Aviva plc Third Quarter 2014

Article date: 30 October 2014

Mark Wilson, Group Chief Executive Officer, said:

“Aviva’s turnaround is delivering. Our key metrics have improved again. Year to date, our net asset value is 10% higher; value of new business is up 15%1 and the general insurance combined ratio improved to 95.9%.

“The steps we have taken to focus and strengthen the Group mean we are in a different position to two years ago.

“Notwithstanding this progress, there is still more to do before we can be satisfied we are fully delivering on our investment thesis of cash flow plus growth.”

Cash flow

  • Progress in cash remittances expected at FY14
  • Operating capital generation £1.3 billion (9M13: £1.3 billion)

Value of new business

  • Value of new business grew 15%1 to £690 million3 (9M13: £619 million2,3)
  • Balanced product mix with VNB split 36% protection, 35% savings and 20% annuities
  • Increase driven by strong performance in Europe (40%1) and Asia (47%1)
  • UK life returned to growth in the 3rd quarter, with VNB up 18%. 9M14 VNB 9% lower

Expenses

  • Momentum on expense efficiency has continued

Combined operating ratio

  • Combined operating ratio (COR) of 95.9% (9M13: 96.9%)
  • UK COR improved by 1.4 percentage points to 94.1% (9M13: 95.5%)
  • Canada COR of 96.8% (9M13: 95.2%) impacted by worse weather and fire losses

Balance sheet

  • IFRS net asset value increased 10% year to date to 298p (FY13: 270p)
  • Economic capital4 surplus £7.9 billion (FY13: £8.3 billion)

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  1. On a constant currency basis.
  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. Excludes Eurovita, Aseval, CxG and Malaysia.
  4. 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 operations9 months
2014
£bn
Restated1
9 months
2013
£bn
United Kingdom & Ireland Life 0.5 0.4
United Kingdom & Ireland General Insurance & Health 0.3 0.3
Europe 0.4 0.5
Canada 0.1 0.1
Asia and Other
Total 1.3 1.3

Value of new business

Continuing operations9 months
2014
£m
Restated1
9 months
2013
£m
Sterling %
change2
Constant
currency %
change2
United Kingdom & Ireland 303 330 (8)% (8)%
France 156 118 33% 39%
Poland3 46 34 34% 40%
Italy, Spain, Turkey & Other3 83 66 26% 41%
Asia3 97 71 36% 47%
Aviva Investors 5
Value of new business – excluding Eurovita, Aseval, CxG & Malaysia 690 619 12% 15%
Eurovita, Aseval, CxG & Malaysia (4)
Value of new business 686 619 11% 15%

General insurance combined operating ratio

Continuing operations9 months
2014
%
9 months
2013
%
Change
United Kingdom & Ireland 94.2% 95.7% (1.5)pp
Europe 99.8% 98.3% 1.5pp
Canada 96.8% 95.2% 1.6pp
General insurance combined operating ratio 95.9% 96.9% (1.0)pp

Capital position

 30 September
2014
£bn
30 June
2014
£bn
Sterling
% Change
Estimated economic capital surplus4 7.9 8.0 (1)%
Estimated IGD solvency surplus4 2.9 3.3 (12)%
IFRS net asset value per share 298p 290p 3%
Pro forma IFRS net asset value per share5 302p    
MCEV net asset value per share (restated)1,6 486p 478p 2%
  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 CxG 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 IFRS NAV at 30 September 2014 includes the benefit of completing the CxG transaction.
  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

Performance in the first nine months of 2014 shows continued upward momentum in our key metrics. Value of new business (VNB) is up 15%1, combined operating ratio (COR) has improved one percentage point to 95.9%, expenses are lower and IFRS net asset value per share has increased 10% over the year to 298p (FY13: 270p). Operating capital generation is stable at £1.3 billion and we continue to make satisfactory progress in increasing cash remittances, a key priority.

Recent market volatility is a reminder of the global economic uncertainty that still exists. We believe our diversified business model and the steps we have taken to improve risk management positions us well for such adversity. A good example of this is that we purchased significant hedging earlier in the year when market conditions were benign. This hedging gave us extra protection to our economic capital position going into October’s market falls.

During the third quarter we announced the disposal of our stake in Spanish bancassurance joint venture CxG Aviva for €287 million, representing 25x 2013 operating earnings. This is expected to add 4p per share to our reported IFRS NAV.

We will continue to reallocate capital across the Group to higher return businesses as we move to a group that is a focused True Customer Composite. This means that we will offer life, general and health insurance together with asset management in areas where we have competitive advantage and enough scale so we can win.

Value of new business

  • Value of new business up 15% in constant currency
  • Increase driven by business mix shift to protection and unit-linked savings

VNB grew 15%1 in the first nine months of 2014, driven by Europe (+40%1) and Asia (+47%1). At the Group level, protection was the largest product contributor, making up 36% of the first nine months’ VNB, while annuities accounted for 20%, down from 32% a year ago. We have actively shifted business mix to mitigate the impact of low interest rates and regulatory change.

Our UK life business returned to growth in the discrete third quarter, with VNB up 18% to £120 million. This has offset some of the decline caused by the new annuity legislation with total VNB for the nine months down 9% to £297 million. Overall UK annuity VNB was down 33% in the first nine months, an improvement on the 41% decline in H1 due to increased bulk purchase annuity volumes.

France continues to grow, with 9M14 VNB up 39%1 to £156 million. Within this, VNB from unit linked savings business grew 73% and protection VNB was 15% higher. These two product lines made up 74% of VNB in Q3 (9M13: 66%), resulting in higher margin and lower investment risk.

Poland VNB has increased 40%1 to £46 million (9M13: £34 million), with strong performance across most product lines and distribution channels. Turkey VNB was broadly level in constant currency at £23 million. In Asia, VNB grew 47%1,2 to £97 million, due to product mix and strong protection sales in China.

Our turnaround businesses in Italy, Spain and Ireland are delivering ahead of schedule. Italy has been our best performing turnaround business, with 9M14 VNB up 68%1,2 to £41 million (9M13: £25 million). A restructure of this business has enabled a reduction in with-profit guarantees contributing to improved margins. Our Spanish business has increased continuing business VNB by 70%1,2 to £19 million (9M13: £12 million) and in Ireland, VNB increased 57%1 to £6 million (9M13: £4 million).

Asset management

  • AIMS outperforms in its first quarter

Aviva Investors flagship range of multi-strategy funds, AIMS, was launched in July. This is part of a renewed focus under Chief Executive Euan Munro to deliver solutions shaped to meet the financial goals of customers. The AIMS Target Return Fund3 delivered a positive return of 1.96% in its first three months. This is ahead of its annual performance target of 5% per annum above the local base rate. It aims to reach its target return whilst limiting the volatility of returns compared with an investment in global equities.

Combined operating ratio

  • COR improved 1 ppt to 95.9%, despite being impacted by worse weather

In general insurance, the combined operating ratio (COR) improved 1 percentage point to 95.9% (9M13: 96.9%) mostly due to a strong result in the UK.

In the UK, the 9M14 COR of 94.1% was significantly better than last year’s result of 95.5%. Disciplined underwriting, good expense management and modest reserve development drove this improvement.

The Canadian COR increased to 96.8% (9M13: 95.2%) principally due to losses from adverse weather and fire in Western Canada.

In Europe, the COR deteriorated to 99.8% (9M13: 98.3%). France’s combined ratio of 99.3% (9M13: 97.4%) was impacted by hailstorms in Burgundy and Bordeaux and floods in Montpellier. The Italian COR of 95.0% is 90bps better with higher volumes and lower expenses.

Net written premiums (NWP) in general and health insurance were 1% lower in constant currency at £6,247 million (9M13: £6,604 million). UK GI net written premiums were down 6% although in September premiums stabilised compared to last year. France, Italy and Canada grew NWP by 5%1, 5%1 and 6%1 respectively.

Balance sheet

  • IFRS net asset value per share up 10% YTD to 298p

Year to date, the IFRS net asset value per share has increased 10% to 298p (FY13: 270p). Profits in the period and an increase in our pension surplus were partially offset by foreign exchange and modest negative investment variances. During the period, we also had a positive closing adjustment related to the sale of Aviva USA, which added 2p per share. In addition, the disposal of our stake in our Spanish bancassurance joint venture CxG Aviva is expected to add 4p per share to our NAV when it completes.

At the end of the quarter, our external leverage ratio was 46.7% (FY13: 50%) and 30% on an S&P basis. Since then, we have announced our intention to call €700 million of external hybrid debt.

Our economic capital surplus is £7.9 billion (FY13: £8.3 billion). The addition to economic capital from operating profits was offset by dividends declared in the year, debt reduction, forex and other market movements. Liquidity at Group centre was £1.25 billion at 30 September 2014.

Expenses

  • Momentum from the first half of the year has continued

We continue to focus on improving our efficiency in order to remain competitive and produce satisfactory returns. Progress continues to be adequate and our expense run rate has improved in the third quarter.

Integration and restructuring costs remain significantly lower at £75 million for the first nine months. This is 62% lower year on year and relates mostly to Solvency II costs.

Management

We have made a number of senior appointments recently as we focus on serving our customers digitally first, including Chris Wei, Chief Executive Officer of Global Life Insurance, Adam Kornick, Global Analytics Director and Andrew Brem, our new Chief Digital Officer who is due to start on 1 December.

Outlook

Performance at Aviva continues to improve. We are focused on maximising the benefits of our composite nature and building a leading digital proposition.

Management decisions will remain focused on achieving on our Investment Thesis of Cash flow plus Growth.

Whilst the economic and regulatory environment remains challenging, we are in an entirely different position to where we were a few years ago. Aviva is starting to demonstrate consistency in its results and our focus remains on addressing our outstanding issues and completing the turnaround.

  1. On a constant currency basis.
  2. Italy excludes Eurovita, Spain excludes Aseval and CxG and Asia excludes Malaysia.
  3. GBP – denominated OEIC.

Notes to editors

All comparators are for the 9 months to 30 September 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 30 September 2014. The average rates employed in this announcement are 1 euro = £0.81 (9 months to 30 September 2013: 1 euro = £0.85) and CAD$1 = £0.55 (9 months to 30 September 2013: CAD$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 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 GMT

Analyst conference call: 09:00 hrs GMT
Tel: +44(0)20 3427 1900
Conference ID:2252936

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