Aviva plc First Quarter 2015

Article date: 7 May 2015

Mark Wilson, Group Chief Executive Officer, said:

“Aviva’s turnaround is on track and ahead of schedule. It’s been a busy quarter. We have completed the acquisition of Friends Life and at the same time delivered an improvement in our key metrics. Value of new business is up, our general insurance combined operating ratio has improved and our IFRS book value has grown over the quarter. In the face of unpredictable global markets, we continue to improve the Group’s resilience.

“Detailed plans to integrate Friends Life are well underway and whilst this is a challenging and complex project, we are confident of timely progress. We expect 2015 to be a year of continued delivery of our turnaround plan.”

The acquisition of Friends Life was completed on 10 April 2015, after the period to which this trading statement applies. Therefore, unless otherwise stated, all numbers outside of the Friends Life section are for Aviva standalone.

Life insurance

  • Value of new business (VNB) grew 14%1 to £247 million (1Q14: £224 million)
  • UK Life VNB grew 15% to £103 million (1Q14: £89 million), driven by higher equity release and pensions, which more than offset a reduction in annuity VNB
  • Europe2 VNB grew 11%1 to £102 million, flat in reported currency
  • Asia2 VNB grew 16%1 to £36 million (1Q14: £29 million)

General insurance

  • Combined operating ratio (COR) improved to 96.4% (1Q14: 97.7%)
  • UK COR of 98.3% (1Q14: 98.6%), Canada COR of 98.1% (1Q14: 102.7%), Europe COR of 89.8% (1Q14: 92.0%)
  • GI and health net written premiums up 2%1 to £2,037 million, down 2% in reported currency
  • UKGI net written premiums up 1% to £855 million (1Q14: £845 million)

Cash

  • Operating capital generation (OCG) £0.5 billion (1Q14: £0.4 billion)

Balance sheet

  • IFRS net asset value per share increased 2% to 348p (FY14: 340p)
  • Economic capital surplus3 £8.1 billion (FY14: £8.0 billion), coverage ratio 177% (FY14: 178%)
  • The acquisition of Friends Life added c.55p to our NAV per share on closure4
  • Standalone external leverage ratio 40% of tangible capital (FY14: 41%), 28% on an S&P basis (FY14: 28%). Adjusted for Friends Life, estimated leverage ratios are 36% and 27% respectively on closure, well within our target range
  • Holding company liquidity of £1.8 billion at 30 April 2015 including Friends Life

Friends Life

  • Friends Life transaction completed on 10 April 2015 and detailed integration plans are being implemented
  • Positive corporate benefits net flows of £0.2 billion, corporate benefits AUA 7% higher at £23.6 billion (FY14: £22.0 billion)
  • Friends Life VNB declined to £20 million (1Q14: £32 million), driven by the expected decline in retirement income VNB following last year’s Budget announcement

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  1. On a constant currency basis.
  2. Europe excludes Eurovita and CxG and Asia excludes South Korea.
  3. 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.
  4. Based on Aviva’s pre-acquisition NAV per share at 31 March 2015 of 348p.

Key financial metrics

Operating capital generation

 3 months
2015
£bn
3 months
2014
£bn
United Kingdom & Ireland Life 0.3 0.1
United Kingdom & Ireland General Insurance & Health 0.1 0.1
Europe 0.1 0.2
Canada
Asia and Other
Total 0.5 0.4

Value of new business

 3 months
2015
£m
3 months
2014
£m
Sterling %
change1
Constant
currency %
change1
United Kingdom & Ireland 106 92 14% 15%
France 56 54 3% 15%
Poland2 15 21 (29)% (22)%
Italy2, Spain2 and Turkey 31 27 17% 28%
Asia2 36 29 21% 16%
Aviva Investors 3
Value of new business – excluding Eurovita, CxG & South Korea 247 223 10% 14%
Eurovita, CxG & South Korea 1
Value of new business 247 224 10% 14%

General insurance combined operating ratio

 3 months
2015
3 months
2014
Change
United Kingdom & Ireland 98.3% 98.7% (0.4)pp
Europe 89.8% 92.0% (2.2)pp
Canada 98.1% 102.7% (4.6)pp
General insurance combined operating ratio 96.4% 97.7% (1.3)pp

Capital position

 31 March
2015
£bn
31 December
2014
£bn
Sterling%
change
Estimated economic capital surplus3 8.1 8.0 1%
Estimated IGD solvency surplus3 3.0 3.2 (6)%
IFRS net asset value per share 348p 340p 2%
MCEV net asset value per share4 526p 527p
  1. Currency movements are calculated using unrounded numbers so minor rounding differences may exist.
  2. Poland includes Lithuania, Italy excludes Eurovita, Spain excludes CxG and Asia excludes South Korea.
  3. 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.
  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

In the first quarter of 2015, key metrics have improved. Value of new business (VNB) is up 14%1, the combined operating ratio (COR) has improved 1.3 percentage points and our IFRS net asset value per share is 8p higher at 348p. Our UK general insurance business has grown 1% in a market environment that continues to be competitive. In asset management, our flagship AIMS range of funds now has £1.2 billion under management.

The Friends Life acquisition closed on 10 April 2015 and work on implementing our detailed integration plans has begun in earnest. We have already announced the closure of the Friends Life head office in London and in Exeter moved to smaller premises.

Despite lower interest rates and adverse foreign currency developments, our economic capital surplus3 has remained broadly constant at £8.1 billion (FY14: £8.0 billion) with a coverage ratio of 177% (FY14: 178%). We continue to work closely with our regulators ahead of Solvency II implementation and our long-standing focus on managing the Group using economic capital helps the transition.

Our strategy of building a true customer composite, growing our digital business, improving our efficiency, integrating Friends Life and implementing Solvency II leaves no room for complacency.

Cash

Operating capital generation (OCG) has increased to £0.5 billion in the first quarter of 2015 (1Q14: £0.4 billion), driven primarily by UK and Ireland Life, which benefitted from a one-off Pillar One capital release from the transfer of our Irish life business to the UK. We plan to replace OCG with a more relevant measure of capital generation once Solvency II is fully implemented.

Life insurance

  • Value of new business up 14% in constant currency
  • UK Life VNB 15% higher driven by strong equity release

Value of new business, our growth measure for life insurance, increased 14% in constant currency to £247 million (1Q14: £224 million).

UK Life, the largest contributor to VNB, grew 15% to £103 million, driven by a combination of strong equity release and pensions. Protection VNB was broadly flat and annuities VNB was down 60%, following last year’s Budget changes. Platform assets under administration have increased 19% to £6.3 billion (FY14: £5.3 billion) with £0.8 billion of positive net fund flows. Pension freedom began on 6 April 2015 and our front line staff were well prepared for the increased volume of enquiries.

Performance in our growth markets of Poland, Turkey and Asia was more subdued in the first quarter although underlying trends remain attractive. Poland2 VNB was 22%1 lower at £15 million (1Q14: £21 million) due to the non-repeat of an £8 million benefit to VNB in 2014 from pension regulatory change in Lithuania, whose financial reporting is incorporated into Poland. Excluding this, Polish2 VNB grew 24%1. In Turkey, VNB grew 4%1 to £6 million (1Q14: £6 million) as the impact of underlying growth was partially offset by a reduction in our share of the business following the partial IPO. Asia2 grew 16%1 as strong performances in China and Singapore were partly offset by India.

In our developed European markets, France VNB grew 15%1 to £56 million (1Q14: £54 million), principally due to a shift to higher margin protection and unit-linked savings business, which together now make up 80% of VNB (1Q14: 72%). Italy2 continued its turnaround, with 44%1 growth in VNB to £19 million (1Q14: £15 million), mostly driven by a re-price of our traditional savings product offering. Spain2 and Ireland grew 14%1 and 1%1 respectively, albeit from low bases.

We exercised financial discipline in our approach to renew our DBS bancassurance agreement which will expire at the end of 2015. Aviva will retain the existing book of business, associated profits and customer rights and relationships which were purchased in the original transaction with DBS in 2001.

General insurance

  • COR improved 1.3pp to 96.4%
  • GI and health net written premiums 2% higher in constant currency

Our general insurance combined operating ratio (COR) improved 1.3 percentage points to 96.4% (1Q14: 97.7%) due to an improved expense ratio and lower weather losses. Favourable reserve development improved the underlying COR by 0.7 percentage points (1Q14: 1.5pp). General insurance and health net written premiums were 2% higher in constant currency at £2,037 million.

The UK COR improved 0.3 percentage points to 98.3% (1Q14: 98.6%). Net written premiums grew 1% in the quarter, in a market rating environment that continues to be competitive.

In Canada, the COR improved 4.6 percentage points to 98.1% (1Q14: 102.7%) reflecting better overall weather experience, albeit claims frequency remained above long term average. Net written premiums are 1%1 lower mainly due to selected exits from unprofitable business lines.

The European COR improved to 89.8% (1Q14: 92.0%) through a combination of better weather in France and a lower expense ratio across all markets. General insurance and health net written premiums grew 2%1 to £488 million (1Q14: £534 million).

Asset Management

  • AIMS now has £1.2 billion of FUM

The turnaround in our asset management business continues. Gross sales of £1.6 billion are encouraging but we have to see the level of redemptions fall. We have introduced a proactive retention programme to retain and grow key funds. The AIMS flagship range of funds now has £1.2 billion of funds under management and performance is strong, with the AIMS Target Return Fund up 9% in the first 9 months after launch. Work is underway to build distribution through Virtus Investment Partners in the United States and we are actively working towards securing more international agreements.

We have already transferred c.£20 billion of funds that were directly managed by Friends Life Group to Aviva Investors. Preparations to receive Friends Life funds managed by external parties are underway.

Friends Life

  • Growth in protection VNB and corporate benefits FUM

In the first quarter, Friends Life value of new business declined to £20 million (1Q14: £32 million) driven principally by a decline in retirement income VNB, following last year’s Budget changes regarding annuities. Protection VNB grew 6% and Friends Life had positive net fund flows in corporate benefits.

Corporate benefits funds under management have increased 7% over the quarter to £23.6 billion (FY14: £22.0 billion) following £0.2 billion of net inflows and £1.4 billion of positive net market movements. International VNB reduced to £2 million (1Q14: £3 million).

Balance Sheet

  • Economic capital surplus3 resilient at £8.1 billion (FY14: £8.0 billion)
  • IFRS NAV per share up 8p to 348p

A resilient capital base is important for our cash flow plus growth thesis. At the end of the first quarter of 2015, our economic capital surplus3 was £0.1 billion higher at £8.1 billion (FY14: £8.0 billion), a coverage ratio of 177% (FY14: 178%). Our relatively low risk portfolio of businesses and active hedging programme meant that interest rate and currency movements experienced in the first quarter had little impact on our economic capital surplus.

Our IFRS book value per share increased 2% over the quarter to 348p per share (FY14: 340p). Operating profits, positive investment variances and a small gain in our pension surplus more than offset the negative impact of foreign exchange movements. The acquisition of Friends Life adds c.55p to our Group IFRS book value per share on closure4.

The increase in our IFRS book value has brought down our debt leverage to 40% of tangible book value (FY14: 41%), and our S&P leverage ratio is 28% (FY14: 28%). On closure, we expect the Friends Life acquisition to reduce both of these ratios by 4 and 1 percentage points respectively. Our external leverage is now within our target range.

Solvency II

The European insurance industry will adopt Solvency II on 1 January 2016. We anticipate publishing our 2015 Solvency II capital position at our preliminary results in March next year. Our current reported economic capital surplus and composition may differ under Solvency II from the current regulatory regime, including the use of transitional measures on our back book.

Good progress has been made on the implementation of Solvency II and we continue to work closely with our regulators prior to formal application for partial internal model approval in June 2015. As previously communicated, we will adopt a standard formula basis for Friends Life initially, transitioning to our internal model over time.

We are managing the Group taking into account our current understanding of how the Solvency II rules are likely to apply, albeit there remains uncertainty regarding the final outcome. Our long-standing focus on managing the Group using economic capital helps the transition.

Outlook

We have had an acceptable start to 2015 with key metrics moving in the right direction. With completion of the Friends Life acquisition, we now have the opportunity to execute on our detailed integration plans. In the other parts of the Group that are not impacted by the integration, our focus is on improving cash flow and growth.

The Group is well positioned to deal with the macro, market and regulatory headwinds that face the sector and I am confident that 2015 will see continued progress.

  1. On a constant currency basis.
  2. Poland includes Lithuania, Italy excludes Eurovita, Spain excludes CxG and Asia excludes South Korea.
  3. 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.
  4. Based on Aviva’s pre-acquisition NAV per share at 31 March 2015 of 348p.

Notes to editors

All comparators are for the 3 months to 31 March 2014 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 2015. The average rates employed in this announcement are 1 euro = £0.74 (3 months to 31 March 2014: 1 euro = £0.83) and CAD$1 = £0.53 (3 months to 31 March 2014: CAD$1 = £0.55).

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 other verbal or written “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”, “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 announcement include, but are not limited to: the impact of ongoing difficult conditions in the global financial markets and the economy generally; the impact of simplifying our operating structure and activities; 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 short or long term inflation; 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; changes in, or restrictions on, our ability to initiate capital management initiatives or an acceleration of repayment of intercompany indebtedness; 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; a cyclical downturn of the insurance industry; the impact of natural and man-made catastrophic events on our business activities and results of operations; our reliance on information and technology and third-party service providers for our operations and systems; 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; our reliance on third-party distribution channels to deliver our products; 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 fluctuations in share price as a result of general market conditions or otherwise; the effect of simplifying our operating structure and activities; 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, including decreased demand for annuities in the UK due to proposed changes in UK law; the inability to protect our intellectual property; the effect of undisclosed liabilities, integration issues and other risks associated with our acquisitions; and the timing/regulatory approval impact, integration risk and other uncertainties, such as non-realisation of expected benefits or diversion of management attention and other resources, relating to announced acquisitions and pending disposals and relating to future acquisitions, combinations or disposals within relevant industries, including specifically the acquisition of Friends Life; the policies, decisions and actions of government or regulatory authorities in the UK, the EU, the US or elsewhere, including the implementation of key legislation and regulation. 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 most recent Annual Report on Form 20-F as filed with the SEC on 16 March 2015 and also the risk factors contained in the Euro Note Programme prospectus published on 1 May 2015. 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:
08:30 hrs BST

Analyst conference call:
10:00 hrs BST

Tel: +44(0)20 3427 1903
Conference ID: 8626356

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