We are a leading Savings, Retirement and Insurance business, helping our 31.6 million customers make the most out of life, plan for the future, and have confidence that if things go wrong we will be with them to put it right.
We have been looking after customers for more than 320 years. We are deeply invested in our people, our communities and the planet. We’re here to be with our customers today as well as working for a better tomorrow.
Over my 30-year career in financial services I’ve often come up against Aviva in its various guises. In that time, I saw again and again a company that was a formidable competitor. The paradox is that for too long we have not had the respect and recognition from the market that we have from our peers or our customers.
Customers Aviva has 18 million customers across our Core markets and we are placing them at the heart of everything that we do – our customers are why we exist, and it is essential that we serve their needs seamlessly and efficiently, whether they be an individual, a business or an intermediary. I recognise that the insurance industry has all too often made the customer experience more difficult and complicated than it needs to be. Well, what do our customers want from their insurer? They want fair prices, a trusted brand that delivers on its promises, excellent service and all from a company that will act in a sustainable and responsible way. Aviva understands these needs and importantly, is responding to them. And by meeting our customers’ expectations, we will live up to our purpose to be “With you today, for a better tomorrow”.
Strategy In 2020 we announced three clear strategic priorities for Aviva: focus the portfolio, transform performance and financial strength.
Percentage of UK employees who were members of a workplace pension scheme in 2019 (up from 47% in 2012 when auto-enrolment began)
Respondents reporting that their companies have adopted AI in at least one business function 50% Source: McKinsey Global AI Survey, November 2020
(where possible), can be found in the ‘Other Information’ section within the Annual Report and Accounts.
Confidence Because we believe that the best is still to come – for our customers, our people, and society. We’re not just here for now; we’re here to imagine and to innovate for the future, creating value for customers and shareholders. We are brave and passionate, setting new standards for ourselves and the competition. With a humility that is as important as the ambition that drives us.
Communities We play a significant role in our communities, including as a major employer and a long-term responsible investor.
Cash remittances1 R Cash remittances1 measure the cash transferred from markets to Group and demonstrate sufficient remittances to cover the dividend.
Solvency II return on equity (RoE)1 Solvency II RoE1 was 9.8% (2019: 14.3%), lower primarily owing to changes to modelling in our French life business which corrected a mis-applied rule, and significantly lower benefit from longevity assumption changes in UK Life. Underlying performance, excluding the impact of capital actions, non-economic assumption changes and other non-recurring items, Solvency II RoE1 increased to 9.8% (2019: 8.1%) driven by underlying improvements in UK Life, due to bulk purchase annuities (BPA) new business, and in our UK and Canada General Insurance businesses.
The Board approved, on 3 March 2021, an £800 million liability management exercise. This tender offer, alongside upcoming debt maturities and optional first calls in the first half of 2021, allows us to reduce our Solvency II debt leverage ratio1 by c.4 percentage points by half year 2021.
In light of our 2020 performance and strong capital and liquidity, the Board has proposed a final dividend of 14 pence per share (2019: nil), bringing the total dividend in respect of 2020 financial year to 21 pence per share (2019: 15.5 pence per share). A second interim dividend in respect of 2019 financial year of 6 pence per share was paid in the third quarter of 2020.
Protection – We are a leading provider of both group and individual protection ranking second1 in each category. In 2020, our group protection business had a record year with sales2 of £716 million (2019: £518 million), however our individual protection business saw lower sales2 of £1,210 million (2019: 1,357 million) owing to the impact of lockdown measures on the housing market and key distributors including advisors, banks and estate agents. The protection market tends to grow in line with or slightly above inflation which provides a steady and high-quality source of earnings for Aviva. Our key sources of competitive advantage include our brand, digital propositions, underwriting discipline, and our relationships with intermediaries. We have invested in these businesses to drive future growth, while also maintaining our focus on efficiency.
We currently have around 10% market share6 benefiting from the strength of the Aviva brand, strong distribution relationships, including with some of the UK’s largest high street banks, as well as market leading reputation with brokers. Until recently only our Quote-me-happy and General Accident brands were available through price comparison websites (PCWs) however in late 2020 we launched our Aviva brand’s motor offering on the major PCWs, with good early signs of success, and our home offering has followed.
Annuities & Equity Release Our Annuities & Equity Release business consists of bulk purchase annuities (BPA), individual annuities and equity release. Our products offer customers safe and secure income in their retirement and support employers in their desire to de-risk their pension schemes. We are the UK’s largest provider of individual annuities3, we manage the UK’s largest book of equity release mortgages4, and in the first half of 2020 we were the third largest provider of BPAs5. Our Annuities & Equity Release products create synergies, with equity release assets being held long-term to back longer-term annuity liabilities, alongside assets sourced by Aviva Investors. Profits are primarily driven by yields, and our focus on capital efficiency secures significant cash flows, which has allowed us to invest in, and grow, our BPA business.
Our transactional net promotor scores (TNPS), a measure of the number of customers who would recommend us following a purchase, service or claim, has increased by 2 points to +45 (2019: +43).
Aviva’s continued strength in the Intermediary sector has been reflected in several awards won during 2020. Aviva were the first insurer to secure a clean sweep of Personal lines, Commercial lines and General Insurer of the Year awards, in a single year, at the 2020
Personal lines In Personal lines, our growth ambitions are centered firstly on our retail sales channels, including sales of the Aviva brand on all price comparison websites and secondly on targeted activity with specific broker and partner relationships. We are rationalising our product portfolio and investing in digital innovations to deliver solutions that are both more efficient and easier for our customers.
Personal lines In the UK, we offer Personal lines insurance, with a core focus on home, motor and travel insurance. Our personal motor digital solution allows customers greater control over their claims with online reporting and a self-serve booking tool for car repairs.
In Ireland, we focus on home and motor insurance in Personal lines. We’re constantly updating our private motor rating models to ensure that we continue to have market-leading risk selection.
• Supported businesses who had to change or adapt their business models and extended our coverage for empty premises.
Our commercial lines business remains intermediated by our broker network, as well as via Managing General Agents, whose proposition is based on their ability to provide a unique product or expertise for a specific group of customers.
• Deliver focused growth by optimising, scaling and diversifying our portfolio and channels.
• People: develop a high-performance culture, focusing on our diversity and inclusion strategy, talent and career development
Notwithstanding the challenging market conditions, we had positive momentum in our Aviva client and external client businesses throughout 2020.
• In General Insurance, we have further diversified our distributor mix, concentrated on non-tied agents, especially through new relations with brokers. The Partnership with B&S has allowed us to become market leader in the CQP/CQS business.
Turkey In Turkey we have a life insurance business through our joint venture with Sabanci. We are number one in the market for pensions and the number two private auto-enrolment provider. We offer protection products through both bancassurance and retail channels including a direct sales force.
Risk management is key to Aviva’s success. We accept the risks inherent to our core business lines of life, health and general insurance and asset management. We diversify these risks through our scale, the variety of the products and services we offer and the channels through which we sell them.
Our governance This includes risk policies and business standards, risk oversight committees and roles and responsibilities. Line management in the business is accountable for risk management which, together with the risk function and internal audit, form our ‘three lines of defence’. The roles and responsibilities of the Customer, Conduct and Reputation Committee, Audit and Risk Committees and management’s Disclosure, Asset Liability and Operational Risk Committees in relation to the oversight of risk management and internal control is set out in the ‘Directors’ and Corporate Governance report’ in the Annual Report and Accounts.
Business interruption – Standard commercial policy wording does not provide cover for COVID-19. However, we have some exposure through broker determined wordings where we are the lead or follow insurer and many of the issues were subject to the FCA test case. The Supreme Court appeal took place on 15 January 2021, following the verdict the legal uncertainty in the UK around gross losses has been significantly reduced.
Economic & credit cycle – uncertainty over prospects for future macroeconomic growth, credit and current low interest rates, and the response of Central Banks, could adversely impact the valuation of our investments or credit default experience as well as the level of the returns we can offer to customers going forwards and our ability to profitably meet our promises of the past.
We monitor our own experience carefully and analyse external population data to identify emerging trends. Detailed analysis of the factors that influence mortality informs our pricing and reserving policies. We add qualitative medical expert inputs to our statistical analysis and analyse factors influencing mortality and trends in mortality by cause of death. We also use longevity swaps to hedge some of the longevity risk from the Aviva Staff Pension Scheme and longevity reinsurance for bulk purchase annuities and for some of our individual annuity business.
Outsourcing – we rely on a number of outsourcing providers for business processes, customer servicing, investment operations and IT support. The failure of a critical outsourcing provider could disrupt our operations.
Risk impacted: Life Insurance risk (mortality, longevity, morbidity), General Insurance (business interruption, travel) and Operational risk.
We have contingency plans which are designed to reduce as far as possible the impact on operational service arising from mass staff absenteeism, travel restrictions and supply chain disruption caused by a pandemic, which we were able to put into action during the current COVID-19 pandemic. We reinsure much of the mortality risk arising from our Life Protection business and hold capital to cover the risks of a 1in -200 year pandemic event. We model extreme pandemic scenarios (e.g. a repeat of the 1918 global influenza pandemic or COVID-19). In the Group and commercial insurance business we limit our potential exposure through our policy wordings. As an investment manager and investor, we engage with companies to ensure the responsible use of antibiotics to reduce the risk that antimicrobial resistance negates the efficacy of medical treatment.
Our new capital framework and priorities In November 2020, we announced a dividend policy and capital framework that aligns with our strategy to focus on the Core markets of the UK, Ireland and Canada. At the core of our capital framework is financial strength and efficient deployment of capital. • We aim to operate a sustainable dividend policy with a level of dividend that is resilient in times of stress and is covered by capital and cash generated from the Core markets. We aim to grow our dividend per share by low to mid-single digits over time as we benefit from growth in key segments, improved efficiency as well as lower levels of debt and associated interest. As we make further progress on focusing the portfolio, this will provide further flexibility to both invest in our business and to provide additional returns to shareholders.
UK & Ireland Life7 1,259 1,248 UK & Ireland General Insurance 357 251 Canada 262 261 Aviva Investors 70 90 Manage-for-value 172 867 Group centre, debt costs and Other7 (188) (458)
At the Interim Results Announcement we also announced that going forward we would focus on our strongest businesses in the UK, Ireland and Canada where we have the necessary size, capability and customer service capabilities to generate superior returns for shareholders. The Aviva international businesses in continental Europe and Asia would be managed for long-term shareholder value, and where we could not meet our strategic objectives, we would withdraw capital. In addition, we announced that we must translate our strength in customer and distribution into superior financial performance for shareholders, and further strengthen our financial position in order to give the optionality to invest in our businesses and provide returns to shareholders.
• The Board continues to monitor and review developments concerning changes to our IT platforms which will allow us to simplify and support service delivery to our customers.
Towards a more sustainable future Aviva is not just an insurer but an investor in the economy, investing in buildings, infrastructure projects and companies around the world to help our customers save for their future.
We limit our exposure to the most carbon intensive elements of the economy through our Group Underwriting Boundaries. These include restrictions on toxic waste companies that present a significant hazard to the environment, and carbon intensive industries such as mining, offshore oil and gas extraction. At the start of 2019, we exited the standalone operational fossil fuel4 power market as part of our commitment to help tackle climate change. These restrictions have been adopted by our general insurance businesses in the UK, Ireland, Canada, France and Poland.
More broadly, we aim to use our underwriting insight to support our investment decisions, to ensure a consistent view of climate-related risks is taken. For example, the issuers on Aviva’s investment Stoplist are mirrored as exclusions in the Group Underwriting Boundaries.
Carbon foot-printing – We use weighted average carbon intensity data to assess our investment portfolio’s sensitivity to an increase in carbon prices and our progress to the Paris Agreement target.
Jim McConville ▲ Position: Independent Non-Executive Director Nationality: British Committee Membership: Customer, Conduct and Reputation Committee (Chair), Audit Committee, Risk Committee, Nomination and Governance Committee Tenure: 3 months. Appointed to the Board in December 2020 Skills and Experience: Jim was previously Group Finance Director of Phoenix Group, where he was responsible for all aspects of the Group’s financial strategy and management, during which he led the transition programme bringing Phoenix and Standard Life Assurance together. Prior to that, he was Chief Financial Officer of Northern Rock from 2010 to 2012, and prior to that he worked for Lloyds TSB Group (now Lloyds Banking Group plc) in a number of senior finance and strategy related roles. With Jim’s extensive experience he is well placed to chair and strengthen the Customer, Conduct and Reputation Committee. Jim’s expertise significantly adds to the knowledge and expertise of the Audit Committee, Risk Committee and Nomination and Governance Committee. External Appointments: N/A.
Governance • Discussed reports from Board committees and management on legislation and proposed consultations that affect or will affect the Group’s legal and regulatory obligations, including the Code
In order to ensure there is a clear division of responsibilities between the running of the Board and the running of the business, the Board has identified certain ‘reserved matters’ for its approval. In relation to all other matters, unless they are specifically reserved for shareholder approval in a general meeting, the Board delegates responsibility for these to our Group CEO, who then delegates responsibility for specific operations to members of the Group Executive Committee (ExCo), comprised of our most senior managers from across the business.
As at the date of the report the representation of women on the Board has increased from 33% in March 2020 to 40%. We actively support women advancing into senior roles, with the Group CEO being a member of the 30% Club. We are a charter signatory of HM Treasury’s Women in Finance Charter, which commits financial services companies to a range of measures to improve gender diversity amongst senior management. As at the date of this report females represent 35% of the ExCo and further details on gender diversity in the workforce and wider senior leadership population can be found in the Strategic report.
• Led the search process for the appointment of the new Non-Executive Chair, Group CEO, SID and three Non-Executive Directors
During 2020, a review of the Terms of Reference was carried out to provide greater clarity to the role and responsibilities between the Committee and CCRC to support appropriate oversight of conduct risk issues. As a result, the Committee held joint meetings with the CCRC to further assist co-ordination between the two Committees when assessing Conduct Risk matters, particularly when monitoring the impact of COVID-19 on customers and markets. This coordinated approach to oversight was formalised through the CCRC becoming a sub-committee of the Risk Committee to bring together committee oversight of all operational risk matters into one area. The Committee Terms of Reference were also clarified in respect of oversight of operational controls, with the Audit Committee overseeing controls over financial reporting, and the Risk Committee overseeing all other operational risk controls. The Committee also works closely with the Remuneration and Audit Committees. The cross membership between these Committees promotes a good understanding of issues and efficient communication.
The operational resilience pilot exercise supported the Group’s approach to COVID-19 resilience activities, for example exceptions on provision of devices and alternate mobile working. This ensured that a strong internal communications cascade was in operation with full colleague support being provided. As part of operational readiness, the Group made the decision that new business was deprioritised in order for staff to deal with existing and vulnerable customers and in particular claims. The Committee focused on the safety of employees, particularly those with underlying health conditions and ensured that management had plans in place to protect employees, and accommodate working from home, while ensuring that all critical services were maintained.
The Committee assessed the potential impact of new International Financial Reporting Standards (IFRS), particularly the new insurance accounting standard (IFRS 17) on the Group’s financial operations.
Committee purpose In January 2020 the Committee’s Terms of Reference were reviewed and updated to further clarify the delineation of oversight of internal controls with the Risk Committee and the Committee operated under the revised terms of reference throughout 2020. The Committee is responsible for overseeing internal controls over financial reporting while the Risk Committee is responsible for the oversight of other areas of internal control. The Committee acts independently of management and works closely with the Remuneration and the Risk Committees. The cross-membership between these Committees supports a good understanding of areas of concern and facilitates efficient communication.
• Reviewed and challenged the treatment and recoverability of goodwill and other intangible assets particularly in the context of the COVID-19 pandemic
In 2020 the Group paid PwC £21.2 million (2019: £21.2 million) for audit and audit-related assurance services. PwC were paid £3.4 million (2019: £0.8 million) for other services, giving a total fee to PwC of £24.6 million (2019: £22.0 million). This included a fee of £2.4 million to undertake a ‘reasonable assurance’ review of the Solvency II Partial Internal Model following the correction of the misapplication of regulatory rules in our French actuarial models. In addition to these fees, audit fees payable to PwC in respect of investment funds consolidated in the Group financial statements were £2.7 million (2019: £2.4 million). These fees are borne directly by the unitholders of the funds and are not borne by the Group. Further details are provided in note 13 of the financial statements.
The review also clarified the role and responsibilities between the Committee and the Risk Committee to support appropriate oversight of conduct risk issues.
The Committee received updates from UK Life and UK General Insurance Conduct Committee Chairs, to provide an update on progress on conduct governance in the UK and the future direction of travel. The UK Life and UK General Insurance CEOs also attended Committee meetings in order to contribute to the discussion on conduct matters in their respective businesses. The UK Life and UK General Insurance Committee Chairs are now standing attendees at Committee meetings.
Committee activities during 2020 Customer and conduct risk • Focused on the customer agenda and received regular updates and monitored progress on customer metrics relating to customer complaints and the conduct agenda, sales, retention and claims experience
• Reviewed the Group’s Modern Slavery statement, annual corporate responsibility reporting and the Group’s Financial Crime, Regulatory Business and Corporate Responsibility, Environment and Climate Change Business Standards
Details of the Company’s share capital and shares under option at 31 December 2020 and shares issued during the year are given in notes 33 to 36. The calculation of earnings per share is included in note 15.
The Policy review highlighted that on the whole our framework remains fit for purpose and has operated as intended, in terms of performance and quantum. Our Policy and our Annual Report on Remuneration have also been well-received by our stakeholders over the last seven years. As such, we are not proposing any major changes to the Policy, nor the overall construct of reward at Aviva. We are however, making some revisions to the metrics used under the annual bonus and Long Term Incentive Plan (LTIP), with three objectives in mind: • Reinforce our desire to reduce complexity; • Ensure colleagues are focused on areas which can transform performance; and • Support our environmental, social and governance responsibilities.
Shareholder consultation In addition to the AGM and consultation with shareholders specifically on the Policy, the Chair and EDs meet with institutional shareholders during the year and a shareholder newsletter is published quarterly on aviva.com. Topics raised included the suspension of dividend, the updated dividend policy and the Policy, which are covered elsewhere in this letter.
Company’s risk management framework • Long-term alignment is achieved through a number of means, including three-year deferral under the annual bonus, the two-year holding period on LTIP awards, and our within- and post-employment shareholding guidelines
employees with that of Directors (see table 14); – The ratio of CEO pay to that of employees (see table 17 and 18); – Spend on pay compared with, for example operating profit, dividends (see table 19); and – Gender pay gap. We released our third gender pay gap review in
• Any material changes to benefit and pension provision for colleagues more widely
Alignment of Group strategy with executive remuneration The Committee considers that alignment between Group strategy and the remuneration of its EDs is critical. The Policy provides market competitive remuneration, and incentivises EDs to achieve both the annual business plan and the longer-term strategic objectives of the Group. Significant levels of deferral and within- and postemployment shareholding requirements align EDs’ interests with those of shareholders and aid retention of key personnel. As well as rewarding the achievement of objectives, variable remuneration can be zero if performance thresholds are not met. Remuneration payments to directors can only be made if they are consistent with the approved Policy.
FTSE listed companies of comparable size to Aviva in terms of market capitalisation, large European and global insurers, and UK financial services companies
Operation EDs who are relocated or reassigned from one location to another receive relevant benefits to assist them and their dependants in moving home and settling into the new location.
Maximum opportunity The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chair of the Company and NEDs will be determined by the Board within the limits set by shareholders and detailed in the Company’s Articles of Association.
The Chair has access to a company car and driver for business use. Where these are deemed a taxable benefit, the tax is paid by the Company.
During the year, the Committee received assistance in considering executive remuneration from a number of senior managers, who attended certain meetings (or parts thereof) by invitation during the year, including: • the Group CEO; • the CFO; • the Group Chief People Officer; • the Group Reward and Performance Director; • the Chief Financial Controller; • the Chief Audit Officer; • the Group Chief Risk Officer; and • the Remuneration Committee Chair of Aviva Investors.
• Reviewed engagement with shareholders on 2020 annual bonus targets, including customer and trust metrics as strategic progress measures
Subsidiary board remuneration committee terms of reference Sets out the subsidiary remuneration committee’s scope and responsibilities
6 Amanda was appointed as Group CEO on 6 July 2020. 7 Jason was appointed to the Board on 26 September 2019. For 2019, the values relate to the period while he was an ED. 8 Maurice stepped down from the Board on 6 July 2020; values for 2020 relate to the period while he was an ED. Details of Maurice’s leaving arrangements and bonus are set out in the Remuneration Committee Report under the heading Departure of Maurice Tulloch and in this Annual Report on Remuneration under Payments for loss of office (after table 12). 9 Year on year increase is primarily due to 2019 figures only reflecting part-year remuneration for Jason, although offset by nil vesting of the 2018 LTIP.
‘Other Information’ section within the Annual Report and Accounts for further information.
• Broader performance context, including financial and non-financial results, and progress against strategic and operational priorities.
TSR position over the three-year performance period Percentage of shares in award that vest based on achievement of TSR targets
in 2019 • Although offset by the role of Group CEO being occupied by an ED for all of 2020, compared with an Executive Chairman and an ED in 2019
2020 (illustrative based on a notional ‘target’ package) 135:1 94:1 57:1
8 The shares comprised in these vested awards include shares issued in lieu of dividends accrued during the deferral period.
Chair of the Company1 £550,000 £550,000 Board membership fee £75,000 £75,000 Additional fees are paid as follows: Senior Independent Director £35,000 £35,000 Committee Chair (inclusive of committee membership fee): • Audit £55,000 £45,000 • Customer, Conduct and Reputation £40,000 £35,000 • Remuneration £40,000 £35,000 • Risk £55,000 £45,000 Committee membership: • Audit £20,000 £15,000 • Customer, Conduct and Reputation £15,000 £12,500 • Nomination and Governance £10,000 £7,500 • Remuneration £15,000 £12,500 • Risk £20,000 £15,000 1 Inclusive of Board membership fee and any committee membership fees, and committee chair of the Nomination and Governance Committee.
– Non-financial strategic measures (30% of total) • 5% – RNPS • 5% – TNPS • 5% – Employee Engagement • 15% – RIT and risk controls quality, with an adjustment process to capture any wider considerations • A quality of earnings assessment will be undertaken by the Committee to provide assurance that bonus payouts appropriately reflect underlying performance and the shareholder experience
Annuitant mortality assumptions (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 42 Insurance liabilities methodology and assumptions (b) Long-term business liabilities.
UK Life has substantial holdings in illiquid asset classes with significant credit risk.
In respect of the credit default assumptions, we performed the following: • Tested the methodology and credit risk pricing models used by management for commercial and equity release mortgages to derive the assumptions with reference to relevant rules and actuarial guidance, including the adoption of an appropriate prudence margin and by applying our industry knowledge and experience; and
The estimation of non-life insurance contract liabilities involves a significant degree of judgement. The liabilities are based on the estimated ultimate cost of all claims incurred but not settled at 31 December 2020, whether reported or not, together with the related claims handling costs.
The valuation of the investment portfolio involves judgement and continues to be an area of inherent risk. The risk is not uniform for all investment types and is greatest for the following, where the investments are hard to value because quoted prices are not readily available: • Commercial mortgage loans (UK Life); • Equity release mortgage loans (UK Life); • Infrastructure loans (UK Life); and • Structured bond-type investments (France Life).
• We have reviewed management’s own results reconciliation testing (between this new model and the current model used for other BPA business) and investigated any differences noted by management.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Financial statements – Group Financial statements – Company
• The directors’ statement as to whether they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
New standards, interpretations and amendments to published standards that have been adopted by the Group and/or the Company The Group and/or the Company has adopted the following amendments to standards which became effective for the annual reporting period beginning on 1 January 2020. The amendments have been issued and endorsed by the EU and do not have a significant impact on the Group’s consolidated financial statements.
During the year management reassessed the critical estimates previously provided and, based on their assessment of qualitative and quantitative risk factors, resolved that valuation of two specific UK Life product governance provisions was no longer a critical estimate in the context of the Group’s results. The valuation of the provisions has decreased significantly in the year, primarily due to utilisation of one of the provisions, resulting in significantly reduced estimation uncertainty in aggregate as at 31 December 2020.
Group’s ownership holding in the entity exceeds 40%, the Group is judged to have control over the entity;
Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FVTPL category has two subcategories – those that meet the definition as being held for trading and those the Group chooses to designate as FVTPL (referred to in this accounting policy as ‘other than trading’) upon initial recognition.
Such investments are those with less than three months’ maturity from the date of acquisition, or which are redeemable on demand with only an insignificant change in their fair values.
Earnings per share AG & 15 Basic (pence per share) 70.2 63.8 Diluted (pence per share)2 69.8 63.6
Group adjusted operating profit before tax attributable to shareholders’ profits from discontinued operations 251
Continuing operations Cash flows from operating activities2 Cash (used in)/generated from operating activities 58(a) (1,644) 6,392 Tax paid (1,040) (543)
Risk profile Note 59 has been updated to reflect the impact of COVID-19 on the risk environment within which the Group operates and the way in which the pandemic has had an impact on the Group’s material risk exposures. This includes descriptions of key actions taken to mitigate these changes in risk exposures during 2020.
Gross written premiums3 19,058 10,653 — — 29,711 Premiums ceded to reinsurers (2,529) (655) — — (3,184) Premiums written net of reinsurance 16,529 9,998 — — 26,527 Net change in provision for unearned premiums — (193) — — (193)
Continuing operations Claims and benefits paid Claims and benefits paid to policyholders on long-term business
Fees payable to Mazars LLP and its associates for the statutory audit of Group subsidiaries in Italy 0.3 0.3
Fees payable for the audit of the Group’s subsidiaries include fees for the statutory audit of the subsidiaries, both inside and outside the UK, and for the work performed by the principal auditors in respect of the subsidiaries for the purpose of the consolidated financial statements of the Group. In addition to these fees, audit fees payable to PwC LLP in respect of investment funds consolidated in the Group financial statements were £2.7 million (2019: £2.4 million). These fees are borne directly by the unitholders of the funds and are not borne by the Group.
Profit attributable to ordinary shareholders from continuing operations 2,570 1,886 48.1 3,320 2,454 62.7
(iii) The calculation of basic earnings per share uses a weighted average of 3,925 million (2019: 3,911 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2020 was 3,928 million (2019: 3,921 million) or 3,926 million (2019: 3,919 million) excluding treasury shares.
United Kingdom general insurance and health 1 1 7.5 6.8 Ireland general insurance and health Nil Nil 7.7 6.8 Italy general insurance and health Nil Nil 11.0 10.3 Canada general insurance 5 4 8.7 8.0
(b) Impairment testing Interests in joint ventures are tested for impairment of goodwill and intangibles when there is an indicator of impairment. They are tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill or intangible relates to the recoverable value of that cash generating unit. Recoverable amount for long-term and general insurance businesses is calculated on a consistent basis with that used for impairment testing of goodwill, as set out in note 17(b). The recoverable amount of property management undertakings is the fair value less costs to sell of the joint venture, measured in accordance with the Group’s accounting policy for investment property (see accounting policy Q).
(ii) The following table analyses the right-of-use assets, primarily relating to leased properties occupied by Group companies.
The lease agreements do not impose any covenants other than the security interest in the leased assets that are held by the lessor.
Total net gains recognised in the income statement in the year ended 31 December 2020 in respect of Level 3 assets measured at fair value amounted to £581 million (2019: net gains of £1,574 million) with net gains in respect of liabilities of £141 million (2019: net losses of £272 million). Net gains of £423 million (2019: net gains of £1,427 million) attributable to assets and net gains of £147 million (2019: net losses of £271 million) attributable to liabilities relate to those still held at the end of the year.
(vi) Financial assets of operations classified as held for sale • Financial assets of operations classified as held for sale are held by our Asia and Italian businesses and consist primarily of discretionary managed funds of £538 million (2019: £1,404 million) and fixed maturity securities which are not traded in an active market and have been valued using third party or counterparty valuations of £487 million (2019: £401 million). These assets are included within the relevant asset category within the sensitivity table below.
Sensitivities 2019 Fair value £bn Most significant unobservable input Reasonable alternative
Healthcare, infrastructure and PFI other loans of £7,283 million (2019: £6,467 million) are secured against the income from healthcare and educational premises.
Aviva’s interest in unconsolidated structured entities that it also manages at 31 December 2020 is £1,803 million (2019: £1,919 million) and the total funds under management relating to these investments at 31 December 2020 is £16,012 million (2019: £15,454 million).
Specialised investment vehicles: 3,658 23 3,108 10 Analysed as: OEICs 410 10 33 — PLPs 3,248 13 3,075 10
Total financial investments 9,722 356,976 1,587 368,285 7,097 342,667 1,478 351,242 Less: Assets classified as held for sale
Loans 2,334 2,111 Fixed maturity securities 45,781 42,350 Equity securities 86,957 83,035 Reinsurance assets 3,860 4,003 Cash and cash equivalents 6,555 8,353 Units trusts and other investment vehicles 34,577 37,822 Other 7,921 8,508
Strategic report Governance IFRS financial statements Other information 36 – Preference share capital This note gives details of Aviva plc’s preference share capital.
on the main pension schemes (see note 51) with a small amount of losses in relation to other schemes. 2 The Group has a shareholder forfeiture programme, where the shares of shareholders with whom Aviva has lost contact over the last 12 years will be forfeited and sold on. Any associated unclaimed dividends will be reclaimed by the Group. After covering administration costs, the majority of the money will be put into a charitable foundation.
France and Italy; • Impact of operating assumption changes of £(0.8) billion mainly due to updates to longevity assumptions (with the impact on profit partially offset by a corresponding reduction in reinsurance assets) in the UK; and • Economic assumption changes of £5.5 billion, which reflects a reduction in valuation interest rates in response to decreasing interest rates and narrowing of credit spreads, primarily in respect of annuity contracts in the UK.
PMA08 HAMWP /PFA08 HAMWP adjusted plus allowance for future mortality improvement Bulk purchase annuities CV3 CV3
The following explicit assumptions are made which could materially impact the level of booked net reserves: Discounting Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held: Discount rate Mean term of liabilities
(a) Carrying amount The liabilities for investment contracts (gross of reinsurance) at 31 December 2020 comprised: £m
Strategic report Governance IFRS financial statements Other information 44 – Liabilities for investment contracts continued (c) Movements in the year The following movements have occurred in the gross provisions for investment contracts in the year: (i) Participating investment contracts £m
Carrying amount at 1 January 92,762 90,455 Liabilities in respect of new business 4,691 6,991 Expected change in existing business (5,127) (4,857) Variance between actual and expected experience 343 4,751 Impact of operating assumption changes 92 173 Impact of economic assumption changes 330 204 Other movements recognised as an expense1 76 103 Change in liability recognised as an expense2 405 7,365 Foreign exchange rate movements 4,003 (4,054) Other movements3 (97) (1,004)
Incurred in current year 521 195 Incurred in prior years (43) 96
Incurred in current year (145) (53) Incurred in prior years (163) (227)
Carrying amount at 31 December 1,933 1,687 1 The movement during 2020 relates to the disposal of the Singapore business.
The impact of change in interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where a reduction in the discount rate, in response to decreasing interest rates and narrowing credit spreads, has increased liabilities.
Total IAS 19 obligations to main staff pension schemes (note 51(a)) 746 770 Deficits in other staff pension schemes 77 66 Total IAS 19 obligations to staff pension schemes 823 836 Restructuring provisions 48 29 Other provisions 565 700 1,436 1,565
Strategic report Governance IFRS financial statements Other information 50 – Pension deficits and other provisions continued (b) Movements on restructuring and other provisions
Other provisions include a £45 million provision (2019: £229 million) and a £173 million provision (2019: £175 million) in respect of two product governance issues in our UK Life business: • The first relates to a historical issue with over 90% of cases identified being pre-2002 and is limited to advised sales by Friends Provident, where a number of external defined benefit pension arrangements transferred into Friends Provident pension arrangements. The reduction in the value of the provision during 2020 of £183 million is due to utilisation in the period of £168 million and a release of £15 million. The issue does not affect any other part of our business. The Group has notified its professional indemnity insurers and intends to make a claim on its insurance to mitigate the financial impact.
Total IAS 19 fair value of scheme assets 14,920 5,205 20,125 11,975 6,793 18,768 1 Cash and other assets comprise cash at bank, receivables, payables, repurchase agreements and longevity swaps. At 31 December 2020, cash and other assets primarily consist of repurchase agreements of £5,168 million
(2019: £3,078 million). 2 As at 31 December 2020, the FPPS asset includes an insurance policy of £667 million (2019: £646 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group’s IAS 19 scheme assets. Insurance policies issued by other Group companies of £2,047 million as at 31 December 2020 (2019: £1,331 million) included in the ASPS assets are transferable and so are not subject to consolidation.
2 In the UK, the only remaining linkage between pension benefits and general salary increases is in respect of a small amount of Guaranteed Minimum Pension benefits, in line with National Average Earnings. 3 For the UK schemes, assumptions are provided for RPI/CPI. In the UK, relevant RPI/CPI swap curves are used, which are equivalent to the single rates shown for ASPS. The assumptions are also adjusted to reflect the relevant caps/floors and the inflation volatility. 4 To calculate scheme liabilities in the UK, a discount rate of 1.31% is used for ASPS and RAC members and 1.37% for FPPS members not included in annuity policies held by the scheme. A discount rate of 1.34% is used for ASPS
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_2019 (S=7.25) Advanced with adjustments’ model (2019: ‘CMI_2018 (S=7.25) Advanced with adjustments’), with a long-term improvement rate of 1.5% per annum (2019: 1.75% per annum) for males and 1.5% per annum (2019: 1.5% per annum) for females. The CMI_2019 tables have been adjusted by adding 0.25% per annum (2019: 0.25% per annum) and 0.35% per annum (2019: 0.35% per annum) 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_2019 is based), and uses the advanced parameters to taper the longterm improvement rates to zero between ages 90 and 115 (2019: long-term improvement rates taper to zero between ages 90 and 115) (the ‘core’ parameters taper the long-term improvement rates to zero between ages 85 and 110).
Within one year 528 387 915 238 372 610 1 to 5 years 948 1,342 2,290 1,347 1,255 2,602 5 to 10 years 930 1,613 2,543 636 1,451 2,087 10 to 15 years —— 1,540 1,540 — 1,417 1,417 Over 15 years 5,864 2,831 8,695 5,257 2,636 7,893
Amounts owed to financial institutions Loans 308 338 Securitised mortgage loan notes UK lifetime mortgage business (note 26(b)) 1,166 1,233
Within one year 298 41 339 294 46 340 1 to 5 years 431 149 580 392 173 565 5 to 10 years 448 143 591 559 148 707 10 to 15 years 198 111 309 59 116 175 Over 15 years 72 60 132 212 109 321
(iii) Commercial paper The commercial paper consists of £108 million issued by the Company (2019: £238 million) and is considered core structural funding. The fair value of the commercial paper is considered to be the same as its carrying value and all issuances are repayable within one year.
The Group’s regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required.
56 – Capital commitments This note gives details of our commitments to capital expenditure. See note 23 for further information on lease commitments.
Solvency II surplus at the Group level represents the excess of eligible Solvency II own funds over the Group’s solvency capital requirements calculated in accordance with Solvency II requirements. The Group maintained capital in excess of the SCR at all times during 2020. All regulated subsidiaries complied with their capital requirements throughout the year.
Premium/discount on debt securities 319 109 Premium/discount on borrowings (24) (23) Premium/discount on non-participating investment contracts 85 101 Financial instruments 84 23 Acquired value of in-force business and intangibles 323 383 787 593 Change in unallocated divisible surplus 1,528 3,616 Interest expense on borrowings 536 545 Net finance income on pension schemes (41) (73) Foreign currency exchange losses 176 349
During the year the net operating cash inflow reflects a number of factors, including the level of premium income, payments of claims, creditors and surrenders and purchases and sales of operating assets including financial investments. It also includes changes in the size and value of consolidated cash investment funds and changes in the Group participation in these funds.
The following table provides information on the Group’s exposure by credit ratings to financial assets that meet the definition of ‘solely payment of principal and interest’ (SPPI).
(iii) Loans The Group loan portfolio principally comprises: • Policy loans which are generally collateralised by a lien or charge over the underlying policy; • Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; • Healthcare, infrastructure and PFI loans secured against healthcare, education, social housing and emergency services related premises; and • Mortgage loans collateralised by property assets.
Average assets £m 2018 2.28% 14,651 2019 2.21% 14,350 2020 1.88% 15,023 1 Before realised and unrealised gains and losses and investment expenses
The Group’s health insurance business (including private health insurance, critical illness cover, income protection and personal accident insurance, as well as a range of corporate healthcare products) exposes the Group to morbidity risk (the proportion of our customers falling sick) and medical expense inflation.
Provisions made for insurance liabilities are inherently uncertain. Due to this uncertainty, general and health insurance reserves are regularly reviewed by qualified and experienced actuaries at the business unit and Group level in accordance with the Group’s reserving framework. These and other key risks, including the occurrence of unexpected claims from a single source or cause and inadequate reinsurance protection/risk transfer, are subject to an overarching risk management framework and various mechanisms to govern and control our risks and exposures. We recognise that the severity and frequency of weather-related events has the potential to adversely impact provisions for insurance liabilities and our earnings, with the result that there is some seasonality in our results from period to period. Large catastrophic (CAT) losses arising as a result of these events are explicitly considered in our economic capital modelling to ensure we are resilient to such CAT scenarios.
The Group purchases reinsurance protections on its property portfolio that includes coverage for business interruption and will seek reinsurance recoveries of those of its business interruption losses that are covered by reinsurance. The continuing nature of the event means that our final exposure is subject to a significant degree of uncertainty.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued (i) Risk and capital management (i) Sensitivity test analysis The Group uses a number of sensitivity tests to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic and operating experience are regularly produced on the Group’s key financial performance metrics to inform the Group’s decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of its business units, and the Group as a whole, are exposed.
Sensitivities as at 31 December 2019 31 December 2019 Impact on profit before tax £m Interest rates
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued (i) Risk and capital management continued (iv) Sensitivity test results continued Sensitivities as at 31 December 2019 31 December 2019 Impact on profit before tax £m Interest rates
Leutschenbachstrasse 45, 8050 Zurich, Switzerland Aviva Investors Schweiz GmbH Ordinary 100 Turkey
Architas Multi-Manager Diversified Protector 80 50 Lothian Road, Festival Square, EH3 9WJ, Edinburgh, United Kingdom ASL Infrastructure Equity Fund Private Equity Fund 100 50 Stratton Street, London W1J 8LL, United Kingdom Lazard Multicap UK Income Fund OEIC 48 7 Lochside View, Edinburgh, EH12 9DH, United Kingdom Origo Services Limited Ordinary 22 7 Newgate Street, London EC1A 7NX, United Kingdom AXA Ethical Distribution Fund OEIC 32 AXA Rosenberg American Fund OEIC 91 AXA Rosenberg Asia Pacific ex Japan Fund
Undershaft (NULLA) Limited Ordinary 100 Voyager Park South Management Company Limited c/o ANESCO Limited, The Green, Easter Partk, Benyon Road, Reading, RG7 2PQ , United Kingdom ANESCO Mid Devon Limited Ordinary 100 ANESCO South West Limited Ordinary 100 Free Solar (Stage 1) Limited Ordinary 100 Homesun 2 Limited Ordinary 100 Homesun 3 Limited Ordinary 100 Homesun 4 Limited Ordinary 100 Homesun 5 Limited Ordinary 100 Homesun Limited Ordinary 100 New Energy Residential Solar Limited
General Accident plc Ordinary 100 Medium Scale Wind No.2 Limited Ordinary 100 Aviva Investors (FP) LP Fund 100 Aviva Investors PEP 2008 Partnership
Aviva Investors Passive Funds ACS AI UK Gilts over 15 years Index fund
Cornerford Limited Ordinary 100 Den Brook Energy Limited Ordinary 100 Dilkes Energy Limited Ordinary 64 EES Operations 1 Limited Ordinary 100 Electric Avenue Ltd Ordinary 100 Fitzroy Place GP 2 Limited Ordinary 50 Fitzroy Place Management Co Limited
Paddington Central III (GP) Limited Ordinary 100 Pegasus House and Nuffield House Nominee 1 Limited
Alternative Investment 100 200 Clarendon Street, 55th Floor, Boston, Massachusetts. United States 2222 Grand Avenue, Des Moines IA 50312, United States Aviva Investors North America Holdings, Inc 251 Little Falls Drive, Wilmington DE 19808, United States AI-RECAP Carry I, LP Ordinary 82 AI-RECAP GP I, LLC Sole Member 100 2711 Centreville Road, Suite 400, Wilmington, New Castle, Delaware, 19808, United States UKP Holdings Inc. Ordinary 100 Cogency Global Inc., 850 New Burton Road, Suite 201, Dover Delaware Kent County 19904, United States Exeter Properties Inc. Common Stock 95
Statement of comprehensive income For the year ended 31 December 2020 £m
(iii) Tax credited to equity Tax credited directly to equity in the year amounted to £nil (2019: £8 million in respect of coupon payments on the direct capital instrument and fixed rate tier 1 notes).
Tax effect of £nil (2019: £8 million) is recognised in respect of coupon payments on the DCI (2019: £43 million in respect of coupon payments on the DCI and tier 1 notes).
Within 1 year 366 338 704 238 311 549 1 – 5 years 448 1,330 1,778 686 1,194 1,880 5 – 10 years 930 1,613 2,543 635 1,451 2,086 10 – 15 years — 1,540 1,540 — 1,417 1,417 Over 15 years 5,864 2,831 8,695 5,251 2,636 7,887
Expenses incurred relates to operating expenses. The Company incurred expenses in the year of £0.7 million (2019: £0.6 million) representing audit fees paid by the Company on behalf of subsidiaries. The Company did not recharge subsidiaries for these expenses.
The related parties’ payables are not secured and no guarantees were given in respect thereof. The payables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties given by the Company on behalf of related parties are given in note 55(f).
The Solvency II regulatory framework requires insurers to hold own funds in excess of the Solvency Capital Requirement (SCR). Own funds are available capital resources determined under Solvency II. This includes the excess of assets over liabilities in the Solvency II balance sheet, calculated on best estimate, market consistent assumptions and include transitional measures on technical provisions (TMTP), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds.
Value of new business on an adjusted Solvency II basis (VNB) VNB measures the additional value to shareholders created through the writing of new life business in the period. It reflects Solvency II assumptions and allowance for risk, and is defined as the increase in Solvency II own funds resulting from life business written in the period, including the impact of interactions between in-force and new business, adjusted to: • remove the impact of the contract boundary restrictions under
A reconciliation between VNB and the Solvency II own funds impact of new business is provided below: Full year 2020
Solvency II contract boundary restrictions – new business (108) — (209) (317)
Present value of new business premiums 43,358 45,665 Investment sales 5,270 4,621 General insurance and health net written premiums 10,232 10,224 Long-term health and collectives business (3,647) (3,563) Total sales 55,213 56,947 Effect of capitalisation factor on regular premium long-term business1 (14,686) (15,294) JVs and associates2 (226) (286) Annualisation impact of regular premium long-term business3 (399) (327) Deposits4 (9,936) (10,917) Investment sales5 (5,270) (4,621) IFRS gross written premiums from existing long-term business6 5,066 5,057 Long-term insurance and savings business premiums ceded to reinsurers (3,101) (2,879)
Solvency II Return on Equity (RoE)# Solvency II RoE is calculated as: • Operating own funds generation less preference dividends, DCI
(2019: £259 million) plus £96 million net deferred tax assets (2019: £78 million).
A reconciliation of Solvency II return on capital by market to the Group level Solvency II return on capital and Solvency II return on equity is provided below.
Direct capital instrument (27) (500) — Preference shares3 (38) (450) — Net deferred tax assets — (78) —
Total 1,500 2,597 1 We use a wholly owned, UK domiciled reinsurance subsidiary for internal capital and cash management purposes. Some remittances otherwise attributable to the operating businesses arise from this internal reinsurance vehicle.
Details of arrangements for the meeting in light of Government restrictions in relation to the COVID-19 pandemic, each resolution to be considered at the meeting and voting instructions are provided in the Notice of AGM, which is available on the Company’s website at www.aviva.com/agm
Group Company Secretary Shareholders may contact the Group Company Secretary: • By email: Aviva.shareholders@aviva.com • In writing: Kirstine Cooper, Group Company Secretary, St Helen’s, 1 Undershaft, London, EC3P 3DQ. • By telephone: +44 (0)20 7283 2000