As previously announced, Aviva plc is to change its definition of group operating profit on an International Financial Reporting Standards basis. The change is in keeping with Aviva's commitment to providing greater clarity and insight into the factors driving the group's results and takes account of feedback from investors.
As previously announced, Aviva plc ("Aviva") is to change its definition of group operating profit on an International Financial Reporting Standards ("IFRS") basis. The change is in keeping with Aviva's commitment to providing greater clarity and insight into the factors driving the group's results and takes account of feedback from investors. The new definition will take effect from 31 December 2007.
Group operating profit on an IFRS basis is one of the key performance indicators for Aviva. Under the new definition, the company will use "expected rates of investment return" to report the operating profit of its long-term savings business to bring this business into line with the way Aviva reports its general insurance and health operating profit.
The change in definition does not affect the underlying performance, the economics of Aviva's business, the profit before tax attributable to shareholders or the profit for the period or year being restated. It also does not alter Aviva's dividend policy and the group's commitment to a progressive dividend policy for its shareholders. It only changes the allocation of profit between operating and non-operating.
The new definition will also bring the methodology used for the IFRS basis into closer alignment with that used for the European Embedded Value (EEV) basis, which is the industry's alternative performance measure.
The key changes to the group operating profit definition on an IFRS basis are as follows:
- Operating profit will be based on the investment returns that the group expects to make on the financial investments that back the shareholder and policyholder funds of its long-term business over the reporting period, rather than actual returns. The difference between the expected return and the actual return on investments and corresponding impact on liabilities will be shown below the operating profit line.
- The amortisation of acquired value of in-force business (AVIF) on both insurance and investment contracts will be included within operating profit. This change matches the emergence of benefit from the acquired book with the associated amortisation expense.
- The criteria for treating an item as exceptional, outside operating profit, have been refined to limit these to significant items only. Therefore, the Financial Services Compensation Scheme and other levies for the periods under the restatement will be included in operating profit.
- Norwich Union Life Services will be treated as life business instead of non-insurance. This matches its treatment under EEV.
Although Generally Accepted Accounting Principles (GAAP) do not require companies to disclose operating profit on an IFRS basis, Aviva believes that this non-GAAP disclosure is helpful to investors because it gives them greater insight into where profits are generated in the business.
The new definition of group operating profit on an IFRS basis will be used for Aviva's full year results for the year ended 31 December 2007. These results will be released on 28 February 2008.
IFRS profits for the six months to 30 June 2007 and for the year to 31 December 2006, under both the original and the revised definitions, are set out below, along with an opinion from Ernst & Young, Aviva's auditors, on the restated results for the year ended 31 December 2006.
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Enquiries:
Analysts
Charles Barrows, investor relations director
+44 (0)20 7662 8115
Susie Yeoh, investor relations manager
+44 (0)20 7662 2117
Media
Sue Winston, head of group media relations
+44 (0)20 7662 8221
Vanessa Rhodes, group media relations manager
+44 (0)20 7662 2482
James Murgatroyd/Ed Simpkins, Finsbury
+44 (0)20 7251 3801
Notes to editors:
- Aviva is the world's fifth-largest insurance group based on gross worldwide premium and one of the leading providers of life and pension products in Europe and is actively growing its long-term businesses in North America and Asia Pacific
- Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total sales of £41.5 billion and assets under management of £364 billion at 31 December 2006
- The Aviva media centre includes images, company and product information and a news release archive
- Acquired value of in-force business (AVIF) represents the present value of future profits on an acquired portfolio of long-term business. The business can be acquired either directly or through the purchase of a subsidiary company. AVIF is then amortised over the useful lifetime of the related contracts in the portfolio of acquired business on a systematic basis. The rate of amortisation is chosen by considering the profile of the acquired portfolio and the expected depletion in its value.
The table below sets out the effect of the changes to operating profit - IFRS basis as at 30 June 2007:
PRO FORMA RECONCILIATION OF GROUP OPERATING PROFIT TO PROFIT BEFORE TAX FOR THE SIX MONTHS ENDING 30 JUNE 2007 - IFRS BASIS - UNAUDITED
| 30 June 2007 £m | Effect of restating the definition of operating profit - IFRS basis £m | Restated 30 June 2007 £m | |
|---|---|---|---|
| Operating profit before tax attributable to shareholders' profits | |||
| Long-term business | 1,081 | (247) | 834 |
| Fund management | 76 | - | 76 |
| General insurance and health | 560 | - | 560 |
| Other: | |||
| Other operations and regional costs | (72) | 23 | (49) |
| Corporate centre | (80) | - | (80) |
| Group debt costs and other interest | (190) | - | (190) |
| Operating profit before adjusting items and tax attributable to shareholders' profits | 1,375 | (224) | 1,151 |
| Adjusted for the following: | |||
| Investment return variances and economic assumption changes on long term business | - | 107 | 107 |
| Impairment of goodwill | (3) | - | (3) |
| Amortisation and impairment of acquired value of in-force business | (114) | 114 | - |
| Amortisation and impairment of intangibles | (52) | 3 | (49) |
| Short-term fluctuation in return on investments backing general insurance and health business | 37 | - | 37 |
| Profit on the disposal of subsidiaries and associates | (5) | - | (5) |
| Integration and restructuring costs | (40) | - | (40) |
| Financial Services Compensation Scheme and other levies | - | - | - |
| Profit before tax attributable to shareholders' profits | 1,198 | - | 1,198 |
| Tax attributable to shareholders' profits | |||
| Operating profit | (378) | 49 | (329) |
| Other activities | 70 | (49) | 21 |
| (308) | - | (308) | |
| Profit for the period | 890 | - | 890 |
NOTES
- EEV life operating profit definition is unchanged. Total EEV operating profit is impacted by the reclassification of Financial Services Compensation Scheme and other levies. For 2007 Interim result the impact was £nil.
- The effect of restating the 2007 Interim result has impacted the operating earnings per share for the period. Restated operating earnings per share are 28.1 pence (published result: 34.7 pence).
The table below sets out the effect of the changes to operating profit - IFRS basis as at 31 December 2006:
PRO FORMA RECONCILIATION OF GROUP OPERATING PROFIT TO PROFIT BEFORE TAX FOR THE YEAR ENDING 31 DECEMBER 2006 - IFRS BASIS - AUDITED
| 31 December 2006 £m | Effect of restating the definition of operating profit – IFRS basis £m | Audited restated 31 December 2006 £m | |
|---|---|---|---|
| Operating profit before tax attributable to shareholders' profits | |||
| Long-term business | 1,896 | (562) | 1,334 |
| Fund management | 155 | - | 155 |
| General insurance and health | 1,680 | 6 | 1,686 |
| Other: | |||
| Other operations and regional costs | (80) | 55 | (25) |
| Corporate centre | (160) | - | (160) |
| Group debt costs and other interest | (381) | - | (381) |
| Operating profit before adjusting items and tax attributable to shareholders' profits | 3,110 | (501) | 2,609 |
| Adjusted for the following: | |||
| Investment return variances and economic assumption changes on long term business | - | 401 | 401 |
| Impairment of goodwill | (94) | - | (94) |
| Amortisation and impairment of acquired value of in-force business | (100) | 100 | - |
| Amortisation and impairment of intangibles | (70) | 6 | (64) |
| Short-term fluctuation in return on investments backing general insurance and health business | 149 | - | 149 |
| Profit on the disposal of subsidiaries and associates | 222 | - | 222 |
| Integration and restructuring costs | (246) | - | (246) |
| Financial Services Compensation Scheme and other levies | 6 | (6) | - |
| Profit before tax attributable to shareholders' profits | 2,977 | - | 2,977 |
| Tax attributable to shareholders' profits | |||
| Operating profit | (725) | 80 | (645) |
| Other activities | 137 | (80) | 57 |
| (588) | - | (588) | |
| Profit for the year | 2,389 | - | 2,389 |
NOTES
- EEV life operating profit definition is unchanged. Total EEV operating profit is impacted by the reclassification of Financial Services Compensation Scheme and other levies. For 2006 Full Year results the impact is a credit of £6 million.
- The effect of restating 2006 Full Year operating profit on an IFRS basis has also impacted dividend cover and operating earnings per share for the year. These are 2.26 times (published result: 2.80 times) and 70.1 pence per share (published result: 86.9 pence).
- The pro forma reconciliation for 2006 has been audited and the opinion of the auditor is set out on page 6.
- Restated operating profit on an IFRS basis for 2005 and 2004 is £1,997 million (published result: £2,128 million) and £1,455 million (published results: £1,669 million) respectively.
Geographical analysis of restated operating profit for long-term business is given below:
| HY 2007 £m | FY 2006 £m | FY 2005 £m | FY 2004 £m | |
|---|---|---|---|---|
| United Kingdom | 357 | 629 | 327 | 288 |
| France | 136 | 224 | 203 | 175 |
| Ireland | 31 | 49 | 2 | 13 |
| Italy | 38 | 81 | 40 | 13 |
| Netherlands | 94 | 102 | 123 | 202 |
| Poland | 53 | 95 | 86 | 69 |
| Spain | 57 | 113 | 78 | 54 |
| Other Europe | (14) | (16) | (4) | 3 |
| Europe | 395 | 648 | 528 | 529 |
| North America | 58 | 13 | 11 | (3) |
| Asia | 3 | 7 | (32) | 29 |
| Australia | 21 | 37 | 30 | 30 |
| Asia Pacific | 24 | 44 | (2) | 59 |
| Total | 834 | 1,334 | 864 | 873 |
BASIS OF PREPARATION
Profit for the year is unchanged and has been prepared on the basis of the accounting policies set out in Aviva plc's 2006 annual report and accounts.
Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
The expected investment returns and corresponding expected movements in long-term business liabilities are calculated separately for each principal long-term business unit.
The expected return on investments for both policyholder and shareholder funds is based on opening economic assumptions applied to the expected funds under management over the period. Expected funds under management are equal to the opening value of funds under management, adjusted for sales and purchases during the period arising from expected operating experience. The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix. To the extent that these differences arise from the operating experience of the life business, or management decisions to change asset mix, the effect is included in the operating profit. The residual difference between actual and expected investment return is included in investment variances.
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. The effect of differences between actual and expected investment experience on liabilities and changes to economic assumptions used to value liabilities are taken outside operating profit. For many types of long-term business, including unit-linked and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
INDEPENDENT AUDITOR'S REPORT TO AVIVA PLC ON THE RESTATED PRO FORMA RECONCILIATION OF GROUP OPERATING PROFIT TO PROFIT BEFORE TAX FOR THE YEAR ENDING 31 DECEMBER 2006
To the Board of Directors of Aviva Plc
We have audited the accompanying pro forma reconciliation of Group operating profit to profit before tax for the year ended 31 December 2006 (the "reconciliation").
Our audit work has been undertaken so that we might state to the Company those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility or liability to anyone other than the Company for our audit work, for this report, or for the opinions we have formed.
Respective Responsibilities of directors and auditors
The Company's directors are responsible for the preparation of the reconciliation in accordance with the basis of preparation.
Our responsibility is to audit the reconciliation in accordance with International Standards on Auditing (UK and Ireland), and report to you our opinion as to whether the reconciliation has been prepared in accordance with the basis of preparation.
We read the other information accompanying the reconciliation and consider whether it is consistent with the reconciliation. This other information comprises pages 1 and 2, the Pro forma reconciliation and notes for the period ended 30 June 2007, the notes to the Pro forma reconciliation for the year ended 31 December 2006 and the Geographical analysis of restated operating profit for long term business. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.
An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the reconciliation. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the reconciliation.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the reconciliation for the year ended 31 December 2006 has been prepared, in all material respects, in accordance with the basis of preparation.
Restriction on use of the Auditor's Report
The reconciliation has been prepared in accordance with the basis of preparation for the purposes of providing information to explain the changes made to management's definition of operating profit - IFRS basis for the year-ending 31 December 2006. The reconciliation may not be suitable for another purpose. Our report is intended solely for the Company and should not be used by parties other than Aviva plc.
Ernst & Young LLP
London
21 November 2007