Aviva Plc · LSE:AV.
Aviva — Investor Presentation (February 2009)
45 slides from Aviva's investor presentation, Feb 4, 2009
Slide 1: Analyst and investor briefing
Analyst and investor briefing 2008 Worldwide long-term savings new business and business update Moving from EEV to MCEV reporting page 1
Slide 2: Disclaimer
Remaining strong through tough economic times Disclaimer This presentation may include oral and written “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. These forward-look
Slide 3: EEV to MCEV
EEV to MCEV Philip Scott Nic Nicandrou David Rogers Tim Harris MCEV Restatement Feb 2009 page 3
Slide 4: Agenda
Agenda • Objectives of MCEV supplementary reporting • Impact on Aviva’s embedded value results • Implied discount rates • Additional disclosures • Effect by region • Summary page 4
Slide 5: Objectives of MCEV reporting: Why adopt MCEV now?
Objectives of MCEV reporting Why adopt MCEV now? • Aviva is taking a step forward in its reporting transparency • MCEV shows the group as a strong diversified business – Impact on NAV per share for 2007 is -1% (763p) and for HY08 is -7% (654p) – But - MCEV will be volatile if investment markets are
Slide 6: Embedded value in context
Objectives of MCEV reporting Embedded value in context • More than one lens needed to view the performance of long-term business: – MCEV – A perspective on value generation - the present value of future cash flows available to the shareholder, adjusted for the risks of those cash flows – Includes th
Slide 7: A step forward in transparency and accessibility
Objectives of MCEV reporting A step forward in transparency and accessibility • Improved consistency of the basic framework for earnings valuation – Asset cashflows consistent with market prices • Increased external disclosures – Standardised analysis of earnings and Group MCEV disclosures – Free su
Slide 8: Next step in evolving embedded value reporting
Objectives of MCEV reporting Next step in evolving embedded value reporting EEV added MCEV adds Explicit allowance for the time value of Market consistent option & guarantee options & guarantees valuation Less subjective – economic Look through to actual expenses within assumptions tied to risk free
Slide 9: Key performance indicators
Impact on Aviva’s embedded value results Key performance indicators 30 June 2008 31 December 2007 Key performance indicators: MCEV EEV MCEV EEV PVNBP £18,214m £17,283m £32,722m £31,600m New business contribution post required capital £352m £488m £897m £912m (Gross) Margins (gross) 1.9% 2.8% 2.7% 2.9
Slide 10: Overview – half-year 2008
Impact on Aviva’s embedded value results Overview – half-year 2008 Time Value of EEV MCEV Opts & Guars Time Value of £0.9bn Cost of Capital Opts & Guars Cost of non hedgeable £1.8bn £0.4bn risk £0.6bn Frictional Costs £1.0bn Value of Value of Future Future Profits Profits £11.5bn £12.4bn EEV MCEV £1
Slide 11: MCEV - key changes
Impact on Aviva’s embedded value results MCEV - key changes • Economic assumptions are now market consistent – Values asset cash flows consistent with current market prices – MCEV uses actual market yield curves and volatilities – New business profits valued on start of quarter economic assumptions,
Slide 12: Change in EV and VNB for 30 June 2008
Impact on Aviva’s embedded value results Change in EV and VNB for 30 June 2008 Embedded value Value of new (EV) business (VNB) 30 June 2008 30 June 2008 £m £m Opening life EV/VNB on an EEV basis 19,867 488 Economic assumptions (16.6%) (61.3%) Discount rate at risk free 14.7% 47.5% Cost of Non-Hedgea
Slide 13: Market consistency in the current market
Impact on Aviva’s embedded value results Market consistency in the current market Corporate bond spreads • In stable markets, swap rates are a suitable proxy for risk- 500 free returns 450 • In the current market, risk free 400 returns in excess of swaps can 350 be earned 300 • Risk free rate adjust
Slide 14: Profit drivers - product impact
Impact on Aviva’s embedded value results Profit drivers - product impact Risk business Savings business Annuity business Group Increase due to lower Decrease as asset Expected impact than average market Neutral spreads are now risk booked when earned 2007 EEV margins 9.1% 2.0% 3.0% 2.9% 2007 MCEV ma
Slide 15: Product mix by region
Impact on Aviva’s embedded value results Product mix by region Europe North America UK Risk Asia Savings Spread/ Annuity Group page 15
Slide 16: Product mix by region
Impact on Aviva’s embedded value results Product mix by region Europe North America UK Risk Asia Savings Spread Spread/ Annuity 2007 EEV MCEV 2007 EEV MCEV 2007 EEV MCEV 2007 EEV MCEV VNB (£m) 108 2 VNB (£m) 305 278 VNB (£m) 456 02 VNB (£m) 43 65 Payback period 5 6yrs Payback period 8yrs Payback per
Slide 17: Implied discount rates
Implied discount rates MCEV Total business EEV 2007 IDR Risk discount rate % % United Kingdom 8.4% 7.3% Europe 7.5% 7.7% North America 14.3% 6.7% Asia Pacific 9.4% 10.7% Average 8.0% 7.6% • IDR is the discount rate applied to all the cash flows (including spread assets) to make them equal the MCEV v
Slide 18: Additional disclosures
Additional disclosures • Emergence of free surplus from existing business and use of free surplus in the writing of New Business (see page 31 of the analyst pack) • Payback periods (see page 30 of the analyst pack) • Timescales for emergence of future profits in to free surplus (see page 31 of the a
Slide 19: Regional review
Regional review page 19
Slide 20: Aviva UK
Aviva UK page 20
Slide 21: Aviva UK Business overview
Aviva UK Business overview Risk FY07 EEV MCEV Savings Aviva UK Operating profit (£m) 864 822 Spread/ VNB (£m) 305 278 Annuity Payback period 8yrs IRR 13% Total EV (£m) 7,106 6,911 HY08 EEV MCEV Operating profit (£m) 471 416 VNB (£m) 154 73 IRR 13% Total EV (£m) 6,547 5,776 page 21
Slide 22: Aviva UK Business overview
Aviva UK Business overview • MCEV confirms benefits of scale & broad FY07 EEV MCEV product strategy Operating profit (£m) 864 822 • Impact on embedded value for 2007 is -3% VNB (£m) 305 278 and HY08 is -12% Payback period 8yrs • Impact on operating earnings for 2007 is IRR 13% -1% and HY08 is -9% (1
Slide 23: Impact of MCEV on embedded value - 30 June 2008
Aviva UK Impact of MCEV on embedded value -30 June 2008 EEV MCEV Annuities - drop in value but underlying economics unchanged £6.5bn £5.8bn • MCEV - calculated assuming assets earn risk –free rate (swaps + 50 bp) £0.7bn - does not factor actual asset yield achieved - treats asset yield Annuities (12
Slide 24: Impact of MCEV on operating earnings
Aviva UK Impact of MCEV on operating earnings -30 June 2008 EEV MCEV £455m (1) £416m New Business New £154m Existing Business Existing Business £73m Business 18% 18% £301m £343m 34% 66% 82% 82% • New business value lower by £81m (-53%) principally due to annuities • Existing business earnings higher
Slide 25: Impact on new business value
Aviva UK Impact on new business value -30 June 2008 HY2008 Life and Savings EEV MCEV • Adoption of MCEV beneficial with: £154m £73m • protection profits 15% higher • asset accumulation unchanged Annuities £84m Annuities (margin: 6.5%) • Reported new business value under MCEV does not factor all of t
Slide 26: Difference in annuity new business value
Aviva UK Difference in annuity new business value -30 June 2008 Asset yield Asset yield EEV Fixed achieved net of exp / asset guarantee reinvestment yield Expenses / Credit Gilts+145bp Gilts+85bp reinvestment default -20bp allowance Gilts+195bp Gilts+175bp -30bp • EEV “locked-in” margin covers risk
Slide 27: Difference in annuity new business value
Aviva UK Difference in annuity new business value -30 June 2008 Asset yield Asset yield Fixed achieved net of exp / guarantee reinvestment Expenses / Gilts+85bp reinvestment -20bp Gilts+195bp Gilts+175bp Gross Return spread given to annuitant page 27
Slide 28: Difference in annuity new business value
Aviva UK Difference in annuity new business value -30 June 2008 Asset yield Asset yield MCEV Fixed achieved net of exp / risk free guarantee reinvestment rate Expenses / Gilts+85bp Gilts+85bp reinvestment (swaps + 55bp) -20bp Gilts+195bp Gilts+175bp “Locked-in” margin for MCEV nil bp Gross Return sp
Slide 29: Difference in annuity new business value
Aviva UK Difference in annuity new business value -30 June 2008 Asset yield Asset yield MCEV Fixed achieved net of exp / risk free guarantee reinvestment rate Expenses / Gilts+85bp Gilts+85bp • Appropriate risk within reinvestment (swaps + 55bp) -20bp balanced portfolio Gilts+195bp Gilts+175bp • Und
Slide 30: Existing business operating earnings
Aviva UK Existing business operating earnings -30 June 2008 EEV (1) MCEV Annuities £301m £343m • Operating earnings higher by £40m. • Reflects asset yield over risk-free earned in period – confirming Annuities MCEV only affects timing of recognition of profit not its overall Annuities £110m £70m qua
Slide 31: Aviva USA
Aviva USA page 31
Slide 32: Aviva USA Business overview
Aviva USA Business overview Risk FY07 EEV MCEV Savings Aviva USA Operating profit (£m) 255 124 Spread Spread/ VNB (£m) 108 2 Annuity Payback period 5 6yrs IRR 12% Total EV (£m) 1,588 1,206 HY08 EEV MCEV Operating profit (£m) 139 VNB (£m) 6874 (8) IRR 11% Total EV (£m) 1,714 974 page 32
Slide 33: Indexed product investment model
Aviva USA Indexed product investment model Duration matching through bonds and derivatives Aviva US $100 Premium $87 PORTFOLIO Credit risk management through Fixed (Average credit selection and diversification Indexed product Income rating ‘A’) investment Index $5 Equity performance covered Annuity
Slide 34: Profit emergence – fixed annuity
Aviva USA Profit emergence – fixed annuity US fixed annuity Profit emergence profile EEV Income MCEEV Income IFRS Income Cumulative EEV Cumulative MCEEV Cumulative IFRS ue 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ss tI • Total profits emerging over the contract life are the
Slide 35: Market spreads for 'A'-rated bonds
Aviva USA Market spreads for ‘A’-rated bonds 10 9 8 7 6 5 Bond yields 4 Swap 3 2 1 0 5 6 7 8 5 6 7 8 5 6 7 8 6 7 08 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 0 0 b- b- b- g g g g ov ov ov ov ay ay ay ay Au Au Au Au Fe Fe Fe N M N N M M M N • Market spread between bond yields and • MCEV values only risk-fr
Slide 36: Value from additional spread
Aviva USA Value from additional spread Total assets @ 30 June 2008 = £18bn ($36bn) Additional spread on Shareholders’ Net of tax = £85m total assets = £200m portion = £130m Allowance for defaults 25bps Additional Post tax 65% c2/3 to spread over shareholders reference rate earned Tax 35% by Aviva 11
Slide 37: Aviva USA Summary
Aviva USA Summary • Reported MCEV: – Impact of recognising only risk-free return up-front flows through NB margin, operating profit and total MCEV Proportion of VIF emerging in – Additional spread profit will emerge as earned in expected future years return in excess of risk-free 180 160 – Present v
Slide 38: Aviva Europe
Aviva Europe page 38
Slide 39: Aviva Europe Business overview
Aviva Europe Business overview Risk FY07 EEV MCEV Savings Aviva Europe Operating profit (£m) 1,543 1,503 Spread Spread/ VNB (£m) 456 02 Annuity Payback period 5 12yrs IRR 13% Total EV (£m) 10,988 11,293 HY08 EEV MCEV Operating profit (£m) 823 VNB (£m) 245 728 55 IRR 2 13% Total EV (£m) 10,949 11,109
Slide 40: Embedded Value by country shows little change
Aviva Europe Embedded Value by country shows little change France - increase in 4,500 TVOG under MCEV 201 EEV FY07 4,000 158 MCEV FY07 3,500 EEV HY08 3,000 FY07 HY08 MCEV HY08 £m 2,500 2,000 1,500 1,000 500 0 France Ireland Italy Netherlands Poland Spain Other Europe (Netherlands includes Belgium an
Slide 41: Geographical spread in Value of New Business
Aviva Europe Geographical spread in Value of New Business NBV FY 2007 • NBV increased under 550 500 MCEV at both FY 2007 450 and HY 2008 400 • Netherlands HY 2008 £m 350 200 NBV FY 2007 300 175 includes a large 250 proportion of corporate 200 150 0 pension business and 125 investment spread profits
Slide 42: PVNBP – Small positive MCEV impact
Aviva Europe PVNBP – Small positive MCEV impact PVNBP • PVNBP increases under 18,000 16,000 MCEV due to change in 14,000 risk free rate 12,000 • Average payback period £m 10,000 4,000 8,000 PVNBP FY 2007 6,000 3,500 of 12 years for Aviva 4,000 Europe including a 2,000 3,000 0 longer payback period F
Slide 43: Aviva Europe Conclusions
Aviva Europe Conclusions Mix of Business • No fundamental impact reflecting the diversity of the underlying portfolio, and relatively low level of annuity business • Negative NVB and longer payback period in Netherlands, Belgium and Germany reflects corporate pension and annuity business • A useful
Slide 44: Summary: Adoption of MCEV
Summary Adoption of MCEV Group life and pensions key metrics • A better measure of profit recognition FY07 EEV MCEV Operating profit (£m) 2,753 2,544 • Provides more disclosure VNB (£m) 912 897 • Demonstrates the strength and value Payback period 9yrs generated from our diversified IRR 12.9% busines
Slide 45: Questions and answers
Questions and answers MCEV Restatement Feb 2009 page 45