Aviva Regulatory News (AV.)

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Contents

As a reminder

Throughout this report we use a range of financial metrics to measure our performance and financial strength. These metrics include Alternative Performance Measures (APMs), which are non-GAAP measures that are not bound by the requirements of IFRS and Solvency II. Further guidance in respect of the APM's used by the Group, including a reconciliation to the financial statements (where possible), can be found within the Other Information section.

All references to 'Operating profit' represent 'Group adjusted operating profit'.

‡ denotes APMs which are key performance indicators. Following a review of the Group's APM's in 2019, we have made certain changes to ensure that they remain relevant and useful to shareholders. These changes are outlined within the Other Information section.

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

All percentages, including currency movements, are calculated on unrounded numbers so minor rounding differences may exist.

Following the announcement at the November 2019 Capital Markets Day, Section 6.i - UK Life and Investments, Savings & Retirement includes additional disclosures on the Savings & Retirement business.

A glossary explaining key terms used in this report is available on www.aviva.com/glossary

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Profit

Capital Position

Dividend

Solvency II basis: Operating capital generation (OCG)‡# and Cash remittances‡#

Solvency II basis: Operating own funds generation and Return on capital/equity‡

Controllable costs‡

Value of new business: Adjusted Solvency II basis (VNB)‡ and Present value of new business premiums (PVNBP)

General insurance combined operating ratio (COR)‡ and Net written premiums (NWP)

‡ Denotes Alternative Performance Measures (APMs) which are key performance indicators of the Group. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

# Denotes key performance indicators which are used by the Group to determine or modify remuneration. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

1 On 31 December 2019 the Group adjusted operating profit APM was 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). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in a reduction in the prior period Group adjusted operating profit of £62 million. There is no impact on profit before tax attributable to shareholders' profit. Following the change in the definition of Group adjusted operating profit, COR, controllable costs and operating earnings per share were also restated to include the amortisation and impairment of internally generated intangible assets. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in an increase in prior period COR of 0.9%, an increase in prior period controllable costs of £62 million and a reduction in prior period operating earnings per share of 1.2 pence.

2 Group adjusted operating profit is a non-GAAP APM which is not bound by the requirements of IFRS. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the 'Other information' section of the Analyst Pack.

4 The estimated Solvency II position represents the shareholder view only. See section 3 for more details.

5 Includes Group centre, debt costs and other items not allocated to the markets.

6 Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £41 million for the 6 month period ended 30 June 2019 and £83 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to the Life & Health businesses from the UK, Ireland and Poland in controllable costs.

7 Group includes Asia & Other net written premiums of £7 million (HY19: £7 million, 2019: £13 million).

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1 - Solvency II return on capital/equity‡

Solvency II return on capital/equity was introduced at our Capital Markets Day in November 2019 to measure return generated on shareholder capital at business division and Group level and is used by the Group to assess performance and growth, as we look to deliver long-term value for our shareholders.

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

2 Preference shares includes £9 million of dividends and £250 million of capital in respect of General Accident plc.

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

2 Preference shares included £9 million of dividends and £250 million of capital in respect of General Accident plc.

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1 - Solvency II return on capital/equity‡ continued

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

2 Preference shares included £21 million of dividends and £250 million of capital in respect of General Accident plc.

In line with targets presented at Capital Markets Day (and how capital is managed by the business), we have presented a combined Solvency II return on capital for the UK Life and Investments, Savings & Retirement business divisions.

Solvency II return on equity has decreased by 3.9pp to 7.1% (HY19: 11.0%), primarily due to:

· In UK Life and Investments, Savings & Retirement, return on capital has reduced by 1.5pp to 5.0% (HY19: 6.5%) and own funds generation has reduced by £93 million to £356 million. Improved new business operating own funds generation as a result of increased bulk purchase annuity volumes and higher margins was more than offset by less benefit from management actions on own funds in the first half of 2020 and reduced fee income from Aviva Investors.

· In the General Insurance business division, return on capital has reduced by 5.3pp to 8.0% (HY19: 13.3%) and own funds generation has reduced by £104 million to £194 million mainly due to a £153 million reduction driven by the impact of COVID-19 which resulted in additional claims on business interruption and travel lines, partly offset by reduced motor claims. In the UK there is also a reduction due to higher weather costs compared to the prior period and adverse prior year reserve developments. This is partially offset by strong underlying performance in Canada where benefits from the extensive profit remediation plan put in place towards the end of 2017 are materialising.

· In the Europe Life business division, return on capital has reduced by 3.9pp to 7.1% (HY19: 11.0%) and own funds generation has reduced by £87 million to £217 million. The reduction is primarily due to lower new business volumes reflecting managed reductions in with-profit volumes as well as a reduction due to the impacts of COVID-19 on trading and less benefit from management actions than the first half of 2019 which included favourable modelling and assumption changes in Italy.

· In the Asia Life business division, return on capital has increased by 2.3pp to 12.7% (HY19: 10.4%) and own funds generation has increased by £21 million to £97 million. The strong growth was primarily driven by improvements to morbidity experience on health business and lapse experience on protection business in Singapore.

· In addition, the return on equity has reduced by a further 0.9pp due to the higher opening own funds for 2020 which were driven by strong own funds generation in excess of dividends and debt repayments during 2019.

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2 - Solvency II capital and cash

2.i - Operating capital generation: Solvency II basis‡#

Solvency II operating capital generation (OCG) measures the amount of Solvency II capital the Group generates from operating activities. Capital generated enhances Solvency II surplus which can be used to support sustainable cash remittances from our business, which in turn, supports the Group's progressive dividend policy.

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

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

2 Following a review of the presentation of intercompany loan interest, comparative amounts for the 6 months ended 30 June 2019 have been amended to reclassify net interest expense from UK Life and Investments, Savings & Retirement to Group centre costs and Other of £34 million as a non-operating item. The change has no impact on the Group's operating capital generation.

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

2 Following a review of the presentation of intercompany loan interest, comparative amounts for the 12 months ended 31 December 2019 have been amended to reclassify net interest expense from UK Life and Investments, Savings & Retirement to Group centre costs and Other of £69 million as a non-operating item. The change has no impact on the Group's operating capital generation.

Solvency II OCG was £890 million for the 6 months ended 30 June 2020 (HY19: £780 million).

UK Life and Investments, Savings & Retirement OCG has increased by £59 million to £581 million for the 6 months ended 30 June 2020, primarily due to improved new business strain as a result of higher margins on annuity business and also a capital action to change the mix of business included in our internal reinsurance vehicle. The increase is partially offset by a reduction in earnings from existing business and a reduced contribution from Aviva Investors.

General Insurance OCG has reduced by £53 million to £163 million for the 6 months ended 30 June 2020, driven by the impact of COVID-19 which resulted in additional claims on business interruption and travel lines and an increase in solvency capital requirement which were partly offset by reduced motor claims. There was a further reduction to OCG due to higher weather costs compared to the prior period and adverse prior year reserves development in the UK partially offset by a strong performance in Canada as a result of rate increases and actions on indemnity management taken as part of the profit remediation plan.

Europe Life OCG has increased by £140 million to £464 million due to an increase in Other OCG in the 6 months ended 30 June 2020, primarily as a result of strategic asset allocation, de-risking and hedging activity in France, Ireland and Italy to protect the capital position against further adverse economic movements in the current market environment.

Asia Life OCG has increased by £25 million to £43 million primarily due to improvements in morbidity experience on health business and lapse experience on protection business in Singapore.

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2.ii - Cash remittances‡#

The table below reflects actual remittances received by the Group from our businesses, comprising dividends and interest on internal loans. Cash remittances are eliminated on consolidation and hence are not directly reconcilable to the Group's IFRS statement of cash flows.

1 We use a wholly-owned, UK domiciled reinsurance subsidiary for internal capital and cash management purposes. Some remittances otherwise attributable to the operating businesses arise from this internal reinsurance vehicle.

2 2019 General Insurance cash remittances include £83 million received from UK General Insurance and £141 million received from Canada in February 2020 in respect of 2019 activity.

A cautious approach on cash remittances is being taken across the Group with markets retaining cash rather than remitting to the Group in the wake of the unprecedented challenges the COVID-19 pandemic presents for businesses, households and customers, and the adverse and highly uncertain impact on the global economy.

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3 - Solvency II position

3.i - Solvency II position (shareholder view)

The estimated Solvency II shareholder cover ratio is 194% at 30 June 2020. The Solvency II position disclosed is based on a 'shareholder view'. The shareholder view is considered by management to be more representative of the shareholders' risk exposure and the Group's ability to cover the solvency capital requirement 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 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 of £2.4 billion at 30 June 2020 (2019: £2.5 billion) and staff pension schemes in surplus of £1.1 billion at 30 June 2020 (2019: £1.2 billion) 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 change in regulations announced in December 2019 allows French insurers to place a part of the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. At December 2019 PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory and shareholder own funds, subject to confirmation of the appropriate treatment at Group level. The treatment has since been confirmed and PPE of £0.4 billion is included within Group regulatory own funds at 30 June 2020 but remains excluded from the shareholder position.

· 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 30 June 2020 Solvency II position includes a notional reset (£0.2 billion increase in surplus) while the 31 December 2019 Solvency II position included a formal, rather than notional, reset of the TMTP in line with the regulatory requirement to reset the TMTP at least every two years and hence no adjustment was required.

· The 30 June 2020 Solvency II position includes the following pro forma adjustments: the disposals of Friends Provident International Limited (FPI), Hong Kong and Indonesia (total impact of £0.1 billion increase in surplus), 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), and an adjustment for potential future corporate bond credit rating downgrades, equivalent to a full letter downgrade on 10% of BBB rated bonds and 5% on bonds rated A and above, in our UK annuity portfolio (£0.1 billion decrease in surplus as a result of an increase in SCR). Even though actual downgrades to our portfolio to date, already incorporated in our Solvency II surplus, has been minimal (£35 million reduction to surplus), this allowance reflects continued uncertainty in the external environment as a result of the COVID-19 pandemic. We will look to realign to actual observed experience within the current financial year. The 31 December 2019 Solvency II position includes the pro forma adjustments for the disposals of FPI (£nil impact on surplus) and 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 reduction in surplus as a result of an increase in SCR).

1 Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. At 31 December 2019 PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory own funds, subject to confirmation of the appropriate treatment at Group level. The treatment has since been confirmed and PPE is included estimated Group regulatory own funds at 30 June 2020.

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3.ii - Movement in Solvency II surplus

1 Opening restatements allows for adjustments to the estimated position presented in the preliminary announcement and the final position in the SFCR.

2 Dividends includes £9 million (HY19: £9 million, 2019: £17 million) of Aviva plc preference dividends and £10 million (HY19: £10 million, 2019: £21 million) of General Accident plc preference dividends.

The estimated Solvency II surplus is £11,952 million at 30 June 2020 (2019: £12,638 million), with a shareholder cover ratio of 194% (2019: 206%). The reduction in surplus of £686 million since 31 December 2019 is mainly due to the adverse impact of £(1.5) billion from non-operating capital generation partially offset by operating capital generation of £890 million over the period.

Non-operating capital generation is primarily due to significant falls in interest rates and equity markets, as well as widening credit spreads, as a result of the global economic downturn driven by the COVID-19 pandemic.

At 30 June 2019 and 31 December 2019 we included a specific allowance for the possible adverse impacts of the UK's exit from the European Union on UK commercial and residential property, which we have now removed. Our future property growth assumptions are updated on a quarterly basis and as at 30 June 2020 they include a cumulative 5-year growth rate assumption, from 2020-24 of ‑15% for UK commercial property and a 12% reduction followed by long-term growth rate for residential property.

3.iii - Diversified SCR analysis

The SCR has increased by £0.8 billion to £12.7 billion since 31 December 2019. The change in risk profile is predominantly driven by the economic downturn as a result of the impact of the COVID-19 pandemic during 2020. Interest rate risk increased by £0.7 billion primarily due to the significant reduction in interest rates over the period. This is partly offset by equity risk which has reduced by £0.2 billion due to the reduced exposure as a result of market falls over the period.

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3.iv - Solvency II sensitivities

Sensitivity analysis of Solvency II surplus

The following sensitivity analysis of Solvency II surplus allows for any consequential impact on the assets and liability valuations. All other assumptions remain unchanged for each sensitivity, except where these are directly affected by the revised economic conditions or where a management action that is allowed for in the SCR calculation is applicable for that sensitivity. For example, future bonus rates are automatically adjusted to reflect sensitivity changes to future investment returns.

TMTP are assumed to be recalculated in all sensitivities where its impact would be material.

All sensitivities are additional to the 30 June 2020 base shareholder solvency position shown in note 3(i). The table below shows the absolute change in cover ratio under each sensitivity, e.g. a 2% positive impact would result in a cover ratio of 196%.

1 Credit spread movement for corporate bonds with credit rating A at a 10 year duration, with the other ratings and durations stressed by the same proportion relative to the solvency capital requirement.

2 A modelling refinement was implemented to the corporate bond credit sensitivities in the UK following a review of the 31 December 2019 methodology.

3 An immediate full letter downgrade on 20% of the annuity portfolio bonds (e.g. from AAA to AA, from AA to A).

4 The property sensitivities are in addition to reduced property growth assumed over the next 5 years in the base solvency position.

During the first half of the year a number of de-risking actions were implemented across most of our markets in response to the global economic downturn as a result of the COVID-19 pandemic. These include a reduction in interest rate exposures, further hedging and changes to asset allocation. This has reduced our Solvency II surplus and cover ratio sensitivity to interest rates, credit risk and equity. Market falls over the period have also reduced the exposure and hence sensitivity to equities.

Limitations of sensitivity analysis

The table above demonstrates the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analysis does not take into consideration that the Group's assets and liabilities are actively managed. Additionally, the Solvency II position of the Group may vary at the time that any actual market movement occurs. For example, the Group's financial risk management strategy aims to manage the exposure to market fluctuations.

As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocations, adjusting bonuses credited to policyholders and taking other protective action.

Other limitations in the above sensitivity analysis include the use of hypothetical market movements to demonstrate potential risk that only represent the Group's view of possible near-term market changes that cannot be predicted with any certainty and the assumption that all interest rates move in an identical fashion.

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3.v - Solvency II net asset value

1 Number of shares as at 30 June 2020: 3,928 million (HY19: 3,917 million, 2019: 3,921 million).

2 Opening restatements allows for adjustments made to the estimated position presented in the preliminary announcement and the final position in the SFCR.

3 Dividends includes £9 million (HY19: £9 million, 2019: £17 million) of Aviva plc preference dividends and £10 million (HY19: £10 million, 2019: £21 million) of General Accident plc preference dividends.

Solvency II net asset value per share decreased by 7 pence to 416 pence per share (HY19: 407 pence, 2019: 423 pence) mainly as a result of the impact of adverse market movements on non-operating capital generation and an increase in the value of subordinated liabilities due to interest falls and sterling depreciation against the Euro partly offset by operating own funds generation during the period.

3.vi - Solvency II regulatory own funds and debt leverage‡

1 Solvency II regulatory debt consists of Restricted Tier 1 and Tier 2 regulatory own funds, and Tier 3 subordinated debt.

2 Tier 3 regulatory own funds at 30 June 2019 consists of £269 million subordinated debt (HY19: £268 million, 2019: £259 million) plus £107 million net deferred tax assets (HY19: £120 million, 2019: £78 million).

3 Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excédents (PPE) into Solvency II own funds. At December 2019 PPE was included in the France local regulatory own funds but was excluded from the estimated Group regulatory own funds, subject to confirmation of the appropriate treatment at Group level. The treatment has since been confirmed and PPE is included in the estimated Group regulatory own funds at 30 June 2020.

4 Solvency II debt leverage is calculated as the total debt as a proportion of total regulatory own funds plus commercial paper and senior notes.

5 The direct capital instrument was redeemed in full at first call date on 27 July 2020.

Solvency II debt leverage has increased by 2pp to 33% (2019: 31%). This was due to an increase in debt in 2020. The increase was driven by the refinancing of the direct capital instrument prior to redemption in July, a larger holding of short-term commercial paper and adverse foreign exchange movements increasing the value of the Group's EUR and CAD denominated borrowings. Excluding the direct capital instrument solvency II debt leverage was 32%.

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4 - Controllable costs‡

1 Following the change in the definition of Group adjusted operating profit on 31 December 2019 (see note B2), controllable costs now include the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in an increase in the prior period controllable costs of £62 million.

2 Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £41 million for the 6 month period ended 30 June 2019 and £83 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to the Life & Health businesses from the UK, Ireland and Poland in controllable costs.

Controllable costs have decreased by 3% to £1,912 million (HY19 restated: £1,966 million) reflecting our focus on cost savings primarily driven by lower staff costs following a reduction in global headcount, partially offset by charitable donations made by Aviva to help those most affected by COVID-19.

The decrease in controllable costs in UK Life and General Insurance is mainly due to lower staff costs and lower project activity, partially offset by operational costs related to COVID-19 and continued investment in our IT infrastructure. The decrease in Other Group activities is mainly due to lower project spend following completion of a number of projects and deferral of certain project activities to the second half of 2020, partially offset by charitable contributions which includes a £10 million donation to our long-standing partner, the British Red Cross; a £5 million contribution to NHS Charities Together; and a £18.5 million contribution to the COVID-19 support fund established by the Association of British Insurers.

The reported controllable costs decrease of £54 million from HY19 has contributed towards £143 million of cumulative savings delivered against our 2018 baseline (£147 million on a constant currency basis).

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5 - Profit and earnings per share

1 On 31 December 2019 the Group adjusted operating profit APM was 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). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated resulting in a reduction in the prior period Group adjusted operating profit of £62 million. There is no impact on profit before tax attributable to shareholders' profit. Following the change in the definition of Group adjusted operating profit, the comparative amount for operating earnings per share for the 6 month period ended 30 June 2019 was also restated resulting in a reduction in prior period operating earnings per share of 1.2 pence.

2 Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts have been restated to reclassify net interest expense from UK Life including Savings & Retirement to Group debt costs and other interest, of £32 million for the 6 month period ended 30 June 2019 and £65 million for the year ended 31 December 2019 as a non-operating item. The change has no impact on the Group's operating profit.

3 Other includes coupon payments in respect of the direct capital instrument (DCI) (net of tax). On 23 June 2020, notification was given that the Group would redeem the 5.9021% £500 million DCI at its principal amount together with accrued interest to (but excluding) 27 July 2020. Interest payable up to 23 June 2020 has been recorded as an appropriation of retained profits with the remaining interest payable from 24 June 2020 to 30 June 2020 recorded within Group debt costs and other interest. In prior periods, the interest on the DCI and tier 1 notes was treated as an appropriation of retained profits and accordingly, accounted for when paid.

Operating profit decreased by 12% to £1,225 million (HY19 restated: £1,386 million), as the COVID-19 pandemic resulted in higher claims within the general insurance business from business interruption, travel, and other commercial insurance lines, and we experienced lower trading volumes due to disruption arising from the implementation of lockdown restrictions in the second quarter of 2020.

UK Life operating profit increased by 9% to £817 million (HY19 restated: £752 million), following BPA volume growth at higher margins, and stronger returns in Savings & Retirement reflecting improved revenue due to a higher asset base. This was partially offset by lower profitability in protection and individual annuities, and there was a net negative overall impact on claims from the COVID-19 pandemic.

Aviva Investors operating profit decreased by 42% to £35 million (HY19 restated: £60 million) due to lower fee income which was impacted by changes in the mix of assets under management, caused by market volatility in the underlying asset classes and de-risking by some clients towards assets which attract lower fees.

In our General Insurance businesses operating profit decreased by 50% to £167 million (HY19 restated: £332 million), primarily reflecting COVID-19 related claims of £165 million, net of reinsurance. This impact is based on estimated claims in business interruption insurance, other commercial lines and travel insurance and allows for favourable impacts in other product lines. In the UK the general insurance business recorded an operating loss of £66 million (HY19 restated: profit of £141 million) with £138 million attributable to COVID-19 related net claims experience. Higher weather costs relative to a benign first half of 2019 also had an adverse impact, along with less favourable prior year development. In Canada, operating profit increased to £129 million (HY19 restated: £89 million) as a favourable contribution from pricing, indemnity management and risk selection actions more than offset the adverse effect of COVID-19. Europe general insurance operating profit was broadly level at £104 million (HY19: £103 million).

Europe Life operating profit decreased by 7% to £367 million (HY19 restated: £392 million), as trading was disrupted by lockdown restrictions. In France, operating profit of £165 million (HY19 restated: £195 million) was also adversely affected by higher protection claims. In Italy, operating profit increased to £100 million (HY19 restated: £82 million) as strong fee generation from a higher asset base offset the impact from the trading disruption, and in Poland actions were taken to reduce costs increasing operating profit to £88 million (HY19 restated: £85 million). In Ireland, operating profit reduced to £8 million (HY19 restated: £24 million), including the impact of de-risking actions taken to improve our solvency cover ratio.

In our Asia Life businesses, operating profit has decreased by 8% to £140 million (HY19: £152 million). Excluding held for sale entities, operating profit was £67 million (HY19 restated: £68 million) despite a difficult trading environment primarily driven by the COVID-19 pandemic.

Other Group operations include investment return on centrally held assets, the results of our internal reinsurance business and the results of other operations. The reduced operating loss of £6 million (HY19: operating loss of £44 million) reflects lower project spend and the alignment of the UK digital business with the UK Life and UK General insurance businesses during 2019. 

Operating earnings per share decreased by 2.7p to 23.4p (HY19 restated: 26.1p) reflecting the decrease in operating profit.

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6 - Divisional performance

6.i - UK Life and Investments, Savings & Retirement

1 On 31 December 2019 the Group adjusted operating profit APM was 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). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated. There is no impact on profit before tax attributable to shareholders' profit.

2 Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts have been restated to reclassify net interest expense from UK Life including Savings & Retirement to Group debt costs and other interest of £32 million for the 6 month period ended 30 June 2019 and £65 million for the year ended 31 December 2019 as a non-operating item. The change has no impact on the Group's operating profit. In addition, comparative amounts for operating capital generation of £34 million for the 6 month period ended 30 June 2019 and £69 million for the year ended 31 December 2019 have been restated. The change has no impact on the Group's operating capital generation.

3 Following a review of the presentation of claims handling costs, to achieve consistency in our reporting, comparative amounts have been restated by £39 million for the 6 month period ended 30 June 2019 and £78 million for the year ended 31 December 2019 to include previously excluded claims handling costs attributable to UK Life in controllable costs.

Overview

Aviva is one of the UK's largest insurers in the UK life and savings market. We are uniquely positioned to help our customers and are a trusted provider of a broad range of products to both individual and corporate customers covering their savings, retirement, insurance and health needs. Our UK Life division incorporates three lines of business: annuities & equity release, protection & health and heritage. This division is key in generating sustainable cash flows. Our Savings & Retirement business is a leading provider of mass market savings and retirement solutions in the UK which is maintaining its strong growth in the savings market through our workplace and retail platforms. Aviva Investors, our international asset management business, leverages its existing investment capabilities to provide active solutions to both retail and institutional clients. The trading environment during the first half of 2020 was impacted by the movement restrictions imposed by the UK Government from early March together with customer caution in the face of the significant uncertainty. UK Life including Savings & Retirement took actions during the first half of 2020 to protect its balance sheet from the impacts of volatile financial markets.

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6.i - UK Life and Investments, Savings & Retirement continued

Operating and financial performance

Solvency II operating own funds generation and return on capital

UK Life and Investments, Savings & Retirement Solvency II return on capital decreased by 1.5pp to 5.0% (HY19: 6.5%) and Solvency II own funds generation decreased by 21% to £356 million (HY19: £449 million). This is due to capital management actions taken in the first half of 2020 including back book de-risking, which have benefitted our solvency capital requirement, whereas actions taken in the prior period largely increased own funds generation.

Operating capital generation‡#

UK Life and Investments, Savings & Retirement Solvency II operating capital generation (OCG) has increased by 11% to £581 million (HY19: £522 million) due to higher margins and improved capital efficiency on our BPA business, capital optimisation actions relating to our back book, and an action to change the mix of business included in our internal reinsurance vehicle. The increase is partially offset by a reduction on earnings from existing business, including a reduced contribution from Aviva Investors as a result of lower fee income which was impacted by changes in the mix of assets under management.

Cash‡#

Cash remittances to Group during the period were £84 million (HY19: £973 million). While our solvency position remains strong, we have adopted a cautious approach and delayed cash remittances to Group in light of economic uncertainty created by the COVID-19 pandemic.

UK Life 

Operating profit‡#, new business and net flows

1 On 31 December 2019 the Group adjusted operating profit APM was 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). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated. There is no impact on profit before tax attributable to shareholders' profit.

2 Following a review of the presentation of intercompany loan interest, to achieve consistency in our reporting, comparative amounts have been restated to reclassify net interest expense from UK Life to Group debt costs and other interest, of £32 million at for the 6 month period ended 30 June 2019 and £65 million for the year ended 31 December 2019 as a non-operating item. The change has no impact on the Group's operating profit.

3 Heritage represents products no longer actively marketed. This includes with-profits and bonds formerly shown in legacy, and non-profit legacy pensions which were formerly shown in long-term savings.

4 Other life represents changes in assumptions and modelling, non-recurring items and non-product specific overheads.

UK Life operating profit increased by 1% to £741 million (HY19: £732 million). Strong growth in BPA was offset by lower profits in our individual annuity, equity release, and protection businesses. UK Life operating profit includes a net provision of £25 million to cover expected COVID-19 related claims within our protection business, net of expected favourable experience variances in our annuity business.

PVNBP increased by 52% to £5,166 million (HY19: £3,401 million) due to strong growth in BPA and health volumes, partly offset by a reduction in individual annuity and equity release sales. VNB increased by 103% to £253 million (HY19: £125 million), mainly reflecting growth in BPA volumes at improved margins, benefitting from higher asset yields as corporate bond spreads widened and efficiently deployed capital.

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6.i - UK Life and Investments, Savings & Retirement continued

Operating and financial performance continued

UK Life continued

Annuities and equity release

Annuities and equity release operating profit increased by 11% to £365 million (HY19 restated: £329 million). Growth in BPA volumes more than offset the impact of lower individual annuity and equity release volumes. In the first half of 2020 BPA delivered new scheme wins of £3,083 million (HY19: £1,177 million) with margins benefitting from higher asset yields as corporate bonds spreads widened, and efficient deployment of capital. Individual annuity and equity release profit fell due to lower volumes as both businesses were adversely impacted by the COVID-19 driven market disruption, including advisers' inability to meet clients during lockdown.

Annuities and equity release VNB increased over 400% to £173 million (HY19: £33 million) driven by growth in BPA volumes. VNB margin strengthened to 4.5% (HY19: 1.5%) due to improved spreads on corporate bonds held to back our new business and our continued focus on capital efficiency.

Protection

Overall protection PVNBP grew 5% to £962 million (HY19: £914 million). We saw growth in both our individual and group protection businesses, where a strong first quarter offset the impact of slower trading in the second quarter following the implementation of lockdown restrictions. VNB decreased by 11% to £67 million (HY19: £76 million) as margins fell compared to the first half of 2019 due to a highly competitive marketplace.

Protection operating profit reduced by 29% to £70 million (HY19 restated: £99 million) due to lower new business margins, and adverse claims experience during the first quarter.

Heritage

Heritage operating profit was stable at £226 million (HY19: £225 million) and contained a net benefit from non-recurring items and other gains. The expected impact of the portfolio run off was offset by cost savings in the first half of 2020.

Health

UK Health operating profit decreased by 23% to £11 million (HY19: £15 million). This includes the expected impact of the fair value pledge provided to policyholders, which reflects the extent to which claims levels were lower in the first half of 2020 as a result of the COVID-19 pandemic. Health and Other PVNBP increased to £366 million (HY19: £269 million) driven by higher large corporate business sales.

Other

Other operating profit increased by £5 million to £69 million (HY19: £64 million). We have recognised a provision of £25 million to meet expected COVID-19 related claims for our individual and group protection businesses, net of expected favourable experience variances on our annuity book. The provision represents our total expected net liabilities on in-force policies from the COVID-19 pandemic over the next two years. During the first half of 2020, COVID-19 related individual and group protection claims amounted to £16 million, net of reinsurance.

Controllable costs‡

UK Life controllable costs decreased by 9% to £336 million (HY19: £369 million) mainly due to reduced spending on project activity as well as the impact of cost reduction.

Investment, Savings & Retirement

The Investment, Savings & Retirement business consists of our long-term Savings & Retirement business (excluding legacy pensions) and Aviva Investors, our international asset management business.

1 On 31 December 2019 the Group adjusted operating profit APM was 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). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts for the 6 month period ended 30 June 2019 have been restated. There is no impact on profit before tax attributable to shareholders' profit.

2 Investments, Savings & Retirement new business figures include Aviva Investors PVNBP of £680 million (HY19: £585 million, 2019: £1,266 million) and VNB of £7 million (HY19: £6 million, 2019: £12 million).

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6.i - UK Life and Investments, Savings & Retirement continued

Operating and financial performance continued

Investment, Savings & Retirement continued

UK Savings & Retirement

UK Savings & Retirement net flows increased by 28% to £4.2 billion (HY19: £3.2 billion) due to higher group pension net flows driven by regular premiums on group pension business, where we saw the benefit of higher levels of auto-enrolment contributions. Inflows onto our platform increased to £2.9 billion (HY19: £2.7 billion), where our flexible pension drawdown capability and comprehensive range of investments saw us increase our share of the advised market on both a gross and net flows basis in the first quarter of 2020. 

Controllable costs increased by 3% to £170 million (HY19: £165 million) as we continue to invest in our growth strategy.

Operating profit grew strongly to £76 million (HY19: £20 million), driven by growing revenue from an asset base which has increased to £113 billion (HY19: £103 billion).

Aviva Investors

Considerable market volatility and investor activity was experienced in the first half as concerns over the economic disruption caused by COVID-19 impacted financial markets. Our investment performance was not immune from the turbulence, but as at the end of June 2020 55% of our funds were ahead of benchmark over three years, and 56% over five years. Fund performance compared to targets have been maintained, with 31% of assets under management exceeding targets over one year, consistent with the position at 31 December 2019. In terms of external client flows, our business has maintained the positive momentum experienced in the second half of 2019, with net positive external clients flows of £1.3 billion in the period, with significant new business wins in the UK and North America in the first half of 2020 demonstrating success in our diversification strategy.

Revenue

Revenue decreased by 8% to £242 million (HY19: £264 million) mainly driven by lower fee income as a result of changes in underlying asset mix towards lower margin assets arising from the widespread impact of COVID-19, de-risking by internal clients, the legacy internal client run off, and the impact of the expiry of a distribution agreement in the prior year resulting in lower revenue this year.

Controllable costs‡

Aviva Investors controllable costs increased by 1% to £207 million (HY19: £204 million), reflecting the impact of inflation and phasing of costs in the first half of the year compared to the prior period.

Operating profit‡#

Aviva Investors operating profit decreased by 42% to £35 million (HY19: £60 million restated) mainly due to the lower fee income during the first half of 2020.

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6.i - UK Life and Investments, Savings & Retirement continued

Operating and financial performance continued

Investment, Savings & Retirement continued

Aviva Investors continued

Net flows and assets under management and under administration

Assets under management represent all assets managed by Aviva Investors. These comprise assets which are included within the Group's statement of financial position and those belonging to external clients outside the Group which are not included in the statement of financial position. Internal assets are managed by Aviva Investors on behalf of Group companies, and includes assets managed for the UK Savings & Retirement business. Internal legacy relates to products that are no longer actively marketed.

Assets under management increased by £8.8 billion to £354.9 billion (2019: £346.1 billion). This is due to £1.3 billion of external net inflows, £5.3 billion of net inflows into liquidity funds and cash and £4.7 billion of positive market and foreign exchange movements, offset by £2.4 billion of net outflows on our internal client. Assets under management and administration at 30 June 2020 were £390.7 billion (2019: £382.4 billion).

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6.ii - General Insurance