Aviva 2014 Annual Report Download - page 33

Solvency II
Next year we expect to report our
economic capital surplus on a Solvency II
basis, which comes into effect from
1 January 2016. We continue to work
with regulators on the application of
Solvency II principles to our business, and
will submit our Group internal model for
formal regulatory review in June this year.
Friends Life will be on a standard formula
basis for reporting under Solvency II from
year end 2015. Once Friends Life becomes
part of Aviva, we will begin transitioning
Friends to our internal model.
As we have said previously, there
remains uncertainty regarding certain
signicant issues under Solvency II
regulations and their interpretation by
regulators. Our reported economic capital
surplus and its composition may differ
under Solvency II from the current
regulatory regime. Regardless, we are
currently managing the Group taking into
account our understanding of how
Solvency II principles are likely to apply
from 2016 onwards.
Leverage
In 2014, we made meaningful progress in
bringing leverage down to desired levels.
In the rst half of the year we called
£240 million of debt instruments with
coupons in excess of 10% without
renancing.
The lower interest rate environment
and better nancial position of the Group
allowed us to raise €700 million of Lower
Tier 2 subordinated debt with a 3.875%
coupon. In Q4 2014, we called a
€700 million Direct Capital Instrument
(DCI) with a 4.7291% coupon.
Lower debt coupled with growth in
our net asset value has resulted in our
leverage ratios falling to 28% (2013: 31%)
on an S&P basis and 41% (2013: 48%) of
tangible capital on an IFRS basis. Following
the integration of Friends Life, we see no
need to further de-lever. However, there is
still further opportunity to optimise our
capital structure and nancing costs.
We continue to reduce the
intercompany loan that exists between our
main UK general insurance legal entity,
Aviva Insurance Limited, and the Group.
The loan balance is currently £2.8 billion
and we remain on track to achieve our
objective of reducing this to £2.2 billion by
the end of 2015.
Summary
Considering Aviva’s overall turnaround in
terms of capital, liquidity and internal and
external leverage together, the Group has
made substantial progress in improving its
nancial exibility over the last two years.
At the end of 2012, Aviva was reliant on
expected proceeds from divestitures, with
just £5.3 billion in economic capital
surplus, low liquidity at the centre, lower
excess centre cash ow from operations, a
£5.8 billion intercompany loan balance,
and external debt leverage approximating
50%. Entering 2015 we are much
stronger on all these measures, our nal
dividend has been increased 30% to
12.25p per share, and we are looking
forward to completing the proposed
acquisition of Friends Life, which we
expect to close in the second quarter of
the year.
Our challenge in 2015 through
2017 is to develop our capabilities
around the True Customer
Composite and Digital First, and
shift towards investing in growth.
—
Tom Stoddard
CFO
IFRS prot before tax
This measures our total statutory IFRS prot
before tax attributable to shareholders
during the year.
It includes operating prot, as well as
non-operating items such as restructuring
costs, impairments, investment variances
and prots or losses arising on disposals.
Total prot before tax of £2,339
million includes £2,281 million from
continuing operations and £58 million
from discontinued operations.
Operating prot performance in the
year is set out on page 10.
On a continuing basis, non-operating
items contributed £108 million to total
prot (2013: £768 million loss). The two
main reasons for the improvement are
lower integration and restructuring costs
and positive investment variances
(2013: negative variances).
Integration and restructuring costs of
£140 million (2013: £363 million) are
£223million lower due to a signicant
reduction in transformation spend. 2014
costs primarily relate to preparation for
SolvencyII.
Total investment variances and
economic assumption changes were
£188million positive (2013: £352 million
adverse). In the non-life business this
included positive short-term uctuations of
£261 million, mainly due to a decrease in
risk-free rates increasing xed income
security market values in the UK, Canada
and France. Economic assumption changes
were £145 million adverse as a result of
lower discount rates. In the life business,
investment return variances were
£72million positive, mainly driven by
lowerrisk free rates and narrowing credit
spreads on government and corporate
bonds in Italy and Spain.
Prot before tax from discontinued
operations was £58 million (2013: £1,273
million) and relates to our US Life and
related internal asset management
businesses.
2014
£2,339m prot
2013
£2,819m
prot
2012
£(2,521)m
loss
Strategic report
Aviva plc Annual report and accounts 2014 |29