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Aviva PLC (AV.)

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Thursday 06 August, 2020

Aviva PLC

Aviva plc HY20 results - 4 of 4

RNS Number : 2920V
Aviva PLC
06 August 2020
 

START PART 4 of 4

Page 89

 

Analysis of assets

In this section

Page

C Analysis of assets

89

C1

Summary of total assets by fund

90

C2

Summary of valuation bases for total shareholders assets

91

C3

Analysis of financial investments by fund

92

C4

Analysis of shareholder debt securities

93

C5

Analysis of loans

94

C6

Analysis of shareholder equity securities

96

C7

Analysis of shareholder investment property

96

C8

Analysis of shareholder other financial investments

96

C9

Summary of exposure to peripheral European countries

97

 

 

 

 

Page 90

 

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 2020

Policyholder assets
£m

Participating fund assets
£m

Shareholder assets
£m

Total assets analysed
£m

Less: Assets classified as held for sale £m

Balance sheet total
£m

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

-

-

4,946

4,946

(447)

4,499

Interests in joint ventures and associates

130

838

587

1,555

(56)

1,499

Property and equipment

-

191

743

934

(8)

926

Investment property

6,694

3,898

714

11,306

-

11,306

Loans

2,005

5,767

32,338

40,110

(1)

40,109

Financial investments







Debt securities

43,873

105,420

62,555

211,848

(584)

211,264

Equity securities

78,020

12,179

1,316

91,515

(207)

91,308

Other investments

39,008

14,091

4,755

57,854

(6,843)

51,011

Reinsurance assets

3,015

478

9,858

13,351

(44)

13,307

Deferred tax assets

-

-

164

164

(2)

162

Current tax assets

-

-

181

181

-

181

Receivables and other financial assets

1,872

2,977

8,216

13,065

(62)

13,003

Deferred acquisition costs and other assets

144

1,269

5,551

6,964

(206)

6,758

Prepayments and accrued income

395

1,335

1,329

3,059

(8)

3,051

Cash and cash equivalents

8,606

4,816

6,565

19,987

(862)

19,125

Assets classified as held for sale

-

-

-

-

9,330

9,330

Total

183,762

153,259

139,818

476,839

-

476,839

Total %

38.6%

32.1%

29.3%

100.0%

-

100.0%

2019 Total

186,182

146,226

127,635

460,043

-

460,043

2019 Total %

40.5%

31.8%

27.7%

100.0%

-

100.0%

 

 

 

Page 91

 

C2 - Summary of valuation bases for total shareholders assets

30 June 2020

Fair value
£m

Amortised cost £m

Equity accounted/ tax

 assets1 

£m

Total
£m

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

-

4,946

-

4,946

Interests in joint ventures and associates

-

-

587

587

Property and equipment

249

494

-

743

Investment property

714

-

-

714

Loans

29,288

3,050

-

32,338

Financial Investments





Debt securities

62,555

-

-

62,555

Equity securities

1,316

-

-

1,316

Other investments

4,755

-

-

4,755

Reinsurance assets

11

9,847

-

9,858

Deferred tax assets

-

-

164

164

Current tax assets

-

-

181

181

Receivables and other financial assets

-

8,216

-

8,216

Deferred acquisition costs and other assets

-

5,551

-

5,551

Prepayments and accrued income

-

1,329

-

1,329

Cash and cash equivalents

6,565

-

-

6,565

Total

105,453

33,433

932

139,818

Total %

75.4%

23.9%

0.7%

100.0%

Less: Assets classified as held for sale

(476)

(550)

(58)

(1,084)

Total

104,977

32,883

874

138,734

Total %

75.7%

23.7%

0.6%

100.0%

2019 Total

96,834

29,956

845

127,635

2019 Total %

75.8%

23.5%

0.7%

100.0%

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

 

 

Page 92

 

C3 - Analysis of financial investments by fund

The asset allocation as at 30 June 2020 across the Group, split according to the type of the liability the assets are backing, is shown in the table below.


Shareholder business assets



Participating fund assets




Carrying value in the statement of financial position

General insurance & health &

other1 

£m

Annuity and non-profit
£m

Total shareholder assets

Policyholder (unit-linked assets)
£m

UK style with-profits
 m

Continental European-style participating funds
£m

Total assets analysed
£m

Less: Assets classified as held for sale £m

Carrying value in the statement of financial position
£m

Debt securities (note C4)










Government bonds

6,718

20,919

27,637

18,731

12,779

35,594

94,741

(142)

94,599

Corporate bonds

4,359

23,028

27,387

17,898

11,645

36,835

93,765

(442)

93,323

Other

2,688

4,843

7,531

7,244

5,781

2,786

23,342

-

23,342


13,765

48,790

62,555

43,873

30,205

75,215

211,848

(584)

211,264

Loans (note C5)










Mortgage loans

-

21,977

21,977

-

41

-

22,018

-

22,018

Other loans

1,477

8,884

10,361

2,005

4,556

1,170

18,092

(1)

18,091


1,477

30,861

32,338

2,005

4,597

1,170

40,110

(1)

40,109

Equity securities (note C6)

1,001

315

1,316

78,020

8,891

3,288

91,515

(207)

91,308

Investment property (note C7)

549

165

714

6,694

1,796

2,102

11,306

-

11,306

Other investments (note C8)

941

3,814

4,755

39,008

8,646

5,445

57,854

(6,843)

51,011

Total

17,733

83,945

101,678

169,600

54,135

87,220

412,633

(7,635)

404,998

2019 Total

16,812

76,893

93,705

172,368

53,123

81,829

401,025

(7,825)

393,200

1  Of the £17,733 million of assets 30% relates to other shareholder business assets.

 

 

Page 93

 

C4 -Analysis of shareholder debt securities

Fair value hierarchy

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

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

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

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

 


Fair value hierarchy


30 June 2020

Level 1
 m

Level 2
 m

Level 3
£m

Total
£m

UK Government

11,072

1,499

454

13,025

Non-UK government

2,455

9,299

2,858

14,612

Europe

1,712

4,578

1,908

8,198

North America

743

3,504

622

4,869

Asia Pacific & Other

-

1,217

328

1,545

Corporate bonds - Public utilities

-

3,616

1,946

5,562

Other corporate bonds

-

17,796

4,029

21,825

Other

-

7,126

405

7,531

Total

13,527

39,336

9,692

62,555

Total %

21.6%

62.9%

15.5%

100.0%

Less: Assets classified as held for sale

(25)

(178)

-

(203)

Total

13,502

39,158

9,692

62,352

Total %

21.7%

62.8%

15.5%

100.0%

2019 Total1

11,604

36,798

8,155

56,557

2019 Total %1

20.5%

65.1%

14.4%

100.0%

1  Following a review of the fair value hierarchy for debt securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £1,450 million of debt securities from fair value hierarchy Level 1 to Level 2 and £514 million from Level 2 to Level 1.

External ratings


External ratings



30 June 2020

AAA
£m

AA
£m

A
£m

BBB
 m

Less than BBB £m

Non-rated
£m

Total
£m

Government








UK Government

-

12,440

224

-

-

155

12,819

UK local authorities

-

-

143

-

-

63

206

Non-UK Government

6,866

4,782

1,761

231

30

942

14,612


6,866

17,222

2,128

231

30

1,160

27,637

Corporate








Public utilities

-

148

1,806

2,329

14

1,265

5,562

Other corporate bonds

2,366

3,171

8,156

5,485

272

2,375

21,825


2,366

3,319

9,962

7,814

286

3,640

27,387

Certificates of deposit

117

3,494

1,662

-

-

27

5,300

Structured








Residential Mortgage Backed Security non-agency prime

115

-

72

-

-

-

187


115

-

72

-

-

-

187

Commercial Mortgage Backed Security

270

139

84

56

-

24

573

Asset Backed Security

125

318

34

152

35

66

730

Asset Backed Commercial Paper

12

2

-

-

-

-

14


407

459

118

208

35

90

1,317

Wrapped credit

-

13

448

99

5

37

602

Other

1

5

23

49

47

-

125

Total

9,872

24,512

14,413

8,401

403

4,954

62,555

Total %

15.9%

39.2%

23.0%

13.4%

0.6%

7.9%

100.0%

Less: Assets classified as held for sale

(32)

(91)

(44)

(25)

-

(11)

(203)

Total

9,840

24,421

14,369

8,376

403

4,943

62,352

Total %

15.9%

39.2%

23.0%

13.4%

0.6%

7.9%

100.0%

2019 Total

8,655

21,388

13,361

8,047

487

4,619

56,557

2019 Total %

15.3%

37.8%

23.6%

14.2%

0.9%

8.2%

100.0%

 

 

 

Page 94

 

C5 - Analysis of loans

(a) Overview

The Group's loan portfolio of £40,109 million (2019: £38,579 million) is principally made up of the following:

· Policy loans of £716 million (2019: £684 million), which are generally collateralised by a lien or charge over the underlying policy;

· Loans and advances to banks of £9,241 million (2019: £8,830 million), 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 £22,019 million (2019: £21,549 million); and

· Healthcare, infrastructure and private financial initiative (PFI) loans of £7,010 million (2019: £6,467 million).

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, 54.9% (2019: 55.8%) is invested in mortgage loans. The shareholder risk relating to these loans is discussed further below.

Healthcare, infrastructure and PFI loans included within shareholder assets are £7,010 million (2019: £6,467 million). These loans are secured against the income from healthcare and education premises, transportation and energy projects and as such are not considered further in this section.

(b) Analysis of shareholder mortgage loans

Mortgage loans included within shareholder assets are £21,977 million (2019: £21,508 million) and are all held in the UK business.

30 June 2020

Total
£m

Non-securitised mortgage loans


- Residential (Equity release)

9,027

- Commercial

7,584

- Healthcare, Infrastructure and PFI mortgage loans

2,934


19,545

Securitised mortgage loans

2,432

Total

21,977

Less: Assets classified as held for sale

-

Total

21,977

2019 Total

21,508

Non-securitised mortgage loans

Residential

The UK non-securitised residential mortgage portfolio has a total value as at 30 June 2020 of £9,027 million (2019: £8,558 million). The movement in the year is predominantly due to £276 million of new lending and an increase in the fair value of £177 million. Additional accrued interest in the year is largely offset by the value of redemptions. These mortgages are all in the form of equity release, whereby homeowners mortgage their property to release cash equity. Due to the structure of equity release mortgages, whereby interest amounts due are not paid in cash but instead rolled into the amount outstanding, they predominantly have a current Loan to Value (LTV) of below 70%. The average LTV across the portfolio is 28.0% (2019: 28.2%).

Commercial

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

30 June 2020

>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

32

-

-

317

-

130

10

158

1,008

5,834

7,489

0 - 3 months

-

-

-

-

-

51

-

-

12

32

95

Total

32

-

-

317

-

181

10

158

1,020

5,866

7,584

Of the £7,584 million (2019: £7,640 million) of mortgage loans in the shareholder fund, £7,584 million 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 ratio, a key indicator of mortgage portfolio performance, reduced to 2.44x (2019: 2.56x). 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, reduced slightly to 2.75x (2019: 2.90x). Average mortgage LTV increased from 55.6% in 2019 to 59.0%. As at
30 June 2020 loans with a value of £95 million have a balance in arrears (2019: £nil).

Commercial mortgages and Healthcare, Infrastructure and PFI loans are held at fair value on the asset side of the statement of financial position. The related insurance liabilities are valued using a discount rate derived from the gross yield on assets, with adjustments to allow for risk. £17,136 million of shareholder loan assets are backing annuity liabilities and comprise of commercial mortgage loans
(£7,584 million), Healthcare, Infrastructure and PFI mortgage loans (£2,934 million) and Primary Healthcare, Infrastructure and PFI other loans (£6,618 million).

 

 

Page 95

 

C5 - Analysis of loans continued

(b) Analysis of shareholder mortgage loans continued

Non-securitised mortgage loans continued

Commercial continued

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

If the LIC 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 £2,934 million (2019: £2,878 million) are secured against primary health care premises, 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 73.5% (2019: 72.6%), 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 2020, the Group has £2,432 million (2019: £2,432 million) of securitised mortgage loans held within shareholder assets. Funding for the securitised residential mortgage assets was obtained by issuing loan note securities. Of these loan notes approximately £222 million (2019: £224 million) are held by Group companies. The remainder is held by third parties external to Aviva. As any cash shortfall arising once all mortgages have been redeemed is borne by the loan note holders, the majority of the credit risk of these mortgages is borne by third parties rather than by shareholders. The average LTV across the securitised mortgage loans is 48.9% (2019: 49.0%).

Valuation allowance

The Group carries a valuation allowance of £3.8 billion (2019: £3.3 billion) within insurance liabilities against the risk of default for assets backing annuities. The total valuation allowance in respect of corporate bonds was £1.4 billion (2019: £1.3 billion) over the remaining term of the portfolio at 30 June 2020. The total valuation allowance in respect of mortgages, including healthcare mortgages but excluding equity release, was £0.6 billion at 30 June 2020 (2019: £0.5 billion). The total valuation allowance in respect of equity release mortgages was £1.8 billion at 30 June 2020 (2019: £1.5 billion). The risk allowances made for corporate bonds (including overseas government bonds and structured finance assets), mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets) and equity release equated to 50 bps, 37 bps, and 135 bps respectively at 30 June 2020 (2019: 45 bps - 47 bps, 31 bps - 35 bps, and 124 bps respectively). Following a change in methodology this disclosure now includes total valuation allowances for all annuities in UK shareholder funds (2019 disclosure included total valuation allowances for annuities transferred in from Aviva Annuity UK Limited).

 

 

Page 96

 

C6 - Analysis of shareholder equity securities


30 June 2020

31 December 2019


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

11

-

-

11

15

-

-

15

Banks, trusts and insurance companies

90

-

105

195

167

-

106

273

Industrial miscellaneous and all other

903

-

20

923

1,313

-

31

1,344

Non-redeemable preferred shares

187

-

-

187

200

-

-

200

Total

1,191

-

125

1,316

1,695

-

137

1,832

Total %

90.5%

-

9.5%

100.0%

92.5%

-

7.5%

100.0%

Less: Assets classified as held for sale

-

-

-

-

-

-

-

-

Total

1,191

-

125

1,316

1,695

-

137

1,832

Total %

90.5%

-

9.5%

100.0%

92.5%

-

7.5%

100.0%

C7 - Analysis of shareholder investment property


30 June 2020

31 December 2019


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

Leased to third parties under operating leases

-

-

714

714

-

-

687

687

Vacant investment property/held for capital appreciation

-

-

-

-

-

-

-

-

Total

-

-

714

714

-

-

687

687

Total %

-

-

100.0%

100.0%

-

-

100.0%

100.0%

Less: Assets classified as held for sale

-

-

-

-

-

-

-

-

Total

-

-

714

714

-

-

687

687

Total %

-

-

100.0%

100.0%

-

-

100.0%

100.0%

C8 - Analysis of shareholder other financial investments


30 June 2020

31 December 2019


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

387

1

215

603

539

1

184

724

Derivative financial instruments

118

3,205

521

3,844

40

1,881

450

2,371

Deposits with credit institutions

2

-

-

2

5

-

-

5

Minority holdings in property management undertakings

-

50

242

292

-

34

245

279

Other

14

-

-

14

12

-

-

12

Total

521

3,256

978

4,755

596

1,916

879

3,391

Total %

11.0%

68.4%

20.6%

100.0%

17.6%

56.5%

25.9%

100.0%

Less: Assets classified as held for sale

(3)

-

-

(3)

(2)

-

-

(2)

Total

518

3,256

978

4,752

594

1,916

879

3,389

Total %

10.9%

68.5%

20.6%

100.0%

17.5%

56.6%

25.9%

100.0%

 

 

 

Page 97

 

C9 - Summary of exposure to peripheral European countries

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


Participating

Shareholder

Total


30 June
2020
£bn

31 December 2019
£bn

30 June
2020
£bn

31 December 2019
£bn

30 June
2020
£bn

31 December 2019
£bn

Ireland

0.7

0.8

0.3

0.3

1.0

1.1

Portugal

0.3

0.2

0.1

0.1

0.4

0.3

Italy

6.9

7.7

-

0.2

6.9

7.9

Spain

0.7

0.6

0.2

0.2

0.9

0.8

Total

8.6

9.3

0.6

0.8

9.2

10.1

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. The Group's direct sovereign exposure to Italy has reduced by £1.0 billion to £6.9 billion over the period primarily due to de-risking activity to protect the capital position against further adverse economic movements in the current market environment.

 

 

 

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Other information

In this section

Alternative Performance Measures

99

Shareholder services

108

 

 

 

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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 amounts 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.

At 30 June 2020, we have removed the operating expenses APM, having disclosed this metric alongside controllable costs at
31 December 2019. The controllable costs metric aligns to our capital markets day target announced in November 2019 and excludes premium based taxes, fees and levies that vary directly with premium volumes. Therefore controllable costs is considered more representative of operational expenses that are controllable by management and is considered more useful and relevant than the operating expenses metric. Other than the removal of the operating expenses APM, there are no changes to existing APMs and no new APMs introduced in 2020.

Further details on APMs derived from IFRS measures and APMs derived from solvency II measures, are provided in the following sections. A further section describes Other APMs.

 

 

 

 

 

 

 

 

 

 

APMs derived from IFRS measures

A number of APMs relating to IFRS are utilised to measure and monitor the Group's performance. Definitions and additional information, including reconciliations to the relevant amounts in the IFRS Financial Statements and, where appropriate, commentary on the material reconciling items are included within this section.

Group adjusted operating profit‡#

Group adjusted operating profit is an APM that supports 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 Group considers this measure meaningful to stakeholders as it enhances the understanding of the Group's operating performance over time by separately identifying non-operating items. The various items excluded from Group adjusted operating profit, but included in IFRS profit before tax, are:

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

Group adjusted operating profit for the life insurance business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification.

For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risk. Where such securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin.

Group adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit.

Group adjusted operating profit for the non-life insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the long-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The long-term return for other investments (including debt securities) is the actual income receivable for the period. Actual income and long-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities.

 

 

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

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

Impairment, amortisation and profit or loss on disposal

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

On 31 December 2019, the Group adjusted operating profit APM was amended to include amortisation and impairment of internally generated intangible assets to provide more relevant information by better reflecting their operational nature. These assets include advisor platforms, digital distribution channels and claims and policy administration systems which are used to support operational activities. Comparative amounts have been restated resulting in a reduction in the Group adjusted operating profit for the six month period ending 30 June 2019 of £62 million. Amortisation and impairment of intangible assets acquired in business combinations continues to be excluded from the Group adjusted operating profit as these relate to merger and acquisition activity.

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. There are no other items to disclose at 30 June 2020.

Other items in 2019 comprised:

· A charge of £45 million relating to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims. Consistent with the presentation of the change in the Ogden discount rate in 2016 and 2018, this is disclosed outside of Group adjusted operating profit; and

· A charge of £2 million relating to the negative goodwill which arose on the acquisition of Friends First in 2018, which is excluded from Group adjusted operating profit for consistency with the treatment of impairment of goodwill.

The Group adjusted operating profit APM should be viewed as complementary to IFRS 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.

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


6 months
2020
£m

Restated1

6 months
2019
 m

Full year
2019
£m

United Kingdom - Life2

817

752

1,920

United Kingdom - General Insurance

(66)

141

250

Canada

129

89

191

Europe

471

495

981

Asia

140

151

275

Aviva Investors

35

60

96

Other Group activities2

(301)

(302)

(529)

Group adjusted operating profit before tax attributable to shareholders' profit

1,225

1,386

3,184

Adjusted for the following:




Investment return variances and economic assumption changes on long-term business

305

372

654

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

(171)

145

167

Economic assumption changes on general insurance and health business

(45)

(73)

(54)

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

(17)

(11)

(15)

Amortisation and impairment of intangibles acquired in business combinations

(44)

(45)

(87)

Amortisation and impairment of acquired value of in-force business

(165)

(191)

(406)

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

(12)

(13)

(22)

Other

-

(47)

(47)

Adjusting items before tax

(149)

137

190

Profit before tax attributable to shareholders' profits

1,076

1,523

3,374

1  On 31 December 2019, the Group adjusted operating profit APM, was revised, and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in a reduction in the prior period Group adjusted operating profit of £62 million. There is no impact on profit before tax attributable to shareholders' profit.

2  Following a review of the presentation of intercompany loan interest, comparative amounts have been amended to reclassify net interest expense from United Kingdom - Life to Other Group activities, of £32 million for the 6 month period ended June 2019 and £65 million for the year ended 31 December 2019. The change has no impact on the Group's operating profit before tax attributable to shareholders' profit or profit before tax attributable to shareholders' profit.

Combined operating ratio (COR)

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

In 2019, the COR did not include the impact of any changes in the discount rate used for estimating lump sum payments in settlement of bodily injury claims.

On 31 December 2019, following the change in the definition of Group adjusted operating profit, the COR has been amended to include the amortisation and impairment of internally generated intangible assets to better reflect their operational nature. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in an increase in the first half year of 2019 underwriting costs of £40 million and an increase in COR of 0.9%. Amortisation and impairment of intangible assets acquired in business combinations will continue to be excluded from the COR as these relate to merger and acquisition activity.

 

 

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The Group COR is shown below.


6 months 2020
 m

Restated1  

6 months 2019
£m

Full year 2019
£m

Incurred claims - GI & Health (as per B6)2

(3,377)

(3,334)

(6,620)

Adjusted for the following:




Incurred claims - Health

273

326

651

Change in discount rate assumptions

45

73

54

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

-

45

45

Total Incurred claims (included in COR)3

(3,059)

(2,890)

(5,870)





Commission and expenses - GI & Health (as per B6)4

(1,768)

(1,653)

(3,321)

Adjusted for the following:




Amortisation and impairment of intangibles acquired in business combinations

8

(2)

19

Foreign exchange gains/(losses)

55

4

(45)

Commission income

9

8

20

Other

7

1

5

Commission and Expenses - Health & Other Non GI

143

150

300

Total commission and expenses (included in COR)5

(1,546)

(1,492)

(3,022)

Total underwriting costs

(4,605)

(4,382)

(8,892)

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

5,017

4,973

10,015

Adjusted for:




Net earned premiums - Health

(403)

(441)

(895)

Net earned premiums (included in COR)

4,614

4,532

9,120

Combined operating ratio

99.8%

96.8%

97.5%

1  Following the change in the definition of Group adjusted operating profit on 31 December 2019, COR now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in an increase in the prior period underwriting costs of £(40) million and an increase in COR of 0.9%.

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

3  Includes £(2) million (HY19: £(6) million, 2019: £(6) million) relating to incurred claims for Aviva Re.

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

5  Includes £(1) million (HY19: £nil million, 2019: £(1) million) relating to commission and expenses for Aviva Re.

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 above.

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.

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 considered meaningful to stakeholders because it enhances the understanding of the Group's operating performance over time by adjusting for the effects of non-operating items.

Following the change in the definition of the Group adjusted operating profit APM on 31 December 2019, operating EPS has been amended and the comparative amount for the 6 month period ended 30 June 2019 has been restated resulting in a reduction in the prior period from 27.3 pence to 26.1 pence.

A reconciliation between operating EPS and basic EPS can be found in note B8.

Controllable costs

Controllable costs are the controllable operational overheads associated with maintaining our businesses. These predominantly consist of staff costs, central costs, property and IT related costs and other expenses. Controllable costs also include indirect acquisition costs, such as underwriting overheads, and claims handling costs. These are considered to be controllable by the operating segments.

Controllable costs exclude impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangible assets acquired in business combinations; 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 controllable costs which is principally used to manage the performance of our operating segments.

Controllable costs exclude costs in relation to product governance and mis-selling. These costs represent compensation and redress payments made to policyholders and are excluded from controllable costs because they have characteristics of claims payments. In 2019 these costs included a £175 million provision in our UK Life business relating to past communications to a specific sub-set of pension policyholders that may not have adequately informed them of switching options into with-profits funds that were available to them.

Controllable costs exclude premium based taxes, fees and levies that vary directly with premiums. These costs are by their nature a direct cost incurred as a result of generating premium income, and therefore not a controllable operational overhead.

Controllable costs also excludes other amounts that, in management's view, are not representative of underlying day-to-day expenses involved in running the business, and that would distort the year on year controllable costs trend such as GI instalment income.

Following the change in the definition of Group adjusted operating profit on 31 December 2019, controllable costs now include the amortisation and impairment of internally generated intangible assets to better reflect their operational nature. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in an increase in controllable costs of £62 million. Amortisation and impairment of intangible assets acquired in business combinations will continue to be excluded from operating expenses as these relate to merger and acquisition activity.

In addition, following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £41 million for the 6 month period ended 30 June 2019 and £83 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to the Life & Health businesses from the UK, Ireland and Poland in controllable costs.

 

 

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A reconciliation of other expenses in the IFRS consolidated income statement to controllable costs is set out below:


6 months 2020
£m

Restated1,2  

6 months 2019
£m

Restated2  

full year 2019
£m

Other expenses (IFRS income statement)

1,643

1,552

3,329

Add: other acquisition costs

507

505

1,001

Add: claims handling costs2

201

211

422

Less: impairment of goodwill, associates and joint ventures and other amounts expensed

(17)

(2)

(6)

Less: amortisation and impairment of intangibles acquired in business combinations1

(41)

(42)

(82)

Less: amortisation and impairment of acquired value of in-force business

(165)

(191)

(406)

Less: foreign exchange (losses)/gains

(138)

(9)

109

Less: product governance and mis-selling costs3

(16)

(11)

(225)

Less: premium based income taxes, fees and levies

(103)

(101)

(180)

Add: other costs

41

54

60

Controllable costs

1,912

1,966

4,022

1  Following the change in the definition of Group adjusted operating profit on 31 December 2019, controllable costs now include the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in an increase in the prior period controllable costs of £62 million.

2  Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £41 million for the 6 month period ended 30 June 2019 and £83 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to the Life & Health businesses from the UK, Ireland and Poland in controllable costs.

3  Product governance and mis-selling costs, previously included within other costs, have been presented as a discrete item in the reconciliation in order to improve transparency.

At 30 June 2020, we have removed the operating expenses APM, having disclosed this metric alongside controllable costs at 31 December 2019. The controllable costs metric aligns to our capital markets day target announced in November 2019 and excludes premium based taxes, fees and levies that vary directly with premium volumes. Therefore, controllable costs is considered more representative of operational expenses that are controllable by management and is considered more useful and relevant than the operating expenses metric.

IFRS Return on Equity (RoE)

The IFRS 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 note A15.

Following the change in the definition of the Group adjusted operating profit APM on 31 December 2019, IFRS RoE has been amended and the comparative amount for the 6 month period ended 30 June 2019 has been restated resulting in a reduction in the prior year from 12.1% to 11.6%.

IFRS net asset value (NAV) per share

IFRS 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 at the balance sheet date. IFRS NAV per share monitors the value generated by the Group in terms of the equity shareholders' face value per share investment.

Assets Under Management (AUM) and Assets Under Administration (AUA)

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

Consistent with previous years, Aviva Investors AUA comprises AUM plus £36 billion (2019: £36 billion) of 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 amounts appearing in the Group's statement of financial position to AUM is shown below:


30 June
2020
£bn

30 June
2019
£bn

31 December 2019
£bn

Assets managed on behalf of Group companies




Assets included in statement of financial position1




Financial investments

361

351

351

Investment properties

11

11

11

Loans

40

39

39

Cash and cash equivalents

20

16

20

Other

4

2

1


436

419

422

Less: third party funds and UK Platform included above

(24)

(18)

(17)


412

401

405

Assets managed on behalf of third parties2




Aviva Investors

72

65

67

UK Platform3

30

26

29

Other

8

9

9


110

100

105

Total AUM4

522

501

510

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

4  Includes AUM of £355 billion (HY19: £346 billion, 2019: £346 billion) managed by Aviva Investors.

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.

 

 

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APMs derived from Solvency II measures

The Solvency II regime requires insurers to hold own funds in excess of the Solvency Capital Requirement (SCR). Own funds are available capital resources determined under Solvency II. This includes the excess of assets over liabilities in the Solvency II balance sheet, calculated on best estimate, market consistent assumptions and include transitional measures on technical provisions (TMTP), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds.

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

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


30 June
2020
£m

30 June
2019
£m

31 December 2019
£m

Total Group equity on an IFRS basis

19,788

18,850

18,685

Elimination of goodwill and other intangible assets1

(8,283)

(7,884)

(8,424)

Insurance assets and liabilities valuation differences (net of transitional deductions)2

18,363

19,513

19,564

Inclusion of risk margin (net of transitional deductions)

(4,196)

(3,325)

(3,122)

Net deferred tax on valuation of differences3

(910)

(1,149)

(1,220)

Revaluation of subordinated liabilities4

(859)

(760)

(716)

Other accounting differences4

53

40

(99)

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

23,956

25,285

24,668

Difference between Solvency II net assets and own funds5

4,420

2,712

3,679

Estimated Solvency II regulatory own funds6

28,376

27,997

28,347

1  Includes £1,850 million (HY19: £1,871 million; 2019: £1,855 million) of goodwill and £6,433 million (HY19: 6,013 million; 2019: £6,569 million) of other intangible assets comprising acquired value of in-force business of £2,299 million (HY19: £2,706 million; 2019: £2,479 million), deferred acquisition costs (net of deferred income) of £3,337 million (HY19: £ 3,089 million; 2019: £3,221 million) and other intangibles of £797 million (HY19: £218 million; 2019: £869 million).

2  Includes valuation adjustments to reflect insurance assets and liabilities valued on a best estimate basis using market-implied assumptions.

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

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

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

6  At 31 December 2019, regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. At this date, PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory own funds subject to confirmation of the appropriate treatment at a Group level. The treatment has since been confirmed and PPE is included in the estimated Group regulatory own funds at 30 June 2020.

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

· Solvency II shareholder cover ratio

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

· Operating Capital Generation (OCG)‡#

· Operating own funds generation

· Solvency II return on equity (ROE)

· Solvency II net asset value (NAV) per share

· Solvency II debt leverage ratio

Solvency II shareholder cover ratio

The estimated Solvency II shareholder cover ratio, which is derived from own funds divided by the SCR using a 'shareholder view', is one of the indicators of the Group's balance sheet strength. The shareholder view is considered by management to be more representative of the shareholders' risk-exposure and the Group's ability to cover the SCR with eligible own funds and aligns with management's approach to dynamically manage its capital position.

In arriving at the shareholder position, the following adjustments are typically made to the regulatory Solvency II position:

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

· A notional reset of the transitional measure on technical provisions (TMTP), calculated using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The 30 June 2020 Solvency II position includes a notional reset while the 31 December 2019 Solvency II position included a formal, rather than notional, reset of the TMTP in line with the regulatory requirement to reset the TMTP at least every two years and hence no adjustment was required.

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

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

A reconciliation of the Solvency II regulatory surplus to the Solvency II shareholder surplus is provided below:

30 June 2020

Own funds
£m

SCR
£m

Surplus
£m

Estimated Solvency II regulatory surplus

28,376

(16,039)

12,337

Adjustments for:




Fully ring-fenced with-profit funds

(2,430)

2,430

-

Staff pension schemes in surplus

(1,085)

1,085

-

PPE1

(369)

-

(369)

Notional reset of TMTP

211

-

211

Pro forma adjustments2

(77)

(150)

(227)

Estimated Solvency II shareholder surplus

24,626

(12,674)

11,952

1  Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. PPE is included in the estimated Group regulatory own funds at 30 June 2020.

2  The 30 June 2020 Solvency II position includes the following pro forma adjustments: the disposals of Friends Provident International Limited (FPI), Hong Kong and Indonesia (total impact of £0.1 billion increase in surplus), the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion decrease in surplus as a result of an increase in SCR), and an allowance for potential future bond credit rating downgrades as a result of the COVID-19 pandemic (£0.1 billion decrease in surplus as a result of an increase in SCR).

 

 

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30 June 2019

Own funds
£m

SCR
£m

Surplus
£m

Estimated Solvency II regulatory surplus

27,997

(16,228)

11,769

Adjustments for:




Fully ring-fenced with-profit funds

(2,630)

2,630

-

Staff pension schemes in surplus

(1,078)

1,078

-

Notional reset of TMTP

208

-

208

Pro forma adjustments 1

(133)

(23)

(156)

Estimated Solvency II shareholder surplus

24,364

(12,543)

11,821

1  The 30 June 2019 Solvency II position includes the pro forma impact of the disposals of FPI (£nil impact on surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion reduction in surplus as a result of an increase in SCR).

31 December 2019

Own funds
£m

SCR
£m

Surplus
£m

Estimated Solvency II regulatory surplus1

28,347

(15,517)

12,830

Adjustments for:




Fully ring-fenced with-profit funds

(2,501)

2,501

-

Staff pension schemes in surplus

(1,181)

1,181

-

Notional reset of TMTP

-

-

-

Pro forma adjustments2

(117)

(75)

(192)

Estimated Solvency II shareholder surplus

24,548

(11,910)

12,638

1  Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. At December 2019 PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory own funds subject to confirmation of the appropriate treatment at Group level.

2  The 31 December 2019 Solvency II position includes three pro forma adjustments that relate to the disposal of FPI (£nil impact on surplus), the disposal of Hong Kong (£nil impact on surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion decrease in surplus as a result of an increase in SCR).

A summary of the shareholder view of the Group's Solvency II position is shown in the table below:


30 June 2020
£m

30 June 2019
£m

31 December 2019
£m

Own Funds

24,626

24,364

24,548

Solvency Capital Requirement

(12,674)

(12,543)

(11,910)

Estimated Solvency II Shareholder Surplus
at 30 June/31 December

11,952

11,821

12,638

Estimated Shareholder Cover Ratio

194%

194%

206%

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

VNB measures the additional value to shareholders created through the writing of new life business in the period. It reflects Solvency II assumptions and allowance for risk, and is defined as the increase in Solvency II own funds resulting from life business written in the period, including the impact of interactions between in-force and new business, adjusted to:

· remove the impact of the contract boundary restrictions under Solvency II;

· include businesses which are not within the scope of Solvency II own funds (e.g. UK and Asia Healthcare, Retail fund management and UK equity release); and

· reflect a gross of tax and non-controlling interests basis, include the impact of 'look through profits' in service companies (where not included in Solvency II), reflect the difference between locally applicable capital requirements for the smaller Asian markets (Indonesia, Vietnam, Hong Kong) and the value of new business on an adjusted Solvency II basis, and reflect the assumed take up of tax-free lump sum payments at retirement (not included in Solvency II Own Funds) on bulk purchase annuities (BPAs).

A reconciliation between VNB and the Solvency II own funds impact of new business is provided below:

6 months 2020

UK Life and IS&R
£m

Europe £m

Asia
£m

Group
£m

VNB (gross of tax and non-controlling interests)

323

188

90

601

Solvency II contract boundary restrictions - new business

(44)

(70)

(18)

(132)

Solvency II contract boundary restrictions - increments/renewals on in-force business

67

48

9

124

Businesses which are not in the scope of Solvency II own funds

(59)

-

(2)

(61)

Tax and Other1

(62)

(79)

(30)

(171)

Solvency II own funds impact of new business (net of tax and non-controlling interests)

225

87

49

361

 


6 month 2019 restated1

UK Life and IS&R
£m

Europe £m

Asia
£m

Group
 m

VNB (gross of tax and non-controlling interests)

202

237

96

535

Solvency II contract boundary restrictions - new business

(23)

(64)

(16)

(103)

Solvency II contract boundary restrictions - increments/renewals on in-force business

68

39

9

116

Businesses which are not in the scope of Solvency II own funds

(66)

-

(8)

(74)

Tax and Other1

(51)

(96)

(22)

(169)

Solvency II own funds impact of new business (net of tax and non-controlling interests)

130

116

59

305

 

Full year 2019

UK Life and IS&R
£m

Europe £m

Asia
 m

Group
 m

VNB (gross of tax and non-controlling interests)

604

414

206

1,224

Solvency II contract boundary restrictions - new business

(71)

(148)

(45)

(264)

Solvency II contract boundary restrictions - increments/renewals on in-force business

98

73

25

196

Businesses which are not in the scope of Solvency II own funds

(150)

(1)

(7)

(158)

Tax and Other1

(100)

(171)

(68)

(339)

Solvency II own funds impact of new business (net of tax and non-controlling interests)

381

167

111

659

1  Other includes the impact of 'look through profits' in service companies (where not included in Solvency II) of £(37) million ( HY19: £(29) million, 2019: £(78) million) , the reduction in value when moving to a net of non-controlling interests basis of £(20) million ( HY19: £(37) million, 2019: £(57) million), the difference between locally applicable capital requirements for the smaller Asian markets (Indonesia, Vietnam, Hong Kong) and the value of new business on an adjusted Solvency II basis of £(17) million ( HY19 restated: £(7) million, 2019: £(37) million ), and the assumed take up of tax-free lump sum payments at retirement (not included in Solvency II Own Funds) on BPAs of £(3) million ( HY19: nil, 2019: nil )

The methodology underlying the calculation of VNB remains unchanged from the prior year. VNB is calculated using economic assumptions as at the point of sale, taken as those appropriate to the start of each quarter. For contracts that are repriced more frequently, weekly or monthly economic assumptions have been used. The economic assumptions follow Solvency II rules for risk-free rates, volatility adjustment and matching adjustment. The operating assumptions are consistent with the Solvency II balance sheet, when these assumptions are updated, the year-to-date VNB will capture the impact of the assumption change on all business sold that year.

 

 

Page 105

 

Matching Adjustment (MA)

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

The MA for UK new business written in the period to 30 June 2020 (where applicable) was 112 bps ( HY19: 96 bps, 2019: 95 bps ).

New business margin

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

Present value of new business premiums (PVNBP)

PVNBP measures sales in the Group's life insurance business. PVNBP is derived from the present value of new regular premiums expected to be received over the term of the new contracts plus 100% of single premiums from new business written in the financial period and is expressed at the point of sale. The discounted value of regular premiums is calculated using the same methodology as for 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
2020
 m

6 months
2019
£m

Full Year
2019
 m

Present value of new business premiums

21,214

21,291

45,665

Investment sales

3,558

1,986

4,621

General insurance and health net written premiums

5,216

5,246

10,224

(1,918)

(1,678)

(3,563)

Total sales

28,070

26,845

56,947

Effect of capitalisation factor on regular premium long-term business1

(7,165)

(7,413)

(15,294)

JVs and associates2

(144)

(159)

(286)

Annualisation impact of regular premium long-term business3

(209)

(332)

(327)

Deposits4

(4,710)

(4,899)

(10,917)

Investment sales5

(3,558)

(1,986)

(4,621)

IFRS gross written premiums from existing long-term business6

2,613

2,839

5,057

(1,673)

(1,126)

(2,879)

Total IFRS net written premiums

13,224

13,769

27,680

Analysed as:




Long-term insurance and savings net written premiums

8,008

8,523

17,456

5,216

5,246

10,224


13,224

13,769

27,680

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.

Operating capital generation (OCG)‡#

OCG measures the amount of Solvency II capital the Group generates from operating activities and incorporates an expected return on investments supporting the life and non-life insurance businesses. The Group considers this measure meaningful to stakeholders as it enhances the understanding of the Group's operating performance over time by separately identifying non-operating items. The calculation of OCG is consistent with previous periods.

The expected investment returns assumed within OCG are consistent with the returns used for Group adjusted operating profit.

OCG includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, the effect of changes in non-economic assumptions (for example, longevity), model changes that are non-economic in nature and the impact of capital actions, for example, strategic changes in asset mix including changes in hedging exposure. Consistent with the Group adjusted operating profit APM, OCG is determined on start of period economic assumptions and therefore excludes economic variances and economic assumption changes.

An analysis of the components of OCG is presented below, including an analysis of Solvency II operating own funds generation which is the own funds component of OCG (see the section below):


6 months 2020
£m

6 months 2019
 m

Full Year 2019
£m

Solvency II own funds impact of new business (net of tax and non-controlling interests)

361

305

659

Operating own funds generation from life existing business

235

173

507

Operating own funds generation from non-life

127

228

431

Operating own funds generation from other1

53

297

944

Group debt costs

(144)

(139)

(284)

Solvency II operating own funds generation

632

864

2,257

Solvency II operating SCR impact

258

(84)

2

Solvency II OCG

890

780

2,259

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

OCG is a key component of the movement in Solvency II shareholder surplus. The tables below provide an analysis of the change in Solvency II shareholder surplus.

Shareholder view - 6 months 2020

Own funds
£m

SCR
£m

Surplus
£m

Group Solvency II shareholder surplus at
1 January

24,548

(11,910)

12,638

Opening restatements1

78

(202)

(124)

Operating capital generation

632

258

890

Non-operating capital generation

(671)

(823)

(1,494)

Dividends2

(19)

-

(19)

Acquired/divested business

58

3

61

Estimated Solvency II shareholder surplus at 30 June

24,626

(12,674)

11,952

1  Opening restatements allows for differences between the shareholder view presented in the 2019 preliminary announcement and the 2019 SFCR.

2  Dividends includes £9 million of Aviva plc preference dividends and £10 million of General Accident plc preference dividends.

 

 

Page 106

 

 

Shareholder view - 6 months 2019

Own funds
£m

SCR
£m

Surplus
£m

Group Solvency II shareholder surplus at
1 January

23,551

(11,569)

11,982

Opening Restatements1

58

6

64

Operating capital generation

864

(84)

780

Non-operating capital generation

722

(896)

(174)

Dividends2

(831)

-

(831)

Share buy-back

-

-

-

Hybrid debt repayments

-

-

-

Acquired/divested business

-

-

-

Estimated Solvency II shareholder surplus at 30 June

24,364

(12,543)

11,821

1  Opening restatements allows for differences between the shareholder view presented in the 2018 preliminary announcement and the 2018 SFCR.

2  Dividends includes £9 million of Aviva plc preference dividends and £10 million of General Accident plc preference dividends.

Shareholder view - Full Year 2019

Own funds
£m

SCR
£m

Surplus
£m

Group Solvency II shareholder surplus at
1 January

23,551

(11,569)

11,982

Opening restatements1

58

6

64

Operating capital generation

2,257

2

2,259

Non-operating capital generation

120

(368)

(248)

Dividends2

(1,222)

-

(1,222)

Share buy-back

-

-

-

Hybrid debt repayments

(210)

-

(210)

Acquired/divested business

(6)

19

13

Estimated Solvency II shareholder
surplus at 31 December

24,548

(11,910)

12,638

1  Opening restatements allows for differences between the shareholder view presented in the 2018 preliminary announcement and the 2018 SFCR.

2  Dividends includes £17 million of Aviva plc preference dividends and £21 million of General Accident plc preference dividends.

Operating own funds generation

Operating own funds generation measures the amount of Solvency II own funds generated from operating activities. Operating own funds generation is the own funds component of OCG and follows the methodology and assumptions outlined in OCG.

Solvency II Return on Equity (RoE)

Solvency II RoE is calculated as:

· Operating own funds generation less preference dividends, direct capital instrument (DCI) and tier 1 note coupons divided by;

· Opening value of unrestricted tier 1 shareholder own funds.

Unrestricted tier 1 shareholder own funds represents the highest quality tier of capital and includes instruments with principal loss absorbing features such as permanence, subordination, undated, absence of redemption incentives, mandatory costs and encumbrances. The tables below provide a summary of the Group's regulatory Solvency II own funds by tier and a reconciliation between unrestricted tier 1 regulatory own funds and unrestricted tier 1 shareholder own funds:

Regulatory view

30 June 2020
£m

30 June
 2019
 m

31 December 2019
 m

Unrestricted regulatory tier 1 own funds

20,096

19,588

20,377

Restricted Tier 1

1,335

2,084

1,839

Tier 2

6,569

5,937

5,794

Tier 31

376

388

337

Estimated Solvency II regulatory own funds2

28,376

27,997

28,347

1  Tier 3 regulatory own funds at 30 June 2019 consists of £269 million subordinated debt (HY19: £268 million, 2019: £259 million) plus £107 million net deferred tax assets (HY19: £120 million, 2019: £78 million).

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

 

 

 

Shareholder view

30 June
2020
£m

30 June
2019
£m

31 December 2019
£m

Unrestricted regulatory tier 1 own funds

20,096

19,588

20,377

Adjustments for:




Fully ring-fenced with-profit funds

(2,430)

(2,630)

(2,501)

Staff pension schemes in surplus

(1,085)

(1,078)

(1,181)

Notional reset of TMTP

211

208

-

PPE

(369)

-

-

Pro forma adjustments1

(77)

(134)

(117)

Unrestricted shareholder tier 1 own funds

16,346

15,954

16,578

1  The 30 June 2020 Solvency II position includes three pro forma adjustments. These relate to the disposals of Friends Provident International Limited (FPI), Hong Kong and Indonesia (total impact of £0.1 billion increase in surplus).

Solvency II RoE provides useful information as it is used as an economic value measure by the Group to assess growth and performance.

The Solvency II return on equity is shown below:


6 months 2020
£m

6 months 2019
£m

Full year 2019
£m

Solvency II operating own funds generation

632

864

2,257

Less: Preference share dividends

(19)

(19)

(38)

Less: DCI and tier 1 note coupons

(27)

(6)

(34)


586

839

2,185

Unrestricted tier 1 shareholder Solvency II own funds

16,578

15,296

15,296

Solvency II Return on Equity

7.1%

11.0%

14.3%

Solvency II return on capital (unlevered)

Solvency II return on capital (unlevered) is calculated as operating own funds generation excluding interest costs divided by opening shareholder Solvency II own funds. It is used as an economic value measure by business divisions to assess growth and performance.

Solvency II net asset value (NAV) per share

Solvency II NAV per share is used to monitor the value generated by the Group in terms of the equity shareholders' face value per share investment. This is calculated as the unrestricted tier 1 Solvency II shareholder own funds, divided by the actual number of shares in issue as at the balance sheet date. Consistent with Solvency II RoE, it is an economic value measure used by the Group to assess growth.

The Solvency II NAV per share is shown below:


30 June
2020

30 June
2019

31 December 2019

Unrestricted tier 1 shareholder Solvency II own funds (£m)

16,346

15,954

16,578

Number of shares in issue (in millions)

3,928

3,917

3,921

Solvency II NAV per share

416p

407p

423p

Solvency II debt leverage ratio

Solvency II debt leverage ratio is calculated as Solvency II debt expressed as a percentage of Solvency II regulatory own funds plus senior debt and commercial paper. Solvency II debt includes subordinated debt and preference share capital. The Solvency II debt leverage ratio provides a measure of the Group's financial strength.


30 June
2020
£m

30 June
2019
 m

31 December 2019
 m

Solvency II regulatory debt

8,173

8,289

7,892

Senior notes

1,129

1,110

1,052

Commercial paper

365

251

238

Direct capital instrument

499

-

-

Total Solvency II debt

10,166

9,650

9,182

Estimated Solvency II regulatory own funds,
senior debt and commercial paper

30,369

29,358

29,637

Solvency II debt leverage

33%

33%

31%

 

 

Page 107

 

A reconciliation from IFRS subordinated debt to Solvency II regulatory debt is provided below:


6 months 2020
£m

6 months 2019
£m

Full Year 2019
£m

IFRS borrowings

10,382

9,234

9,067

Less: Borrowings not classified as Solvency II regulatory debt




Senior notes

(1,129)

(1,110)

(1,052)

Commercial paper

(365)

(251)

(238)

Operational borrowings

(1,560)

(1,540)

(1,571)

IFRS subordinated debt

7,328

6,333

6,206

Revaluation of subordinated liabilities

859

760

716

Direct capital instrument

(499)

-

-

Other movements

35

15

20

Solvency II subordinated debt

7,723

7,108

6,942

Preference share capital, direct capital instrument and tier 1 notes

450

1,181

950

Solvency II regulatory debt

8,173

8,289

7,892

 

 

Other APMs

Cash remittances‡#

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

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

Centre liquidity

Centre liquidity represents cash remitted by the business units to the Group centre less centre operating expenses and debt financing costs. It includes cash disposal proceeds and capital injections. This provides meaningful information because it shows the liquidity at the Group centre available to meet debt interest and central costs and to pay dividends to shareholders.

Excess centre cash flow

This represents the cash remitted by business units to the Group centre less central operating expenses and debt financing costs. Excess centre cash flow is a measure of the cash available to pay dividends, reduce debt or invest back into our business. Excess centre cash flow does not include cash movements such as disposal proceeds or capital injections.

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

Annual Premium Equivalent (APE)

APE is a measure of sales in our life insurance business. APE is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. This provides useful information on sales and new business when considered alongside VNB.

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.

Unit-linked margin

The unit-linked margin represents the annual management charges on unit linked business. This is an indicator of the return arising on this business.

 

 

Page 108

 

Shareholder services

2020 financial year calendar

Ordinary second 2019 interim ex-dividend date

13 August 2020

Second 2019 Interim dividend record date

14 August 2020

Last day for Dividend Reinvestment Plan and
currency election

3 September 2020

Second 2019 Interim dividend payment date1

24 September 2020

Full year results announcement2

4 March 2021

1  Please note that the ADR dividend payment date will be 30 September 2020.

2  This date is provisional and subject to change.

Update on ordinary dividends

On 8 April 2020 we announced that the Board of Directors had agreed to withdraw its recommendation to pay the 2019 final dividend to ordinary shareholders in June 2020. Subsequent to 30 June 2020, the directors declared a second interim dividend in respect of 2019 of 6.00 pence per ordinary share, recognising the strong capital and centre liquidity position, enhanced by receipt of proceeds from the sale of FPI.

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 to elect to receive their dividends or interest payments in a choice of over 125 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 online services to:

· Change your address

· Change your payment options

· Switch to electronic communications

· View your shareholding

· View any outstanding payments

 

Annual General Meeting (AGM)

We held our Annual General Meeting (AGM) at the Company's Head Office at St Helen's, 1 Undershaft, in London on 26 May 2020. Considering the restrictions on public gatherings resulting from COVID-19, the AGM was convened with the minimum quorum of shareholders as stated in the Articles of Association.

You can view on our website at www.aviva.com/agm, the voting results for the 2020 AGM, including proxy votes and votes withheld, and a shareholder presentation from the Chairman and CEO on our community activities as part of supporting the COVID-19 efforts and hear the answers to pre-submitted shareholder questions.

Shareholder contacts:

Ordinary and preference shares - Contact:

For any queries regarding your shareholding, please contact Computershare:

· By telephone: 0371 495 0105

We're open Monday to Friday, 8.30am to 5.30pm UK time, excluding public holidays. Please call +44 117 378 8361 if calling from outside the UK.

· By email: [email protected]

· 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: 1 877 248 4237 (1 877-CITI-ADR),

We're open Monday to Friday, 8.30am to 5.30pm US Eastern Standard Time, excluding public holidays. Please call +1 781 575 4555 if you are calling from outside the US.

· By email: [email protected]

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

Group company secretary

Shareholders may contact the Group Company Secretary:

· B y email: [email protected]

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

· By telephone: +44 (0)20 7283 2000

 

END PART 4 of 4

 


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a d v e r t i s e m e n t