Aviva Plc · LSE:AV.
Aviva — Investor Presentation (January 2005)
39 slides from Aviva's investor presentation, Jan 13, 2005
Slide 1: Impact of European Embedded Value (EEV)
AVIVA plc Impact of European Embedded Value (EEV) Andrew Moss Group Finance Director 13 January 2005
Slide 2: Disclaimer
Disclaimer This presentation may contain certain “forward-looking statements” with respect to certain of Aviva’s plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertai
Slide 3: Agenda
Agenda • Evolving financial reporting journey • Headline messages • Key impacts on the Group’s results and KPIs • Explanation of key EEV principles affecting Aviva • Q&As 3 © Aviva plc
Slide 4: Evolving financial reporting landscape
Evolving financial reporting landscape Eu – Em rop S I be ean IFR ase Va dde Ph lue d Financial Reporting Life – Life Rea RS 27 ce Change Rep listic o F ra n (PS0 rting Assu nting 4/16 u acco ) PSB Regime & IGD (PS04/20) 4 © Aviva plc
Slide 5: European Embedded Value Principles
European Embedded Value Principles • Why EEV? – Based on traditional embedded value which is commonly used and is well established and understood – Addresses criticisms of traditional embedded value: Ø Comparability and transparency Ø Reflecting risks inherent in business (e.g. options and guarantee
Slide 6: Headline messages
Headline messages • No changes to underlying fundamentals or economics of our business: – Minimal impact on operating profit – No impact on capital or solvency requirements – No impact on statutory profits or dividend policy • Refinement of our current approach: – Overall impact on net asset value o
Slide 7: Basis of preparation
Basis of preparation Realistic and robust Consultation assumption set with Tillinghast EEV results No changes to Reviewed and accounting for audited non-life business results Achieved profits results will no longer be reported 7 © Aviva plc
Slide 8: Restatement for EEV
Restatement for EEV 30 June 2004 31 December 2003 Key performance indicators: EEV Achieved EEV Achieved profits* profits* New business contribution post £251m £246m £474m £472m required capital Operating profit £1,145m £1,130m £1,906m £1,907m Total shareholders’ funds £10,544m £11,054m £10,752m £11,
Slide 9: Change in embedded value at June 2004
Change in embedded value at 30 June 2004 Achieved profit basis embedded value: £11.9bn Changes in economic assumptions £431m Changes in overall Changes in cost of required capital £(319)m economic basis: Time value of options & guarantees £(222)m £(110) million Changes in fund management £100m Chang
Slide 10: Nic Nicandrou, Group Financial Control Director
Nic Nicandrou Group Financial Control Director 10 © Aviva plc
Slide 11: EEV Principles
EEV Principles One common set of 12 principles covering: 1. What is EEV 7. Financial options and guarantees 2. Business coverage 8. New business and 3. Definitions renewals 4. Free surplus 9. Assumptions 5. Required capital and cost 10. Economic assumptions of capital 11. Participating business 6. V
Slide 12: EEV Principles: key areas of change
EEV Principles Key areas of change: • Impact of change in overall economic basis – Principle 5: Required capital – Principle 7: Financial options and guarantees – Principle 10: Economic assumptions • Impact of look through principle – Principle 9: Assessment of appropriate projection assumptions • I
Slide 13: Impact of changes in overall economic basis
Impact of changes in overall economic basis 13 © Aviva plc
Slide 14: Allowance for risk in EEV calculations
Allowance for risk in EEV calculations Prudence Financial of liability options and valuation guarantees Aggregate risks Risk Cost of discount required rate capital 14 © Aviva plc
Slide 15: Principle 5: Required Capital
Principle 5: Required Capital • Capital requirements higher of: – Target levels set by reference to own internal risk assessment and internal objectives – Minimum capital level (i.e. level of solvency capital at which local regulator empowered to take action) • Required capital across all the Group’
Slide 16: Principle 5: Required capital by business unit
Principle 5: Required capital by business unit Average Business units required capital levels 100% UK non-annuity business 115% France, Italy, Spain 150% Ireland, Poland, Netherlands 200% UK annuity business 16 © Aviva plc
Slide 17: Principle 5: Required Capital continued
Principle 5: Required Capital continued Analysis of cost of capital at 30 June 2004 Achieved Effect of Impact of EEV basis profits increase in change in cost of basis cost required economic required of capital capital assumptions capital 0 £(920)m £119m £(1,120)m £(319)m 17 © Aviva plc
Slide 18: Principle 7: Financial Options and Guarantees
Principle 7: Financial Options and Guarantees • Under Achieved Profits methodology option and guarantee costs were allowed for as follows: - Explicit valuation of the “intrinsic value” - Implicit valuation of the “time value” via the risk discount rate • EEV principles require explicit valuation of
Slide 19: Impact of time value of options and guarantees across business units
Impact of time value of options and guarantees across business units As at 30 June 2004 - Total: £222 million • United Kingdom: No- MVA guarantees on Netherlands: unitised with-profit £72 million business Other: • France: Guaranteed £49 million crediting rates and surrender values on traditional bus
Slide 20: Principle 10: Setting the risk margins
Principle 10: Setting the risk margins • Based on group WACC calculation 30 June 2004 – Actual equity/debt ratio 70%/30% – Cost of equity using equity risk premium of 3% 9.5% and market assessed ß averaged over 2 years – Actual cost of debt 4.1% • Group WACC adjusted by 10b.p. for risks allowed for
Slide 21: Principle 10: Changes in economic assumptions
Principle 10: Changes in economic assumptions EEV basis Achieved profits basis Risk discount rate equivalent to RFR pre tax + 2.7% RFR pre tax + range 2.6% to 7.3% Risk free rate (RFR) UK: gilt rate UK: gilt rate EU: standard eurozone EU:10 years local 10 year bond government bonds Equity risk premi
Slide 22: Impact of the look through principle
Impact of the look through principle 22 © Aviva plc
Slide 23: Impact of the look through principle on embedded value at 30 June 2004
Impact of the look through principle on the embedded value at 30 June 2004 Fund Service Management Companies Total £m £m £m United Kingdom 51 (429) (378) France 38 (11) 27 Other Europe & International 11 (31) (20) 100 (471) (371) EEV incorporates results of subsidiary undertakings providing in-house
Slide 24: Principle 9: Reduction on UK Life's EV
Principle 9: Reduction on UK Life’s EV • Key reductions on the embedded value are: 30 June 31 2004 December £m 2003 £m Maintenance expenses and normal project allowance 176 182 Increase in pension scheme contribution from 11% to 25% 121 117 Pension scheme deficit funding 132 137 429 436 24 © Aviva p
Slide 25: Principle 9: Treatment of UK life service company
Principle 9: Treatment of UK life service company • Cost base of UK life service company, Norwich Union Life Services (NULS) includes: – operating trading costs, including acquisition and maintenance costs – project expenses such as product development, distribution capability, regulatory compliance
Slide 26: Principle 9: Increase of pension scheme funding
Principle 9: Increase of pension scheme funding • Future obligations of UK life pension scheme for future service costs included within EEV: Pension scheme Increase in future service contribution 11% to 25% of pensionable salaries Non-life UK life companies £19m pa With profit Non profit £1m pa £18m
Slide 27: Principle 9: Inclusion of pension scheme deficit funding
Principle 9: Inclusion of pension scheme deficit funding • Future obligations of UK life pension scheme for pension scheme deficits included within EEV: Deficit funding £50m pa for 10 years Non life UK life £29m pa £21m pa With profit Non profit £1m pa £20m pa • Reduction in EV at 30 June 2004: £132
Slide 28: Changes in reporting operating results
Changes in reporting operating results 28 © Aviva plc
Slide 29: Change in reporting operating results
Change in reporting operating results Analysis of profit and loss account result 30 June 2004 31 December 2003 Results Results Results Results on EEV on AP on EEV on AP £m £m £m £m Life operating return - Life businesses 792 800 1,522 1,555 - Equity release 21 - 31 - - Non insurance service and (26)
Slide 30: Improved disclosures
Improved disclosures 30 © Aviva plc
Slide 31: New business and renewals
New business and renewals • No change to the definition of new business contribution other than the inclusion of equity release business • New business sales now measured as present value of new business premiums (PVNBP) comprising: • 100% of single premiums received in the year; and • Discounted va
Slide 32: Change in new business contribution after cost of required capital
Change in new business contribution after cost of required capital at 30 June 2004 Achieved profit basis NBC: £246 million Changes in economic assumptions £37m Changes in overall Changes in cost of required capital £(20)m economic basis: Time value of options & guarantees £(10)m £7 million Changes i
Slide 33: Impact of EEV: new business sales and margins
Impact of EEV New business sales and margins EEV Achieved profits 30 June 31 Dec 30 June 31 Dec 2004 2003 2004 2003 New business contribution - gross £338m £646m £324m £621m New business contribution – net* £146m £272m £143m £272m New business sales – PVNBP/ APE £9,753m £18,809m £1,224m £2,377m New
Slide 34: Principle 8: Discrete quarterly new business contribution
Principle 8: New business and renewals Discrete quarterly new business contribution £m % 250 NBC EEV Margins* AP Margins** 35 30 200 25 150 20 15 100 10 50 5 0 0 Q103 Q203 Q303 Q403 Q104 Q204 Q304 *Margins calculated as NBC on EEV basis over APE 34 ** Margins as previously reported under achieved pr
Slide 35: Principle 8: Discrete new business margins using PVNBP
Principle 8: New business and renewals cont Discrete new business margins for the Group using PVNBP % 5 Gross margins EEV Net margins EEV 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 35 © Aviva plc
Slide 36: Principle 12: New disclosures
Principle 12: New disclosures There are a number of significant additional disclosures provided in the analyst pack. The following table summarises the new disclosures: Topic New Business The present value of future new business premiums (page 18). Reconciliation of This reconciliation is provided s
Slide 37: Principle 12: New disclosures
Principle 12: New disclosures Topic Sensitivity analysis Significantly extended analysis covering the sensitivities to use of EU minimum in - economic calculations, +/- 1% movement in discount rates, +/- 1% increase in interest rates, +/- 1% movement in equity/property returns, +/- 10% movement in e
Slide 38: Summary
Summary • Fully adopted and complied with the EEV principles • Developed a robust economic assumption set • Refinement of current approach explicitly quantifies risk • Best measure of value added for long term business 38 © Aviva plc
Slide 39: Questions and answers
Questions and answers AVIVA