Aviva plc First Quarter 2014

Article date: 15 May 2014

Mark Wilson, Group Chief Executive Officer, said:

“Aviva’s overall performance in the first quarter was reassuringly calm and stable, in marked contrast to the weather and regulatory developments. The value of new business increased by 13% — the sixth consecutive quarter of year–on–year growth — and our book value grew by 6%.

“We have made further progress simplifying our portfolio of businesses. Since our full year results in March, we have announced disposals of our Turkish general insurance business, US asset management boutique River Road, South Korean joint venture as well as a significant restructure of our Italian business.

“Aviva still faces challenges both in the external environment and in the business as we progress our turnaround. The regulatory environment is constantly changing and soft conditions persist in certain general insurance lines. As a business we remain focused on cash flow, expense efficiency and the clinical allocation of capital to areas where we can maximise returns. There is still much to do.”

Cash flow

  • Operating capital generation £0.4 billion (1Q13: £0.4 billion)
  • Continued focus on improving cash remittances

Value of new business

  • Value of new business up 13% in constant currency to £228 million1 (1Q13: £208 million1,2)
  • Increase driven by strong performance in Europe (45%3) and Asia (96%3) more than offsetting UK VNB reduction (–22%)

Expenses

  • Momentum on expense reduction has continued into 1Q14
  • Restructuring expenses 67% lower at £18 million (1Q13: £54 million)

Combined operating ratio

  • Combined operating ratio of 97.7% (1Q13: 95.5%)
  • COR impacted by increased weather claims in Canada and the UK

Balance sheet

  • IFRS net asset value increased 6% to 286p (FY13: 270p)
  • Pro forma4 economic capital5 surplus £7.8 billion (FY13: £8.3 billion)
  • Reduced external debt by £240 million in April 2014

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  1. Excludes Eurovita, Aseval and Malaysia.
  2. Comparative has been restated to reflect changes in MCEV liquidity premium valuation and an extension of the MCEV covered business. See the basis of preparation in note 1 to the statistical supplement for details.
  3. On a constant currency basis.
  4. The pro forma economic capital surplus at 1Q14 includes the benefit of completing the Eurovita, Turkey GI, US asset management and South Korea transactions.
  5. The economic capital surplus represents an estimated position. The economic 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.

Key financial metrics

Operating capital generation

Continuing operations3 months
2014
£bn
Restated1
3 months 2013
£bn
United Kingdom & Ireland Life 0.1 0.1
United Kingdom & Ireland general insurance & health 0.1 0.1
Europe 0.2 0.1
Canada 0.1
Asia & Other
Total 0.4 0.4

Value of new business

Continuing operations3 months
2014
£m
Restated1
3 months
2013
£m
Sterling%
change2
Local
currency
% change2
United Kingdom & Ireland Life 89 114 (22)% (22)%
Ireland 3
France 54 41 31% 34%
Poland3 21 10 102% 108%
Italy3 15 10 55% 59%
Spain3 8 3 129% 135%
Turkey 6 10 (39)% (21)%
Other Europe 1 (100)% (100)%
Asia3 32 19 80% 96%
Value of new business — excluding Eurovita, Aseval & Malaysia 228 208 10% 13%
Eurovita, Aseval & Malaysia (4) 1
Value of new business 224 209 7% 10%

General insurance combined operating ratio

Continuing operations3 months
2014
3 months
2013
Change
United Kingdom 98.6% 98.1% 0.5pp
Ireland 100.3% 107.6% (7.3)pp
France 91.0% 90.5% 0.5pp
Italy 94.9% 96.4% (1.5)pp
Other Europe 96.8% 109.5% (12.7)pp
Canada 102.7% 92.7% 10.0pp
General insurance combined operating ratio 97.7% 95.5% 2.2pp

Capital position

 31 March
2014
£bn
31 December
2013
£bn
Economic capital surplus4 7.5 8.3
Pro forma economic capital surplus4,5 7.8  
Estimated IGD solvency surplus4 3.2 3.6
IFRS net asset value per share 286p 270p
MCEV net asset value per share (restated)1,6 469p 463p
  1. Comparatives have been restated to reflect the changes in MCEV methodology set out in note 1 to the statistical supplement.
  2. Currency movements are calculated using unrounded numbers so minor rounding differences may exist.
  3. Poland includes Lithuania, Italy excludes Eurovita, Spain excludes Aseval and Asia excludes Malaysia.
  4. The economic capital and IGD surpluses represent an estimated position. The economic 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. The pro forma economic capital surplus at 1Q14 includes the benefit of completing the Eurovita, Turkey GI, US asset management and South Korea transactions.
  6. 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

Aviva’s overall performance in the first quarter was reassuringly calm and stable, in marked contrast to the weather and regulatory developments.

Value of new business increased by 45%1 in Europe and 96%1 in Asia, more than offsetting a 22% decline in the UK. The Group combined operating ratio (COR) was 97.7% and IFRS book value increased 6% to 286p per share.

Since our FY13 results in March, we have announced disposals of our US asset management boutique River Road, South Korean joint venture and Turkish general insurance business as well as a significant restructure of our Italian business. Our group is now simpler, easier to manage and more focused, whilst retaining significant benefits of diversification.

Aviva still faces challenges in both the external environment and in the business as we progress our turnaround. The regulatory environment is constantly evolving and soft conditions in certain general insurance lines persist. We are adapting to these issues and look forward to sharing more of our strategy with you at our upcoming analyst day on 9 July.

Value of new business

  • Value of new business up 13% in local currency
  • Increase driven by Europe and Asia

Value of new business (VNB) is our key measure of growth in life insurance. In the first three months of the year VNB improved 13%1,2 to £228 million (1Q13: £208 million) due to strong performances across Europe and Asia, partly offset by a decline in UK Life. This is our sixth consecutive quarter of year-on-year VNB growth.

Performance in our cash generators has been mixed. In the UK, VNB declined 22% with annuity VNB 43% lower at £40 million (1Q13: £70 million), mostly due to our re-pricing actions and a relatively strong first quarter of 2013. Some of the decline in annuity VNB has been offset by increases in protection and equity release. Going forward, we expect our increased focus on mid-size bulk purchase annuity transactions to partially mitigate the impact of the Budget proposals. In France, VNB increased 34%1 to £54 million as a result of changes in product mix. This reinforces our view that growth is possible and rewarding in mature markets.

There has been tangible progress in our turnaround businesses with Italy2, Spain2 and Ireland collectively growing VNB 100% to £26 million. Our extended distribution agreements with Unicredit and UBI should improve Italian margins going forward and progress in simplifying this business is ahead of plan.

Our growth markets of Poland and Asia grew VNB 108%1 and 96%1,2 respectively while Turkey VNB declined 21%1 due to market volatility. Overall VNB in our growth markets increased by 73%1 and now contributes 26% of the group’s total VNB (1Q13: 19%).

Operating Capital Generation

  • Operating capital generation stable at £0.4 billion
  • Update on cash remittances at half year

Operating capital generation (OCG) in the first quarter of 2014 was £0.4 billion (1Q13: £0.4 billion), with improved OCG in Europe offset by higher weather losses in Canada and the UK.

The UK Life OCG was stable, despite 21% lower annuity sales, which have generated positive new business strain in the recent past.

We are focussed on improving the cash remittances and will update on this at the half year.

Combined operating ratio

  • COR of 97.7%, impacted by worse weather

In general insurance, the combined operating ratio (COR) deteriorated to 97.7% (1Q13: 95.5%) reflecting the worse weather in 1Q14.

In the UK, the COR of 98.6% was only 50bps worse year-on-year, despite the flooding in January. The Canadian COR increased to 102.7% (1Q13: 92.7%), as a result of the harsh winter impacting North America, which resulted in £40 million of additional weather-related claims.

In Europe, the COR improved to 92.0% (1Q13: 93.7%). France’s combined ratio was broadly stable at 91% while improved claims experience in Poland and greater expense efficiency in Italy drove better results in these markets.

Net written premiums in general and health insurance were 6% lower at £2,083 million (1Q13: £2,220 million). UK GI net written premiums were down 8% as we continue to take a disciplined underwriting approach in the face of softening rates, in particular in personal motor. There is an optimal balance between volume and efficiency and achieving this is critical.

Canada net written premiums grew by 5% in constant currency, reflecting growth in Western Canada, improved retention in personal lines and rate increases in commercial lines. The weakening of the Canadian dollar resulted in Canadian NWP declining 9% to £426 million (1Q13: £470 million). Our French general insurance and health business continues to grow steadily, up 5% in constant currency to £412 million (1Q13: £401 million).

Balance sheet

  • IFRS net asset value per share up 6% to 286p

The IFRS net asset value per share increased by 6% to 286p (FY13: 270p). Profits in the period and an increase in our pension surplus were partially offset by foreign exchange.

At the end of the quarter, our external leverage ratio was 48% (FY13: 50%) and 31% on an S&P basis. Since then, our stronger cash flow position has allowed us to repay £240 million of expensive hybrid debt, consistent with our deleveraging plan.

Our pro forma economic capital surplus is £7.8 billion (FY13: £8.3 billion). Disposals, operating profits and positive investment returns were offset by the recognition of dividends and the repayment of hybrid capital in April. Liquidity at Group centre was £1.5 billion at 31 March 2014.

Our plans to reduce the inter-company loan are on track and we will provide an update on this in the 2014 interim results.

Expenses

  • Momentum from 2013 has continued into 2014

In our FY13 results we reported that we had achieved £360 million of the £400 million 2014 cost reduction target and that our cost savings were ahead of plan. Momentum has continued into 2014, as we focus on our operating expense ratio, which we will update at the half year.

Integration and restructuring costs at Aviva have historically been high and an impediment to cash remitted to Group. In the first three months of 2014, integration and restructuring expenses were 67% lower at £18 million (1Q13: £54 million), almost entirely related to Solvency II. Project spend is lumpy and a modest pick-up in this run-rate is expected later in the year.

Management

We continue to strengthen the senior management team. A number of senior executives have joined Aviva recently, including Tom Stoddard, Group CFO and a plc Board Director, Colm Holmes, UK GI CFO, Monique Shivanandan, Chief Information Officer, Simon Rich, Group Treasurer, Ken Rappold, Asia CFO, Mark Versey, Director of Client Solutions at Aviva Investors and David Lovely, Global GI Claims Director.

Outlook

The start of 2014 has demonstrated the benefits of Aviva’s diversification, but we are not content to rely on diversification to ensure results. We focus on individual business cells and improving each is a priority.

The impact of regulatory reform in the UK, poor weather and difficult trading conditions in the UK motor market have been offset by our recovering European businesses and strong performance from our growth markets. As a group, we aim to deliver cash flow plus growth, with an emphasis on cash flow, and there is much work still to do in order to achieve our full potential.

Notes to editors

All comparators are for the 3 months to 31 March 2013 unless otherwise stated.

Income and expenses of foreign entities are translated at average exchange rates while their assets and liabilities are translated at the closing rates on 31 March 2014. The average rates employed in this announcement are 1 euro = £0.83 (3 months to 31 March 2013: 1 euro = £0.85) and CAD$1 = £0.55 (3 months to 31 March 2013: CAD$1 = £0.64).

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

Cautionary statements:

This should be read in conjunction with the documents 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”, “projects”, “plans”, “will,” “seeks”, “aims”, “may”, “could”, “outlook”, “likely”, “target”, “goal”, “guidance”, “trends”, “future”, “projects”, “estimates”, “potential” and “anticipates”, and words of similar meaning, are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. Aviva believes factors that could cause actual results to differ materially from those indicated in forward-looking statements in the presentation include, but are not limited to: the impact of conditions in the global financial markets and the economy generally , including exposure to financial and capital markets risks; the impact of simplifying our operating structure and activities; the impact of various local political, regulatory and economic conditions; market developments and government actions to address fiscal and budget constraints in the EU, UK and the US; 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 impact on our business and strategy due to proposed changes in UK tax law relating to annuities; 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 24 March 2014. 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 6700

Timings

Real time media conference call: 07:30 hrs BST

Analyst conference call: 09:30 hrs BST
Tel: +44 (0)20 3364 5728
Conference ID: 7800389

Download the full announcement PDF (171.4 KB)

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