aviva uk: balance sheet july 2010

8/7/2019 Aviva UK: Balance Sheet July 2010

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u y


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n rew oss

Group Chief Executive

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Capital, cash and profits

to simplify and clarify how we make money and our casheneratin abilit

Three core themes to the presentation

ke drivers of IFRS rofits demonstrate the resilience of Avivas

results even in tough economic conditions

capital generation is significant, resilient and will grow

disciplined allocation of capital will fund profitable growth

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a r c egan

Chief Financial Officer

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How we make money

What drives our IFRS result

How this converts to capital

How capital is turned into cash

ow we use e cas

6CapitalOverview EV IFRS


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.

2. Capital generation and utilisation ource an res ence o e, on- e cap ta

Disciplined capital investment to generate profitable

new business

Converting capital to dividends

. m e e va ue repor ng

4. IFRS profit drivers Life profit drivers

GI & Fund Management profit drivers

n ng expenses to t e pro t r ver ana ys s



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A diversified portfolio with resilient profits

2.0bn2009 IFRS o eratin rofit

SustainableIFRS o eratin rofit

2.2 2.3

n

100%N.Am

Asia Pac

2.0280%

GI &Non-life

Euro e

60%

140% Life

UK

00%

2007 2008 2009


by region by business


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A diversified portfolio and a strong return on capital

SustainableIFRS return on ca ital

2.0bn2009 IFRS o eratin rofit

1213

14100%

N.Am

Asia Pac

11

1080%

GI &Non-life

Euro e

6

860%

4

40% Life

UK

0

2

0%

2007 2008 2009

9CapitalOverview EV IFRSNote: IFRS return on capital based on operating profit post-tax and MI

by region by business


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Key elements of profits, capital and cash

IFRS

Capital generated

Internal dividends

Central liquidity

External dividends



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Defining capital generation at Aviva

IFRS operating returnon Non-Life

Free surplus capital onLife existing business

IFRS operating profit

capital resource

0.6bn1.9bn

DAC

tax and minority interest

= Capital generated

Gross operatingcapital generation

1bn capital generated

2.5bn

Corporate centre

(1.5)bn(0.6)bn(0.5)bn

Dividend

new businessand debt

interest costs

Operating profits use an assumed long term investment return

Note: 2009 numbers net of tax and minorities 11CapitalOverview EV IFRS


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Reconciliation of IFRS to net capital generation

2009bn Total

IFRS operating profit before corporate costs 2.8

Less tax and minorities (0.9)

Net increase in required capital (0.4)

DA and other 0.5

Operational capital after investment in 1.0



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Defining capital generation at Aviva



IFRS operating profit

capital resource

0.6bn1.9bn

DAC

tax and minority interest

= Capital generated


1bn capital generated

IFRS operating profit drivers

1. Underwriting margin & COR

2. Investment margin

3. Expenses

2.5bn

IFRS total profitsCorporate centre

(1.5)bn(0.6)bn(0.5)bn

Dividend

new business

and debtinterest costs


Note: 2009 numbers net of tax and minorities 13CapitalOverview EV IFRS


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Analysis of capital generation and utilisation



Capital maturity profile

Undiscounted capital flows

New business metrics

1. IRR

2. Payback


.

Corporate centreDividend

new business

and debtinterest costs




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Key elements of profits, capital and cash

IFRS

Capital generated

Internal dividends

Central liquidity

External dividends



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Central liquidity

2009bn

1.5 (0.5)

0.2 (0.6)3.5

.

2.2

(0.5)

2.5

3.0

1.4

.

1.5

2.0

0.5

1.0

0.0

Openingcentre

Dividendfrom regions

DL IPO anddisposals

Inheritedestate

Debt raised Interest andcentral costs

Dividendsnet of scrip

Closingcentre

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liquidity payment liquidity

CapitalOverview EV IFRS


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Focused on generationand disciplined allocation of capital

A diversified ran e of life

Capital generationnet of tax and minorities

bn

2.5bn 1.5bn

2.5

and GI businesses with53 million customers

Generating material and

2.0

Non-life0.6bn

With an effective franchise

to profitably attract and

generate further capital

1.3bn1.5

Life

1.9bn

Key levers for growth:

-.1.0

generation

Increasing GI profits

More efficient capital.

0.0

investment

perat ngcapital

generated

nvestmentin new

business

un er y ngcapital

generated

expecteunderlying

capital



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Strong historic life capital generation

2009

2.2

2.0

bn

UK 0.4

1.92 .

North America 0.2

1

.

Delta Lloyd 0.3

US capital for year 1 only 0.3

Underlying generation 2.0

Other (0.1)

0

2007 2008 2009

Total 1.9

20Capitalgeneration

Overview EV IFRS


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Resilience and improvement of capital generation

,

achieved one year early

Consultation around closure of UK final salary pension

scheme

Managing expenses

UK targeting pension, with profits and endowments

customers

Pan-European retention centre of excellence established

in France

Keeping our customers

Reduced shareholder equity exposure

sse an a y ura on ma c ng m s mpac o

interest rate changes

Limited losses on debt and mortgage book

balance sheet

21Capitalgeneration

Overview EV IFRS


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Strong future life capital generation

c. 8 billion undiscounted real world

Expected, undiscountedreal world cash flows

33bn

30

35cash flows to emerge over next 5 years

from existing book

33 billion to emer e over the life of

25

the book

2010 cash flows expected to be in line

15

.

Actual free surplus will be boosted by:

new business written over

8bn

5

10 e per o

Actions to improve value of the

existing book

0First5 yrs

Total

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Future presentation to provide breakdown of 1-5 year profile

Capital

generationOverview EV IFRS


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Opportunity to grow non-life capital generation

bn

Underwriting expertisebn

UK GI 0.4

Ongoing GI pricing action

across all regions contributes

to 98% COR target

Focus on pricing and

1.1

1

.

Europe GI 0.1

risk selection

Operational improvements

UK GI turning the corner into

profitable growth

0.7 0.7

0.6

0.8

.

North America

GI0.1

European market penetration Continuing improvement in

Canadian profitability0.4

.

Other non-life (0.1) Continuing focus on cost

savings, 350 million savings

achieved in the UK

since 2007

0.2

COR 94% 100% 98% 99%

Aviva Investors

Continuing drive for

external FUM

2006 2007 2008 2009

23Capitalgeneration

Overview EV IFRS


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Capital generation enables sustained andgrowing dividend payments

Gross operating Resilient and predictable withcapital generated plans for growth

Interestand corporatecentre costs

Stable average 6% interest on

hybrid debt

Rebased and sustainable with

plans for growth

Net available forinvestment innew business

Disciplined capital investment

24Capitalgeneration

Overview EV IFRS


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Disciplined investment in new business

Payback period less than 10 years

mprov ng ren o new us ness va ue per cap a nves e

25Capitalallocation

Overview EV IFRS


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2009 actual performance

Ca ital2009bn

SalesPVNBP

invested in

life IRRPayback

period

UK 8.9 0.2 14% 8 years

Europe 13.5 0.5 13% 7 years

or mer ca . . years

Asia Pacific 1.4 0.1 8% 20 years

Delta Lloyd 3.7 0.2 6% 33 years

US Capital for

r 1 onl - 0.2

Total 32.0 1.5

26Capitalallocation

Overview EV IFRS


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Actions taken for improvement

Reattribution of the inherited estate provides access to additional

m o cap a or new us ness over nex years

UK life product mix shift towards annuity and term assurance sales

UK

Targeting shift towards unit linked business in EuropeEurope

Pricing actions on annuity business AXXX reinsurance deal in the USA

North America

Growing businesses with aim to establish scale

Asia Pacific exit from capital intensive products in Hong Kong,

Mala sia and Taiwan

Asia Pacific

Partial IPO of Delta Lloyd

Delta Lloyd

27Capitalallocation

Overview EV IFRS


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Returns in line with assumptions

Operating variances andassumption changes

m

2005* (22)

*

2007 (135)

2008 (84)

2009 239

Total (8)

28* 2005-6 on an EEV basis Capitalallocation

Overview EV IFRS


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Embedded Value reporting

introducing additional Real World EV reporting

MCEV:

s a use u oo or r s managemen

underpins Solvency II

Real World EV:

is a better measure of value

is comparable with other UK insurance companies



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Summary life profit drivers

DriverKey:

million 2009 2008

Life 1,887 1,694

Pre-taxoperating profit

2009 2008Variance

to 2008

,

Fund Management 133 123

Other, non insurance (214) (198)

Central costs and debt (744) (520), ,

Operating profit 2,022 2,297

Income

4,424 4,109 8%

DAC/AVIF

amortisation and other

(237) 69 n/a

Expenses

(2,300) (2,484) 7%

New business margin Investment return Acquisition expenses Admin expenses

792 784 1%

Underwriting margin

2,949 2,758 7% (950) (1,159) 18% (1,350) (1,325) (2)%

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683 567 20%

LifeIFRS

CapitalOverview EVNote: There is a positive FX contribution of 100m included in the2009 IFRS operating profit result


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Diversified range of life profits contributes to resilience

2008 2009m

1500

500

0Underwriting

mar inUnit

linkedParticipating

businessSpreadmar in

Expectedreturn

Acquisition

expenses

Admin

expenses

DAC, AVIF

& Other

Newbusiness

-500

marginmargin

-1000

-1500

33LifeIFRS

CapitalOverview EV


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New business margin

DriverKey:

2009 2008Variance

to 2008

Lower APE reflects a disciplined

approach to writing new business

across the group in difficult

New business margin

792 784 1%

Improved new business margin on

APE due to pricing actions

particularly in UK, US and Asia

, ,

Margin 21% 18% 3ppt

New business margin reflects

premiums less initial capital

reserves

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CapitalOverview EV


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Underwriting margins

DriverKey:

683 567 20%2009 2008

Variance

to 2008

Underwriting margin improvement

reflects:Expenses 263 135 95%

DL expense savings

stable risk portfolios

good mortality profits

Mortality &

longevity381 382 -

Persistency 39 50 (21)%

Mortality and persistency margins

reflect conservative reserving for unit

linked, risk and spread business

Expense margin represents unwind

of annual expense allowance on risk

business and assumption changes

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CapitalOverview EV


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Investment return

Investment return

Participating Expected return on

The return we are

making on unit

business shareholder assets

Our share of the

bonus to

The return we are

making on ourThe return we make

on shareholder netlinked business policyholders on

with profit and other

participating

business

annuity and non-

linked investment

business

assets

36LifeIFRS

CapitalOverview EV


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Investment return

DriverKey:

2,949 2,758 7% 2009 2008Variance

to 2008

Unit linked margin Participating business Spread margin Expected return on

1,021 963 6% 573 643 (11)% 863 657 31%

492 495 (1)%

AMC115 109 6

Bonus49 58 (9)

Spread126 112 14 Equity 7.3% 8.3%

(1.0)

Average

reserves(bn)

89.1 88.4 1%Averagereserves(bn)

117.1 111.0 6%Average

reserves(bn)

68.4 58.6 17%Property 5.8% 6.8%

(1.0)

ppt

(0.3). .ppt

Annual management

charge increase

reflecting business mix

in UK and Europe

Lower regular and

special UK with-profits

bonus

Reserves increased

Increase due to pricing

action in the US

Reserves increase due

to rowth in annuit

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mainly due to AFER

in France

business in UK and US

LifeIFRS

CapitalOverview EV


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Expenses

DriverKey:

2009 2008Variance

to 2008

Acquisition expenses

(950) (1,159) 18%

Admin expenses

(1,350) (1,325) (2)%

APE 3,745 4,277 (12)% Existing expense 49 51 2

Acquisitionexpenseratio

25% 27% 2 ppt

ra o ps

Average reserves

(bn)274.6 258.0 (6)%

Acquisition expenses including

commission incurred in writing

new business less deferred

Expenses and renewal

commissions incurred on

managing the existing book

38LifeIFRS

CapitalOverview EV


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Linking expenses to the profit driver analysis

m 2009 2008 Var.Analysis of OperationalCost Base (by Region)

5,750

121 387

6,000

13%* reduction in 2009

u

admin expenses per

profit drivers

2,300 2,484 (7)%

Excluding commissions 282 323 13%

115

133

2095,144

5,500

Life operationalexpenses

2,018 2,161 (7)%

119 388

4,500

, , ,

FM expenses 373 351 6%

-

4,000

08 g,

d

A n K

L yd c.

g,

d

09

Operational expenses 4,756 5,368 (11)%

Restructuring,FY

Restructurin

integrationa

brandFY0

FX&M

Inflati U

Europeex

DeltaLlo

Other(i

Group

Restructurin

integrationa

brandFY0

FY integration and brand

Total expense base 5,144 5,750 (11)%

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500m cost reduction target exceeded one year ahead of schedule

Note: After adjusting for FX and M&AIFRS

ExpensesCapitalOverview EV


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Improved underlying General Insurance


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Improved underlying General Insurance

combined operating ratio

Expense ratioGroup COR

(3.9%)

3.2%

98%

UK: Cost savings target of

350 million achieved

27 o erational sites reduced to 998.1%

99.1%

1.3%0.4%

96%

Europe: Further cost savings to

come through Quantum Leap

94%Claims ratio

90%

92%

UK: enhanced risk selection

-

88%

claims programme

North America: improvements to2008Underlying

improvementWeather Creditor Reserves 2009

41Non-life

IFRSCapitalOverview EV

F d t fit d i A i I t


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Fund management profit drivers Aviva Investors

m 2009 2008Driver

Key:

Pre-tax operating profit

Aviva investors 115 114

Other 18 9

2009 2008Variance

to 2008

115 114 1%unManagement

133 123

Total income

409 388 5%

Operating expenses

294 274 (7)%

Cost/income ratioAverage

fees

(bps)

17.7 16.4 1.3

Averageassets

bn

231 237 (3)%

42Non-life

IFRSCapitalOverview EV

C l i


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Conclusion

Confidence in capital generation

Stron and sustainable life rofits and cash flows

Combined with GI profits currently at cyclical low

A growing franchise with disciplined capital investment

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Inherited estate reattribution


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Inherited estate reattribution

Operational Capital IFRS MCEV

Operating profit

New business margins and

IRRs are not impacted

Operating profit

Earn expected return on:

Assets backin estate

Gross capital generation

Assets and the return

earned on those assets is Earn expected return on:

Assets backing estate

c. 30m pa;

c. 45m pa;

Assets backing non-profit

business held in NWPSF

e n requ re cap a

No benefit to gross capital

generation until restrictions

lifted in c. 6 ears time Assets backing non-profit

business held in NWPSFto extent not offset by

movement in liabilities;

movement in liabilities;

Assets backing

guarantees to extent

Capital invested innew business

Assets backing

guarantees to extent

not hedged

not hedged

Also recognise financial

unwind of guarantee costs

Access to 650 million held

in required capital over

5 year period

unwind of guarantee costs

Non-operating profit

Im act of investment

Non-operating profit

Impact of investment

variances on above

is used so capital invested

in new business will reduce

Benefit of c. 100m in 2010

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variances on above

Life IFRS profit drivers income


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Life IFRS profit drivers income

Income U/L Spread Protection Par Unallocated

Newbusinessmargin Newbusinesscashflows(excludingacquisitionexpenses)basedonactualvolumes

Premiumslessinitialreserves.Includesexpectedinvestmentreturntoendofyear

Excludesvariancesinoperatingexperienceorassumptions

Underwritingmargin

Expenses Protection Allowanceinvaluationbasisforexpenses

Mortality Protection Allowanceinvaluationbasisformortalitylessactualclaims&benefitsUL Chargesmadetopolicyholderslessactualclaims&benefits

Expectedchangeinliabilityforanyguaranteesoroptionssubjecttomortalityrisk

Persistency All Actualreservesreleasedless surrenderbenefitspaid

nnua managemen c argesonun n e us ness ase onexpec e nves men re urns

Excludesriskchargesandcosts

Expectedchangeinliabilityforanyguaranteesoroptionsthatdependoninvestmentreturn

Participatingbusiness UK/Ireland shareholders'shareofactualbonusdeclared

Continental artici atin shareholders' share

US closedblockprofits

Spreadmargin Spread Expectedinvestmentreturnlessunwindofliability/amounts creditedtopolicyholders

Excludesriskchargesandcosts

Protection

Expected

investment

return

less

valuation

discount

rate

applied

to

opening

liabilityExpectedchangeinliabilityforanyguaranteesoroptionthatdependoninvestmentreturn

Expectedreturn Returnonassetscoveringsolvencymarginandadditionalsurplus

Basedonlongertermratesofreturnappliedtoexpectedaveragefundsundermanagement

updatedforfundflowsandoutflows

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Life IFRS profit drivers expenses


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Life IFRS profit drivers expenses

Expenses U/L Spread Protection Par Unallocated

Acquisitionexpenses Newbusinessacquisitioncommissionandexpenseslessdeferredcosts

Admin

expenses

Maintenance

expenses

and

renewal

commission

on

existing

business

DAC/AVIFamortisation AmortisationofDAC,AVIFandimpactofregulatorychanges,reservingmethodologychanges

andother orotheroneoffitems

IFRSlifeo eratin rofitInvestmentvariances AMCsbasedonactualinvestmentreturnlessAMCsbasedonexpectedreturns

andeconomic Spreadbasedonactualinvestmentreturnlessspreadbasedonexpectedreturns

assumptionchanges Varianceincurrentactualandassumedfutureinvestmentreturnlessexpectedinvestmentreturn

TotalIFRSlifeprofit

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2009 IFRS result


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2009 IFRS result

Income statement 2009 2008

Operating profit 2,022 2,297

Investment return variances and assumption changes on long term business

UK provisions for credit default - (550)

Unit-linked provisions in DL and France - (260)

Spain: Write back/(write-off) of UDS 160 (220)

Other (235) (601)

o a ,

Short term fluctuations and assumption changes on non-long term business 152 (913)Impairment and amortisation of goodwill and intangibles (206) (183)

Integration / restructuring costs (286) (326)

Exceptional items 45 (551)

Profit / Loss before tax 1,805 (1,300)Tax (490) 415

Profit / Loss for the year 1,315 (885)

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aviva uk: balance sheet july 2010

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