This report contains ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the ‘Cautionary Statement’ on page 320. The Strategic Report of Aviva is incorporated by reference into the Directors’ and corporate governance report. The Directors’ and corporate governance report has been drawn up and presented in accordance with and in reliance upon applicable English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law.
We care like crazy about our customers, each other and our communities
Governance 64 Board of Directors biographies 68 Group Executive biographies 70 Directors’ and corporate governance report 90 Directors’ remuneration report
I spoke to a young girl with a lovely manner. She told me that I would receive the money once the hospital had confirmed the type of cancer. It was that simple. Aviva even sorted out all the confirmations for me.
In line with the statement we made in the formal offer for Friends Life, the Board has declared a final dividend of 12.25 pence per share (2013: 9.40 pence) representing a 30% increase on the 2013 final dividend per share, and a 2014 full year dividend of 18.1 pence (2013: 15.00 pence), up 21%.
That we were able to contemplate such a transaction shows the improvements we have made, including repairing the balance sheet, reducing costs and growing the profitable segments of the business.
The proposed Friends Life transaction speeds up our turnaround. A successful integration of Friends Life is a major focus and it is important to demonstrate our ability to execute on our plans and achieve our external objectives. This is a bare minimum.
• Allocate capital to those markets which have attractive growth opportunities
I t must be one of the worst moments imaginable: a diagnosis of terminal cancer.
We believe it is our privilege to support our customers at such difficult times.
Life insurance Retirement income, Savings & Pensions, Life cover, Protection Customers buy insurance products to save for the future, to provide reassurance their savings will last through retirement, and to protect against the risks to their family income after an accident, illness or death.
Aviva offers simple, convenient access to meet customers’ insurance, protection, savings and retirement needs We do this by: 1 As at 31 December 2014.
The 2014 winners, our Life Claims Assessment Team (pictured above), speak every day to customers who have been diagnosed with serious illnesses. Thanks to this team’s great ideas, customers’ claims can be settled much more quickly, and they can access support as a result of our partnerships with leading cancer charities such as Macmillan Cancer Support. The results are industry-leading – and mean we can better support our customers when they most need help.
Operating as a True Customer Composite enables us to carry out more effectively our purpose of ‘freeing people from fear of uncertainty’. The True Customer Composite will benefit customers by offering them a flexible combination of products tailored to their needs, from protecting their lives and assets to saving for retirement. We will be able to offer more competitive prices and reward loyalty, since customer acquisition and administration are cheaper. We will provide customers with additional value and convenience compared to our mono-line competitors, supported by the benefits of increased customer retention and engagement.
measures the likelihood of a customer recommending Aviva. During 2014 Aviva returned the most consistent and improved set of RNPS® results since the survey began in 2009.
How we measure it Cash remittances from business units less central spend and debt financing costs
Offering customers a digital one stop shop for all their insurance and savings needs gives us a unique competitive advantage.
• Continued the turnaround of our business in Ireland by seizing the opportunities presented by the economic recovery, and the outstanding levels of brand awareness and relationships we enjoy
Cash remittances improved by 6% to £138 million (up 15% on a constant currency basis) and operating expenses were £316 million (2013: £378 million), down 16% or 6% lower on a constant currency basis.
• Enhance our predictive analytics, so we can better assess risk, behaviour and tailor products to our customers’ needs
• Responded to severe weather, which led to an increased frequency of claims (8.6% in 2014 versus 8.4% in 2013), including 1,300 households adversely impacted by the polar vortex, which caused an ice storm in Toronto
• Transformed how we deal with claims in personal lines, leading to a more efficient and cost effective process and better customer service
• Utilise new technology, such as the ‘Real Time Gateway’ (RTG), so we can offer customers a price based on a more sophisticated assessment of risk. This will improve operational efficiency, effectiveness and profitability
We provide life and pensions products through our bancassurance partners and our retail business and have around 1.1 million customers. We are sixth11 in life premiums and fifth11 in individual protection by market share.
Hong Kong, Taiwan, Indonesia and Vietnam offer us attractive opportunities for growth.
Our strategy is to continue to capitalise on the significant potential for growth in our selected markets. We will do this by providing an excellent service to customers through our distribution network, harnessing the potential of our local partners’ brands and customer reach.
We will embrace the True Customer Composite model by delivering Aviva’s strengths across life, health, general insurance and asset management.
The two funds we’ve launched to date – AIMS Target Return and AIMS Target Income – aim to deliver steady capital growth and generate a reliable income stream respectively. They are managed by an experienced team headed by Peter Fitzgerald (left), Head of Multi-Assets, and Dan James (right), Global Head of Rates.
• Encourage our customers, suppliers and people to make sustainable choices.
We have introduced quarterly surveys – called Snapshot – asking a randomlyselected group of employees for their direct feedback. These surveys give us insights which we have used to help make positive changes for our people.
This year our community development contribution was £6.3 million. This includes our contribution to supporting emergencies such as the Ebola epidemic.
* Greenhouse gas leaks from air conditioning systems. ** Personal business mileage.
Risks and risk management By focusing on four core business lines – life, general and health insurance and asset management – we have chosen to accept the risks inherent in these lines of business
• Franchise value: Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity.
Manage and monitor Monitoring ensures that the risk management and mitigation approaches (accept, avoid, transfer, control) in place are effective. Monitoring may also identify risk-taking opportunities.
• Product design that ensures products and propositions meet customer needs
This ensures that your investment and the assets of the Company are protected. As a Board we take these governance responsibilities seriously and they are particularly important when significant or transformational transactions are being considered.
Our governance responsibilities are particularly important when significant transactions are being considered
Bob Stein Independent Non-Executive Director b.1949 — Bob was appointed to the Board in January 2013 and is a member of the Nomination, Risk and Remuneration Committees. He is currently a Non-Executive Director and Chair of the Audit Committee of Assurant, Inc (US specialty insurance), is a Director and Chair of the Audit Committee of Resolution Life Holdings, Inc. and is a trustee emeritus of the Board of trustees of the US Actuarial Foundation.
The Board — The Board’s role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enable risk to be assessed and managed. The Board believes that a strong system of governance throughout the Group is essential in ensuring that the business runs smoothly, to aid effective decision making and support the achievement of the Group’s objectives.
The Board is responsible to shareholders for promoting the long-term success of the Company and, in particular, for setting the Group’s strategic aims, monitoring management’s performance against those strategic aims, setting the Group’s risk appetite, ensuring the Group is adequately resourced, and that effective controls are in place. The Board also sets the values and supports the culture of the Group.
Independent Board Evaluation conducted an external and independent valuation in 2013 and is carrying out a follow up review in 2015, the results of which will be published in the 2015 Annual report.
Induction, training and development The Board and the Chairman believe strongly in the development of all of its employees and directors and it is a requirement of each director’s appointment that they commit to continuing their professional development.
Governance structure — The Board is responsible for promoting the long-term success of the Company for the benefit of shareholders. This includes ensuring that an appropriate system of governance is in place throughout the Group. To discharge this responsibility, the Board has established frameworks for risk management and internal control using a ‘three lines of defence’ model and reserves to itself the setting of the Group’s risk appetite.
• Identify and nominate suitable candidates for appointment to the Board, including chairmanship of the Board and its committees, and appointment of the Senior Independent Director, against a specification of the role and capabilities required for the position, including relevant financial experience for Audit Committee members
Directors’ and corporate governance report continued time commitments required for the role, and the results of the review of external candidates, the committee concluded that Sir Adrian Montague had the requisite skills and capabilities to undertake the role of Chairman, was the best candidate for the role and recommended his appointment to the Board subject to Sir Adrian reducing his external time commitments during 2015. In particular, an internal appointment provides continuity and stability to the Board. His appointment has received approval from the PRA and FCA. Given the well developed succession plan in place the Committee decided not to use an external search consultancy or open advertising on this occasion.
The Board approved these appointments and intend that they will become effective following the 2015 AGM subject to regulatory approval and successful completion of the proposed acquisition. The new directors would stand for election by shareholders at the 2016 AGM. The Company Secretary will implement induction plans for the new directors. All appointments to the Board are made on merit, against the criteria identified by the committee, having regard to the benefits of diversity on the Board, including gender. The committee strongly believes that diversity throughout the Group and at Board and senior management level is a driver of business success. Diversity brings a broader, more rounded perspective to decision-making and risk management, making the Board and senior management more effective.
• Assess the effectiveness of the Group’s systems of internal control, including financial reporting, financial controls and the Internal Audit function
• Review the design, completeness and effectiveness of the RMF relative to the Group's activities and to assess the adequacy and quality of the risk management function and effectiveness of risk reporting within the Group
The committee met on six occasions in 2014. The Group Company Secretary or her nominee acted as the Secretary to the committee.
The committee requested that certain material subsidiaries establish separate conduct committees to ensure sufficient board time is given to this area and received updates from those committees on the implementation of the new conduct risk framework.
Directors — The directors as at the date of this report are shown together with their biographical details above. During the year and up to the date of this report, the following Board appointments, resignations and retirements occurred: 86 | Aviva plc Annual report and accounts 2014
On behalf of the Board, the Remuneration Committee is pleased to present the Directors’ Remuneration Report (DRR) for the year ended 31 December 2014.
Delivery against this strategy should result in deeper and even more valued relationships with our customers as well as benefits in terms of the experience of shareholders.
• Long Term Incentive Plan – Extend the plan with the addition of a two year compulsory holding period after vesting. Along with the existing three year
The committee retains discretion to amend annual bonus pay-outs for a range of factors, including financial, market and other considerations. The committee will exercise its discretion to reduce otherwise unreasonable reward outcomes. If extraordinary circumstances were to arise where the committee felt an adjustment upwards is warranted, it would consult with major stakeholders before making any adjustment. Any exceptional adjustment would not exceed the stated maximum.
Changes The notable changes from the previous policy are as shown in table 2 below: Table 2: Proposed changes to remuneration policy for 2015 – overview Element Previous policy Proposed policy from 2015
Discretions The discretions the committee has in relation to the operation of the ABP and LTIP are set out in the plan rules. These include (but are not limited to) the ability to set additional conditions (and the discretion to change or waive those conditions) in exceptional circumstances. In relation to the LTIP, in accordance with its terms, the committee has discretion in relation to vesting and in exceptional circumstances to waive or change a performance condition if anything happens which causes the committee reasonably to consider it appropriate to do so. Any use of the discretions will be disclosed, where relevant, in the Annual report and, where appropriate be subject to consultation with Aviva’s shareholders.
By the ED By the Company 12 months, rolling. No notice or payment in lieu of notice to be paid where the Company terminates for cause.
The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chairman 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 key responsibilities of the committee are to: • Make recommendations to the Board regarding the Group remuneration policy in respect of the Board Chairman, EDs, members of the
Committee performance and effectiveness The committee undertook an annual review of its performance and effectiveness which concluded that overall the committee was effective in carrying out its duties. • As indicated above, during 2014 the committee formalised its approach to assuring that reward outcomes under incentive plans are fair and consistent with the experience of shareholders • For the annual bonus, a checkpoint process has been adopted in reviewing performance at year end against the key financial KPIs and to provide assurance as to the quality of earnings, and the exclusion of extraordinary gains in earnings attributable to matters beyond the direct control of management
Reasonable progress against the customer measures. Against the key measure of RNPS, the majority of businesses achieved the targeted improvement, with good results in the UK, Canada and Asia.
Based on independent assessment performed by the Risk Function, Directors’ performance against the 2014 risk and control objectives was deemed in line with expectations. This reflected a generally robust and mature risk management framework in place, with well-established risk governance and adequate use of capital and risk tools. The assessment also reflected satisfactory progress during the year in preparing for Solvency II and the new requirements for Aviva as a global systemically important insurer (G-SII). The assessment also noted the continued need to manage and improve both the control environment and the risk aware culture of the business.
Group CEO – provided exceptional leadership and embedding of the Aviva values within the Group. The committee considers him to have been instrumental in re-invigorating the Company and in aligning the interests of the Group with those of shareholders.
All employee share plans EDs are eligible to participate in two HMRC approved all employee share plans on the same basis as other eligible employees. These plans include a partnership share element of the All Employee Share Option Plan (AESOP) under which eligible employees can invest up to the statutory limits, currently £150 per month, out of their gross salary in the Company’s ordinary shares. The Company matches every purchased share with two matching shares for the first £40 of a participant’s monthly contribution. Matching shares are subject to forfeiture if the purchased shares are withdrawn from the AESOP within three years of purchase, as long as the participant remains employed by the Company. Participants are eligible to receive dividend shares through the AESOP.
Statement of directors’ shareholdings and share interests (audited information) Executive directors’ share ownership requirements The Company requires the Group CEO to build a shareholding in the Company equivalent to 200% of basic salary and each ED to build a shareholding in the Company equivalent to 150% of basic salary. From 2015, subject to shareholder approval, the Group CEO will be required to build a stake equivalent to 300% of salary.
Shareholding requirements will need to be built up over a five year period.
Statement of voting at AGM The result of the shareholder vote at the Company’s 2014 AGM in respect of the 2013 DRR is set out in table 23 below.
Financial statements of the company Income statement 238 Statement of comprehensive income 238 Statement of changes in equity 239 Statement of financial position 240 Statement of cash flows 241 Notes to the Company’s financial statements 242
(iii) Amendments to IFRS 10, IFRS 12 and IAS 27 – Investment Entities Exception
Accounting policies continued agreed notional principal amount, a net payment to be made by one party to the other, depending what rate in fact prevails at a future point in time. Interest rate options, which consist primarily of caps and floors, are interest rate protection instruments that involve the potential obligation of the seller to pay the buyer an interest rate differential in exchange for a premium paid by the buyer. This differential represents the difference between current rate and an agreed rate applied to a notional amount. Exposure to gain or loss on all interest rate contracts will increase or decrease over their respective lives as interest rates fluctuate. Certain contracts, known as swaptions, contain features which can act as swaps or options. These contracts are categorised according to the type of contract they most closely resemble in practice.
Income 6 Gross written premiums 21,670 22,035 1,589 Premiums ceded to reinsurers (1,614) (1,546) (100)
The change in cash and cash equivalents of £1,132 million at 31 December 2013 has been presented in the consolidated statement of cash flows as an increase of opening cash and cash equivalents of £1,111 million as at 1 January 2013, a decrease in net cash flows from operating activities for the year then ended of £8 million and an increase in the effect of exchange rate changes of £29 million. There is no impact from the adoption of these amendments on the consolidated income statement, consolidated statement of comprehensive income or consolidated statement of changes in equity for the year ended 31 December 2013.
Loan settlement1 9 Currency translation reserve recycled to the income statement 9
Liabilities Insurance liabilities 718 Payables and other financial liabilities 24 Other liabilities 7
Claims and benefits paid, net of recoveries from reinsurers (7,522) (2,745) (4,594) (331) (2,572) (1,276) (362) — (72) (19,474) Change in insurance liabilities, net of reinsurance (3,955) 88 (1,119) (70) (212) (70) (294) — 62 (5,570) Change in investment contract provisions (3,036) — (1,881) 8 (1,347) — — (262) — (6,518) Change in unallocated divisible surplus (62) — (2,182) (6) (1,055) — (59) — — (3,364)
Profit/(loss) before tax attributable to shareholders' profits from continuing operations 2,075 759 105 (658) 2,281 Adjusted for: Non-operating items from continuing operations (96) 49 (19) (42) (108)
(b) Tax charged/(credited) to other comprehensive income (i) The total tax charge/(credit) comprises: £m
Notes to the consolidated financial statements continued 14 – Tax continued (c) Tax credited to equity Tax credited directly to equity in the year amounted to £19 million (2013: £52 million). This comprises £19 million in respect of coupon payments on the direct capital instruments and fixed rate tier 1 notes (2013: £22 million). In 2013, £30 million related to the currency translation reserve recycled to the income statement on the sale of Aviva USA Corporation.
(ii) Basic earnings per share is calculated as follows: Continuing operations Before tax £m
17 – Goodwill This note analyses the changes to the carrying amount of goodwill during the year, and details the results of our impairment testing on both goodwill and intangible assets with indefinite lives.
Impairment losses on intangible assets with finite lives of £10 million arose principally from impairments of capitalised software in the UK long-term business and other Group activities. Impairment tests were conducted as described in note 17(b).
Fair value hierarchy 2013 (Restated)1 Level 1 £m Level 2 £m
– £2.3 billion (2013: £2.1 billion) of securitised and equity release mortgages are valued using a DCF model. The inputs include liquidity risk and property risk premium which are deemed unobservable. The liquidity risk premium used ranges between 140 bps to 180 bps.
• Privately placed notes held by our UK Life business of £1.8 billion transferred in during 2014 have been valued by an internal DCF model using discount factors comprising the yield on a sovereign gilt of similar maturity, plus spreads for credit and liquidity risk. The DCF model used was refined during the year to incorporate asset specific counterparty credit ratings. Where credit spreads have been derived internally these inputs have been deemed to be unobservable and notes have been classified as Level 3.
• Other Level 3 investments amount to £1.2 billion (restated 2013: £1.0 billion) and relate to a diverse range of different types of securities held by a number of businesses throughout the Group.
(c) Collateral Loans to banks include cash collateral received under stock lending arrangements (see note 60 for further discussion regarding these collateral positions). The obligation to repay this collateral is included in payables and other financial liabilities (note 51). The Group holds collateral in respect of loans where it is considered appropriate in order to reduce the risk of non-recovery. This collateral generally takes the form of liens or charges over properties and, in the case of policy loans, the underlying policy for the majority of the loan balances above. In all other situations, the collateral must be in a readily realisable form, such as listed securities, and is held in segregated accounts.
Equity securities Ordinary shares Public utilities — 2,929 — 2,929 — 3,716 — 3,716 Banks, trusts and insurance companies — 7,267 8 7,275 — 7,968 39 8,007 Industrial miscellaneous and all other — 25,127 2 25,129 — 25,258 2 25,260
Other investments – short-term — 1 — 1 — 1 — 1
27 – Financial investments continued (f) Exposure to worldwide banks – debt securities Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)
The Group’s regulated subsidiaries are required to hold sufficient capital to meet acceptable solvency levels based on applicable local regulations. Their ability to transfer retained earnings to the UK parent companies is therefore restricted to the extent these earnings form part of local regulatory capital.
Non-profit business The valuation of non-profit business is based on regulatory requirements, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience. For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience. Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes. The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option. Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates 2014 2013
The effect of changes in the main assumptions is given in note 45 and the economic assumption changes are explained in note 10.
(a) UK Life with-profit business In the UK, life insurers are required to comply with the PRA’s realistic reporting regime for their with-profit funds for the calculation of PRA liabilities. Under the PRA’s rules, provision for guarantees and options within realistic liabilities must be measured at fair value, 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. The material guarantees and options to which this provision relates are: (i) Maturity value guarantees Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products. For some unitised with-profit life contracts the amount paid after the fifth policy anniversary is guaranteed to be at least as high as the premium paid increased in line with the rise in RPI/CPI.
44 – Reinsurance assets continued (c) Movements The following movements have occurred in the reinsurance asset during the year: (i) In respect of long-term business provisions £m
Main UK scheme The Company works closely with the trustee, who is required to consult it on the investment strategy. Interest rate and inflation risks are managed using a combination of liability-matching assets and swaps. Exposure to equity risk has been reducing over time and credit risk is managed within risk appetite. Currency risk is relatively small and is largely hedged. The other principal risk is longevity risk. On 5 March 2014, ASPS entered into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities.
(d) Charge to staff costs in the income statement The total pension charge/ (credit) to staff costs for all of the Group’s defined benefit and defined contribution schemes were: £m
Expected to be settled within one year 1,756 2,145 Expected to be settled in more than one year 517 327 53 – Contingent liabilities and other risk factors This note sets out the main areas of uncertainty over the calculation of our liabilities.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2013: £nil). Note 19 sets out the commitments the Group has to its joint ventures.
58 – Risk management continued To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. On a semi-annual basis the business chief executive officers and chief risk officers sign-off compliance with these policies and standards, providing assurance to the relevant oversight committees that there is a consistent framework for managing our business and the associated risks. A regular top-down key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees. Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. Roles and responsibilities for risk management in Aviva are based around the ‘three lines of defence model’ where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the IMMMR process and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes. Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Governance Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital, liquidity and franchise value at Group and in the business units. Economic capital risk appetites are also set for each risk type. The Group’s position against risk appetite is monitored and reported to the Board on a regular basis. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee (ALCO), which focuses on business and financial risks, and the Operational Risk Committee (ORC) which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units. Further information on the types and management of specific risk types is given in sections (b) − (j) below. The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva’s framework.
Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £130.6 billion of debt securities (2013: £125.7 billion), £35.4 billion of other investments (2013 restated: £32.5 billion), £20.9 billion of loans (2013: £18.5 billion) and £2.5 billion of reinsurance assets (2013: £2.0 billion). Where assets have been classed as ‘past due and impaired’, an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.
58 – Risk management continued (ii) Analysis of maturity of financial assets The following table provides an analysis, by maturity date of the principal, of the carrying value of financial assets which are available to fund the repayment of liabilities as they crystallise. This table excludes assets held for sale.
Reinsurance strategy Significant reinsurance purchases are reviewed annually at both business unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by analysis of economic capital, earnings and capital volatility, cash flow and liquidity and the Group’s franchise value. Detailed actuarial analysis is used to calculate the Group’s extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using external probabilistic catastrophe models widely used by the rest of the (re)insurance industry. The Group cedes much of its worldwide catastrophe risk to third-party reinsurers. The total Group potential loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million, for a one in ten year annual loss scenario, compared to approximately £260 million when measured on a one in a hundred year annual loss scenario.
Sensitivities as at 31 December 2013 2013 Impact on profit before tax (£m)
Aggregate tax effect — — — — — — 19 19 — 19
Cash flows from financing activities Funding provided from subsidiaries 597 1,283 New borrowings, net of expenses 2,382 2,137 Repayment of borrowings (2,070) (2,179) Net advance/(repayment) of borrowings 312 (42) Redemption of direct capital instrument (547) — Preference dividends paid (17) (17) Ordinary dividends paid1 (447) (429) Interest paid on direct capital instruments and fixed rate tier 1 notes (88) (92) Interest paid on borrowings (301) (328) Receipts under equity compensation plans 5 7 Treasury shares purchased for employee trusts — (32) Proceeds from issue of ordinary shares 8 —
Current tax For this year (64) (84) Prior year adjustments (7) (7)
Arising in the year: Profit for the year — — — 563 Fair value gains on investments in subsidiaries and joint ventures — 866 — — Remeasurements of pension schemes — — — (1) Dividends and appropriations — — — (551) Reserves credit for equity compensation plans — — 39 — Trust shares distributed in the year — — — (18) Issue of share capital under equity compensation scheme — — (28) 24 Redemption of direct capital instrument — — — (57) Aggregate tax effect — — — 19
On 13 November 2014 the Group and its joint venture partner Sabanci Holdings completed an initial public offering of a minority share of their Turkish life and pensions joint venture AvivaSA Emeklilik ve Hayat A.s (“Aviva SA”). The sale reduced the Group’s holding in Aviva SA from 49.8% to 41.3% and continues to be recognised as a joint venture. The Group received cash proceeds of £40 million from the share sale resulting in a £23 million gain. On 2 December 2014 the Group and Friends Life Group Limited (“Friends Life”) announced that they had reached agreement on the terms of a recommended all share acquisition of Friends Life by the Group. The proposed acquisition is subject to a number of conditions including approval from shareholders at a general meeting on 26 March 2015. If the conditions to the proposed transaction are satisfied, it is expected to complete in the second quarter of 2015. On 11 December 2014, the Group completed the disposal of its 50% holding in Spanish subsidiary CXG Aviva Corporacion Caixa Galicia de Seguros y Reaseguros, S.A. for cash consideration of £221 million. On 18 December 2014, the Group completed the sale of its Turkish general insurance operations resulting in a £17 million loss on sale. Further details can be found in the section ‘IFRS Financial statements – note 4 – Subsidiaries’.
• Non-covered business or investment sales: – These include retail sales of mutual fund type products. – There is no insurance risk borne by the Group therefore, under IFRS, these are treated as deposits and investment management fee income is earned on the funds deposited. These have never been treated as 'covered business' for longterm insurance and savings reporting so we show these separately as investment sales.
Economic assumption changes of £145 million adverse (FY13: £33 million favourable) arise mainly as a result of a decrease in the swap rates used to discount latent claims reserves and periodic payment orders. The total charge for impairment of goodwill, joint ventures and associates for the year was £24 million (2013: £77 million). Profit on disposal and remeasurement of subsidiaries, joint ventures and associates was £174 million (2013: £115 million). See ‘IFRS Financial Statements – note 4 – Subsidiaries’ for further details. Integration and restructuring costs from continuing operations were £140 million (2013: £363 million) and mainly included expenses associated with the Solvency II programme. Integration and restructuring costs reduced by 61%, driven by a significant reduction in transformation spend. Further details on significant movements are outlined in the market performance sections below.
Premiums written net of reinsurance 20,056 20,489 21,173 Net change in provision for unearned premiums 1 134 (16)
Net investment income (from continuing operations) Year ended 31 December 2014 Net investment income from continuing operations was £21,889 million (2013: £12,509 million). Compared to 2013, realised and unrealised gains were higher in 2014 primarily as a result of higher fixed income security market values due to lower interest rates.
Profit before tax attributable to shareholders' profits 980 717 107 1 Comparative has been restated to reflect changes in MCEV liquidity premium and an extension of the MCEV covered business.
Year ended 31 December 2014 On a PVNBP basis, sales in the UK long-term insurance and savings business increased by £85 million, or 1%, to £12,009 million (2013: £11,924 million). Volumes in the UK remained broadly flat year on year. There has been a significant decrease in individual annuities. This is primarily as a result of the changes announced by the UK Chancellor of the Exchequer in the Budget in March 2014 which are intended to give increased flexibility as to how customers can access their pension from April 2015. These changes are having a significant impact across the market and have seen many customers defer their decision regarding their pension, exacerbating the general market decline for individual annuities. This decrease has been partly offset by increases in bulk purchase annuities and equity release sales. Pension sales were up 6% to £5,803 million (2013: £5,476 million). Within this, sales of group pensions decreased to £3,679 million (2013: £3,809 million) whilst sales of individual pensions were £2,124 million (2013: £1,667 million) with growth in our platform (self-invested personal pension) business more than offset by lower sales of other individual pensions products. Sales of annuities were down 16% to £1,948 million (2013: £2,327 million) due to the reasons outlined above. Protection sales were up 11% to £1,103 million (2013: £992 million), reflecting higher sales of individual group business. Bond sales were down 5% to £174 million (2013: £183 million). Equity release sales were 74% higher at £696 million (2013: £401 million) due to higher sales as a result of a strong market. Other sales (which include investment sales) decreased 10% to £2,285 million (2013: £2,545 million), mainly as a result of the UK Retail Fund Management business being transferred from UK Life to Aviva Investors in May 2014. This was partly offset by an increase in the UK Platform business driven by new business volumes. In Ireland, sales fell 7% to £435 million (2013: £469 million). IFRS net written premiums were down 17% to £3,515 million (2013: £4,228 million) primarily due to the impact of lower individual annuities sales. Life business adjusted operating profit before tax increased by 9% to £1,039 million (2013: £952 million). Within this, UK adjusted operating profit increased by 9% to £1,016 million (2013: £930 million). 2014 results saw a net additional benefit to profit from non-recurring items of £282 million (FY13: £116
General insurance and health business 488 471 488 Other operations 4 (6) (8)
Year ended 31 December 2014 The weakening of the Euro affected all metrics from a Group perspective. Total long-term insurance and savings sales increased by £243 million, or 6%, to £4,246 million (2013: £4,003 million) mainly due to increased sales in Italy. In Italy (excluding Eurovita), life sales increased by £498 million, or 25%, to £2,473 million (2013: £1,975 million) driven by higher sales of with-profits products. In Spain (excluding Aseval & CxG), life sales remained relatively stable at £1,054 million (2013: £1,055 million). Other life sales, which mainly includes sales in our Turkey Life joint venture, decreased by £49 million, or 9%, to £495 million (2013: £544 million). General insurance sales decreased by £34 million, or 8%, to £393 million (2013: £427 million) driven by lower sales in Turkey. Premiums in Italy were broadly stable. IFRS net written premiums for the segment increased £251 million, or 8%, to £3,444 million (2013: £3,193 million) for the reasons described above. Total adjusted operating profit decreased by £19 million, or 6%, to £295 million (2013: £314 million). This was mainly due to lower life profits in Spain (mainly reflecting the Aseval and CxG disposals). In Italy, excluding Eurovita, life profits were up 13% (19% in constant currency) driven by improved product mix. Profit before tax attributable to shareholders’ profits decreased by £20 million to £489 million (2013: £509 million). This includes lower adjusted operating profits described above and positive life investment variances, which were lower than prior year, at £101 million (2013: £267 million) arising from narrowing spreads on government and corporate bonds. It also included profit on disposal of subsidiaries, including CxG and Eurovita, of £125 million and impairment charges of £nil (2013: £48 million).
Year ended 31 December 2014 The weakening of the Canadian dollar affected all metrics from a Group perspective. General insurance net written premiums decreased by 6% to £2,104 million (2013: £2,250 million). On a constant currency basis, net written premiums increased by 6% mainly due to new business growth in Western Canada along with rating increases on commercial lines and improved retention on personal lines. Adjusted operating profit was £191 million (2013: £246 million), a 22% reduction compared to the prior year. On a constant currency basis, profit decreased by 12%. The reduction in profits included lower underwriting profits of £83 million (2013: £117 million), reflecting higher large losses and lower prior year reserve releases partly offset by expense savings in all lines and an improvement in the underwriting result for commercial lines. In addition weather experience, although better than 2013, impacted profits, with a harsher winter in the first quarter of the year followed by hail storms in Alberta in August. Profit before tax attributable to shareholders was £253 million (2013: £104 million). Lower operating profits were more than offset by positive short-term investment variances of £65 million (2013: £122 million negative) reflecting higher fixed income security market values.
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Distribution The direct sales force and bancassurance are the main distribution channels for most of the Polish group and is made up of over 2,000 tied insurance agents. Our biggest relationship is with Bank Zachodni WBK (a subsidiary of Banco Santander) that sells both life and general insurance products through the bank's network of over 800 branches10. We also co-operate with independent insurance agencies and brokers. Our mutual funds are also sold in brokerage houses and our individual products are supported by call centre and website sales.
Investment mix The aggregate investment mix of the assets in the three main with-profits funds at 31 December 2014 was: December
% of employees who confirm that they have read, understood, and accepted the Business Ethics Code annually; and all employees in Aviva
% of managed supply that has been engaged on CR during the term of their contract with Aviva
*Due to the change in supplier and the benchmark availability, we changed target to ‘Improve from previous year’.
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Fluctuations in currency exchange rates may adversely affect our results of operations and financial condition. We operate internationally and are exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. For the year ended 31 December 2014, more than half of our premium income from continuing operations arose in currencies other than sterling, and our net assets were denominated in a variety of currencies, of which the largest are the euro, sterling and Canadian dollar. In managing our foreign currency exposures, we do not hedge revenues as these are substantially retained locally to support the growth of the business and meet local regulatory and market requirements. Nevertheless, the effect of exchange rate fluctuations on local operating results could lead to significant fluctuations in our consolidated financial statements upon translation of the results into sterling. Although we take certain actions to address this risk, foreign currency exchange rate fluctuation could materially adversely affect our reported results due to unhedged positions or the failure of hedges to effectively offset the impact of the foreign currency exchange rate fluctuation. Any adverse foreign currency exchange fluctuation may also have a material adverse effect on our regulatory capital surplus based on the EU Insurance Groups Directive and under the Individual Capital Assessment required by the PRA in the UK.
Asset management risks relating to Aviva’s business Our fund management business may be affected by the poor investment performance of the funds we manage Poor investment returns in our investment management business, due either to general market conditions or underperformance (relative to competitors or to benchmarks) by funds or accounts that we manage, may adversely affect our ability to retain existing assets and to attract new clients or additional assets from existing clients. The ability of our investment team to deliver strong investment performance depends in large part on our ability to identify appropriate investment opportunities in which to invest client assets. If the investment team for any of our strategies is unable to identify sufficient appropriate investment opportunities for existing and new client assets on a timely basis, the investment performance of the strategy could be adversely affected. The risk that sufficient appropriate investment opportunities may be unavailable is influenced by a number of factors, including general market conditions. This could adversely affect the management and incentive fees that we earn on assets under management.
disruption will not arise. Such market conditions may limit our ability to replace, in a timely manner, maturing debt, satisfy statutory capital requirements and generate fee income and marketrelated revenue to meet liquidity needs. As such, we may be forced to reduce our dividends, delay raising capital, issue shorter-term securities than we prefer, or bear an unattractive cost of capital which could decrease profitability and reduce financial flexibility. Our results of operations, financial condition and cash flows could be materially adversely affected.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, pandemics, hurricanes, earthquakes and man-made catastrophes may produce significant damage in larger areas, especially those that are heavily populated. Catastrophic events could also harm the financial condition of our reinsurers and thereby increase the probability of default on reinsurance recoveries and could also reduce our ability to write new business. Furthermore, pandemics, natural disasters, terrorism and fires could disrupt our operations and result in significant loss of property, key personnel and information about our clients and our business if our business continuity plans fail to cope with the scale or nature of the catastrophe. Such events could adversely affect our business, results of operations, corporate reputation and financial condition for a substantial period of time. Furthermore, market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect our ability to write future business.
Big Data Large volumnes of data which are a valuable source of information used to identify customer behaviours.
Excess centre cash flow A measure of excess cash flow, calculated by deducting central operating expenses and debt financing costs from cash remitted by business units.