Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of inforce 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 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.
Operating profit before tax after integration and restructuring costs 2,927 2,798
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 34 379 Short-term fluctuation in return on investments on non-long-term business (345) (518) Economic assumption changes on general insurance and health business (7) (242) Impairment of goodwill, associates and joint ventures and other amounts expensed (49) — Amortisation and impairment of intangibles (197) (175) Amortisation and impairment of acquired value of inforce business (495) (540) (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 135 (11) Other — (498)
Life investment variances and economic assumption changes were £34 million positive (2016: £379 million positive). The variance in 2017 is driven by positive variances in the UK, which are partially offset by negative variances in France.
This was, in part, offset by a change in estimate for the interest rate used to discount periodic payment orders to allow for the illiquid nature of these liabilities. Impairment of goodwill, associates and joint ventures expensed in the period comprised of £2 million in respect of an impairment of goodwill at Elite Insurance Company of Canada and £47 million in respect of the full impairment of goodwill in our investment in associate Aviva India (2016: £nil).
Amortisation and impairment of acquired value of in-force business (‘AVIF’) in the year is a charge of £495 million (2016: £540 million charge). The charge for the year includes £469 million of amortisation in respect of the Group’s subsidiaries and jointventures and impairment charges of £26 million in relation to the FPI’s reinsured book of business and Aviva India.
The total Group profit on disposal and remeasurement of subsidiaries, joint ventures and associates is £135 million (2016: £11 million loss). This consists of £23 million of remeasurement gains in respect of the joint venture operations in Poland and Aviva Vietnam; £237 million profit on the disposals of Antarius, France health, three businesses in Spain and other small operations; offset by £125 million of remeasurement losses in relation to FPI and Taiwan. Other items are those items that, in the directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. There were no other items in 2017.
In 2016, other items also include £23 million relating to the loss upon the completion of an outwards reinsurance contract, written in 2015 by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
Solvency II, the European- wide prudential regulatory framework, came into force on 1 January 2016. Solvency II requires European insurers to calculate regulatory capital adequacy at the level of both individual regulated subsidiaries and in aggregate at Group level using a consistent prudential regulatory framework. The Aviva
Subject to regulatory approval, insurers may utilise a transitional measure which spreads the increase in technical provisions arising as a result of the implementation of Solvency II over a period of sixteen years from 1 January 2016. During this year the transitional measures were utilised by three entities across the Aviva Group. No insurance undertakings within the Group use the transitional measure on risk-free interest rates. Available capital resources determined under Solvency II are referred to as ‘own funds’. This includes the excess of assets over liabilities in the Solvency II balance sheet (calculated on best estimate, market consistent assumptions and net of transitional measures on technical provisions), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds.
Aviva 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
Inclusion of risk margin (net of transitional deductions) (3.3) (4.4) Net deferred tax3 (1.3) (1.6) Revaluation of subordinated liabilities (0.7) (0.9)
4 The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva’s 50%
Solvency II position. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional measure on technical provisions (‘TMTP’) to reflect interest rates at 31
Provident International Limited and the Italian joint venture Avipop Assicurazioni S.p.A in 2017 is £nil.
SCR and Group Own Funds of fully ring-fenced with-profits funds £3.3 billion (2016: £2.9 billion) and staff pension schemes in surplus £1.5 billion (2016: £1.1 billion) – these exclusions have no impact on Solvency II surplus.
Solvency II surplus. • Operating Capital Generation (OCG) is the Solvency II surplus movement in the period due to operating items including the impact of new business, expected investment returns on existing business, operating variances, non-economic assumption changes and non-recurring capital actions. It excludes economic variances, economic assumption changes and integration and restructuring costs which are included in non-operating capital generation. ‘Underlying’ OCG is the component of the OCG which excludes the effect of non-recurring capital actions and noneconomic assumption changes and is therefore considered to be more representative of the long-term trend.
Solvency II key performance metrics is included below. The information in the following sections in respect of Solvency II is estimated and is therefore subject to change.
Group’s ability to cover the SCR with eligible own funds. The Solvency II risk margin is highly sensitive to movements in interest rates, which can be offset by a reset of the transitional measure on technical provisions ('TMTP'). The 31 December 2016
Assicurazioni S.p.A. These adjustments have been made in order to show a more representative view of the Group’s solvency position.
The 31 December 2016 Solvency II Own Funds position includes the pro forma impacts of £0.1 billion in relation to the disposal of
1 The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group
International Limited (£0.1 billion increase to surplus) and the Italian joint venture Avipop Assicurazioni S.p.A
3 The 31 December 2016 Solvency II position includes the pro forma impacts of the disposal of Aviva’s 50%
shareholding in Antarius to Sogecap, which completed on 5 April 2017 (£0.2 billion increase to surplus) and an anticipated future change to UK tax rules restricting the tax relief that can be claimed in respect of tax losses (£0.4 billion decrease to surplus). However, under the amended tax rules published on 13 July 2017, this restriction will not be material, and as a result no corresponding pro forma impact is included in the estimated 31 December 2017 Solvency II position. The 31 December 2016 Solvency II position also includes an adverse impact of a notional reset of the transitional measure on technical provisions (‘TMTP’) to reflect interest rates at 31 December 2016 £0.4 billion decrease to surplus.
Solvency II Own Funds impact of new business (net of tax and non-controlling interests)
Total Solvency II operating capital generation 2.6 3.5 1 Other includes the impact of look through profits in service companies (where not included in Solvency II)
and the reduction in value when moving to a net of non-controlling interests basis.
2 Other OCG includes the effect of non-recurring capital actions, non-economic assumption changes and Group diversification benefit.
The Group’s VNB increased by 25% to £1.2 billion (2016: £0.9 billion).
The UK benefitted from strong growth in volumes across all segments. However, average margins reduced reflecting lower margins on individual annuities and equity release. Following a clarification to the Solvency II rules made by the Prudential
Surplus from life new business within OCG) mainly for annuities business by £0.1 billion gross of tax and non-controlling interests as at the end of 2017. The increase in Europe was mainly driven by a change in business mix towards more profitable unit-linked and protection business in France and Italy and favourable foreign exchange movements, partly offset by lower volumes of with-profits business in France and sale of Antarius. Asia benefitted from higher volumes of business in Singapore and China driven by sales growth in agency and broker channels and favourable foreign exchange movements.
1 The combined operating ratio is now reported on an earned basis. Comparatives have been realigned to reflect this change.
COR on a year-on-year basis. The definition of COR has been changed to an earned basis. It was previously calculated on a hybrid basis: the claims ratio was on an earned basis with the incurred claims expressed as a percentage of net earned premiums; while the commission and expense ratio was on a written basis with written commissions and written expenses expressed as a percentage of net written premiums. This did not consider the impact of deferred commissions and expenses, which are included in the underwriting result. The new method is calculated as claims incurred, earned commission and earned expenses as a percentage of net earned premiums which aligns better to our underwriting result. Comparatives have been realigned for 2016 on an earned basis.
Assets under management represent all assets managed or administered by or on behalf of the Group, including those assets managed by third parties. AUM include managed assets that are included 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.
AUM is monitored as this reflects the potential earnings arising from investment interest and commission and measures the size and scale of the AUM business. A reconciliation of this APM to amounts appearing in the
Assets included in statement of financial position1 Financial investments 319 310 Investment properties 11 11 Loans 28 25 Cash and cash equivalents 44 39 Other 1 1
AUM managed on behalf of third parties2 1 Includes assets classified as held for sale 2 AUM managed on behalf of third parties cannot be directly reconciled to the annual report and accounts
A reconciliation of the component parts of this APM to amounts appearing in the financial statements is shown below.
Operating EPS is calculated based on the Group adjusted operating profit attributable to ordinary shareholders net of tax, deducting non-controlling interests, preference dividends, the direct capital instrument (DCI) and tier one note coupons divided by the weighted average number of ordinary shares in issue, after deducting treasury shares. Operating EPS is an important measure used by management to determine the dividend payout ratio target and hence a useful APM for the users of the financial statements.
A reconciliation of the components of this APM to amounts appearing in the financial statements is shown below. The components of operating and basic EPS are also detailed in note 14 – ‘Earnings per share’.
1 This relates to coupon payments in respect of the DCI and tier 1 notes (net of tax).
Operating expenses excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of inforce 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 operating profit APM as this is principally used to manage the performance of our operating segments.
Integration & restructuring costs are also excluded as these are considered non-recurring and can be considered as strategic in nature. Other acquisition costs and claims handling costs are included as these are considered to be controllable by the operating segments and directly impact their performance.
Amounts paid by our operating businesses to the Group, comprise 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. Net cash remittances represent group cash remittances after deducting capital injections. This metric is used in assessing the financial performance within the Directors bonus scorecard for remuneration purposes.
Other key dates: Annual General Meeting 11 am on 10 May 2018 2018 interim results announcement 2 August 2018 * Please note that the ADR local payment date will be approximately four business days after the proposed dividend date for ordinary shares. ** These dates are provisional and subject to change
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. This enables shareholders living outside of the
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 any dividend payments from Aviva.
www.aviva.com/online: You can access Computershare online services and log in using your Computershare details to: • Change your address • Change payment options
Shareholder Services (Citibank): • By Telephone: 1 877 248 4237 (1 877-CITI-ADR)
• In Writing: Citibank Shareholder Services, PO Box 43077, Providence, Rhode Island, 02940-3077 USA
This document should be read in conjunction with the documents distributed by Aviva plc (the ‘Company’ or ‘Aviva’) through 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 the ‘Risk and risk management’ section of the strategic report.