Europe and Asia and a favourable impact from foreign exchange movements of £21 million.

The UK benefitted from an increase in VNB primarily reflecting higher volumes of long-term savings business and the introduction of transitional relief. A clarification to the Solvency II rules made by the Prudential Regulation Authority (PRA) in 2017, relating to new business written since the introduction of Solvency II, has been reflected in the calculation of UK Life's transitional measures. This increased the adjusted Solvency II VNB (and Solvency II Own Funds impact of new business and Solvency II Surplus from life new business within OCG) by £24 million gross of tax and non-controlling interests as at HY17.

The increase in Europe was mainly driven by a change in business mix towards more profitable unit-linked and protection business in France and Italy and favourable foreign exchange movements, partly offset by lower volumes of with-profits business in France and the sale of Antarius. VNB in Asia benefitted from a more profitable business mix and higher volumes of protection business in China and higher volumes of with-profits business in Singapore, as well as favourable foreign exchange movements.

The life new business written during the period has increased the Solvency II Capital Requirement by £0.3 billion, split £0.2 billion for UK & Ireland, £0.1 billion for Europe and £nil for Asia & Other business. This has resulted in a net £nil impact on Solvency II Surplus from life new business across the Group.

Solvency II Surplus impact of new business is set out in section 2.ii Life business Solvency II Operating Capital Generation impact of new business.

 

 

 

Page 9

 

5 - General insurance combined operating ratio (COR)1

 

Net earned premiums

Claims ratio3

Commission and

 expense ratio4

Combined operating ratio5

 

6 months 2017
 £m

6 months 2016
 £m

Full Year 2016
£m

6 months 2017
%

6 months 2016
%

Full Year 2016
%

6 months 2017
%

6 months 2016
%

Full Year 2016
%

6 months 2017
%

6 months 2016
 %

Full Year 2016

%7

United Kingdom2,7

1,996

1,884

3,821

59.9

60.5

73.8

33.3

33.4

32.5

93.2

93.9

106.3

Ireland

202

159

351

52.8

62.4

63.3

31.9

29.5

29.1

84.7

91.9

92.4

United Kingdom & Ireland

2,198

2,043

4,172

59.3

60.6

73.0

33.2

33.2

32.2

92.5

93.8

105.2

Canada

1,429

1,020

2,420

69.5

64.6

63.5

29.4

31.3

29.5

98.9

95.9

93.0

Europe

778

658

1,396

63.4

68.5

66.7

29.3

30.4

29.1

92.7

98.9

95.8

Asia6

6

6

12

87.3

66.9

72.0

44.1

41.7

37.9

131.4

108.6

109.9

Total2,7

4,411

3,727

8,000

63.2

63.5

69.2

31.3

32.2

30.9

94.5

95.7

100.1

1    COR is now reported on an earned basis. Comparatives have been realigned to reflect this change.

2    FY16 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

3    Claims ratio: incurred claims expressed as a percentage of net earned premiums.

4    Commission and expense ratio: earned commissions and expenses expressed as a percentage of net earned premiums.

5    Combined operating ratio: aggregate of claims ratio and commission and expense ratio.

6    Includes Aviva Re net earned premiums.

7    FY16 COR includes the impact of the change in the Ogden discount rate which had an impact of 5.9pp.

Group COR for the period improved 1.2pp to 94.5% (HY16: 95.7%), with the claims ratio improving 0.3pp, and commission and expense ratio decreasing by 0.9pp.

The claims ratio decreased to 63.2pp (HY16: 63.5%), primarily due to more benign weather across the Group and underwriting initiatives in the UK and Ireland. This was partly offset by increased claims frequency and unfavourable prior year development in Canada.

The 0.9pp decrease in the Group's commission and expense ratio was mainly attributable to the contribution from RBC in Canada, which has a lower commission ratio.

We continue to apply our reserving policy consistently and to focus on understanding the cost of claims to ensure that reserves are maintained at an appropriate level. Prior year reserve movements will vary year to year but our business is predominantly short tail in nature and the loss development experience is generally stable. At HY17, we had lower prior year releases in our general insurance business of £32 million (HY16: £57 million), which had a beneficial impact of 0.6pp (HY16: 1.6pp). The impact of Ogden on our HY17 results is not material.

Normalised accident year combined operating ratio (COR)

 

UK & Ireland1

Canada

Europe

Total

 

6 months 2017
%

6 months 2016
%

Full Year 2016
%

6 months 2017
%

6 months 2016
%

Full Year 2016
 %

6 months 2017
 %

6 months 2016
%

Full Year 2016
%

6 months 2017
%

6 months 2016
%

Full Year 2016
 %

Normalised accident year claims ratio2

63.1

64.5

66.0

67.5

67.5

68.2

64.0

66.5

68.6

64.7

65.7

67.1

Impact of change in Ogden discount rate

-

-

11.4

-

-

-

-

-

-

-

-

5.9

Prior year reserve release3

(0.9)

(1.5)

(2.1)

1.6

(3.8)

(5.4)

(2.7)

(0.7)

(2.5)

(0.6)

(1.6)

(2.9)

Weather over/(under) long-term average4

(2.9)

(2.4)

(2.3)

0.4

0.9

0.7

2.1

2.7

0.6

(0.9)

(0.6)

(0.9)

Claims ratio

59.3

60.6

73.0

69.5

64.6

63.5

63.4

68.5

66.7

63.2

63.5

69.2

Commission and expense ratio5

33.2

33.2

32.2

29.4

31.3

29.5

29.3

30.4

29.1

31.3

32.2

30.9

Normalised accident year combined operating ratio

96.3

97.7

98.2

96.9

98.8

97.7

93.3

96.9

97.7

96.0

97.9

98.0

Combined operating ratio

92.5

93.8

105.2

98.9

95.9

93.0

92.7

98.9

95.8

94.5

95.7

100.1

1    FY16 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

2    Normalised accident year claims ratio represents the claims ratio adjusted to exclude prior year claims development and weather variations vs. expectations, gross of the impact of profit sharing agreements and the impact of the change in the Ogden discount rate in FY16.

3    Prior year reserve release represents the changes in the ultimate cost of the claims incurred in prior years, gross of the impact of profit sharing arrangements.

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

5    The commission and expense ratio includes the impact of profit sharing arrangements.

The definition of COR has been changed to an earned basis. It was previously calculated on a hybrid basis: the claims ratio was on an earned basis with the incurred claims expressed as a percentage of net earned premiums; while the commission and expense ratio was on a written basis with written commissions and written expenses expressed as a percentage of net written premiums. This did not consider the impact of deferred commissions and expenses, which are included in the underwriting result. The new method is calculated as claims incurred, earned commission and earned expenses as a percentage of net earned premiums which aligns better to our underwriting result. Comparatives have been realigned for HY16 and FY16 on an earned basis.

 

 

 

Page 10

 

6.i - United Kingdom & Ireland Life

 

6 months
 2017
£m

6 months
2016
 £m

Sterling % change

Full Year
2016
 £m

Life operating profit

756

711

6%

1,555

Cash remitted to Group1

922

577

60%

1,096

Expenses

 

 

 

 

Operating expenses

431

439

(2)%

867

Integration and restructuring costs

32

61

(48)%

119

 

463

500

(7)%

986

Value of new business: Adjusted SII basis

270

205

32%

441

1    HY17 includes £115 million of cash received from the Group's internal reinsurance vehicle. FY16 cash remittances include amounts of £100 million received from UK & Ireland Life in February 2017 in respect of 2016 activity.

Overview

Our franchises across long-term savings, protection and retirement have continued to grow, delivering a 6% year on year increase in operating profit to £756 million. Growth was underpinned by an increase in long-term savings assets under administration (up to £109 billion) and a 32% increase in Solvency II value of new business to £270 million.

The payment of a further £315 million Friends Life integration special remittance takes the total to date to £565 million of the targeted £1 billion.

Operating and financial performance

Operating profit

UK & Ireland Life operating profit for the first half of 2017 increased 6% to £756 million (HY16: £711 million).

In the UK, operating profit increased 7% to £750 million (HY16: £699 million). New business grew, offsetting the expected reduction in Legacy profits as the book continues to run off and the reduction in Other.

Ireland operating profit was £6 million (HY16: £12 million).

 

6 months
 2017
£m

6 months
2016
 £m

Full Year
2016
 £m

Life Operating Profit

New

Business1

Existing Business

Total
£m

New

Business1

Existing Business

Total
£m

Sterling % change

New

Business1

Existing Business

Total
£m

Long-term savings2

(40)

129

89

(45)

109

64

39%

(77)

219

142

Annuities & equity release

109

200

309

88

158

246

26%

305

351

656

Protection

67

66

133

46

68

114

17%

118

124

242

Legacy3

-

187

187

-

192

192

(3)%

-

332

332

Other4

-

32

32

-

83

83

(61)%

-

151

151

UK Life

136

614

750

89

610

699

7%

346

1,177

1,523

Ireland Life

 

 

6

 

 

12

(50)%

 

 

32

Total

 

 

756

 

 

711

6%

 

 

1,555

1    New business represents the income earned on new business written during the period reflecting premiums less initial reserves and initial expenses (including commission) less deferred costs along with any changes to existing contracts, which were not anticipated at the outset of the contract that generate additional shareholder risk.

2    Includes pensions and the savings Platforms.

3    Legacy represents products no longer actively marketed, including With-Profits and Bonds.

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

Long-term savings

Long-term savings generated £89 million of operating profit (HY16: £64 million) comprising £129 million from existing business net of a £40 million new business strain. The increase compared to HY16 is driven by assets under administration increasing to £109 billion (HY16: £95 billion) due to positive net flows and favourable investment market movements. Net fund flows increased to £2.1 billion (HY16: £2.0 billion).

Annuities and equity release

Annuities and equity release generated £309 million of operating profit (HY16: £246 million) comprising £200 million from existing business and £109 million from new business. This was underpinned by a 75% increase in PVNBP to £1,435 million (HY16: £818 million) with an increase in bulk annuities to £320 million (HY16: £64 million). We have continued to optimise our asset mix, increasing our investment in illiquid assets which has resulted in a £54 million benefit for existing business in the first half of 2017.

Protection

Protection generated £133 million of operating profit (HY16: £114 million) including £66 million from existing business and £67 million from new business. Operating profit benefitted from solid growth in individual protection sales together with expense efficiencies.

Legacy

Legacy contributed £187 million of operating profit (HY16: £192 million). The reduction in operating profit is driven by the expected run-off of the business, partly offset by favourable investment market movements as 2017 assets under management reduced 4% to £80 billion (HY16: £83 billion).

Other

£32 million of Other includes a £55 million benefit from a change in the allocation strategy for those assets backing annuities and the net impact of various reserve movements and non product specific items. There were no material assumption changes in HY17. In HY16 Other mainly related to a £63 million benefit in relation to annuitant mortality assumption changes.

 

 

 

Page 11

 

6.i - United Kingdom & Ireland Life continued

Cash

Cash remitted to Group was £922 million (HY16: £577 million) including £315 million, the second instalment of the targeted £1 billion Friends Life integration additional remittance, taking instalments to date to £565 million. Excluding the integration remittance, underlying remittances have increased 5% year on year.

Expenses

Operating expenses reduced 2% to £431 million (HY16: £439 million).

UK Life operating expenses reduced to £412 million (HY16: £418 million) with the reduction year on year reflecting continued cost control, whilst also investing in growth.

Ireland operating expenses have decreased due to reduced project spend and continued focus on cost control.

Integration and restructuring expenses reduced by 48% to £32 million (HY16: £61 million) due to lower integration spend on the Friends Life acquisition.

Value of new business: Adjusted SII Basis (VNB)

 

6 months
2017
£m

6 months
 2016
£m

Sterling %

change1

Full Year
2016
£m

UK Life

 

 

 

 

Long-term savings

82

37

122%

108

Annuities and equity release

77

71

8%

141

Protection

88

79

11%

151

Health & Other

20

13

54%

29

 

267

200

34%

429

Ireland Life

3

5

(42)%

12

Total

270

205

32%

441

1    Currency movements are calculated on unrounded numbers so minor rounding differences may exist.

UK & Ireland Life VNB increased 32% to £270 million (HY16: £205 million).

UK Life VNB increased to £267 million (HY16: £200 million), including a £24 million benefit following a clarification to Solvency II rules on the calculation of transitional measures.

Long-term savings VNB increased to £82 million (HY16: £37 million), driven by continued growth from the savings platforms, and new workplace pension schemes.

Annuities and equity release VNB increased to £77 million (HY16: £71 million) driven by an allowance for transitional relief on new business and higher volumes, partially offset by reduced margins on annuities.

Protection VNB increased to £88 million (HY16: £79 million), benefitting from growth in individual protection new business volumes as we see the continued benefit of our digital platform.

Health & Other VNB increased 54% to £20 million, benefitting from increased volumes.

Ireland VNB decreased to £3 million (HY16: £5 million), due to a change in business mix and reduced annuity margins driven by a reduction in asset yields.

 

 

 

 

Page 12

 

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

 

6 months
2017
£m

6 months
2016
£m

Sterling %
change

Full Year
2016
£m

Operating profit1,2

259

231

12%

471

Cash remitted to Group3

8

-

100%

91

Expenses

 

 

 

 

Operating expenses

346

372

(7)%

665

Integration and restructuring costs

-

8

(100)%

15

 

346

380

(9)%

680

Combined operating ratio2,4,5

92.5%

93.8%

(1.3)pp

105.2%

Combined operating ratio excluding impact of projected change in Ogden rate1,2,4,5

 

 

 

93.8%

 

 

 

 

 

General insurance net written premiums2

2,326

2,180

7%

4,308

1    FY16 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional non-operating item.

2    FY16 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

3    FY16 cash remittances include amounts of £83 million received from UK & Ireland General Insurance in February 2017 in respect of 2016 activity.

4    General insurance business only.

5    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

Overview

Our continued focus on disciplined pricing and underwriting, claims and indemnity management and control of expenses has contributed to our results in HY17.

Premium growth has been in our chosen channels and products, particularly in Digital Motor and Commercial Property and Specialty, which has given us the opportunity to reduce volumes in our underperforming segments within our Commercial Motor book. We continue to make good progress in controlling our costs. Ireland's growth in profitability due to strong rate increases and improved performance enables us to continue to invest in growing the business.

Operating and financial performance

Operating profit1

United Kingdom and Ireland

6 months
2017
£m

6 months
2016
£m

Sterling %
change

Full Year
2016
£m

General insurance

 

 

 

 

Underwriting result

166

127

31%

259

Longer-term investment return

85

93

(9)%

176

Other

-

(1)

100%

(2)

 

251

219

15%

433

Health

 

 

 

 

Underwriting result

7

10

(30)%

35

Longer-term investment return

1

2

(50)%

3

 

8

12

(33)%

38

General insurance and health operating profit

259

231

12%

471

1    FY16 excludes the impact of the change in the Ogden discount rate of £475 million, which has been recognised as an exceptional non-operating item. FY16 also excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

UK & Ireland general insurance and health operating profit increased 12% to £259 million. Excluding Ireland health, which was disposed of in August 2016, general insurance and health operating profit is up 15%.

The general insurance underwriting result increased 31% to £166 million (HY16: £127 million) with improved performance from a continued focus on portfolio rebalancing and cost initiatives, and lower weather claims, despite lower prior year releases.

UK & Ireland general insurance longer-term investment return reduced by £8 million to £85 million (HY16: £93 million), mostly due to the impact of the reduction in the internal loan (Group net neutral). Excluding the internal loan impact, the UK & Ireland general insurance operating profit was up 20%.

Cash

Cash remitted to the Group was £8 million (HY16: £nil).

Expenses

UK & Ireland general insurance and health expenses were 9% lower at £346 million (HY16: £380 million), partially due to the disposal of Ireland health.

 

 

 

 

Page 13

 

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

 

Net written premiums

Combined operating ratio2

United Kingdom and Ireland General insurance1

6 months
 2017
£m

6 months
2016
£m

Sterling % change

Full Year
2016
 £m

6 months
2017
 £m

6 months
2016
£m

Change

Full Year
2016
 £m

Personal Motor

580

530

9%

1,076

 

 

 

 

Personal Home and Specialty

689

658

5%

1,332

 

 

 

 

UK Personal Lines

1,269

1,188

7%

2,408

92.9%

93.3%

(0.4)pp

92.5%

 

 

 

 

 

 

 

 

 

Commercial Motor

269

280

(4)%

538

 

 

 

 

Commercial Property and Specialty

567

533

6%

984

 

 

 

 

UK Commercial Lines

836

813

3%

1,522

93.6%

94.9%

(1.3)pp

96.1%

UK general insurance excluding impact of change in Ogden discount rate

2,105

2,001

5%

3,930

93.2%

93.9%

(0.7)pp

93.9%

Impact of change in Ogden discount rate

 

 

 

 

 

 

 

12.4%

UK general insurance

2,105

2,001

5%

3,930

93.2%

93.9%

(0.7)pp

106.3%

Ireland general insurance

221

179

23%

378

84.7%

91.9%

(7.2)pp

92.4%

Total

2,326

2,180

7%

4,308

92.5%

93.8%

(1.3)pp

105.2%

1    FY16 excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

2    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

General insurance net written premiums

UK & Ireland general insurance net written premiums increased 7%. UK premiums were up 5%, in our chosen channels and products, particularly in Digital Motor and Commercial Property and Specialty.

UK Personal Motor increased 9%, particularly in our Digital channel which grew 15%, from both rate and volume. Our rating has been in line with the market, which has experienced significant increases to match increased claims inflation as a consequence of the change in Ogden rate. Rate hardening and higher levels of switching have allowed us to improve our risk mix reflected in growth in policies in the Digital channel.

UK Personal Home and Specialty grew 5%, driven by additional premiums in Specialty lines, and supported by growth in the Home book due to Digital and Partnerships.

UK Commercial was up 3%, reflecting growth in Property and Specialty, partly offset by rating actions and other underwriting actions taken in underperforming segments in Commercial Motor, in a continued soft market.

Ireland saw a 23% increase (12% in constant currency), with growth across all lines of business from both rate and volume.

General insurance combined operating ratio (COR)

UK & Ireland COR was lower at 92.5% (HY16: 93.8%), reflecting underwriting initiatives, and the continued benefit from growth in targeted markets. Weather experience was more benign in HY17, benefitting both personal and commercial lines, offset by lower levels of prior year releases.

UK Personal Lines COR improved by 0.4pp to 92.9%, as a result of growth in Digital and improved performance in the Broker channel.

UK Commercial Lines COR of 93.6% was 1.3pp lower, as we grow in Property and Specialty, whilst remediating in sectors of Commercial Motor.

Ireland COR of 84.7% was 7.2pp better, with claims initiatives driving a lower claims ratio.

 

 

 

Page 14

 

6.iii - Canada

 

6 months
 2017
£m

6 months
2016
£m

Sterling %
change

Constant
currency %

Full Year
 2016
£m

General Insurance operating profit

71

88

(19)%

(28)%

269

Cash remitted to Group

13

4

225%

-

130

Expenses

 

 

 

 

 

Operating expenses

234

167

40%

25%

396

Integration and restructuring costs

9

3

200%

180%

18

 

243

170

43%

27%

414

Combined operating ratio1

98.9%

95.9%

3.0pp

3.0pp

93.0%

Net written premiums

1,477

1,049

41%

25%

2,453

1    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

Overview

In 2017, operating profit fell 28% in constant currency and the combined operating ratio worsened to 98.9% impacted by prior year development which went from significantly favourable to modestly unfavourable. Catastrophe losses were above the long-term average. Excluding the impact of the RBC acquisition, net written premiums grew 3% in constant currency despite lacklustre economic conditions and continued challenges in the personal motor industry.

The integration of RBC Insurance is progressing well, with the completion of a major new system implementation.

Operating and financial performance

Operating profit

 

6 months
 2017
£m

6 months
2016
£m

Sterling % change

Constant currency %

Full Year
2016
£m

Underwriting result

16

42

(62)%

(66)%

168

Longer-term investment return

57

47

21%

8%

105

Other

(2)

(1)

(100)%

(38)%

(4)

Total

71

88

(19)%

(28)%

269

The lower underwriting result was mainly driven by higher claims frequency and unfavourable prior year development, partly offset by the contribution from RBC. Frequency was worse year-on-year but broadly similar to the three year average and partly a reflection of a more typical Canadian winter. The moderately unfavourable prior year development reflects the absence in HY17, of the large releases that benefitted the prior year (much of which were due to Ontario motor insurance), coupled with revisions in case reserves for a modest number of large claims spread across both motor and property.

Net catastrophe losses are broadly in line with prior year despite having one of the largest Canadian insured events in history, the Alberta wildfires, in the prior year. The longer-term investment result increased due to the contribution from the RBC acquisition.

Cash

Cash remittances during the period were £13 million (HY16: £4 million) reflecting increased loan interest.

Expenses

Operating expenses increased to £234 million (HY16: £167 million) and integration and restructuring costs increased to £9 million (HY16: £3 million) mainly driven by the RBC acquisition and the impact of foreign exchange movements.

 

Net written premiums

Combined operating ratio1

 

 

6 months 2017
£m

6 months
 2016
 £m

Sterling % change

Constant currency %

Full Year
 2016
£m

6 months 2017
£m

6 months
2016
£m

Change

Full Year
 2016
 £m

Personal Lines

1,047

680

54%

37%

1,680

99.4%

96.9%

2.5pp

93.4%

Commercial Lines

430

369

17%

4%

773

97.6%

94.0%

3.6pp

92.2%

Total

1,477

1,049

41%

25%

2,453

98.9%

95.9%

3.0pp

93.0%

1    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

Net written premiums

Net written premiums were £1,477 million (HY16: £1,049 million), up 25% excluding the impact of foreign exchange rate movements, mostly due to the RBC acquisition. Net written premiums increased 3% in constant currency, excluding RBC.

Combined operating ratio

The combined operating ratio was 98.9% (HY16: 95.9%). Excluding prior year development and weather, the claims ratio was stable, despite increased claims frequency. The commission and expense ratio was lower, as a result of the shift in business mix following the RBC acquisition.

 

 

 

Page 15

 

6.iv - Europe1

 

6 months
2017
 £m

6 months
2016
£m

Sterling % change

Constant currency
%

Full Year
 2016
£m

Operating profit

 

 

 

 

 

Life

433

395

10%

(1)%

844

General insurance and health

85

35

143%

117%

120

 

518

430

20%

9%

964

 

 

 

 

 

 

Cash remitted to Group2

190

169

12%

-

449

Expenses

 

 

 

 

 

Operating expenses

351

318

10%

-

641

Integration and restructuring costs

9

5

80%

82%

9

 

360

323

11%

1%

650

 

 

 

 

 

 

Value of new business: Adjusted SII basis

243

188

29%

18%

417

Combined operating ratio3

92.7%

98.9%

(6.2)pp

(6.2)pp

95.8%

Net written premiums3

879

757

16%

5%

1,438

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

2    Cash remittances include amounts of £159 million received from Europe in January 2017 in respect of 2016 activity.

3    General insurance business only.

Overview

Our businesses have shown continued resilient performance, with a 9% increase in operating profit in constant currency, reflecting the strength and diversity of our European franchise. We reported year-on-year volume growth, with value of new business (VNB) and net written premiums (NWP) increasing by 18% and 5% on a constant currency basis respectively. This is despite persistently low interest rates and continued volatility in financial markets, impacted in part by political uncertainty. The business has benefitted from foreign exchange movements following the strengthening of the euro and Polish zloty by 9% and 11% respectively against sterling.

In line with our strategy of allocating capital where we can deliver higher returns, our European businesses announced three disposals in the period. In France, we completed the sale of Antarius in April 2017, to Sogecap, a subsidiary of Société Générale. In Spain, we announced the sale of our 50% shareholding in our life insurance and pension joint ventures Unicorp Vida and Caja España Vida, as well as our retail life insurance business Aviva Vida y Pensiones to Santalucía. In Italy, we have been notified of the termination of our distribution agreement with Banco Popolare.

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

Operating and financial performance

Operating profit

     

Life

General insurance & health

 

6 months 2017
£m

6 months 2016
£m

Sterling % change

Constant currency
 %

Full Year
2016
£m

6 months 2017
£m

6 months 2016
£m

Sterling % change

Constant currency
%

Full Year
 2016
£m

France (excluding Antarius)1

196

173

13%

2%

351

54

16

238%

202%

70

Poland2

77

60

28%

15%

132

11

3

267%

223%

8

Italy

83

74

12%

1%

170

20

16

25%

13%

42

Spain

51

47

9%

(1)%

107

-

-

-

-

-

Turkey

5

2

150%

245%

6

-

-

-

-

-

Total (excluding Antarius)

412

356

16%

5%

766

85

35

143%

117%

120

Antarius1

21

39

(46)%

(51)%

78

-

-

-

-

-

Total

433

395

10%

(1)%

844

85

35

143%

-

120

1    In April 2017, Aviva sold its 50% shareholding in Antarius. The Antarius figures shown represent a full 6 months in HY16, a full year for FY16, and up to completion of the disposal in 2017.

2    Poland operating profit benefits from an additional £7 million due to consolidating our joint ventures with Bank Zachodni WBK SA for the first time in 2017.

Life operating profit was broadly stable at £433 million (HY16: £395 million). Excluding Antarius, life operating profit was up 5%. In France, operating profit excluding Antarius was £196 million (HY16: £173 million), an increase of 2%, due to growth in protection and unit-linked products, and higher unit-linked fee income supported by favourable equity market movements. Poland operating profit of £77 million (HY16: £60 million) increased 15% as a result of the favourable impact of equity market movements on pension assets, and the benefit of consolidating the joint venture with Bank Zachodni WBK SA for the first time in HY17. Italy operating profit of £83 million (HY16: £74 million) was up 1% with volume growth supported by the launch of hybrid with-profits and unit-linked products. Spain operating profit fell 1% to £51 million (HY16: £47 million) due to lower sales on savings products, partially offset by an improved performance on protection business.

General insurance operating profits increased by 117% to £85 million (HY16: £35 million). This was mainly driven by France operating profit growth to £54 million (HY16: £16 million), primarily due to favourable prior year development and better weather experience. In Poland, operating profit increased to £11 million (HY16: £3 million) due to lower commercial large losses and decreased motor claims frequency along with the joint venture consolidation. Operating profit in Italy of £20 million (HY16: £16 million) increased 13% driven by volume growth and claims initiatives.

 

 

 

Page 16

 

 

6.iv - Europe continued

Cash remitted to Group

Cash remitted to Group was £190 million, with higher remittances in France as dividends were not remitted until the second half of 2016.

Expenses

Expenses were up 1% to £360 million (HY16: £323 million) due to the consolidation of the joint ventures in Poland, mostly offset by lower expenses in France despite investment to grow and reorganise the business.

Value of new business: Adjusted SII basis (VNB)

 

6 months
 2017
£m

6 months
 2016
£m

Sterling %

change1

Constant currency % change

Full Year
2016
£m

France

120

101

19%

8%

225

28

22

24%

10%

54

60

42

43%

29%

83

25

12

107%

87%

34

Turkey

10

11

(1)%

8%

21

Total

243

188

29%

18%

417

1    Currency movements are calculated on unrounded numbers so minor rounding differences may exist.

VNB increased by 18% with strong performance across all markets. VNB in France increased 8%, up 25% excluding Antarius, with higher unit-linked and protection volumes, partly offset by lower with-profits volumes. In Poland, VNB increased by 10% due to the consolidation of the joint venture. VNB in Italy was up by 29% as a result of higher unit-linked volumes and improved margin on with-profits products. Spain VNB increased 87%, reflecting growth in higher margin unit-linked and protection products. Turkey's VNB increased 8% due to volume growth on protection and pensions.

 

Net written premiums1

Combined operating ratio1,2

 

6 months 2017
 £m

6 months 2016
£m

Full Year
2016
£m

Sterling % change

Constant currency %

6 months 2017
 £m

6 months 2016
 £m

Change

Full Year
 2016
£m

France

605

526

957

15%

4%

93.2%

100.4%

(7.2)pp

97.0%

Poland3

59

43

86

37%

23%

86.2%

100.1%

(13.9)pp

97.8%

Italy

215

188

395

14%

4%

93.4%

94.8%

(1.4)pp

92.5%

Total

879

757

1,438

16%

5%

92.7%

98.9%

(6.2)pp

95.8%

1    General insurance business only.

2    The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change. See note 5 for details.

3    Poland net written premium and combined operating ratio excludes the joint venture in 2016 but has been consolidated for the first time in 2017.

Net written premiums

General insurance NWP of £879 million has increased by 5% with growth in all our markets. In France, general insurance NWP was £605 million (HY16: £526 million), an increase of 4% primarily reflecting rating actions. In Poland, NWP increased by 23% to £59 million (HY16: £43 million) with benefits from the consolidation of the joint venture partly offset by a reduction in motor volumes as part of underwriting action taken. Italy's NWP grew by 4% to £215 million (HY16: £188 million), primarily in non-motor.

Combined operating ratio (COR)

The European COR has improved by 6.2pp primarily due to France's COR reducing 7.2pp to 93.2%. Our claims ratio has decreased by 5.1pp to 63.4% (HY16: 68.5%) due to favourable prior year development and better weather experience in France. Continued pricing actions across the markets, notably on motor in both France and Poland, and underwriting discipline when selecting risks have also improved the claims ratio.

 

 

 

 

Page 17

 

6.v - Asia

 

6 months
 2017
 £m

6 months
 2016
 £m

Sterling % change

Constant currency %

Full Year
2016
£m

Operating profit

 

 

 

 

 

Life

120

118

2%

(3)%

241

General insurance & health

(5)

(6)

17%

33%

(13)

 

115

112

3%

(1)%

228

Expenses

 

 

 

 

 

Operating expenses

101

88

15%

7%

177

Integration and restructuring costs

-

8

(100)%

(100)%

17

 

101

96

5%

(2)%

194

Value of new business: Adjusted SII basis

71

43

63%

49%

106

Combined operating ratio1

131.4%

108.6%

22.8pp

22.8pp

109.9%

Net written premiums1

6

5

20%

1%

11

1    General insurance business only.

Overview

Asia continues to invest in and strengthen its distribution channels and digital and analytics capabilities to support business growth. In Singapore, subsequent to the successful launch of Aviva Financial Advisers in 2016, the owned financial advisory firm - Professional Investment Advisory Services (PIAS), expanded in May 2017. In China, both the agency and broker channels continued to grow.

On 19 July 2017 we announced the sale of Friends Provident International Limited (FPI) to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited.

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

Operating and financial performance

Operating profit

 

6 months
2017
£m

6 months
2016
£m

Sterling % change

Constant currency %

Full Year
2016
£m

Life operating profit

 

 

 

 

 

Singapore

47

50

(6)%

(15)%

112

FPI

70

70

-

1%

140

Other Asia

3

(2)

-

-

(11)

 

120

118

2%

(3)%

241

General insurance & health operating profit

(5)

(6)

17%

33%

(13)

Total operating profit

115

112

3%

(1)%

228

Operating profit decreased 1% to £115 million (HY16: £112 million) due to a tax recovery benefit in Singapore in HY16. Excluding this, operating profit improved 7% reflecting new business growth generated from the financial advisory channel in Singapore in addition to higher profits generated from existing business and favourable claims and expense experiences in China. The contribution of FPI post amortisation of acquired value in-force business was £2 million (HY16: £1 million loss).

Cash

No dividends were remitted to Group (HY16: £nil) as we continue to reallocate capital to support distribution and digital initiatives in the region.

Expenses

Expenses were broadly flat at £101 million (HY16: £96 million) with the increase in operating expenses driven by higher distribution costs in Singapore and investment in digital and analytics capabilities offset by a reduction in integration and restructuring costs.

Value of new business: Adjusted SII basis (VNB)

 

6 months
 2017
£m

6 months
2016
£m

Sterling %

change1

Constant currency %

change1

Full Year
2016
£m

Singapore

44

34

27%

14%

95

FPI

(1)

-

-

-

4

Other Asia

28

9

211%

207%

7

Total

71

43

63%

49%

106

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

VNB in Asia improved 49% to £71million (HY16: £43 million) reflecting growth in Singapore's core financial advisory channel and China. China increased to £31 million (HY16: £13 million) driven by the improvement in product mix towards higher margin protection business, growth in agency and broker channels and higher interest rates.

Combined operating ratio

The combined operating ratio increased 22.8pp to 131.4% (HY16: 108.6%) due to unfavourable claims experience and continuing softening of market premium rates for motor insurance in Singapore.

 

 

 

Page 18

 

6.vi - Aviva Investors

 

6 months
2017
£m

6 months
2016
£m

Sterling %
change

Full Year
 2016
£m

Revenue: Fee income

273

241

13%

506

Expenses

 

 

 

 

Operating expenses

202

192

5%

367

Integration and restructuring costs

-

10

(100)%

19

 

202

202

-

386

Operating profit

 

 

 

 

Fund management

71

49

45%

139

Other operations

25

20

25%

19

 

96

69

39%

158

Cash remitted to Group

37

2

-

39

Value of new business: Adjusted SII basis

12

12

-

28

Overview

Fund management operating profit increased by 45% to £71 million from HY16. Fund management operating profit margin* increased by 6pp to 26% (HY16: 20%). Progress has been made in broadening our range of outcome oriented propositions, and we continue to invest in the growth of the business.

Operating and financial performance

Revenue

Revenue increased by 13% to £273 million driven by the continued growth of Aviva Investors Multi-Strategy (AIMS) assets under management to £12 billion (HY16: £6 billion), the Friends Life assets on boarded in the second half of 2016 and increased income from the origination of infrastructure assets. Revenue from external clients generated 35% of total revenue (HY16: 30%).

Expenses

Operating expenses in Aviva Investors were £202 million (HY16: £192 million) reflecting increased investment in staff and systems as we support the growth of higher value-add products and further development of the business.

Operating profit

Fund management operating profit increased by £22 million to £71 million (HY16: £49 million). This increase was driven by growth in revenue, with operating expenses increasing at a slower rate. This led to an improved operating profit margin.

Operating profit from other operations of £25 million related to insurance recoveries (HY16: £20 million of which £16 million was from the Group's internal reinsurer).

Cash

Cash remitted to Group was £37 million (HY16: £2 million) as dividends were not remitted until the second half of 2016.

Value of new business: Adjusted SII basis

Value of new business in Aviva Investors was £12 million, in line with prior year.

Net flows and assets under management - Aviva Investors1

 

Internal

Legacy2

 £m

Internal
Core
£m

External
£m

Total
£m

Aviva Investors

 

 

 

 

Assets under management at 1 January 2017

97,290

190,667

56,561

344,518

Total Inflows

1,966

11,304

6,099

19,369

Total Outflows

(4,342)

(9,624)

(4,869)

(18,835)

Net Flows

(2,376)

1,680

1,230

534

Net Flows into Liquidity Funds

(573)

(138)

955

244

Reallocation3

-

(13,414)

13,414

-

Disposals4

-

-

(714)

(714)

Market and foreign exchange movements

3,148

2,541

1,046

6,735

Assets under management at 30 June 2017

97,489

181,336

72,492

351,317

1    Assets under management represents all assets managed by Aviva Investors. These comprise Aviva (internal) assets which are included within the Group's statement of financial position and those belonging to external clients outside the Aviva Group which are therefore not included in the Group's statement of financial position. These assets under management exclude those funds that are managed by third parties.

2    Assets managed by Aviva Investors on behalf of internal Aviva Clients relating to products that are no longer actively marketed.

3    Retention of assets under management following sale of Antarius, resulting in a switch from Internal to External.

4    Disposal of Real Estate fund in February 2017.

Aviva Investors assets under management increased by £6.8 billion to £351.3 billion (FY16: £344.5 billion) in HY17 with net external inflows of £1.2 billion. Internal Core net inflows were £1.7 billion while net outflows on the Internal Legacy book were £2.4 billion. Net flows into liquidity funds were £0.2 billion. The remaining increase of £6.0 billion comprised favourable market movements of £3.9 billion and favourable foreign exchange rate movements of £2.8 billion, offset by the disposal of a Real Estate fund (£0.7 billion).

 

 

 

 

*    Operating profit margin is calculated as operating profit expressed as a percentage of revenue.

 

 

 

 

Page 19

 

 

7.i - Life business profit drivers

Life business operating profit before shareholder tax increased by 8% to £1,319 million (HY16: £1,226 million), up 3% on a constant currency basis.

Overall, total income increased by 8% to £2,290 million (HY16: £2,114 million) and total expenses increased by 5% to £1,117 million (HY16: £1,059 million). This increase in net income of £118 million has been partially offset by a lower benefit from DAC and other items, giving a total increase in life operating profit of £93 million for the half year, which includes favourable currency movements of £49 million.

 

United Kingdom & Ireland

Europe

Asia

Total

 

6 months 2017
£m

6 months 2016
£m

Full year 2016
 £m

6 months 2017
 £m

6 months 2016
£m

Full year 2016
£m

6 months 2017
£m

6 months 2016
£m

Full year 2016
 £m

6 months 2017
 £m

6 months 2016
£m

Full year 2016
 £m

New business income1

370

316

801

129

130

267

101

74

184

600

520

1,252

Underwriting margin2

164

158

326

124

115

223

36

37

76

324

310

625

Investment return3

676

677

1,352

605

545

1,134

85

62

159

1,366

1,284

2,645

Total Income

1,210

1,151

2,479

858

790

1,624

222

173

419

2,290

2,114

4,522

Acquisition expenses4

(213)

(210)

(396)

(135)

(144)

(274)

(91)

(68)

(158)

(439)

(422)

(828)

Administration expenses5

(325)

(332)

(652)

(300)

(258)

(520)

(53)

(47)

(96)

(678)

(637)

(1,268)

Total Expenses

(538)

(542)

(1,048)

(435)

(402)

(794)

(144)

(115)

(254)

(1,117)

(1,059)

(2,096)

DAC and other

84

102

124

10

7

14

42

60

76

136

169

214

 

756

711

1,555

433

395

844

120

118

241

1,309

1,224

2,640

Other business6

 

 

 

 

 

 

 

 

 

10

2

2

Total life business operating profit

 

 

 

 

 

 

 

 

 

1,319

1,226

2,642

1    Represents the income earned on new business written during the period reflecting premiums less initial reserves.

2    Underwriting margin represents the release of reserves held to cover claims, surrenders and expenses less the cost of actual claims and surrenders in the period.

3    Represents the expected income on existing business (other than the underwriting margin). Life investment return comprises unit-linked margin, shareholders' return on participating business, spread margin and the expected return on shareholder assets.

4    Initial expenses and commission incurred in writing new business less deferred costs.

5    Expenses and renewal commissions incurred in managing existing business.

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

Income: New business income and underwriting margin

 

United Kingdom & Ireland

 

Europe

 

Asia

 

Total

 

6 months
 2017
£m

6 months
 2016
£m

6 months
2017
£m

6 months
2016
£m

6 months
2017
£m

6 months
2016
£m

6 months
 2017
£m

6 months
2016
£m

New business income (£m)

370

316

129

130

101

74

600

520

APE (£m)1

1,422

1,194

632

617

180

120

2,234

1,931

As margin on APE (%)

26%

26%

20%

21%

56%

62%

27%

27%

Underwriting margin (£m)

164

158

124

115

36

37

324

310

Analysed by:

 

 

 

 

 

 

 

 

Expenses

36

31

29

28

28

23

93

82

Mortality and longevity

125

135

98

82

8

12

231

229

Persistency

3

(8)

(3)

5

-

2

-

(1)

1    Used as a measure of life sales. It is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. APE excludes UK Retail Fund Management and Health business in UK & Ireland and Asia.

(a) New business income

New business income increased to £600 million (HY16: £520 million), mainly driven by UK & Ireland, Asia and favourable foreign exchange movements of £19 million.

The net contribution from new business is the new business income less associated acquisition expenses (see (g) below). This increased to a profit of £161 million (HY16: profit of £98 million). In the UK & Ireland, net contribution from new business increased to £157 million (HY16: £106 million) mainly driven by growth in sales of individual protection and annuities.

In Europe, the net contribution improved to a loss of £6 million (HY16: loss of £14 million) with an improved contribution in Poland due to consolidating the joint venture with Bank Zachodni WBK SA for the first time. Volumes based on APE decreased by 6% in constant currency, reflecting the sale of Antarius in France, partly offset by higher sales volumes in Spain and Turkey. New business margin on APE remained broadly stable in Europe at 20% (HY16: 21%).

In Asia, the net contribution increased 26% in constant currency to a profit of £10 million (HY16: profit of £6 million) mainly as a result of higher sales in Singapore for with-profits business and higher sales volumes in China, with changes in business mix reducing the new business margin.

(b) Underwriting margin

The underwriting margin increased to £324 million (HY16: £310 million) mainly due to favourable currency movements, with the amount being broadly consistent on a constant currency basis. In the UK & Ireland, underwriting margin increased to £164 million (HY16: £158 million) with improved expenses and persistency margins being partially offset by a reduction in mortality margins. In Europe, underwriting margin increased to £124 million (HY16: £115 million) reflecting favourable foreign exchange movements, with a decrease of 2% on a constant currency basis, reflecting a lower persistency margin, partially offset by an improvement in the mortality margin, in Italy.

In Asia, underwriting margin decreased 9% in constant currency to £36 million (HY16: £37 million) mainly due to adverse mortality margins in Singapore, partly offset by an improved expenses margin in China.

 

 

 

 

Page 20

 

7.i - Life business profit drivers continued

Income: Investment return

 

United Kingdom & Ireland

 

Europe

 

Asia

 

Total

 

6 months
2017
£m

6 months
2016
£m

6 months
 2017
£m

6 months
2016
£m

6 months
2017
£m

6 months
 2016
£m

6 months
 2017
£m

6 months
 2016
£m

Unit-linked margin1 (£m)

439

429

285

236

68

52

792

717

As annual management charge on average reserves (bps)

74

80

150

146

145

127

95

97

Average reserves 5 (£bn)

118.4

107.2

38.1

32.4

9.4

8.2

165.9

147.8

Participating business2 (£m)

89

79

269

258

1

(5)

359

332

As bonus on average reserves (bps)

36

30

80

83

5

n/a

60

57

Average reserves 5 (£bn)

49.5

51.9

67.1

62.2

3.9

3.3

120.5

117.4

Spread margin3 (£m)

129

135

3

3

7

8

139

146

As spread margin on average reserves (bps)

39

44

19

19

108

145

40

44

Average reserves5 (£bn)

65.4

61.4

3.2

3.2

1.3

1.1

69.9

65.7

Expected return on shareholder assets4 (£m)

19

34

48

48

9

7

76

89

Total (£m)

676

677

605

545

85

62

1,366

1,284

1    Unit-linked margin represents the annual management charges on unit-linked business based on expected investment return.

2    The shareholders' share of the return on with-profit and other participating business.

3    Spread margin represents the return made on annuity and other non-linked business, based on the expected investment return less amounts credited to policyholders.

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.

5    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.

(c) Unit-linked margin

The unit-linked average reserves have increased to £166 billion (HY16: £148 billion), with the movement largely driven by favourable market performance. This increased the unit-linked margin to £792 million (HY16: £717 million). The margin as a proportion of average unit-linked reserves remained broadly stable at 95 bps (HY16: 97 bps).

The unit-linked margin in UK & Ireland has increased mainly due to favourable market movements and growth in the sales of group pensions. The margin on average reserves has decreased to 74 bps (HY16: 80 bps) due to the expected run-off in the higher margin back book and lower margins on group pensions. The unit-linked margin in Europe increased on a constant currency basis by £24 million, mainly driven by favourable market movements and the benefit of consolidating the Polish joint venture for the first time. The increase in unit-linked margin in Asia on a constant currency basis was £15 million, which is mainly due to higher sales volumes in Indonesia.

(d) Participating business

The participating average reserves have increased to £121 billion (HY16: £117 billion). Income from participating business increased to £359 million (HY16: £332 million). In the UK & Ireland, participating business income increased to £89 million (HY16: £79 million). In Europe, income has increased to £269 million (HY16: £258 million) reflecting favourable foreign currency movements of £27 million, partly offset by lower income in France due to the disposal of Antarius. The majority of participating business income continues to be earned in France, where there is a fixed management charge of around 50bps on AFER business, which is the largest single component of this business.

(e) Spread margin

Spread business income, which mainly relates to UK in-force immediate annuity and equity release business, decreased to £139 million (HY16: £146 million). The spread margin decreased to 40 bps (HY16: 44 bps) mainly due to the increase in average reserves to £70 billion (HY16: £66 billion), which is largely driven by lower interest rates in the UK. In Europe, spread margin remained stable at £3 million. In Asia, spread business income decreased £2 million on a constant currency basis to £7 million (HY16: £8 million) driven by lower investment margins in Singapore.

(f) Expected return on shareholder assets

Expected returns, representing investment income on surplus funds, have decreased to £76 million (HY16: £89 million). This is mainly due to the impact of the economic capital optimisation (hedging) activity in Friends Life and the fall in interest rates in the UK, both reducing the expected return on shareholder assets in UK Life.

 

 

 

 

Page 21

 

7.i - Life business profit drivers continued

Expenses

 

United Kingdom & Ireland

 

Europe

 

Asia

 

Total

 

6 months
 2017
£m

6 months
 2016
£m

6 months
 2017
£m

6 months
2016
£m

6 months
 2017
£m

6 months
2016
£m

6 months
2017
£m

6 months
2016
£m

Acquisition expenses (£m)

(213)

(210)

(135)

(144)

(91)

(68)

(439)

(422)

APE (£m)1

1,422

1,194

632

617

180

120

2,234

1,931

As acquisition expense ratio on APE (%)

15%

18%

21%

23%

51%

57%

20%

22%

Administration expenses (£m)

(325)

(332)

(300)

(258)

(53)

(47)

(678)

(637)

As existing business expense ratio on average reserves (bps)

28

30

55

53

73

75

38

39

Average reserves (£bn)

233.3

220.5

108.4

97.8

14.6

12.6

356.3

330.9

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

(g) Acquisition expenses

Acquisition expenses increased to £439 million (HY16: £422 million) primarily reflecting higher sales volumes in Asia and higher protection sales in the UK. Europe acquisition expenses have decreased 14% on a constant currency basis, mainly driven by the sale of Antarius in France and lower sales volumes in Italy.

The increase in Asia is due to higher new business sales in China and Indonesia. The group ratio of acquisition expenses to APE improved to 20% (HY16: 22%).

(h) Administration expenses

Administration expenses increased to £678 million (HY16: £637 million) with an expense ratio of 38 bps (HY16: 39 bps) on average reserves of £356 billion (HY16: £331 billion). The decrease in UK & Ireland to £325 million (HY16: £332 million) is driven by continued cost control, whilst also investing in growth. Administration expenses in Europe have increased to £300 million (HY16: £258 million) due to adverse exchange rate movements of £26 million, the consolidation of the joint venture in Poland and higher renewal commission costs in Italy, driven by business mix. On a constant currency basis, administration expenses in Asia increased by 8%, primarily due to increases in Hong Kong (where they were offset by a reduction in acquisition expenses).

The overall increase in life business acquisition and administration expenses was £58 million, with increased costs due to higher sales volumes and adverse foreign exchange rate movements.

(i) DAC and other

DAC and other items amounted to an overall positive contribution of £136 million (HY16: £169 million). In the UK, DAC and other includes a £55 million benefit from a change in the allocation strategy for those assets backing annuities, partly offset by an increase in DAC amortisation. There were no material assumption changes in HY17. Other in HY16 mainly related to a £63 million benefit in relation to annuitant mortality assumption changes.

In Asia, DAC and other items reduced to £42 million (HY16: £60 million) mainly due to a recovery of indirect tax in Singapore in HY16.

 

 

 

Page 22

 

7.ii - General insurance and health

6 months 2017

UK
Personal
 £m

UK Commercial £m

Total
UK
 £m

Ireland
 £m

Total
 UK & Ireland
£m

Canada Personal
 £m

Canada Commercial £m

Total Canada
 £m

Europe
£m

Asia &

Other1

£m

Total
£m

General insurance

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

1,300

934

2,234

229

2,463

1,066

463

1,529

911

6

4,909

Net written premiums

1,269

836

2,105

221

2,326

1,047

430

1,477

879

6

4,688

Net earned premiums

1,218

778

1,996

202

2,198

1,019

410

1,429

778

6

4,411

Net claims incurred

(719)

(477)

(1,196)

(107)

(1,303)

(742)

(250)

(992)

(493)

2

(2,786)

Of which claims handling costs

 

 

(72)

(5)

(77)

 

 

(58)

(26)

-

(161)

Earned commission

(327)

(159)

(486)

(33)

(519)

(174)

(87)

(261)

(165)

-

(945)

Earned expenses2

(87)

(92)

(179)

(31)

(210)

(94)

(66)

(160)

(63)

(3)

(436)

Underwriting result

85

50

135

31

166

9

7

16

57

5

244

Longer-term investment return3

 

 

78

7

85

 

 

57

28

1

171

Other4

 

 

-

-

-

 

 

(2)

-

-

(2)

Operating profit

 

 

213

38

251

 

 

71

85

6

413

Health insurance

 

 

 

 

 

 

 

 

 

 

 

Underwriting result

 

 

 

 

7

 

 

-

-

(4)

3

Longer-term investment return

 

 

 

 

1

 

 

-

-

-

1

Operating profit

 

 

 

 

8

 

 

-

-

(4)

4

Total operating profit

 

 

 

 

259

 

 

71

85

2

417

General insurance combined operating ratio1

 

 

 

 

 

 

 

 

 

 

 

Claims ratio

59.0%

61.4%

59.9%

52.8%

59.3%

72.8%

61.0%

69.5%

63.4%

 

63.2%

Commission ratio

26.8%

20.4%

24.3%

16.4%

23.6%

17.2%

20.9%

18.2%

21.2%

 

21.4%

Expense ratio

7.1%

11.8%

9.0%

15.5%

9.6%

9.4%

15.7%

11.2%

8.1%

 

9.9%

Combined operating ratio5

92.9%

93.6%

93.2%

84.7%

92.5%

99.4%

97.6%

98.9%

92.7%

 

94.5%

Assets supporting general insurance
and health business

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

3,255

283

3,538

 

 

4,247

2,270

174

10,229

Equity securities

 

 

6

-

6

 

 

249

41

-

296

Investment property

 

 

207

-

207

 

 

-

137

-

344

Cash and cash equivalents

 

 

902

73

975

 

 

145

293

38

1,451

Other6

 

 

1,808

56

1,864

 

 

213

324

2

2,403

Assets at 30 June 2017

 

 

6,178

412

6,590

 

 

4,854

3,065

214

14,723

Debt securities

 

 

3,718

360

4,078

 

 

4,349

2,175

197

10,799

Equity securities

 

 

7

-

7

 

 

235

25

-

267

Investment property

 

 

208

-

208

 

 

-

133

-

341

Cash and cash equivalents

 

 

757

47

804

 

 

115

220

23

1,162

Other6

 

 

1,464

4

1,468

 

 

256

305

3

2,032

Assets at 31 December 2016

 

 

6,154

411

6,565

 

 

4,955

2,858

223

14,601

Average assets

 

 

6,165

412

6,577

 

 

4,904

2,962

219

14,662

LTIR as % of average assets

 

 

2.5%

3.4%

2.6%

 

 

2.3%

1.9%

0.9%

2.3%

1    Asia & Other includes Aviva Re.

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

3    The UK & Ireland LTIR includes £28 million (HY16: £37 million) relating to the internal loan. This is lower than 2016 primarily as a result of the reduction in the loan balance in HY16.

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

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

6    Includes loans and other financial investments.

 

 

 

 

Page 23

 

 

7.ii - General insurance and health continued

6 months 2016

UK Personal £m

UK Commercial £m

Total
UK
 £m

Ireland
 £m

Total
UK & Ireland
 £m

Canada Personal £m

Canada Commercial
 £m

Total Canada
£m

Europe
 £m

Asia &

Other1

£m

Total
£m

General insurance

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

1,225

921

2,146

185

2,331

692

399

1,091

786

6

4,214

Net written premiums

1,188

813

2,001

179

2,180

680

369

1,049

757

5

3,991

Net earned premiums

1,121

763

1,884

159

2,043

655

365

1,020

658

6

3,727

Net claims incurred

(666)

(473)

(1,139)

(99)

(1,238)

(447)

(212)

(659)

(451)

(19)

(2,367)

Of which claims handling costs

 

 

(68)

(5)

(73)

 

 

(41)

(22)

-

(136)

Earned commission

(273)

(154)

(427)

(25)

(452)

(127)

(74)

(201)

(132)

-

(785)

Earned expenses2

(106)

(97)

(203)

(23)

(226)

(61)

(57)

(118)

(65)

(3)

(412)

Underwriting result

76

39

115

12

127

20

22

42

10

(16)

163

Longer-term investment return3

 

 

85

8

93

 

 

47

28

1

169

Other4

 

 

(1)

-

(1)

 

 

(1)

-

-

(2)

Operating profit

 

 

199

20

219

 

 

88

38

(15)

330

Health insurance

 

 

 

 

 

 

 

 

 

 

 

Underwriting result

 

 

 

 

10

 

 

-

(3)

(5)

2

Longer-term investment return

 

 

 

 

2

 

 

-

-

-

2

Operating profit

 

 

 

 

12

 

 

-

(3)

(5)

4

Total operating profit

 

 

 

 

231

 

 

88

35

(20)

334

General insurance combined operating ratio

 

 

 

 

 

 

 

 

 

 

 

Claims ratio

59.4%

62.0%

60.5%

62.4%

60.6%

68.2%

58.1%

64.6%

68.5%

 

63.5%

Commission ratio

24.4%

20.2%

22.6%

15.3%

22.1%

19.4%

20.3%

19.7%

20.5%

 

21.2%

Expense ratio

9.5%

12.7%

10.8%

14.2%

11.1%

9.3%

15.6%

11.6%

9.9%

 

11.0%

Combined operating ratio5

93.3%

94.9%

93.9%

91.9%

93.8%

96.9%

94.0%

95.9%

98.9%

 

95.7%

Assets supporting general insurance
and health business

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

3,474

413

3,887

 

 

3,500

2,168

202

9,757

Equity securities

 

 

8

-

8

 

 

201

16

-

225

Investment property

 

 

205

-

205

 

 

-

163

-

368

Cash and cash equivalents

 

 

811

71

882

 

 

462

236

43

1,623

Other6

 

 

1,535

102

1,637

 

 

166

235

2

2,040

Assets at 30 June 2016

 

 

6,033

586

6,619

 

 

4,329

2,818

247

14,013

Debt securities

 

 

3,993

470

4,463

 

 

2,999

1,937

209

9,608

Equity securities

 

 

8

-

8

 

 

188

21

-

217

Investment property

 

 

198

-

198

 

 

-

137

-

335

Cash and cash equivalents

 

 

639

79

718

 

 

107

118

26

969

Other6

 

 

2,559

104

2,663

 

 

135

209

1

3,008

Assets at 31 December 2015

 

 

7,397

653

8,050

 

 

3,429

2,422

236

14,137

Average assets

 

 

6,715

620

7,335

 

 

3,878

2,620

242

14,075

LTIR as % of average assets

 

 

2.5%

2.6%

2.6%

 

 

2.4%

2.1%

0.8%

2.4%

1    Asia & Other includes Aviva Re.

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

3    The UK & Ireland LTIR includes £37 million (HY15: £59 million) relating to the internal loan. This is lower than 2015 primarily as a result of a reduction in the balance of this loan during 2015 and 2016.

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

5    COR is now reported on an earned basis and is calculated as incurred claims, earned commission and earned expenses, expressed as a percentage of net earned premiums. Comparatives have been realigned to reflect this change. See note 5 for details. COR is calculated using unrounded numbers so minor rounding differences may exist.

6    Includes loans and other financial investments.

 

 

 

 

 

Page 24

 

 

7.ii - General insurance and health continued

Full year 2016

UK Personal £m

UK Commercial £m

Total
UK
 £m

Ireland
£m

Total UK & Ireland
 £m

Canada Personal £m

Canada Commercial £m

Total Canada
£m

Europe
 £m

Asia &

Other2

 £m

Total
 £m

General insurance

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

2,476

1,743

4,219

392

4,611

1,711

831

2,542

1,499

12

8,664

Net written premiums1

2,408

1,522

3,930

378

4,308

1,680

773

2,453

1,438

12

8,211

Net earned premiums1

2,295

1,526

3,821

351

4,172

1,645

775

2,420

1,396

12

8,000

Net claims incurred1

(1,602)

(1,220)

(2,822)

(222)

(3,044)

(1,104)

(433)

(1,537)

(931)

(24)

(5,536)

Of which claims handling costs

 

 

(137)

(9)

(146)

 

 

(93)

(45)

-

(284)

Earned commission

(570)

(310)

(880)

(53)

(933)

(283)

(160)

(443)

(268)

-

(1,644)

Earned expenses3

(180)

(182)

(362)

(49)

(411)

(150)

(122)

(272)

(133)

(6)

(822)

Impact of change in Ogden discount rate excluded from underwriting result

230

245

475

-

475

-

-

-

-

-

475

Underwriting result1

173

59

232

27

259

108

60

168

64

(18)

473

Longer-term investment return4

 

 

162

14

176

 

 

105

55

3

339

Other5

 

 

(2)

-

(2)

 

 

(4)

-

-

(6)

Operating profit1

 

 

392

41

433

 

 

269

119

(15)

806

Health insurance

 

 

 

 

 

 

 

 

 

 

 

Underwriting result

 

 

 

 

35

 

 

-

-

(12)

23

Longer-term investment return

 

 

 

 

3

 

 

-

1

-

4

Operating profit

 

 

 

 

38

 

 

-

1

(12)

27

Total operating profit1

 

 

 

 

471

 

 

269

120

(27)

833

General insurance combined operating ratio1

 

 

 

 

 

 

 

 

 

 

 

Claims ratio1

69.8%

79.9%

73.8%

63.3%

73.0%

67.1%

55.9%

63.5%

66.7%

 

69.2%

Commission ratio

24.8%

20.3%

23.0%

15.1%

22.3%

17.2%

20.6%

18.3%

19.6%

 

20.6%

Expense ratio

7.8%

11.9%

9.5%

14.0%

9.9%

9.1%

15.7%

11.2%

9.5%

 

10.3%

Combined operating ratio6

102.4%

112.1%

106.3%

92.4%

105.2%

93.4%

92.2%

93.0%

95.8%

 

100.1%

Combined operating ratio, excluding the impact of change in Ogden discount rate6

92.5%

96.1%

93.9%

92.4%

93.8%

93.4%

92.2%

93.0%

95.8%

 

94.1%

Assets supporting general insurance and health business

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 

3,718

360

4,078

 

 

4,349

2,175

197

10,799

Equity securities

 

 

7

-

7

 

 

235

25

-

267

Investment property

 

 

208

-

208

 

 

-

133

-

341

Cash and cash equivalents

 

 

757

47

804

 

 

115

220

23

1,162

Other7

 

 

1,464

4

1,468

 

 

256

305

3

2,032

Assets at 31 December 2016

 

 

6,154

411

6,565

 

 

4,955

2,858

223

14,601

Debt securities

 

 

3,993

470

4,463

 

 

2,999

1,937

209

9,608

Equity securities

 

 

8

-

8

 

 

188

21

-

217

Investment property

 

 

198

-

198

 

 

-

137

-

335

Cash and cash equivalents

 

 

639

79

718

 

 

107

118

26

969

Other7

 

 

2,559

104

2,663

 

 

135

209

1

3,008

Assets at 31 December 2015

 

 

7,397

653

8,050

 

 

3,429

2,422

236

14,137

Average assets

 

 

6,776

532

7,308

 

 

4,192

2,640

229

14,369

LTIR as % of average assets

 

 

2.4%

2.6%

2.4%

 

 

2.5%

2.1%

1.3%

2.4%

1    Excludes the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).

2    Asia & Other includes Aviva Re.

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

4    The UK & Ireland LTIR includes £69 million (FY15: £115 million) relating to the internal loan. This is lower than 2015 primarily as a result of a reduction in the balance of this loan during 2016.

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

6    COR is now reported on an earned basis and is calculated as incurred claims, earned commission and earned expenses, expressed as a percentage of net earned premiums. Comparatives have been realigned to reflect this change. See note 5 for details. COR is calculated using unrounded numbers so minor rounding differences may exist.

7    Includes loans and other financial investments.

 

 

 

 

Page 25

 

7.iii - Fund flows

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

 

Managed
 assets at
 1 January
 2017
 £m

Premiums
 and deposits,
 net of
 reinsurance
 £m

Claims and
 redemptions,
 net of
 reinsurance
 £m

Net flows1,2
 £m

Market and
 other
 movements
 £m

Managed
 assets at
 30 June
 20173
 £m

Life and platform business

 

 

 

 

 

 

UK - non-profit:

 

 

 

 

 

 

- platform

12,963

3,771

(807)

2,964

555

16,482

- pensions and other long term savings

91,589

3,376

(4,192)

(816)

2,181

92,954

- long term savings

104,552

7,147

(4,999)

2,148

2,736

109,436

- annuities and equity release

57,316

682

(1,231)

(549)

2,203

58,970

- other

25,851

887

(1,470)

(583)

991

26,259

Ireland

5,989

475

(314)

161

101

6,251

United Kingdom & Ireland (excluding UK with-profits)

193,708

9,191

(8,014)

1,177

6,031

200,916

Europe

113,842

5,202

(4,106)

1,096

(5,538)

109,400

Asia

13,456

362

(181)

181

383

14,020

Other

1,599

13

(154)

(141)

61

1,519

 

322,605

14,768

(12,455)

2,313

937

325,855

UK - with-profits and other

61,796

 

 

 

 

59,187

Total life and platform business

384,401

 

 

 

 

385,042

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

2    For the period to 30 June 2017, net flows of £2.3 billion includes net flows of £1.0 billion that are included in the IFRS income statement within net written premiums and net paid claims.

3    Life and platform business managed assets at the balance sheet date includes financial investments, loans, investment property, externally reinsured non-participating investment contracts and cash and cash equivalents included on the IFRS statement of financial position, plus assets administered by the Group that are not included on the IFRS statement of financial position. At 30 June 2017, life and platform business managed assets of £385 billion (FY16: £384 billion) includes £371 billion (FY16: £373 billion) that is on the IFRS statement of financial position.

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

United Kingdom & Ireland (excluding UK with-profits)

UK long-term savings managed assets4 have increased to c.£109 billion (FY16: c.£105 billion) during the period. Within this, net inflows were £2.1 billion mainly reflecting continued growth from our platform business of £3.0 billion with managed assets increasing 27% in the period to £16.5 billion (FY16: £13.0 billion).

UK annuities and equity release and other non-profit outflows were £1.1 billion driven by net outflows in Bonds & Savings as the book continues to run off as expected. Market and other movements include favourable market movements driven by narrowing spreads and growth in equities.

Europe

Net inflows were £1.1 billion. This was mainly driven by unit-linked volumes in France and improved margin on with-profits products in Italy. Market and other movements in Europe reflect the disposal of £11.4 billion investment assets following the sale of Antarius, partly offset by favourable foreign exchange rate movements of £3.3 billion and investment market movements of £2.6 billion.

Asia and other

Net inflows in Asia were £0.2 billion arising mainly in Singapore. Other business net outflows of £0.1 billion primarily relate to Aviva Investors' Pooled Pensions business. 

 

 

 

 

Page 26

 

 

8.i - Summary of assets

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

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

The Group seeks to diversify its asset portfolio in order to reduce risk and provide more attractive risk-adjusted returns. In order to achieve this there is a comprehensive risk limit framework in place. There is an allowance for diversification in our economic capital model and we continue to broaden the investment portfolio in individual businesses.

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

The asset allocation as at 30 June 2017 across the Group, split according to the type of liability the assets are covering, is shown in the table below. Further information on these assets is given in the Analysis of Assets section.

 

Shareholder business assets

 

Participating fund assets

 

 

 

Carrying value in the statement of financial position

General Insurance &

health & other1

£m

Annuity and non-profit
£m

Policyholder (unit-linked assets)
£m

UK style with-profits
£m

Continental European-style Participating funds
 £m

Total assets analysed
£m

Less assets of operation classified as held for sale £m

Carrying value in the statement of financial position
 £m

Debt securities

 

 

 

 

 

 

 

 

Government bonds

6,843

16,218

13,655

17,720

28,035

82,471

(1,811)

80,660

Corporate bonds

4,250

22,815

10,408

15,868

26,483

79,824

(1,239)

78,585

Other

366

2,226

2,836

1,169

6,220

12,817

(992)

11,825

 

11,459

41,259

26,899

34,757

60,738

175,112

(4,042)

171,070

Loans

 

 

 

 

 

 

 

 

Mortgage loans

-

18,975

-

109

-

19,084

-

19,084

Other loans

164

3,170

8

2,301

792

6,435

(67)

6,368

 

164

22,145

8

2,410

792

25,519

(67)

25,452

Equity securities

321

547

57,623

13,086

2,614

74,191

(616)

73,575

Investment property

354

172

6,595

2,342

1,257

10,720

(1)

10,719

Other investments

1,180

3,157

51,368

4,185

4,806

64,696

(119)

64,577

Total as at 30 June 2017

13,478

67,280

142,493

56,780

70,207

350,238

(4,845)

345,393

Total as at 31 December 2016

14,152

65,628

132,901

56,672

76,863

346,216

(10,829)

335,387

1    Of the £13.5 billion of assets 11% relates to other shareholder business assets.

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

General insurance and health

All the investment risk is borne by shareholders and the portfolio held to cover these liabilities contains a high proportion of fixed and variable income securities, of which 83% are rated A or above. The assets are relatively short duration reflecting the short average duration of the liabilities. Liquidity, interest rate and currency risks are maintained at a low level within risk appetite.

Annuity and other non-profit

All the investment risk is borne by shareholders. The annuity liabilities have a long duration but are also illiquid as customers cannot surrender their policies. The assets are chosen to provide stable income and cash flow. Currency and interest rate exposures are closely matched to the liabilities in line with risk appetite. We are able to invest part of the portfolio in less liquid assets in order to improve risk-adjusted returns given the illiquid nature of the liabilities. The asset portfolio is principally comprised of long maturity bonds and loans including a material book of commercial mortgage loans. The other non-profit business assets are a smaller proportion of this portfolio and are generally shorter in duration and have a high proportion invested in fixed income.

£11.7 billion of shareholder loan assets are backing UK annuity liabilities and comprise of commercial mortgage loans (£6.9 billion), Healthcare, Infrastructure and PFI mortgage loans (£3.5 billion) and Primary Healthcare, Infrastructure and PFI other loans (£1.3 billion). The Group carries a valuation allowance within the liabilities against the risk of default of commercial mortgages, including Healthcare and PFI mortgages, of £0.4 billion which equates to 39bps at 30 June 2017 (FY16: 50bps).

 

 

 

 

 

Page 27

 

 

8.i - Summary of assets continued

Policyholder assets

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

UK style with-profits (WP)

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

Continental European style participating funds

Continental European style participating funds hold relatively long-term contracts with policyholders participating in pooled investment performance subject to some minimum guarantees. Smoothed returns are used to declare bonuses to policyholders. A certain portion of the guarantees are subject to annual discretion declared at the start of the year. Other guarantees are subject to revision downwards at contractual dates. The investment portfolio holds a higher proportion of fixed income assets than the UK style equivalent.

 

 

 

Page 28

 

8.ii - Net asset value

At HY17, the net asset value per share was 412 pence (FY16: 414 pence). Increases in operating profit and profit on disposal and remeasurements of subsidiaries, joint ventures and associates were offset by the payment of the final 2016 dividend to shareholders, adverse economic variances, the cost of shares purchased in the buy-back and impairment and amortisation of intangibles and acquired value of in-force business.

Total investment variances and economic assumption changes were £396 million adverse. This included £217 million adverse variances in the non-life business, primarily reflecting unfavourable short-term fluctuations. These short-term fluctuations were mainly due to interest rate increases reducing the value of fixed income securities and foreign exchange losses and adverse market movements on Group centre holdings, including the centre hedging programme.

In the life businesses, investment variances and economic assumption changes were £179 million adverse. The negative variance in HY17 primarily reflects the treatment on disposal of our French subsidiary Antarius and falling interest rates in Asia. Of the £180 million profit on disposal of Antarius, £147 million has been transferred under French reserving rules to insurance contract liabilities and is expected to be released over time in accordance with French reserving rules (see A4 for further details).

 

30 June
 2017
£m

pence per

share2

30 June
 2016
 £m

pence per

share2

31 December 2016
£m

pence per

share2

Equity attributable to shareholders of Aviva plc at 1 January1

16,803

414p

15,802

390p

15,802

390p

Operating profit

1,465

37p

1,325

32p

3,010

73p

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

(396)

(10)p

(455)

(11)p

(381)

(9)p

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

202

5p

(18)

-

(11)

-

Goodwill impairment and amortisation of intangibles

(110)

(3)p

(92)

(2)p

(175)

(4)p

Amortisation and impairment of acquired value of in-force business

(234)

(6)p

(318)

(8)p

(540)

(13)p

Integration and restructuring costs

(52)

(1)p

(105)

(3)p

(212)

(5)p

Other3

 -

-

 -

-

(498)

(13)p

Tax on operating profit and on other activities

(159)

(4)p

(136)

(3)p

(334)

(8)p

Non-controlling interests

(79)

(2)p

(71)

(2)p

(156)

(4)p

Profit after tax attributable to shareholders of Aviva plc

637

16p

130

3p

703

17p

AFS securities (fair value) & other reserve movements

(3)

-

21

-

4

-

Ordinary dividends

(646)

(16)p

(570)

(14)p

(871)

(22)p

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

(32)

(1)p

(30)

(1)p

(85)

(2)p

Foreign exchange rate movements

(21)

-

730

18p

945

23p

Remeasurements of pension schemes

(25)

-

607

15p

242

6p

Shares purchased in buy-back

(73)

(2)p

 -

-

 -

-

Other net equity movements

51

1p

23

1p

63

2p

Equity attributable to shareholders of Aviva plc at 30 June/31 December1

16,691

412p

16,713

412p

16,803

414p

1    Excluding preference shares of £200 million (HY16: £200 million; FY16: £200 million).

2    Number of shares as at 30 June 2017: 4,055 million (30 June 2016: 4,058 million; 31 December 2016: 4,062 million).

3    Other items in FY16 include an exceptional charge of £475 million with a post tax impact of £380 million, relating to the impact of the change in Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017. Other items also includes a loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premium ceded, less £78 million in reinsurance recoverables recognised and £6 million handling provisions released.

 

 

 

 

 

Page 29

 

 

8.iii - Return on equity1

The return on equity calculation is based on operating return after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity.

During HY17, return on equity has increased to 12.4% (HY16: 11.0%), reflecting the increase in operating profit in 2017.

 

6 months
2017
 %

6 months
2016
 %

Full Year
 2016
 %

United Kingdom & Ireland Life

10.7%

9.9%

11.2%

United Kingdom & Ireland General Insurance and Health

23.2%

12.4%

15.6%

Canada

7.1%

12.3%

15.7%

Europe

13.2%

11.9%

13.1%

Asia

12.9%

14.3%

14.0%

Fund management

22.9%

18.8%

24.4%

Corporate and Other Business

n/a

n/a

n/a

Return on total capital employed

9.3%

8.8%

9.7%

Subordinated debt

4.3%

4.4%

4.5%

Senior debt

0.3%

-

0.1%

Return on total equity

11.9%

10.7%

12.1%

Less: Non-controlling interest

10.6%

11.1%

11.5%

Direct capital instrument and tier 1 notes

6.1%

5.6%

6.1%

Preference capital

8.5%

9.0%

8.5%

Return on equity shareholders' funds

12.4%

11.0%

12.5%

1    Please refer to note C1 for further analysis of return on equity.

 

 

 

 

 

 

Page 30

 

 

8.iv - Solvency II

The estimated pro forma shareholder cover ratio on a Solvency II basis is 193% at 30 June 2017. The Solvency II position disclosed is based on a 'shareholder view'. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds (£3.2 billion at 30 June 2017) and staff pension schemes in surplus (£1.2 billion at 30 June 2017). These exclusions have no impact on Solvency II surplus. The most material fully ring fenced with-profit funds and staff pension schemes are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised in the Group position. The shareholder view is therefore considered by management to be more representative of the shareholders' risk exposure and the Group's ability to cover the SCR with eligible Own Funds.

The Solvency II risk margin is highly sensitive to movements in interest rates, which can be offset by a reset of the transitional measure on technical provisions ('TMTP'). The Solvency II position disclosed therefore assumes that the TMTP, approved for use by the PRA, has been notionally reset to reflect interest rates at 30 June 2017. This presentation is in line with the Group's preference to manage its capital position assuming a dynamic TMTP in respect of the impact of interest rate movements on the risk margin, as this avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered.

The 30 June 2017 Solvency II position disclosed includes three pro forma adjustments, to reflect known or highly likely events materially affecting the Group's solvency position post 30 June 2017. The adjustments consist of the disposal of the Spanish joint ventures Unicorp Vida and Caja Espana Vida and its retail life insurance business Aviva Vida y Pensiones, the disposal of Friends Provident International Limited, and the remaining share capital out of the £0.3 billion share buy-back announced on 25 May 2017. These adjustments have been made in order to show a more representative view of the Group's solvency position.

Summary of Solvency II position

 

30 June
 2017
£bn

30 June
2016
£bn

31 December 2016
£bn

Own Funds1,2,3,4

23.7

22.4

24.0

Solvency Capital Requirement before diversification1,2,3,4

(17.6)

(17.8)

(18.1)

Diversification benefit

5.3

4.9

5.4

Diversified Solvency Capital Requirement1,2,3,4

(12.3)

(12.9)

(12.7)

Estimated Solvency II Surplus at 30 June/31 December2,3,4

11.4

9.5

11.3

Estimated Shareholder Cover Ratio1,2,3,4

193%

174%

189%

1    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 £3.2 billion (HY16: £2.7 billion; FY16: £2.9 billion) and staff pension schemes in surplus £1.2 billion (HY16: £0.9 billion; FY16: £1.1 billion) - these exclusions have no impact on Solvency II surplus.

2    The estimated Solvency II position includes an estimated adverse impact of a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates at 30 June 2017 £0.5 billion decrease to surplus (HY16: £nil; FY16: £0.4 billion). Also included are the pro forma impacts of the disposal of the Spanish joint ventures Unicorp Vida and Caja Espana Vida and its retail life insurance business Aviva Vida y Pensiones (£0.1 billion increase to surplus), the disposal of Friends Provident International Limited (£0.1 billion increase to surplus), and the remaining £0.2 billion of the share buy-back announced on 25 May 2017.

3    The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva's 50% shareholding in Antarius to Sogecap which completed on 5 April 2017 (£0.2 billion increase to surplus) and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.4 billion decrease to surplus). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact is included in the estimated 30 June 2017 Solvency II position.

4    The 30 June 2016 Solvency II position includes the pro forma impact of acquiring the RBC General Insurance business (£(0.3) billion).

Movement in Group Solvency II Surplus

 

30 June
2017
£bn

30 June
2016
£bn

31 December 2016
£bn

Group Solvency II Surplus at 1 January

11.3

9.7

9.7

Operating Capital Generation

1.1

1.2

3.5

Non-operating Capital Generation

(0.3)

(1.2)

(1.8)

Dividends

(0.7)

(0.6)

(1.0)

Share buy-back

(0.3)

-

-

Foreign exchange variances

0.1

0.4

0.6

Hybrid debt issuance

-

0.3

0.4

Acquired/divested business

0.2

(0.3)

(0.1)

Estimated Solvency II Surplus at 30 June/31 December

11.4

9.5

11.3

The estimated Solvency II surplus at 30 June 2017 is £11.4 billion, with a shareholder cover ratio of 193%. This is an increase of £0.1 billion compared to the 31 December 2016 surplus. The beneficial impacts of operating capital generation, disposals and foreign exchange variances have been partially offset by the impact of the Aviva plc dividend, share buy-back and the adverse non-operating capital generation. The non-operating capital generation includes a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates at 30 June 2017.

 

 

 

 

Page 31

 

8.iv - Solvency II continued

Summary of analysis of diversified Solvency Capital Requirement

 

30 June
2017
£bn

30 June
 2016
 £bn

31 December 2016
 £bn

Credit risk1

3.4

2.8

3.3

Equity risk2

1.4

1.2

1.3

Interest rate risk3

0.4

0.9

0.4

Other market risk4

1.5

1.2

1.6

Life insurance risk5

3.1

3.7

3.3

General insurance risk6

0.6

0.9

0.6

Operational risk

1.1

1.1

1.1

Other risk7

0.8

1.1

1.1

Total

12.3

12.9

12.7

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

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

3    Capital held in respect of interest rate risk recognises the Group's shareholder exposure to changes in the value of net assets as a result of movements in interest rates.

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

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

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

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

Changes to the diversified Solvency Capital Requirement since 31 December 2016 primarily reflect the pro forma disposals of Spanish joint ventures Unicorp Vida and Caja Espana Vida and its retail life insurance business Aviva Vida y Pensiones, and Friends Provident International Limited. In addition, the 31 December 2016 other risk included the pro forma impact of the anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses. This pro forma adjustment is not present in the corresponding 30 June 2017 figure following the amended tax rules published on 13 July 2017.

Sensitivity analysis of Solvency II surplus

The following table shows the sensitivity of the Group's Solvency II surplus to:

Economic assumptions:

· 25 basis point increase and decrease, 50 basis point decrease and 100 basis point increase in the risk-free rate, including all consequential changes (including assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

· 50 basis point increase and decrease and 100 basis point increase in credit spreads for corporate bonds with credit rating A at 10 year duration, with the other ratings and durations stressed by the same proportion relative to the stressed capital requirement;

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

· 10% increase and decrease and 25% decrease in market values of equity assets.

Non-Economic assumptions:

· 10% increase in maintenance and investment expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £11 p.a.);

· 10% increase in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 5.5% p.a.);

· 5% increase in both mortality and morbidity rates for life assurance;

· 5% decrease in mortality rates for annuity business;

· 5% increase in gross loss ratios for general insurance and health business.

 

 

 

 

Page 32

 

8.iv - Solvency II continued

The sensitivity 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 Solvency Capital Requirement calculation is applicable for that sensitivity. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns.

Transitional Measures on Technical Provisions is assumed to be recalculated in all sensitivities where its impact would be material.

The table below shows the absolute change in cover ratio under each sensitivity, e.g. a 4% positive impact would result in a cover ratio of 197%.

Sensitivities

 

Impact on
cover ratio
%

Changes in Economic assumptions

25 bps increase in interest rate

4%

 

100 bps increase in interest rate

16%

 

25 bps decrease in interest rate

(6%)

 

50 bps decrease in interest rate

(12%)

 

50 bps increase in corporate bond spread1

0%

 

100 bps increase in corporate bond spread

(1%)

 

50 bps decrease in corporate bond spread

(2%)

 

Credit downgrade on annuity portfolio

(4%)

 

10% increase in market value of equity

2%

 

10% decrease in market value of equity

(2%)

 

25% decrease in market value of equity

(3%)

Changes in Non-Economic assumptions

10% increase in maintenance and investment expenses

(7%)

 

10% increase in lapse rates1

0%

 

5% increase in mortality/morbidity rates - Life assurance

(2%)

 

5% decrease in mortality rates - annuity business

(12%)

 

5% increase in gross loss ratios

(3%)

1    A 50 bps increase in corporate bond spread and 10% increase in lapse rates result in a proportionate decrease in Group Own Funds and Group SCR with no overall impact on the rounded Group cover ratio.

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 allocation, 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.

Reconciliation of IFRS total equity to Solvency II Own Funds

The reconciliation from total Group equity on an IFRS basis to Solvency II Own Funds is presented below. The valuation differences reflect moving from IFRS valuations to a Solvency II shareholder view of Own Funds.

 

30 June
2017
£bn

30 June
2016
£bn

31 December 2016
£bn

Total Group equity on an IFRS basis

19.3

19.3

19.6

Elimination of goodwill and other intangible assets1

(10.1)

(9.9)

(10.0)

Liability valuation differences (net of transitional deductions)2,3

22.5

21.4

22.1

Inclusion of risk margin (net of transitional deductions)

(4.5)

(4.9)

(4.4)

Net deferred tax3,4

(1.5)

(1.4)

(1.6)

Revaluation of subordinated liabilities

(0.8)

(1.1)

(0.9)

Estimated Solvency II Net Assets (gross of non-controlling interests)2,3

24.9

23.4

24.8

Difference between Solvency II Net Assets and Own Funds2,3,5

(1.2)

(1.0)

(0.8)

Estimated Solvency II Own Funds6

23.7

22.4

24.0

1    Includes £2.0 billion (HY16: £1.9 billion; FY16: £2.0 billion) of goodwill and £8.1 billion (HY16: £8.0 billion; FY16: £8.0 billion) of other intangible assets comprising acquired value of in-force business of £3.6 billion (HY16: £4.0 billion; FY16: £3.9 billion), deferred acquisition costs (net of deferred income) of £2.8 billion (HY16: £2.6 billion; FY16: £2.5 billion) and other intangibles of £1.7 billion (HY16: £1.4 billion; FY16: £1.6 billion).

2    The estimated Solvency II position includes an estimated adverse impact of a notional reset of the transitional measure on technical provisions ('TMTP') to reflect interest rates at 30 June 2017 £0.5 billion decrease to surplus (HY16: £nil; FY16: £0.4 billion). Also included are the pro forma impacts of the disposal of the Spanish joint ventures Unicorp Vida and Caja Espana Vida and its retail life insurance business Aviva Vida y Pensiones (£0.1 billion decrease to Own Funds), the disposal of Friends Provident International Limited (£0.1 billion decrease to Own Funds), and the remaining £0.2 billion of the share buy-back  announced on 25 May 2017.

3    The 30 June 2016 Solvency II position includes the pro forma impact of acquiring the RBC General Insurance business £(0.3) billion. The 31 December 2016 Solvency II position includes pro forma impacts of the disposal of Aviva's 50% shareholding in Antarius to Sogecap completed on 05 April 2017 and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.1 billion decrease to Own Funds). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact in respect of tax losses is included in the estimated 30 June 2017 Solvency II position.

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

5    Regulatory adjustments to bridge from Solvency II Net Assets to Own Funds include recognition of subordinated debt capital and non-controlling interests.

6    The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds £3.2 billion (HY16: £2.7 billion; FY16: £2.9 billion) and staff pension schemes in surplus £1.2 billion (HY16: £0.9 billion; FY16: £1.1 billion) - these exclusions have no impact on Solvency II surplus.

 

 

 

 

 

Page 33

 

 

Financial supplement

 

Page

A     Income & expenses

34

B      IFRS financial statements and notes

39

C      Capital & liquidity

87

D     Analysis of assets

93

E      VNB & Sales analysis

109

 

 

In this section

 

A     Income & expenses

 

Reconciliation of Group operating profit to profit
after tax

34

A1   Other operations

35

A2   Corporate centre

35

A3   Group debt costs and other interest

35

A4   Life business: Investment return variances
and economic assumption changes

36

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

37

A6   General insurance and health business:
economic assumption changes

37

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

38

A8   Amortisation and impairment of acquired
value of in-force business

38

A9   Profit/loss on the disposal and
remeasurement of subsidiaries, joint ventures
and associates

38

A10 Other

38

 

 

 

 

Page 34

 

 

Reconciliation of Group operating profit to profit after tax

For the six month period ended 30 June 2017

 

6 months 2017
 £m

6 months
2016
 £m

Full Year
2016
£m

Operating profit before tax attributable to shareholders' profits

 

 

 

Life business

 

 

 

United Kingdom & Ireland

756

711

1,555

Europe

433

395

844

Asia

120

118

241

Other

10

2

2

Total life business

1,319

1,226

2,642

General insurance and health

 

 

 

United Kingdom & Ireland

259

231

471

Canada

71

88

269

Europe

85

35

120

Asia

(5)

(6)

(13)

Other

7

(14)

(14)

Total general insurance and health

417

334

833

Fund management

 

 

 

Aviva Investors

71

49

139

Asia

(2)

-

(1)

Total fund management

69

49

138

Other

 

 

 

Other operations (note A1)

(98)

(49)

(94)

Market operating profit

1,707

1,560

3,519

Corporate centre (note A2)

(83)

(80)

(184)

Group debt costs and other interest (note A3)

(159)

(155)

(325)

Operating profit before tax attributable to shareholders' profits

1,465

1,325

3,010

Integration and restructuring costs

(52)

(105)

(212)

Operating profit before tax attributable to shareholders' profits after integration and restructuring costs

1,413

1,220

2,798

Adjusted for the following:

 

 

 

Investment return variances and economic assumption changes on long-term business (note A4)

(179)

6

379

Short-term fluctuation in return on investments backing non-long-term business (note A5)

(205)

(338)

(518)

Economic assumption changes on general insurance and health business (note A6)

(12)

(123)

(242)

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

(19)

-

-

Amortisation and impairment of intangibles

(91)

(92)

(175)

Amortisation and impairment of acquired value of in-force business (note A8)

(234)

(318)

(540)

Profit/(loss) on the disposal and re-measurement of subsidiaries, joint ventures and associates (note A9)

202

(18)

(11)

Other (note A10)

-

-

(498)

Non-operating items before tax

(538)

(883)

(1,605)

Profit before tax attributable to shareholders' profits

875

337

1,193

Tax on operating profit

(311)

(323)

(706)

Tax on other activities

152

187

372

 

(159)

(136)

(334)

Profit for the period

716

201

859

 

 

 

 

 

Page 35

 

 

Other Group Operating Profit Items

A1 - Other operations

 

6 months
 2017
 £m

6 months
2016
£m

Full Year
2016
 £m

United Kingdom & Ireland Life

(25)

(14)

(7)

United Kingdom & Ireland General Insurance

1

2

3

Europe

(17)

(10)

(19)

Asia

(17)

(14)

(26)

Other Group operations1

(40)

(13)

(45)

Total

(98)

(49)

(94)

1    Other Group operations include Group and head office costs.

Other operations relate to non-insurance activities across the Group, with total losses increasing to £98 million (HY16: £49 million). Within UK & Ireland the result primarily relates to the losses on the savings platform businesses as they continue to grow to scale. Europe and Asia include holding company expenses and adverse foreign exchange movements of £4 million.

 'Other Group operations' includes further investment in resources and talent in UK Digital to establish a centre of excellence for digital expertise and to support the growth in direct customer sales through MyAviva.

Additionally, there has been investment in organisation and culture initiatives within the Group in the first half of the year. Partly offsetting these overall costs was an income of £25 million relating to insurance recoveries (HY16: £20 million, of which £16 million was due from the Group's internal reinsurer and therefore had a neutral effect on overall Group operating profit).

A2 - Corporate centre

 

6 months
 2017
£m

6 months
2016
£m

Full Year
2016
£m

Project spend

(4)

(12)

(30)

Central spend and share award costs

(79)

(68)

(154)

Total

(83)

(80)

(184)

Corporate costs of £83 million increased by £3 million (HY16: £80 million) mainly due to higher share scheme costs offset by a decrease in Group led projects.

A3 - Group debt costs and other interest

 

6 months
 2017
£m

6 months
2016
£m

Full Year
2016
£m

External debt

 

 

 

Subordinated debt

(191)

(184)

(387)

Other

(2)

-

(1)

Total external debt

(193)

(184)

(388)

Internal lending arrangements

(3)

(15)

(23)

Net finance income on main UK pension scheme

37

44

86

Total

(159)

(155)

(325)

 

 

 

 

 

Page 36

 

Non-operating profit items

A4 - Life business: Investment variances and economic assumption changes

(a) Definitions

Operating profit for life business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as other items. 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 operating profit.

(b) Economic volatility

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

Life business

6 months
 2017
£m

6 months
 2016
 £m

Full Year
2016
 £m

Investment variances and economic assumptions

(179)

6

379

Investment variances and economic assumption changes were £179 million negative (HY16: £6 million positive; FY16: £379 million positive). The negative variance in 2017 primarily reflects the treatment on disposal of our French subsidiary Antarius and falling interest rates in Asia. The profit on sale of Antarius of £180 million is reported as a profit on disposal of subsidiaries (see note B4(b)(i) for further details). Under French reserving rules (applicable under grandfathering of French GAAP when IFRS was adopted), £147 million of the profit on disposal has been transferred to insurance liabilities at 30 June 2017, and is expected to be released over time in line with French rules governing the annual minimum allocation of bonuses to policyholders. The impact of the transfer at 30 June 2017 is shown in investment variances above.

The investment variances at HY16 were £6 million positive. Positive variances in the UK reflecting lower interest rates were partially offset by an adverse impact reflecting the Group's revised expectation of future property prices and rental income in light of the UK referendum vote for the UK to leave the European Union. The positive variance in the UK was broadly offset by negative variances in Asia and France due to decreasing interest rates and equity underperformance.

In 2016, investment variances and economic assumption changes were £379 million positive. Positive variances in the UK reflected lower interest rates and narrowing credit spreads, which increase asset values more than liabilities. The adverse impact of the Group's revised expectation of future property prices and rental income in light of the UK referendum vote for the UK to leave the European Union was broadly offset in the second half of the year as expectations for future property price and rental growth increased. In addition, in the UK the investment variance reflected a refined approach of assuming best estimate expected credit defaults on corporate bonds, with a resulting increase in operating profit in the period. The positive variance in the UK was partially offset by negative variances in France and Italy.

(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 equities and properties are:

 

Equities

Properties

 

6 months
2017
 %

6 months
 2016
 %

Full Year
2016
%

6 months
2017
%

6 months
 2016
%

Full Year
2016
%

United Kingdom

4.8%

5.5%

5.5%

3.3%

4.0%

4.0%

Eurozone

4.2%

4.5%

4.5%

2.7%

3.0%

3.0%

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

All territories

6 months
2017
%

6 months
2016
%

Full Year
2016
 %

Equity risk premium

3.5%

3.5%

3.5%

Property risk premium

2.0%

2.0%

2.0%

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

Territories

2017
%

2016
%

United Kingdom

1.3%

2.0%

Eurozone

0.7%

1.0%

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

 

 

 

 

 

Page 37

 

 

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

General Insurance and health

6 months
 2017
£m

6 months
2016
 £m

Full Year
 2016
£m

Analysis of investment income:

 

 

 

- Net investment income

122

209

383

- Foreign exchange gains/losses and other charges

(17)

(15)

(35)

 

105

194

348

Analysed between:

 

 

 

- Longer-term investment return, reported within operating profit

172

171

343

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

(67)

23

5

 

105

194

348

Short-term fluctuations:

 

 

 

- General insurance and health

(67)

23

5

- Other operations1

(138)

(361)

(523)

Total short-term fluctuations

(205)

(338)

(518)

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

The longer-term investment return is calculated separately for each principal non-life business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-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 longer-term return for other investments is the actual income receivable for the period. Actual income and longer-term investment return both contain the amortisation of the discount/premium arising on the acquisition of fixed income securities.

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

The adverse short-term fluctuations during the first half of 2017 are mainly due to interest rate increases reducing the value of fixed income securities, and foreign exchange losses and adverse market movements on Group centre holdings, including the centre hedging programme.

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

 

6 months
 2017
£m

6 months
2016
£m

Full Year
2016
£m

Debt securities

10,229

9,757

10,799

Equity securities

296

225

267

Properties

344

368

341

Cash and cash equivalents

1,451

1,623

1,162

Other1

2,403

2,040

2,032

Assets supporting general insurance and health business

14,723

14,013

14,601

Assets supporting other non-long-term business2

1,173

513

724

Total assets supporting non-long-term business

15,896

14,526

15,325

1    Includes the internal loan.

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

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

 

Longer-term rates of return on equities

Longer-term rates of return on property

 

6 months
2017
%

6 months
2016
 %

Full Year
2016
 %

6 months
2017
 %

6 months
2016
 %

Full Year
2016
 %

United Kingdom

4.8%

5.5%

5.5%

3.3%

4.0%

4.0%

Eurozone

4.2%

4.5%

4.5%

2.7%

3.0%

3.0%

Canada

5.5%

5.4%

5.4%

4.0%

3.9%

3.9%

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

A6 - General insurance and health business: Economic assumption changes

Economic assumption changes of £12 million adverse (HY16: £123 million adverse) mainly arise as a result of an increase in the estimated future inflation rate used to value periodic payment orders partly offset by a slight increase in the interest rates used to discount claim reserves for periodic payment orders and latent claims. During the first half of 2016 market interest rates used to discount periodic payment orders and latent claims reduced and the estimated future inflation rate used to value periodic payment orders was increased to be consistent with market expectations. This was, in part, offset by a change in estimate for the interest rate used to discount periodic payment orders to allow for the illiquid nature of these liabilities.

 

 

 

 

Page 38

 

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

Impairment of goodwill, joint ventures and associates in the period is a charge of £19 million (HY16: £nil) in respect of the group's associate in India as management determined that the goodwill of this business is not fully recoverable.

A8 - Amortisation and impairment of acquired value of in-force business

Amortisation of acquired value of in-force business in the period is a charge of £234 million (HY16: £318 million charge). There were no impairments of acquired value of in-force business in the period (HY16: £nil). 

A9 - Profit/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates

The profit on the disposal and remeasurement of subsidiaries, joint ventures and associates during the period of £202 million (HY16: loss of £18 million) consists of a £180 million profit on disposal of Antarius (see note B4(b)(i)) and £22 million of remeasurement gains in respect of the joint venture operations in Poland and Aviva Vietnam. See note B4(b)(ii) and note B4(a) for further details of Poland and Aviva Vietnam respectively.

A10 - 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. There were no such items in the first half of 2017 (HY16: £nil).


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