Aviva PLC

Management Reports • Mar 5, 2020

National Storage Mechanism | Additional information

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RNS Number : 0616F

Aviva PLC

05 March 2020

START PART 5 of 5

Page 110

Other information

In this section	Page
Alternative Performance Measures	111

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Alternative Performance Measures

In order to fully explain the performance of our business, we discuss and analyse our results in terms of financial measures which include a number of Alternative Performance Measures (APMs). APMs are non-GAAP measures which are used to supplement the disclosures prepared in accordance with other regulations such as International Financial Reporting Standards (IFRS) and Solvency II. We believe these measures provide useful information to enhance the understanding of our financial performance. However, APMs should be viewed as complementary to, rather than as a substitute for, the amounts determined according to other regulations.

The APMs utilised by Aviva may not be the same as those used by other insurers and may change over time.

At our capital markets day in November 2019, we announced new financial targets focussed on economic value, to measure our progress in meeting our key strategic initiatives. Consequently, we have introduced four APMs in 2019, that are based on Solvency II:

· Solvency II return on equity (ROE) ‡

· Operating own funds generation

· Solvency II net asset value (NAV) per share‡

· Solvency II debt leverage ratio

These capital measures provide useful information as they are based on economic value which is used by the Group to assess performance and growth.

In addition, we have made certain changes to existing APMs to ensure that they remain relevant and useful for stakeholders.

The Group adjusted operating profit APM has been amended and now includes amortisation and impairment of internally generated intangible assets to provide more relevant information by better reflecting their operational nature. 2018 comparatives have been restated. For consistency with the change in Group adjusted operating profit, the combined operating ratio, operating earnings per share , operating expenses and IFRS return on equity have also been amended.

Furthermore, controllable costs is a new APM in 2019, based on operating expenses adjusted to exclude premium related costs such as premium based taxes, fees and levies that vary directly with premium volumes.

Further details on APMs derived from IFRS measures and APMs derived from Solvency II measures including changes that have been made in 2019, are provided in the following sections. A further section describes Other APMs.

‡ denotes APMs which are key performance indicators.

denotes key performance indicators used as a base to determine or modify remuneration.

APMs derived from IFRS measures

A number of APMs relating to IFRS are utilised to measure and monitor the Group's performance. Definitions and additional information, including reconciliations to the relevant amounts in the IFRS Financial Statements and, where appropriate, commentary on the material reconciling items are included within this section.

Group adjusted operating profit‡#

Group adjusted operating profit is an APM that supports decision making and internal performance management of the Group's operating segments that incorporates an expected return on investments supporting the life and non-life insurance businesses. The Group considers this measure meaningful to stakeholders as it enhances the understanding of the Group's operating performance over time by separately identifying non-operating items. The various items excluded from Group adjusted operating profit, but included in IFRS profit before tax, are:

Investment variances, economic assumption changes and short-term fluctuation in return on investments

Group adjusted operating profit for the life insurance business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification.

For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risk. Where such securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin.

Group adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit.

Group adjusted operating profit for the non-life insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the long-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The long-term return for other investments (including debt securities) is the actual income receivable for the period. Actual income and long-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities.

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Changes due to market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed separately outside Group adjusted operating profit. The impact of changes in the discount rate applied to claims provisions is also disclosed outside Group adjusted operating profit.

The exclusion of short-term investment variances from this APM reflects the long-term nature of much of our business. The Group adjusted operating profit which is used in managing the performance of our operating segments excludes the impact of economic variances, to provide a comparable measure year on year.

Impairment, amortisation and profit or loss on disposal

Group adjusted operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangible assets acquired in business combinations; amortisation and impairment of acquired value of in-force 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 Group adjusted 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.

In 2019, the Group adjusted operating profit APM has been amended and now includes amortisation and impairment of internally generated intangible assets to provide more relevant information by better reflecting their operational nature. These assets include advisor platforms, digital distribution channels and claims and policy administration systems which are used to support operational activities. Comparative amounts have been restated resulting in a reduction in the prior year Group adjusted operating profit of £112 million. Amortisation and impairment of intangible assets acquired in business combinations will continue to be excluded from the Group adjusted operating profit as these relate to merger and acquisition activity.

In addition, integration and restructuring costs are now included in Group adjusted operating profit. There is no impact on 2018 comparative figures.

Other items

These items are, in the Directors' view, required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. Other items at 2019 comprise:

· A charge of £45 million relating to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (see note A11). Consistent with the presentation of the change in the Ogden discount rate in 2016 and 2018, this is disclosed outside of Group adjusted operating profit; and

· A charge of £2 million relating to the negative goodwill which arose on the acquisition of Friends First in 2018, which is excluded from Group adjusted operating profit for consistency with the treatment of impairment of goodwill.

Other items at 2018 comprised:

· A movement in the discount rate used for estimating lump sum payments in settlement of bodily injury claims which resulted in a gain of £190 million. Consistent with the presentation of the change in the Ogden discount rate in 2016, this was disclosed outside of Group adjusted operating profit;

· A charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirement to equalise members' benefits for the effects of Guaranteed Minimum Pension. This was disclosed outside of Group adjusted operating profit as the additional liability arose as a consequence of a High Court judgement in October 2018 in the case involving Lloyds Banking Group; and does not reflect the financial performance of the Group for the year;

· A charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs;

· A release of a provision of £78 million relating to the sale of Aviva USA in 2013, which represents the reversal of an item previously excluded from Group adjusted operating profit; and

· A gain of £36 million relating to negative goodwill on the acquisition of Friends First, which was excluded from Group adjusted operating profit for consistency with the treatment of impairment of goodwill.

The Group adjusted operating profit APM should be viewed as complementary to IFRS measures. It is important to consider Group adjusted operating profit and profit before tax together to understand the performance of the business in the period.

The table below presents a reconciliation between our consolidated operating profit and profit before tax attributable to shareholders' profits.

	2019 £m	Restated1   2018 £m
United Kingdom - Life	1,855	1,886
United Kingdom - General Insurance	250	383
Canada	191	27
Europe	981	1,008
Asia	275	261
Aviva Investors	96	148
Other Group activities	(464)	(709)
Group adjusted operating profit before tax attributable to shareholders' profit	3,184	3,004
Adjusted for the following:
Investment return variances and economic assumption changes on long-term business	654	(197)
Short-term fluctuation in return on investments on non long-term business	167	(476)
Economic assumption changes on general insurance and health business	(54)	1
Impairment of goodwill, associates and joint ventures and other amounts expensed	(15)	(13)
Amortisation and impairment of intangibles acquired in business combinations	(87)	(97)
Amortisation and impairment of acquired value of in-force business	(406)	(426)
(Loss)/profit on the disposal and re-measurement of subsidiaries, joint ventures and associates	(22)	102
Other	(47)	231
Adjusting items before tax	190	(875)
Profit before tax attributable to shareholders' profits	3,374	2,129

1   During 2019 the Group adjusted operating profit APM has been revised, and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note B2 (b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax.

Combined operating ratio (COR)‡

A financial measure of general insurance underwriting profitability calculated as total underwriting costs in our insurance entities expressed as a percentage of net earned premiums. A COR below 100% indicates profitable underwriting.

In 2018 and 2019, the COR does not include the impact of any changes in the discount rate used for estimating lump sum payments in settlement of bodily injury claims.

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In 2019, following the change in the definition of Group adjusted operating profit, the COR has been amended to include the amortisation and impairment of internally generated intangible assets to better reflect their operational nature. Comparative amounts have been restated resulting in an increase in the prior year underwriting costs of £53 million and an increase in COR of 0.6%. Amortisation and impairment of intangible assets acquired in business combinations will continue to be excluded from the COR as these relate to merger and acquisition activity.

The Group COR is shown below.

	2019 £m	Restated1   2018 £m
Incurred claims - GI & Health (as per note B6)2	(6,620)	(6,400)
Adjusted for the following:
Incurred claims - Health	651	633
Change in discount rate assumptions	54	-
Impact of change in the discount rate used in settlement of bodily injury claims	45	(190)
Total Incurred claims (included in COR)3	(5,870)	(5,957)
Commission and expenses - GI & Health (as per note B6)4	(3,321)	(3,188)
Adjusted for the following:
Amortisation and impairment of intangibles acquired in business combinations	19	31
Foreign exchange gains/losses	(45)	7
Commission income	20	19
Other	5	4
Commission and Expenses - Health & Other Non GI	300	309
Total commission and expenses (included in COR)5	(3,022)	(2,818)
Total underwriting costs	(8,892)	(8,775)
Net earned premiums - GI & Health (as per note B6)	10,015	9,887
Adjusted for:
Net earned premiums - Health	(895)	(857)
Net earned premiums (included in COR)6	9,120	9,030
Combined operating ratio	97.5%	97.2%

1   Following the change in the definition of Group adjusted operating profit, COR now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets. Comparative amounts have been restated resulting in an increase in the prior period underwriting costs of £(53) million and an increase in COR of 0.6%.

2   Corresponds to the sum of claims and benefits paid, net of recoveries from reinsurers and the change in insurance liabilities, net of reinsurance per note B6.

3   Includes £(6) million (2018: £1 million) relating to incurred claims for Aviva Re.

4   Commission and expenses consists of fee and commission expense and other operating expenses included within the general insurance & health segmental income statement (per note B6) adjusted to an earned basis and to remove the health business.

5   Includes £(1) million (2018: £3 million) relating to commission and expenses for Aviva Re.

6   Includes £nil (2018: £(5) million) relating to net earned premiums for Aviva Re.

Claims ratio

A financial measure of the performance of our general insurance business which is calculated as incurred claims expressed as a percentage of net earned premiums, which can be derived from the COR table above.

Commission and expense ratio

A financial measure of the performance of our general insurance business which is derived from the sum of earned commissions and expenses expressed as a percentage of net earned premiums from the COR table above.

Operating earnings per share (EPS)‡#

Operating EPS is calculated based on the Group adjusted operating profit attributable to ordinary shareholders net of tax, deducting non-controlling interests, preference dividends and the direct capital instrument (DCI) and tier 1 note coupons divided by the weighted average number of ordinary shares in issue, after deducting treasury shares. Operating EPS is considered meaningful to stakeholders because it enhances the understanding of the Group's operating performance over time by adjusting for the effects of non-operating items.

Following the change in the definition of the Group adjusted operating profit APM in 2019, operating EPS has been amended and the 2018 comparative amount has been restated resulting in a reduction in the prior year from 58.4 pence to 56.2 pence.

A reconciliation between operating EPS and basic EPS can be found in note B8.

Controllable costs‡ and operating expenses

Controllable costs are the controllable operational overheads associated with maintaining our businesses. Controllable costs are calculated as operating expenses, less premium based taxes, fees and levies that vary directly with premiums. These costs are by their nature a direct cost incurred as a result of generating premium income, and therefore not a controllable operational overhead. Operating expenses continues to be a useful measure alongside controllable costs.

Following the change in the definition of Group adjusted operating profit, operating expenses has been amended to include the amortisation and impairment of internally generated intangible assets to better reflect their operational nature. Comparative amounts have been restated resulting in an increase in prior year operating expenses of £112 million. Amortisation and impairment of intangible assets acquired in business combinations will continue to be excluded from operating expenses as these relate to merger and acquisition activity.

A reconciliation of other expenses in the IFRS consolidated income statement to operating expenses (restated) and controllable costs is set out below:

	2019 £m	2018 £m
Other expenses (IFRS income statement)	3,329	3,843
Less: impairment of goodwill, associates and joint ventures and other amounts expensed	(15)	(13)
Less: amortisation and impairment of intangibles acquired in business combinations1	(87)	(97)
Less: amortisation and impairment of acquired value of in-force business	(406)	(426)
Less: foreign exchange gains/(losses)	109	(28)
Add: other acquisition costs	1,001	954
Add: claims handling costs	339	336
Less: other costs	(151)	(431)
Operating expenses1	4,119	4,138
Less: premium based income taxes, fees and levies	(180)	(170)
Controllable costs	3,939	3,968

1   Following the change in the definition of Group adjusted operating profit, operating expenses now include the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets. Comparative amounts have been restated resulting in an increase in the prior period operating expenses of £112 million.

Operating expenses exclude impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangible assets acquired in business combinations; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items relate to merger and acquisition activity which we view as strategic in nature, hence they are excluded from operating expenses as this is principally used to manage the performance of our operating segments.

Operating expenses include indirect acquisition costs, such as underwriting overheads, and claims handling costs. These are considered to be controllable by the operating segments and are therefore also included in controllable costs.

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Operating expenses exclude other amounts that, in management's view, are not representative of underlying day-to-day expenses involved in running the business, and that would distort the year on year operating expenses trend, including historical product governance costs and GI instalment income. In 2019 other costs includes an additional £175 million product governance provision in our UK Life business relating to past communications to a specific sub-set of pension policyholders that may not have adequately informed them of switching options into with-profits funds that were available to them.

Other costs in 2018 included movements in provisions set aside in respect of ongoing regulatory compliance as well as an increase of £175 million product governance provision relating to a historical issue over pension arrangement sales by Friends Provident (of which over 90% of cases related to pre-2002).

IFRS Return on Equity (RoE)

The IFRS RoE calculation is based on Group adjusted operating profit after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders' equity (excluding non-controlling interests, preference share capital and direct capital instrument and tier 1 notes) as shown in note A13.

Following the change in the definition of the Group adjusted operating profit APM in 2019, IFRS RoE has been amended and the 2018 comparative amount has been restated resulting in a reduction in the prior year from 13.3% to 12.8%.

IFRS net asset value (NAV) per share

IFRS NAV per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the consolidated statement of financial position), divided by the actual number of shares in issue at the balance sheet date. IFRS NAV per share monitors the value generated by the Company in terms of the equity shareholders' face value per share investment.

Assets Under Management (AUM) and Assets Under Administration (AUA)

AUM represent all assets managed or administered by or on behalf of the Group, including those assets managed by Aviva Investors and by third parties. AUM include managed assets that are reported 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.

Consistent with previous years, Aviva Investors AUA comprises AUM plus £36 billion (2018: £29 billion) of assets managed by third parties on platforms administered by Aviva Investors.

Both AUM and AUA are monitored as they reflect the potential earnings arising from investment returns and fee and commission income and measure the size and scale of the Group's fund management business.

A reconciliation of amounts appearing in the Group's statement of financial position to AUM is shown below:

	2019 £bn	Restated1   2018 £bn
Assets managed on behalf of Group companies
Assets included in statement of financial position2
Financial investments	351	327
Investment properties	11	11
Loans	39	36
Cash and cash equivalents	20	17
Other	1	1
	422	392
Less: third party funds included above	(17)	(17)
	405	375
Assets managed on behalf of third parties4
Aviva Investors	67	64
UK Platform5	29	23
Other	9	9
	105	96
Total AUM3	510	471

1   Following a review of the Group's presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the period or equity. See note B2(a) for further information.

2   Includes assets classified as held for sale.

3   Includes AUM of £346 billion (2018: £331 billion) managed by Aviva Investors.

4   AUM managed on behalf of third parties cannot be directly reconciled to the financial statements.

5   UK Platform relates to the assets under management in the UK long-term savings business.

Net fund flows

Net fund flows is one of the measures of growth used by management and is a component of the movement in the life and platform business managed assets (excluding UK with-profits) during the period. It is the difference between the inflows (being IFRS net written premiums plus deposits received under investment contracts) and outflows (being IFRS net paid claims plus redemptions and surrenders under investment contracts). It excludes market and other movements.

APMs derived from Solvency II measures

The Solvency II regime requires insurers to hold own funds in excess of the Solvency Capital Requirement (SCR). Own funds are available capital resources determined under Solvency II. This includes the excess of assets over liabilities in the Solvency II balance sheet, calculated on best estimate, market consistent assumptions and include transitional measures on technical provisions (TMTP), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds.

The SCR is calculated at Group level using a risk-based capital model which is calibrated to reflect the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one-year time horizon - equivalent to a 1 in 200 year event - against financial and non-financial shocks. As a number of subsidiaries utilise the standard formula rather than a risk-based capital model to assess capital requirements, the overall Group SCR is calculated using a partial internal model, and it is shown after the impact of diversification benefit.

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The reconciliation from total Group equity on an IFRS basis to Solvency II own funds is presented below.

	2019 £m	2018 £m
Total Group equity on an IFRS basis	18,685	18,455
Elimination of goodwill and other intangible assets1	(8,424)	(7,828)
Insurance assets and liabilities valuation differences (net of transitional deductions)2	19,564	19,293
Inclusion of risk margin (net of transitional deductions)	(3,122)	(3,256)
Net deferred tax on valuation differences3	(1,220)	(1,149)
Revaluation of subordinated liabilities 4	(716)	(649)
Other accounting differences4	(99)	(286)
Estimated Solvency II net assets (gross of non-controlling interests)	24,668	24,580
Difference between Solvency II net assets and own funds5	3,679	2,987
Estimated Solvency II regulatory own funds6	28,347	27,567

1   Includes £1,855 million (2018: £1,872 million) of goodwill and £6,569 million (2018: £5,956 million) of other intangible assets comprising acquired value of in-force business of £2,479 million (2018: £2,916 million), deferred acquisition costs (net of deferred income) of £3,221 million (2018: £2,858 million) and other intangibles of £869 million (2018: £182 million).

2   Includes valuation adjustments to reflect insurance assets and liabilities valued on a best estimate basis using market-implied assumptions.

3   Net deferred tax includes the tax effect of all other reconciling items in the table above which are shown gross of tax.

4.  Includes valuation adjustments and the impact of the difference between consolidation methodologies under Solvency II and IFRS.

5   Regulatory adjustments to bridge from Solvency II net assets to own funds include recognition of subordinated debt capital, non-controlling interests and adjustments for ring-fenced funds restrictions.

6   Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excedents (PPE) into Solvency II own funds. The PPE has been included in the France local regulatory own funds in 2019 but it is not included in the Group regulatory own funds.

A number of APMs relating to Solvency II are utilised to measure and monitor the Group's performance, growth and financial strength:

· Solvency II shareholder cover ratio‡

· Value of new business on an adjusted Solvency II basis (VNB)‡

· Operating Capital Generation (OCG) ‡#

· Operating own funds generation

· Solvency II return on equity (ROE)‡

· Solvency II net asset value (NAV) per share‡

· Solvency II debt leverage ratio

Solvency II shareholder cover ratio‡

The estimated Solvency II shareholder cover ratio, which is derived from own funds divided by the SCR using a 'shareholder view', is one of the indicators of the Group's balance sheet strength. The shareholder view is considered by management to be more representative of the shareholders' risk-exposure and the Group's ability to cover the SCR with eligible own funds and aligns with management's approach to dynamically manage its capital position. In arriving at the shareholder position, the following adjustments are typically made to the regulatory Solvency II position:

· The contribution to the Group's SCR and own funds of the most material fully ring fenced with-profits funds and staff pension schemes in surplus are excluded. These exclusions have no impact on Solvency II surplus as these funds are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised.

· A notional reset of the transitional measure on technical provisions (TMTP), calculated using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The 31 December 2019 position is based on a formal reset of the TMTP, in line with the requirement to reset the TMTP at least every two years and hence no adjustment is required. The TMTP is amortised on a straight-line basis over 16 years from 1 January 2016 in line with the Solvency II rules.

· Pro forma adjustments are made if the Solvency II shareholder cover ratio does not fully reflect the effect of transactions or capital actions that are known as at each reporting date. Such adjustments may be required in respect of planned acquisitions and disposals, group reorganisations and adjustments to the Solvency II valuation basis arising from changes to the underlying regulations or updated interpretations provided by EIOPA. These adjustments are made in order to show a more representative view of the Group's solvency position.

A reconciliation of the Solvency II regulatory surplus to the Solvency II shareholder surplus is provided below:

2019	Own funds 2019 £m	SCR 2019 £m	Surplus 2019 £m
Estimated Solvency II regulatory surplus	28,347	(15,517)	12,830
Adjustments for:
Fully ring-fenced with-profit funds	(2,501)	2,501	-
Staff pension schemes in surplus	(1,181)	1,181	-
Notional reset of TMTP	-	-	-
Pro forma adjustments1	(117)	(75)	(192)
Estimated Solvency II shareholder surplus	24,548	(11,910)	12,638

1   The 31 December 2019 Solvency II position includes three pro forma adjustments that relate to the disposal of FPI (£nil impact on surplus), the disposal of Hong Kong (£nil impact on surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion decrease in surplus as a result of an increase in SCR).

2018	Own funds 2018 £m	SCR 2018 £m	Surplus 2018 £m
Estimated Solvency II regulatory surplus	27,567	(15,339)	12,228
Adjustments for:
Fully ring-fenced with-profit funds	(2,634)	2,634	-
Staff pension schemes in surplus	(1,142)	1,142	-
Notional reset of TMTP	(127)	-	(127)
Pro forma adjustments1	(113)	(6)	(119)
Estimated Solvency II shareholder surplus	23,551	(11,569)	11,982

1   The 31 December 2018 Solvency II position includes the pro forma impact of the disposals of FPI (£0.1 billion increase in surplus) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£0.2 billion reduction in surplus as a result of an increase in SCR).

A summary of the shareholder view of the Group's Solvency II position is shown in the table below:

	2019 £m	2018 £m
Own Funds	24,548	23,551
Solvency Capital Requirement	(11,910)	(11,569)
Estimated Solvency II Shareholder Surplus at 31 December	12,638	11,982
Estimated Shareholder Cover Ratio	206%	204%

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Value of new business on an adjusted Solvency II basis (VNB)‡

VNB measures the additional value to shareholders created through the writing of new life business in the period. It reflects Solvency II assumptions and allowance for risk, and is defined as the increase in Solvency II own funds resulting from life business written in the period, including the impact of interactions between in-force and new business, adjusted to:

· remove the impact of the contract boundary restrictions under Solvency II;

· include businesses which are not within the scope of Solvency II own funds (e.g. UK and Asia Healthcare, Retail fund management and UK equity release); and

· reflect a gross of tax and non-controlling interests basis, include the impact of 'look through profits' in service companies (where not included in Solvency II) and reflect the difference between locally applicable capital requirements for the smaller Asian markets (Indonesia, Vietnam, Hong Kong) and the value of new business on an adjusted Solvency II basis.

A reconciliation between VNB and the Solvency II own funds impact of new business is provided below:

2019	UK £m	Europe £m	Asia & Other £m	Group £m
VNB (gross of tax and non-controlling interests)	592	414	218	1,224
Solvency II contract boundary restrictions - new business	(71)	(148)	(45)	(264)
Solvency II contract boundary restrictions - increments / renewals on in-force business	98	73	25	196
Businesses which are not in the scope of Solvency II own funds	(138)	(1)	(19)	(158)
Tax and Other1	(100)	(171)	(68)	(339)
Solvency II own funds impact of new business (net of tax and non-controlling interests)	381	167	111	659

20181 Restated	UK £m	Europe £m	Asia & Other £m	Group £m
VNB (gross of tax and non-controlling interests)	481	517	204	1,202
Solvency II contract boundary restrictions - new business	(51)	(131)	(31)	(213)
Solvency II contract boundary restrictions - increments / renewals on in-force business	126	83	21	230
Businesses which are not in the scope of Solvency II own funds	(117)	(4)	(36)	(157)
Tax and Other1	(92)	(212)	(69)	(373)
Solvency II own funds impact of new business (net of tax and non-controlling interests)	347	253	89	689

1   Other includes the impact of 'look through profits' in service companies (where not included in Solvency II) of £(78) million (2018: £(63) million), the reduction in value when moving to a net of non-controlling interests basis of £(57) million (2018: £(81) million) and the difference between locally applicable capital requirements for the smaller Asian markets (Indonesia, Vietnam, Hong Kong) and the value of new business on an adjusted Solvency II basis of £(37) million (2018 restated: £(46) million).

The methodology underlying the calculation of VNB remains unchanged from the prior year. For 2018, new business written contributed to the calculation of the UK Life's transitional measures (in line with the clarification issued by the PRA in 2017), but this is no longer applicable to the Group in 2019.

VNB is calculated using economic assumptions as at the point of sale, taken as those appropriate to the start of each quarter. For contracts that are repriced more frequently, weekly or monthly economic assumptions have been used. The economic assumptions follow Solvency II rules for risk-free rates, volatility adjustment and matching adjustment. The operating assumptions are consistent with the Solvency II balance sheet, when these assumptions are updated, the year-to-date VNB will capture the impact of the assumption change on all business sold that year.

Matching Adjustment (MA)

A MA is applied to certain obligations based on the expected allocation of assets backing new business at each year-end date. This allocation may be different to the MA applied at the portfolio level. Aviva applies a MA to certain obligations in UK Life, using methodology which is set out in the Solvency and Financial Condition Report.

The matching adjustment used for 2019 UK new business (where applicable) was 95 bps (2018: 105 bps).

New business margin

New business margin is calculated as value of new business on an adjusted Solvency II basis (VNB) divided by the present value of new business premiums (PVNBP) and expressed as a percentage.

Present value of new business premiums (PVNBP)

PVNBP measures sales in the Group's life insurance business. PVNBP is derived from the present value of new regular premiums expected to be received over the term of the new contracts plus 100% of single premiums from new business written in the financial period and is expressed at the point of sale. The discounted value of regular premiums is calculated using the same methodology as for VNB. PVNBP also includes any changes to existing contracts which were not anticipated at the outset of the contract that generate additional shareholder risk and associated premium income of the nature of a new policy.

The table below presents a reconciliation of sales to IFRS net written premiums:

	2019 £m	2018 £m
Present value of new business premiums	45,665	40,763
Investment sales	4,621	4,799
General insurance and health net written premiums	10,224	9,968
Long-term health and collectives business	(3,563)	(3,840)
Total sales	56,947	51,690
Effect of capitalisation factor on regular premium long-term business1	(15,294)	(12,726)
JVs and associates2	(286)	(257)
Annualisation impact of regular premium long-term business3	(327)	(247)
Deposits4	(10,917)	(10,329)
Investment sales5	(4,621)	(4,799)
IFRS gross written premiums from existing long-term business6	5,057	4,776
Long-term insurance and savings business premiums ceded to reinsurers	(2,879)	(1,775)
Total IFRS net written premiums	27,680	26,333
Analysed as:
Long-term insurance and savings net written premiums	17,456	16,365
General insurance and health net written premiums	10,224	9,968
	27,680	26,333

1   Discounted value of regular premiums expected to be received over the term of the new contract, adjusted for expected levels of persistency.

2   Total long-term new business sales include our share of sales from joint ventures and associates. Under IFRS, premiums from these sales are excluded.

3   The impact of annualisation is removed in order to reconcile the non-GAAP new business sales to IFRS premiums.

4   Under IFRS, only the margin earned from non-participating investment contracts is recognised in the IFRS income statement.

5   Investment sales included in total sales represent the cash inflows received from customers investing in mutual fund type products such as unit trusts and OEICs.

6   The non-GAAP measure of sales focuses on new business written in the period under review while the IFRS income statement includes premiums received from all business, both new and existing.

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Operating capital generation (OCG)‡#

OCG measures the amount of Solvency II capital the Group generates from operating activities and incorporates an expected return on investments supporting the life and non-life insurance businesses. The Group considers this measure meaningful to stakeholders as it enhances the understanding of the Group's operating performance over time by separately identifying non-operating items. The calculation of OCG is consistent with previous periods.

The expected investment returns assumed within OCG are consistent with the returns used for Group adjusted operating profit.

OCG includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, the effect of changes in non-economic assumptions (for example, longevity), model changes that are non-economic in nature and the impact of capital actions, for example, strategic changes in asset mix including changes in hedging exposure. Consistent with the Group adjusted operating profit APM, OCG is determined on start of period economic assumptions and therefore excludes economic variances and economic assumption changes.

An analysis of the components of OCG is presented below, including an analysis of Solvency II operating own funds generation which is the own funds component of OCG (see the section below):

	2019 £m	2018 £m
Solvency II own funds impact of new business (net of tax and non-controlling interests)	659	689
Operating own funds generation from Life existing business	507	835
Operating own funds generation from non-life	431	299
Other own funds generation1	944	497
Group debt costs	(284)	(298)
Solvency II operating own funds generation	2,257	2,022
Solvency II operating SCR impact	2	1,176
Solvency II OCG	2,259	3,198

1      Other includes the impact of capital actions and non-economic assumption changes.

OCG is a key component of the movement in Solvency II shareholder surplus. The tables below provide an analysis of the change in Solvency II shareholder surplus.

2019 Shareholder view	Own funds 2019 £m	SCR 2019 £m	Surplus 2019 £m
Group Solvency II shareholder surplus at 1 January	23,551	(11,569)	11,982
Operating capital generation	2,257	2	2,259
Non-operating capital generation	178	(362)	(184)
Dividends1	(1,222)	-	(1,222)
Share buy-back	-	-	-
Hybrid debt repayments	(210)	-	(210)
Acquired/divested business	(6)	19	13
Estimated Solvency II shareholder surplus at 31 December	24,548	(11,910)	12,638

1   Dividends includes £17 million (2018: £17 million) of Aviva plc preference dividends and £21 million (2018: £21 million) of General Accident plc preference dividends.

2018 Shareholder view	Own funds 2018 £m	SCR 2018 £m	Surplus 2018 £m
Group Solvency II shareholder surplus at 1 January	24,737	(12,506)	12,231
Operating capital generation	2,022	1,176	3,198
Non-operating capital generation	(777)	(231)	(1,008)
Dividends1	(1,166)	-	(1,166)
Share buy-back	(600)	-	(600)
Hybrid debt repayments	(875)	-	(875)
Acquired/divested business	210	(8)	202
Estimated Solvency II shareholder surplus at 31 December	23,551	(11,569)	11,982

1   Dividends includes £17 million (2018: £17 million) of Aviva plc preference dividends and £21 million (2018: £21 million) of General Accident plc preference dividends.

Solvency II future surplus emergence

Solvency II future surplus emergence is a projection of the capital generation from existing long-term in-force life business. The projection is a static analysis as at a point in time and hence it does not include the potential impact of future new business or the potential impact of active management of the business (for example, active management of market, demographic and expense risk through investment, hedging, risk transfer, operational risk and expense management), which may affect the actual amount of OCG earned from existing business in future periods.

For business subject to short contract boundaries under Solvency II, allowance has been made for the impact of renewal premiums as and when they are expected to occur.

The projected surplus, which is primarily expected to arise from the release of risk margin (including transitional measures) and solvency capital requirement as the business runs off over time, is expected to emerge through OCG in future years. The cash flows are real-world cash flows, i.e. they are based on best estimate non-economic assumptions used in the Solvency II valuation and real-world investment returns rather than risk-free. The expected investment returns are consistent with the returns used in IFRS.

Operating own funds generation

Operating own funds generation measures the amount of Solvency II own funds generated from operating activities. Operating own funds generation is the own funds component of OCG and follows the methodology and assumptions outlined in OCG.

Solvency II Return on Equity (RoE)‡

Solvency II ROE is calculated as:

· Operating own funds generation less preference dividends, direct capital instrument (DCI) and tier 1 note coupons divided by;

· Opening value of unrestricted tier 1 shareholder own funds

Unrestricted tier 1 shareholder own funds represents the highest quality tier of capital and includes instruments with principal loss absorbing features such as permanence, subordination, undated, absence of redemption incentives, mandatory costs and encumbrances. The tables below provide a summary of the Group's regulatory Solvency II own funds by tier and a reconciliation between unrestricted tier 1 regulatory own funds and unrestricted tier 1 shareholder own funds:

Regulatory view	2019 £m	2018  £m
Unrestricted regulatory tier 1 own funds	20,377	19,312
Restricted Tier 1	1,839	2,096
Tier 2	5,794	5,811
Tier 31	337	348
Estimated Solvency II regulatory own funds2	28,347	27,567

1   Tier 3 regulatory own funds at 31 December 2019 consists of £259 million subordinated debt(2018: £253 million) plus £78 million net deferred tax assets (2018: £95 million).

2   Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excedents (PPE) into Solvency II own funds. The PPE has been included in the France local regulatory own funds in 2019 but it is not included in the Group regulatory own funds.

Shareholder view	2019 £m	2018  £m
Unrestricted regulatory tier 1 own funds	20,377	19,312
Adjustments for:
Fully ring-fenced with-profit funds	(2,501)	(2,634)
Staff pension schemes in surplus	(1,181)	(1,142)
Notional reset of TMTP	-	(127)
Pro forma adjustments1	(117)	(113)
Unrestricted shareholder tier 1 own funds	16,579	15,296

1   The 31 December 2019 Solvency II position includes two pro forma adjustments that relate to the disposalof FPI (£0.1 billion reduction in own funds) and the disposal of Hong Kong (£nil impact on own funds). The 31 December 2018 Solvency II position includes the pro forma impact of the disposal of FPI (£0.1 billion reduction in own funds).

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Solvency II RoE provides useful information as it is used as an economic value measure by the Group to assess growth and performance.

The Solvency II return on equity is shown below:

	2019 £m	2018 £m
Solvency II operating own funds generation	2,257	2,022
Less preference share dividends	(38)	(38)
Less DCI and tier 1 note coupons	(34)	(36)
	2,185	1,948
Opening Unrestricted tier 1 shareholder Solvency II own funds	15,296	15,550
Solvency II Return on Equity	14.3%	12.5%

Solvency II return on capital (unlevered)

Solvency II return on capital (unlevered) is calculated as operating own funds generation excluding interest costs divided by opening shareholder Solvency II own funds. It is used as an economic value measure by business divisions to assess growth and performance.

Solvency II net asset value (NAV) per share‡

Solvency II NAV per share is used to monitor the value generated by the Group in terms of the equity shareholders' face value per share investment. This is calculated as the unrestricted tier 1 Solvency II shareholder own funds, divided by the actual number of shares in issue as at the balance sheet date. Consistent with Solvency II ROE, it is an economic value measure used by the Group to assess growth.

The Solvency II NAV per share is shown below:

	2019	2018
Unrestricted tier 1 shareholder Solvency II own funds (£m)	16,579	15,296
Number of shares in issue at 31 December (in millions)	3,921	3,902
Solvency II NAV per share	423p	392p

Solvency II debt leverage ratio

Solvency II debt leverage ratio is calculated as Solvency II debt expressed as a percentage of Solvency II regulatory own funds plus senior debt and commercial paper. Where Solvency II debt includes subordinated debt, preference share capital and direct capital instrument and tier 1 notes. The Solvency II debt leverage ratio provides a measure of the Group's financial strength.

	2019 £m	2018  £m
Solvency II regulatory debt	7,892	8,160
Senior notes	1,052	1,113
Commercial paper	238	251
Total Solvency II debt	9,182	9,525
Estimated Solvency II regulatory own funds, senior debt and commercial paper	29,637	28,931
Solvency II debt leverage	31%	33%

A reconciliation from IFRS subordinated debt to Solvency II regulatory debt is provided below:

	2019 £m	2018 £m
IFRS borrowings	9,067	9,420
Less: borrowings not classified as Solvency II regulatory debt
Senior notes	(1,052)	(1,113)
Commercial paper	(238)	(251)
Operational borrowings	(1,571)	(1,721)
Less: Amounts held by Group Companies	-	5
IFRS subordinated debt	6,206	6,340
Revaluation of subordinated liabilities	716	649
Other movements	20	(10)
Solvency II subordinated debt	6,942	6,979
Preference share capital, deferred capital instrument and tier 1 notes	950	1,181
Solvency II regulatory debt	7,892	8,160

Other APMs

Cash remittances‡ #

Cash paid by our operating businesses to the Group, comprised of 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.

Cash remittances eliminate on consolidation and hence are not directly reconcilable to the Group's IFRS consolidated statement of cash flows.

Centre liquidity

Centre liquidity represents cash remitted by the business units to the Group centre less centre operating expenses and debt financing costs. It includes cash disposal proceeds and capital injections. This provides meaningful information because it shows the liquidity at the Group centre available to meet debt interest and central costs and to pay dividends to shareholders.

Excess centre cash flow

This represents the cash remitted by business units to the Group centre less central operating expenses and debt financing costs. Excess centre cash flow is a measure of the cash available to pay dividends, reduce debt or invest back into our business. Excess centre cash flow does not include cash movements such as disposal proceeds or capital injections.

These amounts eliminate on consolidation and hence are not directly reconcilable to the Group's IFRS consolidated statement of cash flows.

Annual Premium Equivalent (APE)

APE is a measure of sales in our life insurance business. APE is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period. This provides useful information on sales and new business when considered alongside VNB.

Operating expense ratio

The operating expense ratio expresses expenses as a percentage of operating income.

Operating income is calculated as Group adjusted operating profit before Group debt costs and operating expenses.

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Spread margin

The spread margin represents the return made on the Group's annuity and other non-linked business, based on the expected investment return, less amounts credited to policyholders. While not a key performance metric of the Group, the spread margin is a useful indicator of the expected investment return arising on this business.

Underwriting margin

The underwriting margin represents the release of reserves held to cover claims, surrenders and administrative expenses less the cost of actual claims and surrenders in the period.

Unit-linked margin

The unit-linked margin represents the annual management charges on unit-linked business. This is an indicator of the return arising on this business.

END PART 5 of 5

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