We also responded to challenges in our UK business. We encountered disruption during the migration of our independent financial adviser platform to a new supplier, which adversely affected our service standards. Our teams worked hard to resolve these challenges and advisers are now starting to benefit from the improved functionality and processing capability that the new platform offers. We also increased the amount set aside for customer redress in relation to historical advised sales by Friends Provident to £250 million (2017: £75 million). Over 90% of cases identified are pre-2002.
Combined operating ratio2 The combined operating ratio (COR)2 is a measure of general insurance profitability. The lower the COR2 is below 100%, the more profitable we are. Reported COR2 is broadly in line with 2017 for all markets.
Why it’s important Digital First is about making sure Aviva is an, efficient insurance company which delivers attractive products and services for our customers. The launch of AvivaPlus at the end of the year is an example of our commitment to lead the way to meet this challenge.
Major markets and strategic investments Our major markets and strategic investments categorisation shows how Aviva’s markets and business lines contribute to our overall portfolio, both now and in the future.
• We continue to have a successful year with our Global Graduate scheme with 36 people starting in September 2018, including 17 females.
We continue to provide an employee share scheme and all employees have the opportunity to engage with senior leaders through weekly #Uncut (a 30 minute no holds barred interview with senior leaders) and our live results presentations. This ensures everyone at Aviva is aware of significant changes in the business as well as financial and economic factors affecting the business.
Inclusive diversity Inclusive diversity is key to Aviva being a sustainable, successful business. An inclusive culture ensures employees are happier, act as themselves and work towards achieving their and the organisation’s goals. Aviva’s employees need to reflect our customer base and we continue to make sure all our customers are represented inside the organisation.
Aviva made further strategic and financial progress in Italy in 2018. Our focus on diversifying distribution and providing customers with innovative products has delivered higher sales, positive net fund flows2 and growth in adjusted operating profit1. On a like-for-like basis (excluding the divested Avipop business), adjusted operating profit1 increased 16% to £188 million (2017: £162 million). In life insurance, sales rose 37% in local currency terms to £6.3 billion (2017: £4.5 billion). Hybrid products, which provide customers a combination of with-profit, unit linked and protection coverage, achieved growth of 161% and contributed 44% of our total life sales (2017: 23%). We also expanded our distribution capability; in 2018, non-bank channels accounted for greater than 40% of life insurance sales.
At our Capital Markets Day in November 2017, we upgraded our target for cumulative cash remittances2 over the three year period ending in December 2018 to £8 billion (from £7 billion previously). We fell slightly short of the upgraded target, achieving £7.9 billion of cumulative cash flows to Group centre from remittances and divestiture proceeds. This reflects the delay in completing the sale of Friends Provident International and our decision to retain the £0.2 billion of proceeds from the sale of Avipop in our Italian subsidiary to support capital given growth in the business and recent trends in Italian Government bond spreads.
UK Health adjusted operating profit1,7 increased by 6% to £38 million (2017: £36 million) due to improved underlying margins.
Annuities and Equity Release Annuities and equity release adjusted operating profit1 increased by 7% to £779 million (2017: £725 million). BPA trading drove a 12% increase in volumes to £4,784 million (2017: £4,287 million), including Aviva’s largest BPA deal to date of £925 million with Marks and Spencer, leading to an 8% increase in new business profits to £363 million (2017: £335 million). Existing business adjusted operating profit1,7 increased by £26 million to £416 million (2017: £390 million) due to favourable longevity experience partly offset by a reduction to £24 million (2017: £86 million) in the benefit from the optimisation of the asset mix by increasing the proportion of illiquid assets backing the in-force portfolio.
UK Personal lines COR2 of 92.4% was 0.4pp higher year on year, reflecting higher weather costs partly offset by higher prior year reserve releases and improved business mix.
• Through Quantum, our data science practice, we continue to simplify how customers buy from us. This capability is being used across life and general insurance, for individual, SME and partners such as HSBC and Barclays. We ask fewer questions and make it as simple as possible for our customers to find the best solution to suit their needs.
NWP Net written premiums were down 3% to £2,928 million (2017: £3,028 million) but flat on a constant currency basis. In personal lines, lower new business sales were offset by rate increases. Commercial lines premiums reduced slightly over the prior year as rate increases were offset by lower new business sales and retention as we tightened our underwriting risk appetite.
Overall adjusted operating profit1,2 in Europe was down by 5% to £1,051 million (2017: £1,096 million). However excluding disposals, adjusted operating profit1,2 grew 10% to £1,034 million (2017: £944 million), driven primarily by our life businesses which continue to grow revenue, improve product mix and focus on expense efficiencies.
Excluding disposals, the adjusted operating profit1,2 of our General insurance businesses grew by 6% to £218 million (2017: £204 million). Dealing with each of the markets in turn: • In France, adjusted operating profit1,2 was £110 million (2017: £104 million), an increase of 5%, due to growth, particularly in commercial lines, turnaround of the health business and expense efficiencies, partially offset by higher large losses and weatherrelated claims.
Life adjusted operating profit1,3 Singapore 141 118 Other Asia (excl. FPI, Taiwan) 8 (3)
Adjusted operating profit1,3 from our life and general insurance and health businesses was £284 million (2017: £227 million). Excluding FPI and Taiwan, life adjusted operating profit1,3 increased by 31% to £149 million (2017: £115 million). Within this, Singapore’s adjusted operating profit1,3 improved by 21% to £141 million (2017: £118 million), which was mainly due to a higher contribution from the financial advisory channel. Improved results in China, Indonesia and Vietnam were partly offset by the initial set up costs of Blue in Hong Kong. Life adjusted operating profit1,3 for FPI improved from £119 million to £151 million as a result of improved operational performance and cost reductions.
Expenses Total operating expenses2 for Asia were £186 million (2017: £207 million). Excluding FPI, operating expenses2 were £143 million (2017: £150 million). The decrease is mainly as a result of cost saving initiatives as well as lower project development and IT costs.
• Completed modern slavery threat assessments on eight suppliers to include a review of recruitment processes, policies and procedures. These assessments were carried out with two suppliers in Singapore, two in Poland, and four in the UK across the following services: car valeting, cleaning, media production and digitisation
We use our role as responsible shareholders to engage on issues such as Anti Microbial Resistance (AMR) and climate change. We worked with our investee companies, predominantly in the pharmaceutical and food sectors, to develop a robust policy on AMR and phase out antibiotic use across their supply chains. We also fulfilled the Chairman’s promise made at the AGM, working with other investors, to engage with the Polish coal mining sector on climate risk and the need for greater transparency and disclosure.
Our investments also support the transition to a low-carbon economy (see below for more details). In 2018, Aviva assigned £1.8 billion of new investment in wind, solar, biomass and energy efficiency. We also set an associated carbon savings target for this investment of 100,000 tonnes of CO2e annually. Aviva also hold nearly £1.3 billion in green bonds to support the transition to a low-carbon economy.
• Investment in lower carbon infrastructure – Aviva announced in 2015 an investment target of £500 million annually for the next five years in lower carbon infrastructure
We divest where necessary. To date we have divested Aviva’s own assets from 17 thermal coal mining and power generation companies from the Coal 403. In addition in 2018, we were asked by Urgewald, an environmental and human rights non-governmental organisation (NGO), to review our holdings against their CoalExit list of 120 coal companies. Aviva actively-manages positions within our beneficial holdings in 15 of these companies with a total market value of £415 million or 0.09% of our total assets. Ten of the 120 companies on the list are companies that we have put on our investment stoplist. More details of this engagement can be found on www.aviva.com/social-purpose.
Total 8 3 9 Gender Male 5 3 6 Female 3 — 3 Experience and Skills1
I am proud to be an active member of the FTSE 100 30% Club and that we are part of the Future Boards Scheme. Our Board Diversity and Inclusion Statement was published in May 2017 and reflects the continued support for the diversity and inclusiveness programme throughout the business. You can find the statement on our website at www.aviva.com/corporate-governance.
The Nomination Committee report sets out the process that would be adopted to identify and appoint new NEDs, which includes consideration of diversity criteria. The NEDs assist management in the development of the Group’s strategy, so it is important that they have experience of strategy formulation, business planning and transformation. To be effective, it is the Board’s view that the majority of our NEDs should also have a sound understanding of the financial services industry to be able to fully understand the strategic issues and opportunities the Company faces so that they can provide appropriate challenge. All Board appointments are also subject to continued satisfactory performance following the Board’s annual effectiveness review, and the Company’s articles of association (Articles), which prescribe that all serving directors will retire and stand for election or re-election at each Annual General Meeting (AGM).
The Board prioritised discussions on strategy during 2018 and held in depth strategy discussions in June and September. The Board undertook an investor survey to garner investor thoughts and feedback. This feedback was incorporated into Board discussions on strategy and into the areas of focus for the Board during the year.
International focus Strategic priorities The Board has enhanced its focus on its international markets through business unit presentations from key international markets and visits to offices outside the UK. This was supported by Maurice Tulloch’s appointment to the Board in June 2017.
The Board received two formal presentations on customer issues during the year and focused on customer issues during the Board’s strategy offsite meetings. The Governance Committee, working in support of the Board, considers customer matters at every meeting to ensure a consistent and deep focus on the customer experience and on customer issues. As noted in the Directors’ Remuneration Report, customer measures have been introduced into the annual bonus element of executive directors’ pay, to further encourage a more customer centric approach. As a business we conduct extensive direct customer testing and during 2019 the Board has made the customer a priority area of focus.
The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the RMF outlined in this report. We continue to work with these entities to understand how their risks are managed and to align them, where possible, with our framework.
Board composition and diversity • Led the search process for the new Group CEO • Reviewed the composition of the Board and its committees and whether the Board required additional skills and experience which would complement those of the existing members and the Company’s risk profile and strategy
Talent pipeline • Reviewed the career and development plans for the Group
Capital and liquidity During the year the Committee reviewed the current and projected liquidity position, risk environment and risk profile including credit cycle analysis and the economic outlook.
The Committee acts independently of management and works closely with the Governance, Remuneration and Risk Committees. There is cross-membership between these Committees to ensure a good understanding and efficient communication of the work of each.
Significant issues The significant issues that the Committee considered during the year are set out in the table below.
The Company has complied with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 for the year ended 31 December 2018.
In line with the Standard, our Committee satisfied itself that for all non-audit engagements, robust controls were in place through a quarterly review process for audit related and non-audit services provided, to ensure that PwC’s objectivity and independence was safeguarded, and concluded that it was in the interests of the Company to purchase these services from PwC due to their specific expertise. Further details are provided in note 13 of the financial statements.
Internal control The Committee is responsible for supporting the Board in ensuring a robust system of internal control and risk management in the Group. The Committee receives regular reports on the status of the control environment, reports on our remaining Group MCIT, and updates on the management of operational risks and controls under ORCM. More information about our system of internal control and risk management can be found in the Directors’ and Corporate Governance report.
The Committee is also supported in its work by the Audit Committees that operate in the Group’s regulated subsidiary entities. These subsidiary Audit Committees review the operation of internal controls, and actively challenge judgement made by management, strengthening the overall governance and control framework for the Group. The Committee Chair has engaged with subsidiary company entity chairs during the year on Group matters.
• Approved auditor terms of engagement and remuneration • Reviewed reports from the External Auditor with regard to: the 2018 Audit Plan and progress against plan and reports on the audit of the 2018 half and full year results including key assumptions used and outcomes of the audit
During 2018, the Company re-purchased 119,491,188 ordinary shares of 25 pence each for an average of £5.0213 per share and an aggregate amount of £600 million. The purchased shares represent 2.54% of called-up share capital as at 31 December 2018. All shares purchased have been cancelled.
In approving these remuneration terms, the Committee has been mindful of the views of shareholders. Maurice’s salary is below that for Mark prior to his departure, reflecting that Maurice is new to the role. We have also reduced Maurice’s pension provision to align with the majority of our UK workforce, and he will not be eligible for a car allowance. Finally, Maurice’s 2019 LTIP opportunity of 300% is lower than that permitted under our Policy, but in line with awards made in recent years.
Revised Corporate Governance Code In July 2018, the Financial Reporting Council (FRC) published the 2018 Code. The Committee welcomes the 2018 Code and is pleased that in several areas our practice is already aligned with the new provisions. For example, approval of the remuneration for the Group Executive (GE) already falls within our remit; our Policy provides unfettered ability to apply discretion to incentive outcomes and; our malus and clawback provisions are aligned with those suggested under the 2018 Code.
Notwithstanding these achievements, the Committee was conscious that the Group experienced several events during 2018 which had an impact on our customers, our shareholders, and our broader stakeholder community. Firstly, we recognise the negative impact that our March 2018 announcement on preference shares had on the Group. Secondly, it is recognised that our UK savings business encountered disruption during the migration of our independent adviser platform to a new supplier, which adversely affected our service standards. Thirdly, the Committee is conscious that our oversight in some areas of the Canadian business fell below our high standards and contributed to the issues in the financial performance experienced.
Maurice Tulloch 11 May 2018 LTIP 225% £1,556,750 20% 100% 31 Dec 2020 27 Mar 2023 26 Mar 2018 ABP 80% £557,066 N/A 27 Mar 2021 1 ABP and LTIP awards have been granted as share awards. The LTIP is a conditional right to receive shares based on a three-year performance period, with an additional two-year holding period. ABP represents the portion of the 2017 bonus deferred into shares for three years. Shares issued in lieu of dividends accrue on ABP and LTIP awards during the ABP deferral period and the LTIP performance period. AESOP includes partnership, matching and dividend share awards which vest after three years. Further details are provided in Tables 16 and 18.
• On 31 October 2017 Russell was also appointed as a NED of Aviva Insurance Limited (AIL), also a subsidiary company of Aviva plc. Russell subsequently stepped down from AIL on 28 February 2018
Payments for loss of office (audited information) We announced on 9 October 2018 that the Board had agreed with Mark that he would step down as Group CEO and as a Director of the Company with immediate effect. Mark was placed on garden leave for six months with effect from 9 October 2018. During this period, he continues to receive his salary and contractual benefits. For the remainder of 2018, these amounts totalled £319,866. At the end of his garden leave period (9 April 2019), Mark’s employment will terminate and the Company, at its discretion, will make a payment in lieu of notice of six months basic salary, pension entitlement and contractual benefits in monthly instalments, over the remainder of his contractual 12-month notice period. We expect Mark to mitigate his loss during the last six months of this notice period, by seeking alternative employment, or engagement. The total amount during 2019 in respect of the remainder of Mark’s garden leave and payment in lieu of notice is expected to be £1,102,954. This includes the continued provision of Mark’s private medical insurance, on the same terms, for the remainder of his contractual notice period. The total value of this benefit is anticipated to be in the region of £30,000.
Dilution Awards granted under Aviva employee share plans are generally met by issuing new shares as agreed by the Board. Shares are held in employee trusts, details of which are set out in note 34.
Bonus4 • One-year performance assessed against critical financial and non-financial performance measures
Financial measures (70% of total): • 20% – Operating EPS2 • 25% – Cash remittances2 • 25% – Operating capital generation2
Maximum opportunity Dependent on location and family size, benefits are market related and time bound. They are not compensation for performing the role but to defray costs of a relocation or residence outside the home country.
Illustration of the Policy The charts below illustrate how much EDs could earn under different performance scenarios in one financial year: • Minimum – basic salary, pension or cash in lieu of pension and benefits, no bonus and no vesting of the LTIP • Target – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 100% and an LTIP of 300% of basic salary (with notional LTIP vesting at 50% of maximum) for the Group CEO; and – A bonus of 100% and an LTIP of 225% of basic salary (with notional LTIP vesting at 50% of maximum) for the CFO and CEO UKI.
Belén Romana García ✓ ✓ ✓ 26 June 2015 AGM 2019
There are inherent limitations in the audit procedures described above and, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Based on the work performed and the evidence obtained, we consider the assumptions used and the output from the new actuarial model to be appropriate.
Credit default assumptions for illiquid assets, specifically: Commercial mortgages and equity release mortgages (Group) Refer to the Audit Committees’ Report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 43 Insurance liabilities methodology and assumptions (a) Long-term business.
• We validated significant assumptions used by management by ensuring consistency with the assumptions used for the valuation of the assets, and against market observable data (to the extent available and relevant) and our experience of market practices.
Based on the work performed and the evidence obtained, we consider the assumptions used by management to be appropriate.
Strategic report and Directors’ and corporate governance report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ and Corporate Governance Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: • The directors’ confirmation on page 51 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. • The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. • The directors’ explanation on page 66 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Principal assumptions used in the calculation of life insurance and participating investment contract liabilities include those in respect of annuitant mortality, expenses, valuation interest rates and credit default allowances on corporate bonds and other non-sovereign credit assets. Principal assumptions used in the calculation of general insurance and health liabilities include the discount rates used in determining our latent claim and structured settlements liabilities, and the assumption that past claims experience can be used as a basis to project future claims (estimated using a range of standard actuarial claims projection techniques).
Liabilities Gross insurance liabilities L & 42 144,077 148,650 Gross liabilities for investment contracts M & 44 202,468 203,986 Unallocated divisible surplus L & 48 5,949 9,082 Net asset value attributable to unitholders D 18,125 18,327 Pension deficits and other provisions AA, AB & 50 1,399 1,429 Deferred tax liabilities AC & 49 1,885 2,377 Current tax liabilities 254 290 Borrowings AD & 52 9,420 10,286 Payables and other financial liabilities S & 53 16,882 16,459 Other liabilities 54 3,043 2,791 Liabilities of operations classified as held for sale AH & 4(c) 8,521 9,873
Total net cash from operating activities 5,958 7,741 Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 58(b) 192 25 Disposals of subsidiaries, joint ventures and associates, net of cash transferred 58(c) 381 (49) Purchases of property and equipment 21 (87) (69) Proceeds on sale of property and equipment 15 5 Purchases of intangible assets (64) (107)
If the acquisition had been effective on 1 January 2018, on a pro-forma basis the contribution to the Group’s net earned premiums is estimated at £102 million and profit before tax attributable to shareholders is estimated at £5 million. In determining this amount, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 January 2018. The pro-forma results are provided for information purposes only and do not necessarily reflect the actual results that would have occurred had the acquisition taken place on 1 January 2018, nor are they necessarily indicative of the future results of the combined Group.
Strategic report Governance IFRS financial statements Other information 4 – Subsidiaries, joint ventures and associates – disposals and held for sale continued On 5 November 2018, Aviva Investors completed the sale of its Real Estate Multi-Manager business to LaSalle Investment Management and exited its partnership arrangement in Encore+, a pan-European commercial property fund, also with LaSalle. The assets disposed of represent customer related intangible assets. The gain on disposal was £27 million.
Investment (income)/expense attributable to unitholders (704) 496 Reinsurance commissions and other fee and commission expense 490 454
(b) Economic volatility The investment variances and economic assumption changes excluded from Group adjusted operating profit for life businesses are as follows: Life business 2018 £m
(a) Tax (credited)/charged to the income statement (i) The total tax (credit)/charge comprises: £m
Goodwill in all business units is tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill relates, to the recoverable value of that cash generating unit. The recoverable amount is the value in use of the cash generating unit unless otherwise stated. The classification of FPI in Asia remains as held for sale (see note 4(c)). The Group measured the recoverable amount of FPI at the estimated fair value less costs to sell.
At 31 December 2017 (27) (134) (46) (71) (278) Impairment charges3 — (13) — — (13) Disposals — — 8 — 8 Foreign exchange rate movements — — — — — At 31 December 2018 (27) (147) (38) (71) (283) Carrying amount At 1 January 2017 1,750 2,097 1,391 242 5,480 At 31 December 2017 1,533 1,725 1,376 252 4,886
On 13 February 2018, Aviva announced that it has completed the transaction to develop a digital insurance joint venture in Hong Kong with Hillhouse Capital Group (Hillhouse) and Tencent Holdings Limited (Tencent). The joint venture commenced operating under its new corporate structure during the first half of 2018. The transaction included the sale of 60% of the shareholding in Aviva Life Insurance Company Limited (Aviva Hong Kong) as detailed in note 4(d). This is reflected as reclassification from subsidiary of £5 million and new capital addition of £20 million in 2018.
At 31 December 2017 1 340 3 155 265 764 Additions 1 21 1 24 40 87 Disposals (2) (8) — (7) (6) (23) Transfers (to)/from investment property (note 22) — — — — — — Fair value gains — 3 — — — 3 Foreign exchange rate movements — 3 — 3 7 13 At 31 December 2018 — 359 4 175 306 844 Depreciation and impairment At 1 January 2017 — (20) (2) (246) (141) (409) Charge for the year — — — (13) (22) (35) Disposals1 — 15 — 134 54 203 Impairment charge — 2 — — (8) (6) Foreign exchange rate movements — — — — (3) (3)
Carrying amount At 31 December 2017 1 337 1 30 145 514 At 31 December 2018 — 356 1 38 158 553 Less: Amounts classified as held for sale — (4) — — (1) (5) At 31 December 2018 — 352 1 38 157 548 1 Disposals of computer equipment primarily comprise exhausted assets within Aviva Central Services.
Total 797 217 51,097 6,886 58,997 820 326 51,091 5,283 57,520 1 Following a review of the Group’s investment classifications, comparative amounts in respect of structured debt securities have been amended from those previously reported to include certain government and corporate debt securities that meet the definition of structured entities. The effect of this change is to increase the reported 2017 structured debt securities by £424 million. 2 Primarily reported within ‘other debt securities’ in note 27a. 3 Loans include Healthcare, infrastructure & PFI other loans along with certain non-securitised mortgage loans.
Equity securities Ordinary shares Public utilities — 2,383 — 2,383 — 2,402 — 2,402 Banks, trusts and insurance companies1 — 18,039 1 18,040 — 18,852 1 18,853 Industrial miscellaneous and all other1 — 61,719 — 61,719 — 68,656 8 68,664
Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £12.0 billion (2017: £11.7 billion). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (25%), French (17%), Italian (6%), US (6%), Polish (4%) and German (4%) government debt securities.
Concentrations of credit risk with respect to receivables are limited due to the size and spread of the Group’s trading base. No further credit risk provision is therefore required in excess of provisions already recognised for doubtful receivables.
Strategic report Governance IFRS financial statements Other information 29 – Deferred acquisition costs continued Long-term business
DAC for long-term business increased over 2018 mainly due to new business sales across various European markets. DAC for general insurance and health business decreased slightly over 2018 mainly due to the disposal of Avipop in Italy.
(b) Prepayments and accrued income Prepayments and accrued income of £2,951 million (2017: £2,876 million) include assets classified as held for sale of £4 million (2017: £16 million) and £9 million (2017: £7 million) that is expected to be recovered more than one year after the statement of financial position date.
Shares held by employee trusts 455,986 2 295,906 1 Shares held by subsidiary companies 2,435,983 13 2,471,599 13
On a winding up, they carry a preferential right of return of capital ahead of the ordinary shares. Holders are entitled to receive dividends out of the profits available for distribution and resolved to be distributed in priority to the payment of dividends to holders of ordinary shares. The Company does not have a contractual obligation to deliver cash or other financial assets to the preference shareholders and therefore the directors may make dividend payments at their discretion.
Long-term business Change in insurance liabilities (note 42(b)(iii)) 624 315 939 Change in provision for outstanding claims (65) (11) (76)
144,077 148,650 1 Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations, where applicable, are included in other line items. At 31 December 2018 this provision is nil for the life operations.
(ii) Group practice The long-term business liabilities are calculated separately for each of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006.
For participating insurance liabilities, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the year (shown in note 47), together with the impact of movements in related non-financial assets.
The Group only establishes reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability.
The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2008. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2018 were £94 million (2017: £95 million). The movement in the year reflects a reduction of £6 million due to favourable claims development, claim payments net of reinsurance recoveries and foreign exchange movements.
Expenses Maintenance expense assumptions for with-profits business are generally expressed as a fixed ‘per policy’ charge in line with agreements between Aviva Life Services UK Limited (UKLS) and Aviva Life & Pensions UK Limited (AVLAP). The assumptions increase by a future inflation charge over the lifetime of each contract, which is 50% RPI, 100% RPI or 100% RPI + 1% depending on product type. Any excess of expenses charged by UKLS to AVLAP over the charges specified by the agreements is borne by the non-profit business.
No adjustments are made to the claims technicians’ case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.
The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of these assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate of £20 million (2017: £35 million) greater than the best estimate, or £30 million (2017: £40 million) lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.
Carrying amount at 1 January 87,654 89,739 Liabilities in respect of new business 6,301 5,193 Expected change in existing business (4,491) (4,986) Variance between actual and expected experience (1,441) 2,072 Impact of operating assumption changes 59 10 Impact of economic assumption changes (40) 411 Other movements recognised as an expense1 152 (16) Change in liability recognised as an expense2 540 2,684 Effect of portfolio transfers, acquisitions and disposals3 427 (7,243) Foreign exchange rate movements 774 2,452 Other movements4 1,060 22 Carrying amount at 31 December 90,455 87,654 1 Other movements during 2018 and 2017 primarily relate to a special bonus distribution to with-profits policyholders in UK Life. 2 Total interest expense for participating investment contracts recognised in profit or loss is £(419) million (2017: £2,489 million). 3 The movement during 2018 relates to the acquisition of Friends First in Ireland. The movement during 2017 relates to the disposal of Antarius in France. 4 The movement during 2018 relates to the reclassification in France from non- participating investment contracts to participating investment contracts (£151m) and from insurance to participating investment contracts (£56m)
(ii) Guaranteed unit price on certain products Certain pension products linked to long-term life insurance funds provide policyholders with guaranteed benefits at retirement or death. No additional provision is made for this guarantee as the investment management strategy for these funds is designed to ensure that the guarantee can be met from the fund, mitigating the impact of large falls in investment values and interest rates.
(iii) Return of Premium guarantees German pension products sold in Friends Life between 2006 and 2014 are subject to a Return of Premium guarantee whereby the product guarantees to return the maximum of the unit fund value or total premiums paid (before deductions). Provisions for this guarantee are calculated using a market-consistent stochastic model and amount to £153 million at 31 December 2018 (2017: £132 million).
Strategic report Governance IFRS financial statements Other information 45 – Financial guarantees and options continued (b) UK with-profits business The Group’s UK with-profits liabilities are evaluated by reference to FRS 27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. Under the PRA’s rules, provision for guarantees and options within realistic liabilities are measured using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
Carrying amount at 31 December 5,949 9,082 1 The movement during 2018 relates to the acquisition of Friends First (£66 million), and the disposal of the remainder of the Spanish business (£18 million). The movement during 2017 relates to the disposal of Antarius (£832 million) and majority of Spanish business (£244 million). 2 The amount classified as held for sale in 2017 relates to the remainder of the Spanish business (£19 million).
The mortality tables, average life expectancy and pension duration used at 31 December 2018 for scheme members are as follows: Life expectancy/(pension duration) at NRA of a male Life expectancy/(pension duration) at NRA of a female
The assumptions above are based on commonly used mortality tables. The tables make allowance for observed variations in such factors as age, gender, pension amount, salary and postcode-based lifestyle group, and have been adjusted to reflect recent research into mortality experience. However, the extent of future improvements in longevity is subject to considerable uncertainty and judgement is required in setting this assumption. For the ASPS, which is the most material scheme to the Group, the allowance for mortality improvement is per the actuarial profession’s ‘CMI_2017 (S=7.5) Advanced with adjustments’ model (2017: ‘CMI_2016 (S=7.5) Advanced with adjustments’), with a long-term improvement rate of 1.75% (2017: 1.75%) for males and 1.5% (2017: 1.5%) for females. The CMI_2017 tables have been adjusted by adding 0.25% (2017: 0.25%) and 0.35% (2017: 0.35%) to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the pension scheme membership relative to the general population on which CMI_2017 is based), and uses the advanced parameters to taper the long-term improvement rates to zero between ages 90 and 115 (the ‘core’ parameters taper the long-term improvement rates to zero between ages 85 and 110).
Bank overdrafts amount to £153 million (2017: £115 million) in life business operations and £410 million (2017: £384 million) in general insurance business and other operations.
• 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 Solvency II own funds that arise only when the formal TMTP reset points are triggered. The 31 December 2018 Solvency II own funds include a notional reset (£0.1 billion decrease in own funds) while the 31 December 2017 Solvency II own funds 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 or in the event of a material change in the risk profile. The TMTP is amortised on a straight-line basis over 16 years from 1 January 2016 in line with the Solvency II rules.
Cash at bank and in hand 7,615 6,293 Cash equivalents 39,557 37,793 47,172 44,086 Bank overdrafts (563) (499)
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued We continue to limit our direct equity exposure in line with our risk preferences. At a business unit level, investment limits and local investment regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.
The impact of these is reflected in the capital model and managed as part of the asset liability framework. Further disclosure on financial guarantees and options embedded in contracts and their inclusion in insurance and investment contract liabilities is provided in note 45.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued Long-term business Sensitivities as at 31 December 2018 31 December 2018 Impact on profit before tax £m Interest rates
The Group uses a variety of derivative financial instruments, including both exchange traded and over-the-counter instruments, in line with the Group’s overall risk management strategy. The objectives include managing exposure to market, foreign currency and/or interest rate risk on existing assets or liabilities, as well as planned or anticipated investment purchases.
Lithuania Uždaroji akcinė gyvybės draudimo ir pensijų bendrovė ‘Aviva Lietuva’ (90%)
Aviva-COFCO Life Insurance Company Ltd2 China 12/F,Block A,Landgent Centre, 20 East Third Ring Middle Road, Beijing, 100022
China Units 1805-1807, 18th Floor, Block H Office Building, Phoenix Land Plaza, No. A5 Yard, Shuguangxili, Chaoyang District, Beijing
Locamat SAS Ordinary Shares 100 Newco Ordinary Shares 100 SCI Pesaro Ordinary Shares 79 Selectinvie – Societe Civile Immobiliere Ordinary Shares 100 Selectipierre – Société Civile Ordinary Shares 94 Societe Concessionaire des Immeubles de la Pepiniere
Aviva Undershaft Four Limited Ordinary Shares 100 Peak Re Designated Activity Company Ordinary Shares 100 Charlotte House, Charlemont St Mercer Diversified Retirement Fund OEIC 22 3rd Floor, 2 Harbourmaster Place, IFSC KBI Institutional Fund ICAV – KBI Institutional Eurozone Equity Fund
20 Gracechurch Unit Trust Unit Trust 100 COW Real Estate Investment Unit Trust Unit Trust 100 Designer Retail Outlet Centres (Mansfield) Unit Trust
Aviva Investors Sfio Akcyjny Non UCITS 100 Aviva Investors Sfio Aviva Lokacyjny Non UCITS 71 Aviva Investors Sfio Dluzny Non UCITS 100 Aviva Investors Sfio Pap Nieskarbowych Non UCITS 99 Aviva Investors Sfio Pieniezny Non UCITS 100 Aviva Investors Sfio Spolek Dywidend Non UCITS 100 Aviva Sfio Subfundusz Aviva Oszczędnościowy Non UCITS 70 Aviva Investors Fio Malych Spolek UCITS 69 Ul. Burakowska 5/7, 01-066 , Warszawa Berkley Investments S.A. Ordinary A Shares 90 Porowneo.Pl Sp. Z O.O Ordinary Shares 90 Ul. Prosta 69, 00-838 Warsaw, 00-838, Warsaw AdRate Sp. z o.o. Ordinary Shares 90 Expander Advisors Sp. z o.o. Ordinary Shares 90 Life Plus Sp. z o.o. Ordinary Shares 90 Ul.Inflancka 4B, 00-189, Warsaw Aviva Investors Poland Towarzystwo Funduszy Inwestycyjnych S.A.
Al Hadi Sharia Compliant Fund Mutual Fund 83 Al Mokdam Sharia Compliant Fund Mutual Fund 77 Al Shamekh Fund Mutual Fund 70 Al Shuja’a Sharia Compliant Fund Mutual Fund 77 Singapore 12 Marina View, #18-02 Asia Square Tower 2, 018961
RAC Pension Trustees Limited Ordinary Shares 100 Solus (London) Limited Ordinary Shares 100 Synergy Sunrise (Broadlands) Limited Ordinary Shares 100 Argyll House, All Saints Passage, London, SW18 1EP
Friends SL Nominees Limited Ordinary Shares 100 Friends SLUA Limited Ordinary Shares 100 Gateway Specialist Advice Services Limited Ordinary Shares 100 Hengrove Park Bristol (Phase I) Management Company Limited
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 102 to 115. The notes identified alphabetically on pages 246 to 252 are an integral part of these separate financial statements. Where the same items appear in the Group financial statements, reference is made to the notes (identified numerically) on pages 123 to 241.
Other provisions primarily include amounts set aside for costs of compensation, litigation and staff entitlements.
K – Borrowings continued Maturity analysis of contractual undiscounted cash flows: Principal £m
P – Related party transactions The Company had the following related party transactions.
On 3 September 2013 Aviva Group Holdings Limited, its subsidiary, provided an unsecured rolling credit facility of €250 million to the Company, accruing interest at 75 basis points above 6 month LIBOR and with an initial maturity date of 3 September 2018, which was subsequently extended to 31 December 2023. The total amount drawn down on the facility at 31 December 2018 was £nil (2017: £nil).
2 Includes the adjustments required to reflect market consistent principles under Solvency II whereby noninsurance assets and liabilities are measured using market value and liabilities arising from insurance contracts are valued on a best estimate basis using market-implied assumptions.
6 The estimated Solvency II position represents the shareholder view only.