Aviva issues guidance under new industry accounting standards

Insurance and financial services firm Aviva issued an update on Wednesday in a bid to reassure investors over the effects of the industry-wide adoption of IFRS 17 accounting standards.

The FTSE 100 company said IFRS 17 would not have any impact on its strategy, capital generation, dividend guidance, or capital return outlook.

Cash remittances, capital generation, and its approach to capital allocation would remain unchanged under the new accounting standards, and its adherence to Solvency II would also be unaffected.

Moreover, Aviva confirmed that its dividend guidance for 2023, amounting to around £915m, remained intact, with expectations of low-to-mid single-digit growth in the cash cost of dividends thereafter.

The firm added that its commitment to regular and sustainable returns of capital to shareholders would also remain unaltered.

Aviva said it remained confident in meeting or surpassing its group financial targets for cash remittances, own funds generation, and cost reduction, with no changes under IFRS 17.

The company said the transition to IFRS 17 would have financial implications, albeit with no overall impact on total profit over the lifetime of a contract.

However, the timing of profit recognition would be altered, resulting in increased long-term predictability.

The restated business unit operating profit for the 2022 fiscal year was said to be £1.9bn, which was 15% lower than under IFRS 4 and aligned with previous guidance.

Aviva said that decline primarily stemmed from accounting changes in its annuities and protection businesses, where new business profit would now be deferred over the lifetime of contracts.

The board said it expected operating profit to grow from the restated base.

IFRS 17 was introducing two new concepts on the balance sheet - the contractual service margin (CSM) and the risk adjustment (RA), which represent significant future profit stocks, primarily from the annuities and protection businesses, to be released over time.

As at 31 December 2022, the stock of future profit amounted to £7.8bn, and Aviva said it foresaw the CSM to increase over time.

Shareholders' equity adjusted for IFRS 17, including CSM net of tax, was reported as £14.3bn at the end of 2022, compared to £11.9bn under IFRS 4.

The shareholders' equity under IFRS 17 alone stood at £9.4bn as at the end of December last year.

To facilitate the transition to IFRS 17 for stakeholders, Aviva said it was providing an exceptional group operating profit guidance.

It said it expected group operating profit for the first half of 2023 to be around £700m - an increase from £661m in the first half of 2022.

Additionally, Aviva said it was projecting a 5% to 7% growth in group operating profit for the 2023 fiscal year, with a base of £1.35bn in the 2022 period.

“The adoption of IFRS 17 is a significant milestone for the insurance industry, and provides a comprehensive and more consistent approach to accounting for insurance contracts,” said group chief financial officer Charlotte Jones.

“The operating profit and balance sheet impacts we are announcing today are consistent with our previous guidance, and there is no impact to the underlying economics of our business, our strategy or dividend guidance.”

Reporting by Josh White for Sharecast.com.