Half-year Report - Part 4 of 4 - Capital_Assets

RNS Number : 5541W

Aviva PLC

02 August 2018

 

START PART 4 of 4

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Analysis of assets

In this section		Page
C: Analysis of assets
C1	Summary of total assets by fund	83
C2	Summary of valuation bases for total shareholder assets	84
C3	Analysis of financial investments by fund	85
C4	Analysis of shareholder debt securities	86
C5	Analysis of loans	87
C6	Analysis of shareholder equity securities	88
C7	Analysis of shareholder investment property	88
C8	Analysis of shareholder other financial investments	89
C9	Summary of exposure to peripheral European countries	89

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

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

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

This section provides an analysis of the Group's assets with a focus on financial investments backing liabilities held by the shareholder fund.

C1 - Summary of total assets by fund

30 June 2018	Policyholder assets £m	Participating fund assets  £m	Shareholder assets1 £m	Total assets analysed £m	Less assets of operations classified as held for sale £m	Balance sheet total £m
Goodwill and acquired value of in-force business and intangible assets	-	-	6,206	6,206	(950)	5,256
Interests in joint ventures and associates	-	1,069	519	1,588	-	1,588
Property and equipment	-	191	345	536	(5)	531
Investment property2	6,619	3,991	541	11,151	-	11,151
Loans2	9	3,243	24,465	27,717	-	27,717
Financial investments2
Debt securities	31,006	94,765	48,529	174,300	(736)	173,564
Equity securities	72,299	13,970	1,052	87,321	(189)	87,132
Other investments	43,438	8,543	3,548	55,529	(6,822)	48,707
Reinsurance assets	6,490	537	6,850	13,877	(46)	13,831
Deferred tax assets	-	-	156	156	-	156
Current tax assets	-	-	118	118	-	118
Receivables and other financial assets	454	2,216	6,708	9,378	(26)	9,352
Deferred acquisition costs and other assets	51	615	6,072	6,738	(169)	6,569
Prepayments and accrued income	378	1,267	1,499	3,144	(15)	3,129
Cash and cash equivalents	13,940	18,081	13,129	45,150	(707)	44,443
Assets of operations classified as held for sale	-	-	-	-	9,665	9,665
Total	174,684	148,488	119,737	442,909	-	442,909
Total %	39.5%	33.5%	27.0%	100.0%	-	100.0%
FY17 Total	172,635	148,839	121,211	442,685	-	442,685
FY17 Total %	39.0%	33.6%	27.4%	100.0%	-	100.0%

1    Refer to note C2 for a summary of total shareholder assets by valuation base.

2    Refer to note C3 for an analysis of invested assets by type of fund.

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C2 - Summary of valuation bases for total shareholders assets

30 June 2018	Fair value £m	Amortised cost £m	Equity accounted/ tax assets £m	Total £m
Goodwill and acquired value of in-force business and intangible assets	-	6,206	-	6,206
Interests in joint ventures and associates	-	-	519	519
Property and equipment	226	119	-	345
Investment property	541	-	-	541
Loans	24,249	216	-	24,465
Financial Investments
Debt securities	48,529	-	-	48,529
Equity securities	1,052	-	-	1,052
Other investments	3,548	-	-	3,548
Reinsurance assets	5	6,845	-	6,850
Deferred tax assets	-	-	156	156
Current tax assets	-	-	118	118
Receivables and other financial assets	-	6,708	-	6,708
Deferred acquisition costs and other assets	-	6,072	-	6,072
Prepayments and accrued income	-	1,499	-	1,499
Cash and cash equivalents	13,129	-	-	13,129
Total	91,279	27,665	793	119,737
Total %	76.2%	23.1%	0.7%	100.0%
Assets of operations classified as held for sale	627	1,200	-	1,827
Total (excluding assets held for sale)	90,652	26,465	793	117,910
Total % (excluding assets held for sale)	76.9%	22.4%	0.7%	100.0%
FY17 Total	92,403	28,061	747	121,211
FY17 Total %	76.2%	23.2%	0.6%	100.0%

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C3 - Analysis of financial investments by fund

The asset allocation as at 30 June 2018 across the Group, split according to the type of the liability the assets are backing, is shown in the table below.

	Shareholder business assets				Participating fund assets
Carrying value in the statement of financial position	General Insurance & health & other1 £m	Annuity and non-profit  £m	Total Shareholder assets £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 (note C4)
Government bonds	6,328	16,752	23,080	14,311	16,284	29,321	82,996	(255)	82,741
Corporate bonds	3,714	19,609	23,323	14,248	15,762	26,651	79,984	(481)	79,503
Other	255	1,871	2,126	2,447	945	5,802	11,320	-	11,320
	10,297	38,232	48,529	31,006	32,991	61,774	174,300	(736)	173,564
Loans (note C5)
Mortgage loans	-	19,636	19,636	-	72	-	19,708	-	19,708
Other loans	200	4,629	4,829	9	2,476	695	8,009	-	8,009
	200	24,265	24,465	9	2,548	695	27,717	-	27,717
Equity securities (note C6)	867	185	1,052	72,299	11,623	2,347	87,321	(189)	87,132
Investment property (note C7)	365	176	541	6,619	2,301	1,690	11,151	-	11,151
Other investments (note C8)	1,492	2,056	3,548	43,438	3,377	5,166	55,529	(6,822)	48,707
Total as at 30 June 2018	13,221	64,914	78,135	153,371	52,840	71,672	356,018	(7,747)	348,271
FY17 Total	13,581	65,576	79,157	153,729	54,813	70,349	358,048	(8,312)	349,736

1    Of the £13.2 billion of assets 7% relates to other shareholder business assets.

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C4 - Analysis of shareholder debt securities

Fair value hierarchy

	Fair value hierarchy
30 June 2018	Level 1 £m	Level 2 £m	Level 3  £m	Total £m
UK Government	9,732	1,367	234	11,333
Non-UK government	3,398	6,983	1,366	11,747
Europe	3,221	3,434	988	7,643
North America	80	3,009	324	3,413
Asia Pacific & Other	97	540	54	691
Corporate bonds - Public utilities	114	4,210	785	5,109
Other corporate bonds	1,040	14,485	2,689	18,214
Other	172	1,693	261	2,126
Total	14,456	28,738	5,335	48,529
Total %	29.8%	59.2%	11.0%	100.0%
Assets of operations classified as held for sale	393	-	-	393
Total (excluding assets held for sale)	14,063	28,738	5,335	48,136
Total % (excluding assets held for sale)	29.2%	59.7%	11.1%	100.0%
FY17 Total	14,445	29,438	5,303	49,186
FY17 Total %	29.3%	59.9%	10.8%	100.0%

External ratings

	External ratings
30 June 2018	AAA £m	AA £m	A £m	BBB £m	Less than BBB £m	Non-rated £m	Total £m
Government
UK Government	-	10,995	117	28	-	176	11,316
UK local authorities	-	-	-	-	-	17	17
Non-UK Government	4,999	4,312	1,090	986	5	355	11,747
	4,999	15,307	1,207	1,014	5	548	23,080
Corporate
Public utilities	-	123	2,394	2,164	30	398	5,109
Other corporate bonds	2,048	2,166	7,225	4,703	273	1,799	18,214
	2,048	2,289	9,619	6,867	303	2,197	23,323
Certificates of deposits	-	-	-	-	-	58	58
Structured
Residential Mortgage Backed Security non-agency prime	-	1	61	4	3	29	98
Residential Mortgage Backed Security agency	2	-	-	-	-	-	2
	2	1	61	4	3	29	100
Commercial Mortgage Backed Security	203	15	155	-	-	1	374
Asset Backed Security	-	357	262	34	44	-	697
	203	372	417	34	44	1	1,071
Wrapped credit	-	11	387	66	42	13	519
Other	3	7	22	117	164	65	378
Total	7,255	17,987	11,713	8,102	561	2,911	48,529
Total %	14.9%	37.1%	24.1%	16.7%	1.2%	6.0%	100.0%
Assets of operations classified as held for sale	9	9	-	375	-	-	393
Total (excluding assets held for sale)	7,246	17,978	11,713	7,727	561	2,911	48,136
Total % (excluding assets held for sale)	15.1%	37.3%	24.3%	16.1%	1.2%	6.0%	100.0%
FY17 Total	7,039	17,394	12,932	8,637	526	2,658	49,186
FY17 Total %	14.2%	35.4%	26.3%	17.6%	1.1%	5.4%	100.0%

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C5 - Analysis of loans

(a) Overview

The Group's loan portfolio of £27.7 billion (2017: £27.9 billion) is principally made up of the following:

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

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

· Mortgage loans collateralised by property assets of £19.8 billion (2017: £20.3 billion); and

· Healthcare, infrastructure and private financial initiative (PFI) loans of £4.1 billion (2017: £3.6 billion).

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

For certain mortgage loans, the Group has taken advantage of the fair value option under IAS 39 Financial Instruments: Recognition Measurement to present the mortgages, associated borrowings, other liabilities and derivative financial instruments at fair value, since they are managed together on a fair value basis. These mortgage loans are not traded in active markets and are classified within level 3 of the fair value hierarchy as the significant valuation assumptions and inputs are not deemed to be market observable. Of the Group's total loan portfolio, 71% (2017: 73%) is invested in mortgage loans. The shareholder risk relating to these loans is discussed further below.

Primary healthcare, infrastructure and PFI loans included within shareholder assets are £4.1 billion (2017: £3.6 billion). These loans are secured against the income from healthcare and education premises and as such are not considered further in this section.

(b) Analysis of shareholder mortgage loans

Mortgage loans included within shareholder assets are £19.6 billion (2017: £20.2 billion) and are almost entirely held in the UK. The narrative below focuses on explaining the risks arising as a result of these exposures.

30 June 2018	Total £m
Non-securitised mortgage loans
- Residential (Equity release)	7,053
- Commercial	7,271
- Healthcare, Infrastructure & PFI mortgage loans	2,899
	17,223
Securitised mortgage loans	2,413
Total	19,636
Assets of operations classified as held for sale	-
Total (excluding assets held for sale)	19,636
FY17 Total	20,189

Non-securitised mortgage loans

Residential

The UK non-securitised residential mortgage portfolio has a total value as at 30 June 2018 of £7.1 billion (2017: £6.8 billion). The movement in the year is due to £0.4 billion of accrued interest (net of redemptions). Fair value movements were a £0.1 billion decrease from prior year. These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the structure of equity release mortgages, whereby interest amounts due are not paid in cash but instead rolled into the amount outstanding, they predominantly have a current Loan to Value (LTV) of below 70%. The average LTV across the portfolio is 24.3% (2017: 24.6%).

Commercial

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

30 June 2018	>120% £m	115-120% £m	110-115% £m	105-110% £m	100-105% £m	95-100% £m	90-95% £m	80-90% £m	70-80% £m	<70% £m	Total £m
Not in arrears	-	-	-	-	-	-	328	20	329	6,594	7,271
Total	-	-	-	-	-	-	328	20	329	6,594	7,271

Of the £7.3 billion (2017: £7.5 billion) of mortgage loans in the shareholder fund, £6.7 billion are used to back annuity liabilities and are stated on a fair value basis. The UK loan exposures are calculated on a discounted cash flow basis, and include a risk adjustment through the use of a Credit Risk Adjusted Value (CRAV).

For commercial mortgages, loan service collection ratios, a key indicator of mortgage portfolio performance, improved to 2.3x (2017: 2.23x). Loan Interest Cover (LIC), which is defined as the annual net rental income (including rental deposits less ground rent) divided by the annual loan interest service, also improved to 2.58x (2017: 2.51x). Average mortgage LTV decreased by 1pp compared to 2017 from 56% to 55%. There are no loans in arrears (2017: nil).

Commercial mortgages and Healthcare, Infrastructure & PFI loans are held at fair value on the asset side of the statement of financial position. The related insurance liabilities are valued using a discount rate derived from the gross yield on assets, with adjustments to allow for risk. £12.9 billion of shareholder loan assets are backing annuity liabilities and comprise of commercial mortgage loans (£6.7 billion), Healthcare, Infrastructure and PFI mortgage loans (£3.9 billion) and Primary Healthcare, Infrastructure and PFI other loans (£2.3 billion). The Group carries a valuation allowance within insurance liabilities against the risk of default of commercial mortgages of £0.4 billion which equates to 40 bps at 30 June 2018 (2017: 40 bps).

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C5 - Analysis of loans continued

(b) Analysis of shareholder mortgage loans continued

Non-securitised mortgage loans continued

Commercial continued

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

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

Healthcare, Infrastructure and PFI

Primary Healthcare, Infrastructure and PFI mortgage loans included within shareholder assets of £2.9 billion (2017: £3.4 billion) are secured against primary health care premises (including General Practitioner surgeries), education, social housing and emergency services related premises. For all such loans, Government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not Government guaranteed, the nature of these businesses provides considerable comfort of an ongoing business model and low risk of default.

On a market value basis, we estimate the average LTV of these mortgages to be 73% (2017: 76%), although this is not considered to be a key risk indicator due to the Government support noted above and the social need for these premises. We therefore consider these loans to be lower risk relative to other mortgage loans.

Securitised mortgage loans

As at 30 June 2018, the Group has £2.4 billion (2017: £2.5 billion) of securitised mortgage loans within shareholder assets. Funding for the securitised residential mortgage assets was obtained by issuing loan note securities. Of these loan notes approximately £224 million (2017: £231 million) are held by Group companies. The remainder is held by third parties external to Aviva. As any cash shortfall arising once all mortgages have been redeemed is borne by the loan note holders, the majority of the credit risk of these mortgages is borne by third parties rather than by shareholders.

C6 - Analysis of shareholder equity securities

				30 June 2018	31 December 2017
	Fair value hierarchy				Fair value hierarchy
	Level 1  £m	Level 2  £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Public utilities	6	-	-	6	4	-	-	4
Banks, trusts and insurance companies	33	1	106	140	34	-	106	140
Industrial miscellaneous and all other	692	-	14	706	624	-	15	639
Non-redeemable preferred shares	200	-	-	200	212	-	-	212
Total	931	1	120	1,052	874	-	121	995
Total %	88.5%	0.1%	11.4%	100.0%	87.8%	-	12.2%	100.0%
Assets of operations classified as held for sale	6	-	-	6	6	-	-	6
Total (excluding assets held for sale)	925	1	120	1,046	868	-	121	989
Total % (excluding assets held for sale)	88.4%	0.1%	11.5%	100.0%	87.8%	-	12.2%	100.0%

C7 - Analysis of shareholder investment property

				30 June 2018	31 December 2017
	Fair value hierarchy				Fair value hierarchy
	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Lease to third parties under operating leases	-	-	523	523	-	-	561	561
Vacant investment property/held for capital appreciation	-	-	18	18	-	-	14	14
Total	-	-	541	541	-	-	575	575
Total %	-	-	100.0%	100.0%	-	-	100.0%	100.0%
Assets of operations classified as held for sale	-	-	-	-	-	-	-	-
Total (excluding assets held for sale)	-	-	541	541	-	-	575	575
Total % (excluding assets held for sale)	-	-	100.0%	100.0%	-	-	100.0%	100.0%

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C8 - Analysis of shareholder other financial investments

				30 June 2018	31 December 2017
	Fair value hierarchy				Fair value hierarchy
	Level 1  £m	Level 2  £m	Level 3  £m	Total £m	Level 1 £m	Level 2  £m	Level 3  £m	Total £m
Unit trusts and other investment vehicles	1,349	1	64	1,414	1,271	-	45	1,316
Derivative financial instruments	36	1,407	398	1,841	46	1,844	373	2,263
Deposits with credit institutions	16	-	-	16	4	-	-	4
Minority holdings in property management undertakings	-	28	248	276	-	27	205	232
Other	1	-	-	1	70	-	1	71
Total	1,402	1,436	710	3,548	1,391	1,871	624	3,886
Total %	39.5%	40.5%	20.0%	100.0%	35.8%	48.1%	16.1%	100.0%
Assets of operations classified as held for sale	76	-	-	76	76	-	4	80
Total (excluding assets held for sale)	1,326	1,436	710	3,472	1,315	1,871	620	3,806
Total % (excluding assets held for sale)	38.2%	41.4%	20.4%	100.0%	34.5%	49.2%	16.3%	100.0%

C9 - Summary of exposure to peripheral European countries

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

		Participating		Shareholder		Total
	30 June  2018 £bn	31 December 2017  £bn	30 June 2018  £bn	31 December 2017  £bn	30 June 2018  £bn	31 December 2017  £bn
Greece	-	-	-	-	-	-
Ireland	0.8	0.7	0.2	0.1	1.0	0.8
Portugal	0.1	0.1	-	-	0.1	0.1
Italy	6.1	6.0	0.6	0.6	6.7	6.6
Spain	0.5	0.3	0.1	-	0.6	0.3
Total	7.5	7.1	0.9	0.7	8.4	7.8

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

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Other information

In this section	Page
Alternative performance measures	91
Shareholder services	96

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

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

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Alternative Performance Measures

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

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

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

Annual Premium Equivalent (APE)

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

Assets under management (AUM)

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

Assets under administration (AUA) comprise AUM plus assets managed by third parties on platforms administered by Aviva Investors.

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

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

	30 June 2018  £bn	30 June 2017 £bn	31 Dec3 2017 £bn
AUM managed on behalf of Group companies
Assets included in statement of financial position1
Financial investments	317	313	319
Investment properties	11	11	11
Loans	28	26	28
Cash and cash equivalents	45	43	44
Other	1	1	1
	402	394	403
Less: third party funds included above	(19)	(21)	(19)
	383	373	384
AUM managed on behalf of third parties2
Aviva Investors3	71	72	72
UK Platform	23	16	20
Other	10	12	11
	104	100	103
Total AUM	487	473	487

1    Includes assets classified as held for sale.

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

3    Following a review of AUM managed on behalf of third parties, comparative amounts for Aviva Investors have been amended from those previously reported to reflect the fact that certain crossholdings had not been correctly eliminated on consolidation. The effect of this change is to reduce total AUM by £2.5 billion at 31 December 2017.

Cash remittances^{‡ #}

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

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

Claims ratio

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

Combined operating ratio (COR)^‡

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

A reconciliation of the Group reported COR to amounts appearing in the Annual Report and Accounts is shown below.

	6 months  2018  £m	6 months 2017  £m	Full year  2017 £m
Incurred claims	(2,962)	(2,786)	(5,856)
Commissions	(936)	(945)	(1,912)
Expenses	(454)	(436)	(901)
Total underwriting costs	(4,352)	(4,167)	(8,669)
Net earned premiums	4,466	4,411	8,976
Combined operating ratio	97.4%	94.5%	96.6%

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

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

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Combined operating ratio (COR)^‡ continued

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

Commission and expense ratio

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

Group adjusted operating profit ^{‡ #}

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

Investment variances and economic assumption changes

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

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

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

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

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

Impairment, amortisation and profit/loss on disposal

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

Other items

These items are, in the Directors' view, required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. Further details on the other items are shown in section A11.
 

Group adjusted operating profit is presented before and after integration and restructuring costs.

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

Investment sales

This measure comprises retail sales of mutual fund-type products such as unit trusts, individual savings accounts (ISAs) and open-ended investment companies (OEICs).

Net asset value (NAV) per share

Net asset value (NAV) per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the consolidated statement of financial position), divided by the actual number of shares in issue as at the balance sheet date as shown in section 8.ii.

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

Net fund flows

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

New business income

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

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New business margin

New business margin is calculated as VNB divided by the present value of new business premiums (PVNBP), and expressed as a percentage.

Operating capital generation (OCG)^#

OCG is the Solvency II surplus movement in the period due to operating items. For life business, OCG is split into the impact of new business, earnings from existing business and other OCG, where other OCG includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit. OCG excludes economic variances, economic assumption changes and integration and restructuring costs which are included in non-operating capital generation. The expected investment returns assumed within earnings from existing business are consistent with the returns used under 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.

An analysis of the components of OCG is presented below:

	6 months  2018 £bn	6 months  2017  £bn	Full year  2017  £bn
Adjusted Solvency II VNB (gross of tax and non-controlling interests)	0.6	0.6	1.2
Allowance for Solvency II contract boundary rules	-	-	-
Differences due to change in business in scope	(0.1)	(0.1)	(0.2)
Tax & Other1	(0.1)	(0.2)	(0.3)
Solvency II Own Funds impact of new business (net of tax and non-controlling interests)	0.4	0.3	0.7
Solvency II SCR impact of new business	(0.5)	(0.3)	(0.8)
Solvency II surplus impact of new business	(0.1)	-	(0.1)
Life earnings from existing business	0.8	0.7	1.6
Life Other OCG2	0.2	0.2	0.9
Life Solvency II OCG	0.9	0.9	2.4
GI, Health, FM & Other Solvency II OCG	-	0.2	0.2
Total Solvency II OCG	0.9	1.1	2.6

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

2    Other OCG includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.

Operating expenses 

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

	6 months 2018 £m	6 months  2017 £m	Full year 2017 £m
Other expenses (IFRS income statement)	1,706	1,669	3,537
Less: amortisation and impairment	(311)	(320)	(678)
Less: foreign exchange gains/(losses)	7	(39)	(49)
Other acquisition costs	414	431	892
Claims handling costs	166	163	330
Integration and restructuring costs	-	(52)	(141)
Less other costs 1	(53)	(1)	(113)
Operating expenses	1,929	1,851	3,778

1    Other costs represent a reallocation based on management's assessment of ongoing maintenance of business units and includes movements in provisions set aside in respect of ongoing regulatory compliance (included in B14 - Pension deficits and other provisions)

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

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

We have improved our quality of earnings by more strictly applying the criteria to determine whether integration and restructuring costs should be excluded from operating expenses. As these costs are not material in the period to 30 June 2018, they have been absorbed within operating expenses. However, it is possible that significant integration and restructuring activity undertaken in the future may result in the related costs being excluded from operating expenses.

Operating expense ratio

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

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

Operating earnings per share (EPS)

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

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Present value of new business premiums

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

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

	6 months 2018 £m	6 months 2017 £m	2017 £m
Present value of new business premiums	21,509	20,025	40,795
Investment sales	2,708	4,208	7,888
General insurance and health net written premiums	5,189	5,224	10,035
Long-term health and collectives business	(2,084)	(2,851)	(5,213)
Total sales	27,322	26,606	53,505
Effect of capitalisation factor on regular premium long-term business1	(6,401)	(5,938)	(11,412)
JVs and associates2	(160)	(354)	(618)
Annualisation impact of regular premium long-term business3	(129)	(152)	(281)
Deposits4	(5,355)	(5,132)	(10,953)
Investment sales5	(2,708)	(4,208)	(7,888)
IFRS gross written premiums from existing long-term business6	2,351	2,516	4,765
Long-term insurance and savings business premiums ceded to reinsurers	(836)	(838)	(1,741)
Total IFRS net written premiums	14,084	12,500	25,377
Analysed as:
Long-term insurance and savings net written premiums	8,895	7,276	15,342
General insurance and health net written premiums	5,189	5,224	10,035
	14,084	12,500	25,377

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

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

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

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

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

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

Return on capital employed (ROCE)

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

Return on Equity (RoE)

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

Solvency II

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

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

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

	30 June 2018 £bn	30 June 2017 £bn	31 December 2017 £bn
Total Group equity on an IFRS basis	18.3	19.3	19.1
Elimination of goodwill and other intangible assets1	(9.1)	(10.1)	(9.8)
Liability valuation differences (net of transitional deductions)2	21.5	22.5	22.0
Inclusion of risk margin (net of transitional deductions)	(3.0)	(4.5)	(3.3)
Net deferred tax3	(1.3)	(1.5)	(1.3)
Revaluation of subordinated liabilities	(0.7)	(0.8)	(0.7)
Estimated Solvency II net assets (gross of non-controlling interests)	25.7	24.9	26.0
Difference between Solvency II net assets and own funds4	(2.1)	(1.2)	(1.3)
Estimated Solvency II own funds5	23.6	23.7	24.7

1    Includes £1.9 billion (HY17: £2.0 billion, 2017: £1.9 billion) of goodwill and £7.2 billion (HY17: £8.1 billion, 2017 £7.9 billion) of other intangible assets comprising acquired value of in-force business of £3.1 billion (HY17: £3.6 billion, 2017: £3.3 billion), deferred acquisition costs (net of deferred income) of £2.9 billion (HY17: £2.8 billion, 2017: £2.9 billion) and other intangibles of £1.2 billion (HY17: £1.7 billion, 2017: £1.7 billion).

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

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

4    Regulatory adjustments to bridge from Solvency II net assets to own funds include recognition of subordinated debt capital, the remaining share buy-back of £0.4 billion announced in May 2018 and non-controlling interests.

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

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

· Solvency II shareholder cover ratio^‡

· Operating Capital Generation (OCG)^#

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

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

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Solvency II shareholder cover ratio^‡

The estimated Solvency II shareholder cover ratio is an indicator of the Group's balance sheet strength which is derived from own funds divided by the SCR using a 'shareholder view'. The shareholder view is considered by management to be more representative of the shareholders' risk-exposure and the Group's ability to cover the SCR with eligible own funds, and aligns with management's approach to dynamically manage its capital position. In arriving at the shareholder position, the following adjustments are made to the Solvency II regulatory position:

· The contribution to the Group's SCR and own funds of fully ring fenced with-profits funds and staff pension schemes in surplus are excluded. These exclusions have no impact on Solvency II surplus as these funds are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised. 

· The Solvency II position disclosed includes a reset of the TMTP. In periods when the TMTP has not been formally reset, then the TMTP is notionally reset, using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered.

· The estimated Solvency II shareholder cover ratio is shown inclusive of pro forma adjustments to align it with the capital information presented to management internally. Pro forma adjustments are made when, in the opinion of the Directors, the cover ratio does not fully reflect the effect of transactions or capital actions that are known as at each reporting date. Such adjustments may be required in respect of planned acquisitions and disposals, Group reorganisations and proposed adjustments to the Solvency II valuation basis arising from changes to the underlying regulations.

A summary of the Group's Solvency II position and movement in the Group surplus during the period is shown in section 8.i.

Spread margin

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

Underwriting margin

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

Unit-linked margin

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

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

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, including the impact of interactions between in-force and new business, adjusted to:

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

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

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

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

Operating assumptions

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

Economic assumptions

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

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

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

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

Matching adjustment (MA)

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

The matching adjustment used for UK new business (where applicable) was 95 bps as at HY18 (HY17: 123 bps, 2017: 116 bps).

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Shareholder services

2018 financial year calendar

2018 interim dividend ex-dividend date	16 August 2018
2018 interim dividend record date	17 August 2018
Last day for Dividend Reinvestment Plan and currency election for 2018 interim dividend	3 September 2018
Payment date1	24 September 2018
Full year results announcement2	7 March 2019

1    Please note that the ADR dividend payment date will be 28 September 2018

2    This date is provisional and subject to change

Dividend payment options

Shareholders are able to receive their dividends in the following ways:

· Directly into a nominated UK bank account

· Directly into a nominated Eurozone bank account

· The Global Payment Service provided by our Registrar, Computershare Investor Services PLC (Computershare). This enables shareholders living outside of the Single Euro Payment Area (SEPA) to elect to receive their dividends or interest payments in a choice of over 60 international currencies

· The Dividend Reinvestment Plan enables eligible shareholders to reinvest their dividends in additional Aviva ordinary shares

You can find further details regarding these payment options at www.aviva.com/dividends and register your choice by contacting Computershare using the contact details opposite, online at www.aviva.com/online or by returning a dividend mandate form. You must register for one of these payment options to receive dividend payments from Aviva.

Manage your shareholding online

www.aviva.com/shareholders:

General information for shareholders

www.aviva.com/online:

You can access Computershare online services directly using your Computershare details to:

· Change your address

· Change your payment options

· Switch to electronic communications

· View your shareholding

· View any outstanding payments

www.aviva.co.uk/myaviva:

If you've already registered for MyAviva you'll be able to view useful shareholder information. You can also check the details of Aviva policies you may have. Our online portal brings all this information together into one safe and secure place at a time that suits you. Just log in as normal using your email address via www.aviva.co.uk/myaviva.

MyAviva also includes a link to the Investor Centre, where you can log in and manage your shareholding as outlined above.

Annual General Meeting (AGM)

The voting results for the 2018 AGM, including proxy votes and votes withheld, can be viewed on our website at www.aviva.com/agm. There, you'll also find a webcast of the formal business of the meeting and information relating to past general meetings.

Shareholder contacts:

Ordinary and preference shares - Contact:

For any queries regarding your shareholding, please contact Computershare:

· By telephone: [phone]

We're open Monday to Friday, 8.30am to 5.30pm UK time,
excluding public holidays. Please call [phone] if calling from outside the UK.

· By email: [e-mail]

· In writing: Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZZ

American Depositary Receipts (ADRs) - Contact:

For any queries regarding Aviva ADRs, please contact Citibank Shareholder Services (Citibank):

· By telephone: [phone] (1 877-CITI-ADR),

We're open Monday to Friday, 8.30am to 5.30pm US Eastern Standard Time, excluding public holidays. Please call [phone] if you are calling from outside the US.

· By email: [e-mail]

· In writing: Citibank Shareholder Services, PO Box 43077, Providence, Rhode Island 02940-3077 USA

Group company secretary

Shareholders may contact the Group Company Secretary:

· By email: [e-mail]

· In writing: Kirstine Cooper, Group Company Secretary,
St Helen's, 1 Undershaft, London EC3P 3DQ

· By telephone: [phone]

END PART 4 of 4

 

END

 

 

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