Aviva 2014 Annual Report Download - page 32

Along with the contribution from prots,
the IFRS net asset value was boosted by a
45p increase in our pension surplus, as
measured on an IAS 19 basis. We manage
our staff pension scheme on a funding
basis, not an IAS 19 basis, which means
we hold higher technical provisions for
funding and hedge on that basis, which
introduces potential volatility into our IAS
19 reporting. The large increase in our IAS
19 pension surplus reported this year is
largely attributable to a combination of
wider credit spreads and lower interest
rates. This could reverse in the future.
Prior to the declaration of our 2014
nal dividend, our economic capital
surplus4 increased marginally to
£8.4 billion (2013: £8.3 billion), with a
coverage ratio of 182% (2013: 182%), and
is £8.0 billion after the early declaration of
our nal dividend, which we announced
on 2 December 2014 coincident with the
proposed Friends Life acquisition. The
coverage ratio is 178% after deducting the
accrual of the nal dividend, which was
reasonably foreseeable at year end. We
have also improved our modelling and
methodology to improve the quality of our
estimate of economic capital surplus
during the year.
IGD surplus was stable at £3.6 billion
prior to the declaration of our 2014 nal
dividend (2013: £3.6 billion) and reduced
to £3.2 billion after. The redemption of
hybrid debt during the year reduced our
surplus by £0.2 billion.
Liquidity at Group centre is £1.1 billion as
at the end of February 2015 (February 2014:
£1.6 billion), and within our risk appetite.
External and internal debt reduction, pension
contributions, external dividends and the
capitalisation of our internal reinsurance
company offset remittances received from
businesses and disposal proceeds.
business (VNB) of £482 million is at
year-on-year, as increased VNB from equity
release, bulk purchase annuities and
protection offset the lower contribution
from individual annuities following the
regulatory changes announced in March
2014. Throughout the year we have also
taken steps to improve the quality of our
asset portfolio, reducing exposure to
certain non-core property assets.
Our UK & Ireland general insurance
business has improved its combined
operating ratio (COR) by 2.3 percentage
points to 94.9% (2013: 97. 2%) and
increased its underwriting prot 66% to
£204 million (2013: £123 million). Net
written premium declined 4% to
£3,935 million but most of this reduction
occurred in the earlier part of the year.
Our UK commercial book showed
signicant improvement, with the COR
improving to 92.8% (2013: 102.9%) as we
completed portfolio actions to improve the
quality of our commercial motor book and
reserves developed more favourably
relative to the prior year.
Italy was the stand-out performer of
our European businesses. Cash increased
167% to £32 million, VNB6 was 55%7
higher at £63 million (2013: £43 million)
and the COR improved 1.2 percentage
points to 94.0% (2013: 95.2%). Operating
prot was 2% higher at £172 million
(2013: £169 million). Good execution of a
major restructure has helped improve the
performance of this turnaround business.
Elsewhere in Europe, France delivered a
solid result in benign economic conditions
with operating prot of £452 million
(2013: £448 million). French VNB was
25%7 higher as we continue to improve
the business mix, focusing on unit-linked
and protection. Our Spanish business is
adapting to its smaller footprint with
operating prot of £126 million
(2013: £151 million) impacted by the
disposals of Aseval and CxG.
Growth markets of Poland, Turkey and
Asia continued their upward momentum.
Poland delivered £192 million of operating
prot (2013: £184 million), benetting
from a £39 million one-off from regulatory
pension changes. VNB grew 31%7 to
£64 million (2013: £51 million) and the
business remitted £106 million of cash to
Group. With a 25% increase in cash,
and a 31%7 increase in VNB, Poland is
a prime example of delivering cash ow
plus growth.
In Asia, our Chinese business grew
VNB 100%7 due to changes in product mix
and effective bundling. The average
product holding of our Chinese customers
is now 3.5x. In Singapore, VNB increased
23%7 to £87 million (2013: £76 million).
We are seeking to renew our distribution
agreement with DBS this year on
appropriate terms.
Our fund management segment, led by
Aviva Investors, was largely at, ending the
year with assets under management
of £246 billion and operating prot of
£86 million, as we increased operating
expenses partly in connection with new
product development and distribution
initiatives. The AIMS fund range has
started well and we are condent in this
external market proposition. The proposed
Friends Life transaction provides the
opportunity to add up to c.£70 billion
funds under management to Aviva
Investors.
Capital and liquidity
In 2014, IFRS net asset value (NAV)
increased 26% to 340p (2013: 270p) and
our Market Consistent Embedded Value
per share was 14% higher at 527p, as
shown below.
Net asset value8
IFRS MCEV
Opening NAV per share
at 31 December 2013 270p 463p
Operating profit 47p 62p
Dividends & appropriations (15)p (15)p
Investment variances and
AFS equity movements 5p (2)p
Pension scheme
remeasurements 45p 45p
Integration and
restructuring costs, goodwill
impairment and other (1)p (7)p
Foreign exchange
movements (11)p (19)p
Closing NAV per share at
31 December 340p 527p
6 Italy excludes Eurovita.
7 On a constant currency basis.
8 Net of tax and controlling interests.
Managing capital
effectively
How we allocate capital is vital to
delivering our investment thesis of ‘cash
ow plus growth’. We invest in order to
optimise returns and future cash ows,
while maintaining sufcient
diversication to withstand the impact
of any unforeseen events.
We have exited businesses that were
capital inefcient or subscale but there
remains more to do to improve overall
return on capital. The proposed
acquisition of Friends Life should provide
greater nancial exibility to drive
growth in the rest of the Group.
£692m
(2013: £420m)
excess centre cash ow
65%
increase
28 | Aviva plc Annual report and accounts 2014
Chief Financial Ofcer’s review continued