Aviva plc Third Quarter 2013

Article date: 7 November 2013

Mark Wilson, Group Chief Executive Officer, said:

“Progress is in line with our expectations and we remain focused on delivering cash flow plus growth. In the first nine months of 2013 our key measure of growth, value of new business, increased by 14%. We had strong performances from France and our growth markets of Turkey, Poland and Asia. Conversely, value of new business remains depressed in our turnaround businesses of Italy and Spain, and this is being addressed.

“Capital generation in the period was stable at £1.3 billion and our economic capital surplus now stands at £8 billion. We continue to make satisfactory progress on cost reduction, with operating expenses 10% below the 2011 baseline.

“Aviva remains in the early stages of turnaround. Whilst we have resolved a key issue in the disposal of our US business and have made progress in a number of areas, there remains much work to be done.”

Cash flow

  • Operating capital generation stable at £1.3 billion1 (9M12: £1.3 billion)
  • Continued focus on improving remittance ratios
  • Full update on cash remittances to be provided at the year end

Expenses

  • Operating expenses of £2,277 million, 10% lower than our 2011 baseline

Value of new business

  • Value of new business up 14% to £571 million2 (9M12: £503 million)
  • Increase driven by France (+33%) and our growth markets of Turkey (+40%), Poland (+48%) and Asia (+43%)
  • Growth markets contributed 22% of value of new business (9M12: 18%)

Combined operating ratio

  • Combined operating ratio stable at 96.9% (9M12: 96.7%)

Balance sheet

  • Pro forma3 economic capital4 surplus at £8.0 billion (HY13: £7.6 billion)
  • IFRS net asset value per share 273p (HY13: 281p)
  • MCEV5 net asset value per share 437p (HY13: 441p)
  • Completed sale of US business for US$2.6 billion6 (£1.6 billion) in October

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  1. On a continuing basis. All numbers are continuing unless otherwise stated.
  2. On a continuing basis excluding Malaysia and Sri Lanka.
  3. The pro forma economic capital surplus includes the impact of the US Life transaction and an increase in the risk allowance for staff pension schemes from five to ten years of stressed contributions.
  4. The economic capital surplus represents an estimated position. The capital requirement is based on Aviva’s own internal assessment and capital management policies. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
  5. In preparing the MCEV information, the directors have done so in accordance with the European Insurance CFO Forum MCEV Principles with the exception of stating held for sale operations at their expected fair value, as represented by expected sale proceeds, less cost to sell.
  6. Transactional proceeds include repayment of an external loan of US$290 million.

Key financial metrics

Operating Capital Generation

Continuing operations 9 months
2013
£bn
9 months
2012
£bn
United Kingdom & Ireland life 0.4 0.5
United Kingdom & Ireland general insurance & health 0.3 0.3
Europe 0.5 0.4
Canada 0.1 0.1
Asia & Other
Total 1.3 1.3

Expenses

Continuing operations9 months
2013
£m
9 months
2012
£m
Sterling %
change
Operating expenses 2,277 2,449 (7)%
Integration & restructuring costs 198 252 (21)%
Total expenses 2,475 2,701 (8)%

Value of new business

Continuing operations9 months
2013
£m
9 months
2012
£m
Sterling %
change
United Kingdom 302 288 5%
Ireland 2 (11)
France 112 84 33%
Poland 34 23 48%
Italy 7 19 (63)%
Spain 19 32 (41)%
Turkey 28 20 40%
Other 1 2 (50)%
Asia1 66 46 43%
Value of new business – ongoing basis 571 503 14%
Effect of disposals (Malaysia & Sri Lanka) 1 8 (88)%
Value of new business 572 511 12%

General insurance combined operating ratio

Continuing operations9 months
2013
9 months
2012
Change
United Kingdom 95.5% 97.0% (1.5)pp
Ireland 98.3% 105.3% (7.0)pp
France 97.4% 94.9% 2.5pp
Italy 95.9% 100.9% (5.0)pp
Other Europe 109.2% 119.8% (10.6)pp
Europe 98.3% 99.5% (1.2)pp
Canada 95.2% 92.6% 2.6pp
General insurance combined operating ratio 96.9% 96.7% 0.2pp

Capital position

  Pro forma3
30
September
2013
£bn
Pro forma3
30
June
2013
£bn
30
September
2013
£bn
30
June
2013
£bn
Estimated economic capital surplus2 8.0 7.6 7.4 7.1
Estimated IGD solvency surplus 3.7 3.7 4.0 4.2
IFRS net asset value per share     273p 281p
MCEV4 net asset value per share     437p 441p
  1. Excluding Malaysia and Sri Lanka.
  2. The economic capital surplus represents an estimated position. The capital requirement is based on Aviva’s own internal assessment and capital management policies. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
  3. The pro forma economic capital and IGD surpluses include the impact of the US Life transaction and, for economic capital only, an increase in pension scheme risk allowance from five to ten years of stressed contributions.
  4. In preparing the MCEV information, the directors have done so in accordance with the European Insurance CFO Forum MCEV Principles with the exception of stating held for sale operations at their expected fair value, as represented by expected sale proceeds, less cost to sell.

Group Chief Executive Officer’s report

Overview

Performance in the first nine months of 2013 has been satisfactory. In line with our investment thesis of ‘cash flow plus growth’, operating capital generation was stable and we have increased the value of new business. We are on track with our cost cutting programme and the combined operating ratio of our general insurance business was broadly unchanged at 96.9% (9M12: 96.7%).

On the 2nd October we completed the sale of the US business which is an important step in simplifying Aviva. We also made a number of senior management changes recently to ensure we have the right team to take Aviva forward.

Operating Capital Generation

  • Operating capital generation stable at £1.3 billion

In March we set out Aviva‘s investment thesis, ‘cash flow plus growth’ and our focus is on improving dividends paid by our business units to Group. Operating capital generation (OCG) is a precursor to cash remitted to Group and in the first nine months, OCG was stable at £1.3 billion (9M12: £1.3 billion). Lower capital generation due to floods in Canada was more than offset by expense reductions across Aviva and lower new business strain. Historically the remittance ratios from OCG to dividends have been materially lower than our peers, and improving this ratio remains an absolute priority.

Expenses

  • Operating expenses of £2,277 million 10% lower than 2011 baseline

Reducing our expense base is essential to the transformation of Aviva and improving cash flows. We have made further progress in this area, and operating expenses are 10% below the 2011 baseline expense level and 7% lower year-on-year. We are on track to deliver a cost-base in 2014 which is £400 million lower than 2011, regardless of the impact of inflation.

Integration and restructuring costs at Aviva have been historically high and an impediment to cash remitted to Group. In the first nine months of 2013 restructuring costs fell 21% to £198 million. In line with our previous indications, we expect restructuring costs for 2013 to be lower than the 2012 level of £461 million and materially lower in 2014.

Value of new business

  • Value of new business up 14% to £571 million1
  • Increase driven by France and our growth markets of Poland, Turkey and Asia

Value of new business (VNB) is our key measure of growth. Over the first nine months of the year VNB improved 14% to £571 million1 (9M12: £503 million). In line with our previous guidance we expect overall growth of VNB to moderate in the final quarter of the year primarily due to a strong 4Q 2012.

Our two major life cash-generators, UK and France, increased VNB by 5% and 33% respectively. In the UK deliberate actions to improve margin led to an increase in VNB and lower volumes, both in line with our expectations.

In France, VNB increased 33%. This was mainly driven by outperformance from our AFER network and a shift in Aviva‘s business mix towards higher margin unit linked and protection products across all channels.

In the first nine months of 2013, our growth markets of Poland, Turkey and Asia1 increased VNB by 48%, 40% and 43% respectively. Collectively, these businesses grew by 44% and contributed 22% of Group VNB (9M12: 18%).

In Spain and Italy – two of our turnaround businesses – the value of new business fell to £19 million and £7 million respectively (9M12: £32 million, £19 million). Actions are underway to improve performance in both of these businesses including focusing more on protection and unit-linked products and potentially exiting unprofitable distribution agreements.

Combined operating ratio

  • COR stable at 96.9%

In general insurance the combined operating ratio (COR) remained stable at 96.9% (9M12: 96.7%) reflecting the benefit of our geographic diversification. In the UK COR was 95.5%, as a result of lower expenses and favourable weather conditions. We expect the losses from the UK storms in October to be in the region of £10 million. In Canada COR was 95.2% despite the impact of two 1:100 year floods. Across our general insurance businesses in Europe, the COR was 98.3% (9M12: 99.5%) with improved profitability in Italy and Poland offsetting a deterioration in France mainly due to adverse weather.

Net written premiums in our general insurance and health business were 2% lower at £6,604 million (9M12: £6,735 million). Growth in Canada was more than offset by a 6% reduction in UK GI volumes due to a combination of the softening personal lines rate environment and a shift in business mix in UK motor.

Balance sheet

  • IFRS net asset value per share 273p
  • Pro forma economic capital at £8.0 billion
  • Completed sale of US business for US$2.6 billion2

The IFRS net asset value per share decreased by 3% to 273p. Profits in the period and additional proceeds from the sale of the US were offset by foreign exchange movements and a reduction in the accounting surplus on the Aviva staff pension scheme on an IAS19 basis.

Maintaining a healthy capital position is an important priority and the pro forma economic capital surplus was £8.0 billion, a coverage ratio of 178%.

In October we completed the sale of Aviva USA, which is an important development for the company. Transaction proceeds were higher than previously announced at US$2.6 billion2 (£1.6 billion), further strengthening the Group‘s capital position.

Net asset value3IFRSMCEV
Opening NAV per share at 30 June 2013 281p 441p
US disposal 8p 8p
Pension fund (11)p (11)p
Foreign exchange (8)p (11)p
Profit and other movements 3p 10p
Closing NAV per share at 30 September 2013 273p 437p

The balance of our inter-company loan remains unchanged from our last reporting date at £5.1 billion. We continue to see a substantial reduction in the loan over the next couple of years as one of our key priorities and remain in active dialogue with our regulator about the ultimate level and the options for achieving it.

The Polish government‘s review of the Pillar II pension system continues. Our current expectation is that the potential legislative change would reduce our Poland pensions‘ value in force (VIF) by between £150 million and £400 million, in line with our previous guidance. This reduction has not been reflected in these results due to the continuing significant level of uncertainty.

Management

One of the priorities this year has been to strengthen the senior management team. It is critical that we have the best possible leadership team so that Aviva can achieve its potential. We have made two important appointments recently. In September Maurice Tulloch was appointed Chief Executive Officer of our UK & Ireland general insurance business, and in October Greg Somerville became Chief Executive of Aviva Canada. Both Maurice and Greg have long track records of success at Aviva. Their appointments build on the changes that have been made to the senior management team in the first half of the year.

Outlook

In summary, overall operating performance continues to be satisfactory and Aviva is where I thought it would be at this point in its transformation. Although the macroeconomic environment is showing signs of improvement, our plans do not require this. The turnaround at Aviva is still in its infancy; we have made progress this year and whilst there is room for optimism there remains much to do.

  1. On a continuing basis excluding Malaysia and Sri Lanka.
  2. Transactional proceeds include repayment of an external loan of US$290 million.
  3. Net of tax and non-controlling interests.

Notes to editors

All comparators are for the nine months to 30 September 2012 unless otherwise stated.

Income and expenses of foreign entities are translated at average exchange rates while their assets and liabilities are translated at the closing rates on 30 September 2013. The average rates employed in this announcement are 1 euro = £0.85 (9 months to 30 September 2012: 1 euro = £0.81) and US$1 = £0.65 (9 months to 30 September 2012: US$1 = £0.63).

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

Cautionary statements:

This should be read in conjunction with the documents filed by Aviva plc (the “Company” or “Aviva”) with the United States Securities and Exchange Commission (“SEC”). This announcement contains, and we may make verbal statements containing, “forward-looking statements” with respect to certain of Aviva‘s plans and current goals and expectations relating to future financial condition, performance, results, strategic initiatives and objectives. Statements containing the words “believes”, “intends”, “expects”, “plans”, “will,” “seeks”, “aims”, “may”, “could”, “outlook”, “estimates” and “anticipates”, and words of similar meaning, are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. Aviva believes factors that could cause actual results to differ materially from those indicated in forward-looking statements in the presentation include, but are not limited to: the impact of ongoing difficult conditions in the global financial markets and the economy generally; the impact of various local political, regulatory and economic conditions; market developments and government actions regarding the sovereign debt crisis in Europe; the effect of credit spread volatility on the net unrealised value of the investment portfolio; the effect of losses due to defaults by counterparties, including potential sovereign debt defaults or restructurings, on the value of our investments; changes in interest rates that may cause policyholders to surrender their contracts, reduce the value of our portfolio and impact our asset and liability matching; the impact of changes in equity or property prices on our investment portfolio; fluctuations in currency exchange rates; the effect of market fluctuations on the value of options and guarantees embedded in some of our life insurance products and the value of the assets backing their reserves; the amount of allowances and impairments taken on our investments; the effect of adverse capital and credit market conditions on our ability to meet liquidity needs and our access to capital; a cyclical downturn of the insurance industry; changes in or inaccuracy of assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, lapse rates and policy renewal rates), longevity and endowments; the impact of catastrophic events on our business activities and results of operations; the inability of reinsurers to meet obligations or unavailability of reinsurance coverage; increased competition in the UK and in other countries where we have significant operations; the effect of the European Union‘s “Solvency II” rules on our regulatory capital requirements; the impact of actual experience differing from estimates used in valuing and amortising deferred acquisition costs (“DAC”) and acquired value of in-force business (“AVIF”); the impact of recognising an impairment of our goodwill or intangibles with indefinite lives; changes in valuation methodologies, estimates and assumptions used in the valuation of investment securities; the effect of legal proceedings and regulatory investigations; the impact of operational risks, including inadequate or failed internal and external processes, systems and human error or from external events; risks associated with arrangements with third parties, including joint ventures; funding risks associated with our participation in defined benefit staff pension schemes; the failure to attract or retain the necessary key personnel; the effect of systems errors or regulatory changes on the calculation of unit prices or deduction of charges for our unit-linked products that may require retrospective compensation to our customers; the effect of a decline in any of our ratings by rating agencies on our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products and services; changes to our brand and reputation; changes in government regulations or tax laws in jurisdictions where we conduct business; the inability to protect our intellectual property; the effect of undisclosed liabilities, integration issues and other risks associated with our acquisitions; and the timing impact and other uncertainties relating to acquisitions and disposals and relating to other future acquisitions, combinations or disposals within relevant industries. For a more detailed description of these risks, uncertainties and other factors, please see Item 3d, “Risk Factors”, and Item 5, “Operating and Financial Review and Prospects” in Aviva‘s Annual Report Form 20-F as filed with the SEC on 25 March 2013. Aviva undertakes no obligation to update the forward looking statements in this announcement or any other forward-looking statements we may make. Forward-looking statements in this presentation are current only as of the date on which such statements are made.

Aviva plc is a company registered in England No. 2468686. Registered office St Helen’s 1 Undershaft, London EC3P 3DQ

Contacts

Investor contacts

Colin Simpson
+44 (0)20 7662 8115

David Elliot
+44 (0)20 7662 8048

Media contacts

Nigel Prideaux
+44 (0)20 7662 0215

Andrew Reid
+44 (0)20 7662 3131

Sarah Swailes
+44 (0)20 7662 7600

Timings

Real time media conference call: 07:30 hrs GMT

Analyst conference call: 08:30 hrs GMT
Tel: +44 (0)20 3427 1917
Conference ID: 8270708

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