Adjusted IFRS RoE1 Performance 50% 28.8% 35.2% 42.9% 100% Relative TSR2 Performance 50% Median Upper quintile and above 10.3/14 0% 1 2017 adjusted IFRS RoE performance outcome excludes the positive impact of the £300 million and £600 million share buy-backs (in 2017 and 2018 respectively). 2 TSR is a measure of share price growth, calculated as the difference between the share price at the vesting date and the 90 day average for the period immediately preceding the start of the three year performance period.
Maurice Tulloch 25 Mar 2019 LTIP 300% £2,925,000 20% 100% 31 Dec 2021 25 Mar 2024 25 Mar 2019 ABP 41% £398,759 N/A 25 Mar 2022 01 Oct 2019 SAYE 1.85% £18,000 01 Dec 2022
Jason Windsor3 25 Mar 2019 LTIP N/A £310,000 N/A N/A N/A 25 Mar 2022 25 Mar 2019 ABP N/A £136,025 N/A 25 Mar 2022 01 Oct 2019 SAYE 2.67% £18,000 01 Dec 2022
Tom Stoddard 25 Mar 2019 LTIP5 225% £1,650,060 20% 100% 31 Dec 2021 25 Mar 2024 25 Mar 2019 ABP 56% £410,677 N/A 25 Mar 2022
Andy Briggs 25 Mar 2019 LTIP5 225% £1,691,775 20% 100% 31 Dec 2021 25 Mar 2024 25 Mar 2019 ABP 56% £421,063 N/A 25 Mar 2022 14 Oct 2016 AESOP 0.37% £2,750 N/A 17 Oct 2022 1 ABP and LTIP awards have been granted as share awards. The LTIP is a conditional right to receive shares based on a three-year performance period, with an additional two-year holding period. ABP represents the portion of the 2018 bonus deferred into shares which vests in three equal tranches. Shares issued in lieu of dividends accrue on ABP and LTIP awards during the ABP deferral period and the LTIP performance period. SAYE awards are savingsrelated options normally exercisable during the six-month period following the end of the relevant 3 or 5 year savings contract. AESOP includes partnership, matching and dividend share awards which vest after three years. Further details are provided in tables 16 and 18.
2 Face value for the awards granted on 25 March 2019 has been calculated using the average of the middle-market closing price of an Aviva ordinary share on the three consecutive business days immediately preceding the main date of grant, of 421.00 pence. For SAYE the option price is fixed to a three day average closing middle-market price of an ordinary share of the Company, prior to invitation date, with a discount of 20% as permitted under the SAYE plan (284.00 pence). AESOP has been calculated using the average price achieved at purchase of the partnership shares throughout 2019 of 407.00 pence.
Operating EPS1,2 targets for awards made in 2019 Operating EPS1,2 performance determines the vesting of 50% of the LTIP award. Three-year targets are set annually within the context of the Company’s strategic plan. The 2019 targets are provided below.
The performance period for the TSR performance condition is the three years beginning 1 January 2019. For the purposes of measuring the TSR performance condition, the Company’s TSR and that of the comparator group will be based on the 90-day average TSR for the period immediately preceding the start and end of the performance period. The vesting schedule is set out in the table below.
8 TSR vesting schedule for the 2019 LTIP award (audited information)
• In line with the Policy, Andy was entitled to a capped contribution of £5,000 (excluding VAT) towards legal fees incurred in connection with his departure
Strategic report Governance IFRS financial statements Other information 9 Total 2019 remuneration for Non-Executive Directors (audited information) The table below sets out the total remuneration earned by each NED who served during 2019 for Group-related activities.
Chairman Sir Adrian Montague 550 550 88 88 638 638 — — 638 638 Non-Executive Directors Claudia Arney2 155 155 2 2 157 157 73 78 230 235 Glyn Barker2 177 168 2 3 179 171 — — 179 171 Patricia Cross 128 128 — — 128 128 60 60 188 188 George Culmer3 29 — 2 — 31 — — — 31 — Patrick Flynn3 55 — 2 — 57 — — — 57 — Belén Romana García 139 105 15 10 154 115 44 40 198 155 Michael Mire 118 118 3 1 121 119 — — 121 119
Percentage change in remuneration of the Group CEO The table below sets out the increase in the basic salary, bonus and benefits of the Group CEO and that of the wider workforce. The UK employee workforce was chosen as a suitable comparator group, as the Group CEO and CFO are based in the UK (albeit with global responsibilities), and pay changes across the Group vary widely depending on local market conditions. Given that both the Group CEO and his predecessor served for a part-year only in 2019, the Group CEO’s pay for each year has been annualised so as to provide a comparison. The reduction in salary reflects the differences in the incumbent’s package. The increase in benefits reflects relocation and taxable travel and subsistence.
Maurice Tulloch1 — — — — — — — — — 48.1% Mark Wilson2 — — — 75.0% 86.7% 91.0% 91.0% 94% 42.0% — Andrew Moss3 74.3% 81.0% — — — — — — — —
Maurice Tulloch — — — — — — — — — 2,352 Mark Wilson — — — 2,615 2,600 5,438 4,523 4,318 1,836 Andrew Moss 2,748 3,477 554 — — — — — — —
Strategic report Governance IFRS financial statements Other information 13 CEO Pay ratio table
We would highlight the following in terms of the approach taken: • In calculating the Group CEO data for 2019, we have aggregated the amount shown in the single figure table of £106,625 for Sir Adrian
Montague in respect of his services as Executive Chairman from 1 January to 3 March 2019 (for which he received no additional payment), and the amount shown in the single figure table of £2.35 million for Maurice in respect of his services from 4 March to 31 December 2019. Similar to 2018, as 2019 was an atypical year for Aviva, we have provided an additional ratio below, calculated on a full-year basis using total target remuneration
• In 2018, the single figure for Mark Wilson was aggregated with the pro-rata fees for Sir Adrian Montague as Executive Chairman • The P25, P50 and P75 employees were calculated based on full-time equivalent data as at 31 December of the relevant years • Out of the three alternatives available for calculating the ratio, we chose to use Option A as it is considered to be the most accurate way of identifying employees at P25, P50 and P75, and is aligned with investor expectations. Under this approach we calculate total remuneration on a full-time equivalent basis for all of our UK employees and rank them accordingly
14 Salary and total remuneration used in the CEO pay ratio calculations
These circumstances would lead to a total single figure for the Group CEO of £3.98 million and the following Group CEO pay ratios.
2019 (illustrative based on a notional ‘target’ package) 146:1 102:1 61:1
Group adjusted operating profit1 2,975 3,004 3,184 6% Dividends paid2 983 1,128 1,184 5% Share buy-backs 300 600 — (100)% Total staff costs3 1,942 1,974 2,036 3% 1 Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to accounting policy B in the ‘Accounting Policies’ section and to the ‘Other Information’ section within the Annual report and accounts for further information. 2 The total cost of ordinary dividends paid to shareholders. 3 Total staff costs from continuing operations includes wages and salaries, social security costs, post-retirement obligations, profit sharing and incentive plans, equity compensation plans and termination benefits. The average number of employees in continuing operations was 31,791 (2019) and 31,232 (2018). 4 During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note 1(b) of the Annual report and accounts). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million (2017: £93 million). There is no impact on profit before tax attributable to shareholders’ profit.
Statement of directors’ shareholdings and share interests EDs share ownership requirements Under our Employment Shareholding Policy, the Company requires the Group CEO to build a shareholding in the Company equivalent to 300% of basic salary and each ED to build a shareholding in the Company equivalent to 200% of basic salary. • The EDs are required to retain 50% of the net shares released from ABP and LTIP awards until the shareholding requirement is met • The shareholding requirement needs to be built up over a period not exceeding five-years • Unvested share awards, including shares held in connection with bonus deferrals, are not taken into account in applying this test • A post-cessation holding period of two years applies. There will be a transitional period until 31 December 2020, where any leaver will be required to hold 50% of the current (within employment) guideline. From 1 January 2021, the post-cessation guideline will be the same level as the current (within employment) guideline. The Committee will retain the discretion to waive part or all of the guideline where considered appropriate, for example in exceptional or compassionate circumstances 16 Executive directors – share ownership requirement (audited information)
4 Savings-related options (without performance conditions) over shares granted under the SAYE plan. 5 Based on the closing middle-market price of an ordinary share of the Company on 31 December 2019 of 418.7 pence. The closing middle-market price of an ordinary share of the Company during the year ranged from 352.3 pence to 438.8 pence. 6 Maurice is still within the timeframe required to meet his shareholding requirement, which increased upon his appointment to Group CEO.
There were no changes to the EDs interests in Aviva shares during the period 1 January 2020 to 4 March 2020.
Sir Adrian Montague 58,553 58,553 Claudia Arney 14,000 14,000 Glyn Barker 22,700 47,700 Patricia Cross 25,112 30,574 George Culmer — 31,276 Patrick Flynn — — Belén Romana García 4,475 10,223 Michael Mire 50,000 50,000 1 This information includes holdings of any connected persons.
There were no changes to the NEDs interests in Aviva shares during the period 1 January 2020 to 4 March 2020.
Prudential, RSA Insurance Group, Standard Life and Zurich Insurance Group. For the 2018 and 2019 LTIP, the comparator group is: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, Legal & General, Lloyds Banking Group, Old Mutual, Phoenix, Prudential, RSA, Standard Life Aberdeen, Zurich Insurance Group.
4 The performance periods for these awards begin at the commencement of the financial year in which the award is granted and run for a three-year period. 5 LTIP awards for Jason comprise RSUs and were granted prior to his appointment to the Board. The transfer of the shares at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if he leaves service before the end of the period. 6 Andy stepped down from the Board on 24 April 2019. Following confirmation of Andy joining Phoenix Group, the 2017, 2018 and 2019 LTIP awards lapsed in full. 7 Tom stepped down from the Board on 30 June 2019. The 2017 and 2018 LTIP awards have been time pro-rated to reflect the number of days worked from the date of grant to the final date of service, and the 2019 LTIP award lapsed in full. 8 Any unexercised options will lapse at the end of the exercise period. Options are not subject to performance conditions. The option price was fixed by reference to a three day average closing middle-market price of an ordinary share of the Company, prior to invitation date, with a discount of 20% as permitted under the SAYE plan. Options granted under the SAYE are normally exercisable during the six-month period following the end of the relevant (3 or 5 year) savings contract.
9 The shares comprised in these vested awards include shares issued in lieu of dividends accrued during the deferral period.
The Company monitors the number of shares issued under the Aviva employee share plans and their impact on dilution limits. The Company’s usage of shares compared to the relevant dilution limits set by the Investment Association in respect of all share plans (10% in any rolling ten-year period) and executive share plans (5% in any rolling ten-year period) was 3.58% and 1.89% respectively on 31 December 2019.
Governance Regulatory Remuneration Code Aviva Investors and two small ‘firms’ (as defined by the FCA) within the UK Insurance business are subject to the Capital Requirements Directive IV (CRD IV) and the FCA Remuneration Code (SYSC 19A). Additionally, Aviva Investors UK Funds Services Ltd is subject to the Alternative Investment Fund Management Directive (AIFMD), the Undertakings for Collective Investments in Transferrable Securities (UCITS V) directive and the Markets in Financial Instruments Directive II (MiFID II). Remuneration Code requirements include an annual disclosure. For AIFMD and UCITS V the disclosure is part of the Financial Statements and/or Annual accounts of the Alternative Investment Funds or UCITS V. For CRD IV requirements the most recent Aviva Investors disclosure can be found in Section 5 of the Pillar 3 Disclosure available at www.aviva.com/pillar3 and a link to the disclosure for the UK Insurance firms can be found at www.aviva.com/remuneration-committee.
Solvency II remuneration Remuneration Requirements (PRA PS22/16 & SS10/16) apply to the Aviva Group. Our remuneration structures have been designed in a way so that they are compliant with these requirements for all senior managers across the Group, not just those identified as being specifically covered by the requirements of the regulation. Such employees at Aviva are termed ‘Covered Employees’. We are required to complete a Remuneration Policy Statement, which outlines how we have complied with each of the requirements, this document was approved by the Group Remuneration Committee and submitted to the Prudential Regulatory Authority (PRA).
The Solvency II reporting requirements for the year ended 31 December 2019 necessitate firms to produce the Solvency and Financial Condition Report (SFCR) which contains remuneration information and is publicly available. Aviva’s reward principles and arrangements are designed to incentivise and reward employees for achieving stated business goals in a manner that is consistent with the Company’s approach to sound and effective risk management.
Statement of voting at AGM The result of the shareholder vote at the Company’s 2019 AGM in respect of the 2018 Directors’ Remuneration report is set out in table 19. The Committee was pleased with the level of support received from shareholders for the resolution.
Directors’ Remuneration Policy1 97.13% 2.87% 2,809,661,298 83,164,398 3,970,718 Directors’ Remuneration Report 97.61% 2.39% 2,574,643,176 63,055,053 2,660,993 1 Voting on Remuneration Policy at 2018 AGM.
Chairman of the Company1 £550,000 £550,000 Board membership fee £75,000 £70,000 Additional fees are paid as follows: Senior Independent Director £35,000 £35,000 Committee Chair (inclusive of committee membership fee): • Audit £45,000 £45,000 • Governance £35,000 £35,000 • Remuneration £35,000 £35,000 • Risk £45,000 £45,000 Committee membership: • Audit £15,000 £15,000 • Governance £12,500 £12,500 • Nomination £7,500 £7,500 • Remuneration £12,500 £12,500 • Risk £15,000 £15,000 1 Inclusive of Board membership fee and any committee membership fees, and committee chair of the Nomination Committee.
• Group CEO – £989,625 per annum • CFO – £685,125 per annum
• Performance against a number of other non-financial modifiers will be considered when determining bonus payouts (employee engagement, customer trust and risk)
As outlined in the Chair’s letter, for 2020 LTIP awards, Operating EPS2,4 will be replaced with SII RoE3: • 50% SII RoE3 subject to a SII shareholder cover ratio3 • 50% relative TSR against a comparator group5
For the 2020 awards, the SII shareholder cover ratio3 is to meet or exceed the minimum of the stated working range (currently 160% to 180%).
Our Remuneration Policy was approved by shareholders at our AGM on 10 May 2018 and will apply for a period of up to three years. The full and definitive Policy is therefore set out in our 2018 Annual report and accounts, which can be found on our website at
Table 22 below provides an overview of the Policy for EDs. For an overview of the Policy for NEDs, see table 24.
Maximum opportunity There is no maximum increase within the Policy. However, basic salary increases take account of the average basic salary increase awarded to the broader employee population. Different levels of increase may be agreed in certain circumstances at the Committee’s discretion, such as: • An increase in job scope and responsibility • Development of the individual in the role • A significant increase in the size, value or complexity of the
Malus and clawback Cash and deferred awards are subject to malus and clawback. Details of when these may be applied are set out in the notes below.
Operation Shares are awarded annually which vest dependent on the achievement of performance conditions. Vesting is subject to an assessment of quality of earnings, the stewardship of capital and risk review.
Performance period Three years. Additional shares are awarded at vesting in lieu of dividends on any shares which vest.
Pension Purpose To give a market competitive level of provision for post retirement income.
Benefits Purpose To provide EDs with a suitable but reasonable package of benefits as part of a competitive remuneration package. This involves both core executive benefits, and the opportunity to participate in flexible benefits programmes offered by the Company (via salary sacrifice).
EDs are eligible to participate in the Company’s broad based employee share plans on the same basis as other eligible employees.
LTIP performance measures are chosen to provide an indication of both absolute and relative return generated for shareholders. In terms of target setting, a number of reference points are taken into account each year including, but not limited to, the Group’s business plan and external market expectations of the Company. Maximum payouts require performance that significantly exceeds expected performance under both the annual bonus and the LTIP.
Quality of Earnings assessments Throughout the year, the Committee engages in a regular quality of earnings assessment. A quality of earnings assessment sign-off is the final step in determining annual bonus scorecard outcomes, and in making decisions on LTIP vesting. This sign-off is undertaken before decisions are made on the modifiers for risk, customer and employee engagement under the annual bonus, and before vesting is determined against financial metrics under the LTIP.
Malus and Clawback The circumstances when malus (the forfeiture or reduction of unvested shares awarded under the ABP and LTIP) and clawback (the recovery of cash and share awards after release) may apply include (but are not limited to) where the Committee considers that the employee concerned has been involved in or partially/wholly responsible for: • A materially adverse misstatement of the Company’s financial statements, or a misleading representation of performance; • A significant failure of risk management and/or controls; • A scenario or event which causes material reputational damage to the Company; • Misconduct which, in the opinion of the Committee, ought to result in the complete or partial lapse of an award; • Conduct which resulted in significant loss(es); • Failure to meet appropriate standards of fitness and propriety; • Any other circumstance required by local regulatory obligations.
The clawback period runs for two years from the date of payment in the case of the cash element of any annual bonus award.
For deferred bonus elements and LTIP awards, the overall malus and clawback period is five years from the date of grant.
Consistency of executive Policy across the Group The Policy for our EDs is designed as part of the remuneration philosophy and principles that underpin remuneration for the wider Group. Remuneration arrangements for employees below the EDs take account of the seniority and nature of the role, individual performance and local market practice. The components and levels of remuneration for different employees may therefore differ from the Policy for EDs. Any such elements are reviewed against market practice and approved in line with internal guidelines and frameworks.
The maximum level of variable pay which could be awarded to a new ED, excluding any buyouts, would be in line with the Policy set out above and would therefore be no more than 550% of basic salary for the Group CEO (200% of basic salary annual bonus opportunity and 350% of basic salary as the face value of a LTIP grant) and 500% of basic salary for other EDs (150% of basic salary annual bonus opportunity and 350% of basic salary as the face value of a LTIP grant).
On appointing a new NED, the Committee would align the remuneration package with the Policy for NEDs, outlined in table 24, including fees and travel benefits.
Notes to the charts Fixed pay consists of basic salary, pension as described in table 22, and estimated value of benefits provided under the Remuneration Policy, excluding any one offs. Actual figures may vary in future years. The value of the deferred element of the annual bonus assumes a constant share price and does not include additional shares awarded in lieu of dividends that may have been accrued during the vesting period. The value of the LTIP assumes a constant share price (with the exception of the maximum with share price increase scenario) and does not include additional shares awarded in lieu of dividends that may have been accrued during the vesting period. The LTIP is as proposed to be awarded in 2020.
Employment contracts and letters of appointment ED employment contracts and NED letters of appointment are available for inspection at the Company’s registered office during normal hours of business, and at the place of the Company’s 2020 AGM on 26 May from 1.15pm until the close of the meeting.
Provision Policy Notice period By the ED By the Company 6 months. 12 months, rolling. No notice or payment in lieu of notice to be paid where the Company terminates for cause.
Remuneration and Benefits The operation of the annual bonus and LTIP is at the Company’s discretion. Expenses Reimbursement of expenses reasonably incurred in accordance with their duties. Holiday entitlement 30 working days plus public holidays. Private medical insurance Private medical insurance is provided for the ED and their family. The ED can choose to opt out of this benefit or take a lower level of cover. However, no payments are made in lieu of reduced or no cover. Other benefits Other benefits include participation in the Company’s staff pension scheme, life insurance and, where applicable, access to a Company car and driver for business related use. Sickness 100% of salary for the first 52 weeks and up to £150,000 per annum for a further 5 years.
Policy on payment for loss of office There are no pre-determined ED special provisions for compensation for loss of office. The Committee has the ability to exercise its discretion on the final amount actually paid. Any compensation would be based on basic salary, pension entitlement and other contractual benefits during the notice period, or a payment made in lieu of notice, depending on whether the notice is worked.
Non-Executive Directors The table below, sets out details of our Policy for NEDs.
Operation NEDs receive a basic annual fee in respect of their Board duties. Further fees are paid for membership and, where appropriate, chairing Board committees. The Chairman receives a fixed annual fee. Fees are reviewed annually taking into account market data and trends and the scope of specific Board duties. NEDs are able to use up to 100 percent of their post-tax base fees to acquire shares in Aviva plc.
The Chairman 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.
Belén Romana García ✓ ✓ ✓ C 26 June 2015 AGM 2020
Michael Mire ✓ ✓ ✓ ✓ 12 September 2013 AGM 2020 Key C Chair of Committee ✓ Committee 1 The dates shown above reflect the date the individual was appointed to the Aviva plc Board. 2 Appointment end dates are in accordance with letters of appointment.
In this section Independent auditors’ report to the members of Aviva plc 109 Accounting policies 117
Consolidated income statement 132 Consolidated statement of comprehensive income 133 Reconciliation of Group adjusted operating profit to profit for the year
Income statement 264 Statement of comprehensive income 264 Statement of changes in equity 265 Statement of financial position 266 Statement of cash flows 267 Notes to the Company’s financial statements 268
Company’s profit and cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual report and accounts (the “Annual Report”), which comprise: • the Consolidated and Company statements of financial position as at 31 December 2019; • the Consolidated and Company income statements and statements of comprehensive income for the year then ended; • the Reconciliation of Group adjusted operating profit to profit for the year then ended; • the Consolidated and Company statements of cash flows for the year then ended; • the Consolidated and Company statements of changes in equity for the year then ended; • the principal accounting policies adopted in the preparation of the financial statements; and • the notes to the financial statements, which include other explanatory information.
Audit procedures performed by the engagement team included: • Discussions with the Board, management, internal audit, senior management involved in the Risk and Compliance functions and the Group and Company’s legal function, including consideration of known or suspected instances of non-compliance with laws and regulation and fraud; • Evaluation and testing of the operating effectiveness of management’s controls designed to prevent and detect irregularities; • Assessment of matters reported on the Group and Company’s whistleblowing helpline and fraud register and the results of management’s investigation of such matters; • Reading key correspondence with the Prudential Regulation Authority and the Financial Conduct Authority, including those in relation to compliance with laws and regulations; • Reviewing relevant meeting minutes including those of the Board of Directors and Audit Committee; • Making enquiries of the Group Investigations team who are responsible for independently investigating suspected or alleged fraudulent activity across the group, utilising activities including, but not limited to, whistle blowing hotlines and data analytics; • Identifying and testing journal entries based on risk criteria; • Designing audit procedures to incorporate unpredictability around the nature, timing or extent of our testing; and • Testing transactions entered into outside of the normal course of the Group and Company’s business specifically in respect of acquisitions and disposals.
Valuation of life insurance contract liabilities (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 43 Insurance liabilities (b) Long-term business liabilities.
As part of our consideration of the entire set of assumptions, we focused particularly on annuitant mortality, credit default and expense assumptions for the UK Life component given their significance to the Group’s result and the level of judgement involved. These aspects of our work have been considered in more detail below.
Based on the work performed and the evidence obtained, we consider the methodology and assumptions used to value the life insurance contract liabilities to be appropriate.
Annuitant mortality assumptions at UK Life require a high degree of judgement due to the number of factors which may influence mortality experience. The differing factors which affect the assumptions are underlying mortality experience (in the portfolio), industry and management views on the future rate of mortality improvements and external factors arising from developments in the annuity market.
• Rate of mortality improvements: this component is more subjective given the lack of data and the uncertainty over how life expectancy will change in the future.
In addition, a margin for prudence is applied to the annuitant mortality assumptions.
Credit default assumptions for illiquid assets, specifically: commercial mortgages and equity release mortgages (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 44 Insurance liabilities methodology and assumptions (a) Long-term business.
• We validated significant assumptions used by management by ensuring consistency with the assumptions used for the valuation of the assets, and against market observable data (to the extent available and relevant) and our experience of market practices
Future maintenance expenses and expense inflation assumptions are used in the measurement of life insurance contract liabilities at UK Life. The assumptions reflect the expected future expenses that will be required to maintain the in-force policies at the balance sheet date, including an allowance for project costs and a margin for prudence. The assumptions used require significant judgement.
• We tested that the assumptions appropriately reflect the expected future expenses for maintaining policies in force at the balance sheet date, which includes consideration of the allowance for project costs.
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 2019, whether reported or not, together with the related claims handling costs.
Given their size in relation to the consolidated Group and the complexity of the judgements involved, our work focused on the actuarial liabilities in the UK General Insurance and Canada General Insurance components.
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 and UK securitised mortgage loans (UK Life); • Collateralised loan obligations and non-recourse loans (UK
The valuation of product governance provisions involves significant judgement. Given the historic nature of these provisions, information to calculate redress amounts can be limited.
The second provision relates to past communications to a specific sub-set of pension policyholders on a product sold between 1985 and 1989 by an entity acquired by the Group through the purchase of Friends Life. Specifically, these policyholders may not have been adequately informed of switching options into with-profit funds that were available to them. The valuation of the provision involves a high degree of judgement and estimation uncertainty due to the dependence on decisions made by customers.
• We assessed the adequacy of the disclosure in the financial statements.
In respect of the first provision, we also assessed management's approach to valuation of the provision by performing the following procedure: • We assessed the expertise and independence of management's experts.
In respect of the second provision, we also assessed management's approach to valuation of the provision by performing the following procedure: • We used auditors’ experts to assess certain key assumptions to confirm whether they were based on regulatory expectations.
Based on the work performed and the evidence obtained, we consider the valuation of the provisions to be appropriate.
How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the financial reporting process and controls, and the industries in which they operate.
Overall materiality £158.0 million (2018: £156.0 million). £47.8 million (2018: £105.0 million).
In determining our materiality, we considered financial metrics which we believed to be relevant, and concluded, consistent with the prior year that profit before tax was the most relevant benchmark as the Company is profitorientated and users of the financial statements will be focused on this benchmark.
We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and Company’s ability to continue as a going concern. For example, the terms of the United Kingdom’s withdrawal from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group and Company’s business, customers, suppliers and the wider economy.
Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Directors’ Responsibilities Statement set out on page 82, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Appointment Following the recommendation of the audit committee, we were appointed by the members on 3 May 2012 to audit the financial statements for the year ended 31 December 2012 and subsequent financial periods. The period of total uninterrupted engagement is 8 years, covering the years ended 31 December 2012 to 31 December 2019.
Andrew Kail (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 4 March 2020 1 The maintenance and integrity of the Aviva plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly the auditors accept no responsibility for any changes that may have occurred to the full annual financial statements since they were initially presented on the website. 2 Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
(A) Basis of preparation The consolidated financial statements and those of the Company have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, investment property, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are stated in pounds sterling, which is the Company’s functional and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m). The separate financial statements of the Company are on pages 264 to 273.
The adoption of IFRS 16 has resulted in an update to the Group’s stated accounting policy for leases. The standard has introduced a definition of a lease with a single lessee accounting model, eliminating the previous classification of either operating or finance leases. Lessees are required to recognise lease assets and liabilities on the statement of financial position for all leases, with the exception of shortterm and low-value leases. Further information can be found in accounting policy Z.
• Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Group has reviewed existing service and outsourcing contracts to determine whether they are either a lease or contain a lease at the date of initial application. This has not resulted in any additional contracts being recognised as leases in the statement of financial position.
Lessor accounting remains similar to the previous approach set out in IAS 17. The Group’s lessor accounting policies have not changed as a result of the introduction of IFRS 16.
The following amendments to existing standards and IFRIC interpretations have been issued and endorsed by the EU, are effective from 1 January 2019 or earlier, and do not have an impact on the Group’s consolidated financial statements.
(ii) IFRIC 23, Uncertainty over Income Tax Treatments In June 2017, the IASB published IFRIC 23 Uncertainty over Income Tax Treatments. The standard is effective for annual reporting beginning on or after 1 January 2019.
(v) Annual Improvements to IFRS Standards 2015-2017 Cycle These improvements consist of amendments to four IFRSs including IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income taxes and IAS 23 Borrowing Costs. The amendments are effective for annual reporting beginning on or after 1 January 2019.
(ii) IFRS 9, Financial Instruments In September 2016, the IASB published amendments to IFRS 4 Insurance Contracts that addressed the accounting consequences of the application of IFRS 9 to insurers prior to implementing IFRS 17. The amendments introduced two options for insurers: the deferral approach and the overlay approach. The deferral approach provides an entity, if eligible, with a temporary exemption from applying IFRS 9. The overlay approach allows an entity to remove from profit or loss the effects of some of the accounting mismatches that may occur before the new insurance contracts standard is applied. The Group has met the eligibility requirements of the deferral approach as set out below and has opted to apply this deferral from 1 January 2018. The Group has however been required to apply the additional disclosure requirements of IFRS 9 which are set out in note 54 and note 60.
Strategic report Governance IFRS financial statements Other information risk management practices and follow a more principle based approach.
The Company is not eligible to apply the deferral approach and has adopted IFRS 9 from 1 January 2018. IFRS 9 information relating to entities within the Group which have applied IFRS from 1 January 2018 can be found in the entities’ publicly available individual financial statements.
The following new standards and amendments to existing standards have been issued, are not yet effective and are not expected to have a significant impact on the Group’s consolidated financial statements: (iii) Amendments to References to the Conceptual Framework in IFRS Standards Published by the IASB in March 2018. The amendments are effective for annual reporting beginning on or after 1 January 2020 and were endorsed by the EU on 29 November 2019.
(v) Amendment to IAS 1 and IAS 8: Definition of material Published by the IASB in October 2018. The amendments are effective for annual reporting beginning on or after 1 January 2020 and were endorsed by the EU on 29 November 2019.
Group adjusted operating profit also excludes other items, which are those items that, in the Directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. Details of these items, including an explanation of the rationale for their exclusion, are provided in the Alternative Performance Measures section within ‘Other information’.
The Group adjusted operating profit APM should be viewed as complementary to IFRS GAAP measures. It is important to consider Group adjusted operating profit and profit before tax together to understand the performance of the business in the period.
Item Critical accounting estimates Accounting policy Note investment property include broker quotes and models using both observable and unobservable market inputs. The valuation techniques involve judgement with regard to the valuation models used and the inputs to these models can lead to a range of plausible valuations for financial investments.
During the year management reassessed the critical estimates previously provided and, based on their assessment of qualitative and quantitative risk factors, resolved that amortisation and impairment of acquired value of in-force business (AVIF) and deferred acquisition costs (DAC) were no longer critical estimates in the context of the Group results.
(D) Consolidation principles Subsidiaries Subsidiaries are those entities over which the Group has control. The Group controls an investee, if and only if, the Group has all of the following: • power over the investee, • exposure, or rights, to variable returns from its involvement with the investee, and • the ability to use its power over the investee to affect its returns.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control.
Strategic report Governance IFRS financial statements Other information ownership over a period of time. This is performed in line with the following principles: • Where the entity is managed by a Group asset manager, and the
Group’s ownership holding in the entity exceeds 40 per cent, the Group is judged to have control over the entity; • Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is between 30 per cent and 40 per cent, the facts and circumstances of the Group’s involvement in the entity are considered, in forming a judgement as to whether the Group has control over the entity. Considerations include the rights held by other parties, the Group’s rights to fees from the entity, the variability in the returns associated with the Group’s aggregate economic interest in the fund and the nature of the Group’s exposure to variability compared with that of other investors; • Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is less than 30 per cent, the Group is judged to not have control over the entity.
The Group is required to use the acquisition method of accounting for business combinations. Under this method, the Group recognises identifiable assets, liabilities and contingent liabilities at fair value, and any non-controlling interest in the acquiree. For each business combination, the Group has the option to measure the noncontrolling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see accounting policy O below). Acquisition-related costs are expensed as incurred.
Merger accounting and the merger reserve Prior to 1 January 2004, the date of first time adoption of IFRS, certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account. These transactions have not been restated, as permitted by the IFRS 1 transitional arrangements.
Other than investments in investment vehicles which are carried at fair value through profit or loss, investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s postacquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in accounting policy O, the cost includes goodwill recognised on acquisition. The Group’s share of their post-acquisition profit or losses is recognised in the income statement and its share of postacquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence or joint control over the investment.
(G) Product classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts. Some insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts.
The long-term business provisions are calculated separately for each life operation, based either on local regulatory requirements or existing local GAAP (at the later of the date of transition to IFRS or the date of the acquisition of the entity); and actuarial principles consistent with those applied in each local market. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 43(a). For the UK with-profits funds, FRS 27 required liabilities to be calculated on the realistic basis adjusted to remove the shareholders’ share of future bonuses. FRS 27 was grandfathered from UK regulatory requirements prior to the adoption of Solvency II. For UK non-profit insurance contracts, the liabilities are calculated using the gross premium valuation method. This method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions are set on a prudent basis and can vary by contract type and reflect current and expected future experience. These estimates depend upon the outcome of future events and may need to be revised as circumstances change. The liabilities are based on the UK regulatory requirements prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business.
Embedded derivatives Embedded derivatives that meet the definition of an insurance contract or correspond to options to surrender insurance contracts for a set amount (or based on a fixed amount and an interest rate) are not separately measured. All other embedded derivatives are separated and measured at fair value if they are not considered closely related to the host insurance contract or do not meet the definition of an insurance contract. Fair value reflects own credit risk to the extent the embedded derivative is not fully collateralised.
General insurance and health provisions Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the statement of financial position date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the statement of financial position date. As such, booked claim provisions for general insurance and health insurance are based on the best estimate of the cost of future claim payments plus an explicit allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 43(b).
Provision for unearned premiums The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as a provision for unearned premiums. The change in this provision is taken to the income statement as recognition of revenue over the period of risk.
The liability’s fair value is determined using a valuation technique to provide a reliable estimate of the amount for which the liability could be transferred in an orderly transaction between market participants at the measurement date, subject to a minimum equal to the surrender value. For unit-linked contracts, the fair value liability is equal to the current unit fund value, including any unfunded units. In addition, if required, non-unit reserves are held based on a discounted cash flow analysis. For non-linked contracts, the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price for risk.
Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at its book value (original cost less cumulative amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated.
Impairment testing For impairment testing, goodwill and intangible assets with indefinite useful lives have been allocated to cash-generating units. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 17. Any impairments are charged as expenses in the income statement.
This excludes owner-occupied properties held under lease arrangements, which are measured at amortised cost. Refer to accounting policy Z for further information.
Impairment The Group reviews the carrying value of its AFS investments on a regular basis. If the carrying value of an AFS investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. The following policies are used to determine the level of any impairment, some of which involve considerable judgement.
Strategic report Governance IFRS financial statements Other information amortised cost due to changes in risk-free interest rates does not necessarily represent objective evidence of a loss event.
The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions. These amounts are disclosed in note 60(b).
Hedge accounting Hedge accounting is applied to certain transactions which meet the criteria set out in IAS 39, in order to mitigate the Group’s exposure to risk. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment of whether the hedge is expected to be, and has been,
Changes in the fair value of hedging instruments that are designated and qualify as a hedge of the fair value of a recognised asset or liability (fair value hedges) are recognised in the income statement. The gain or loss on the hedged item that is attributable to the hedged risk is recognised in the income statement. This applies even if the hedged item is an available for sale financial asset or is measured at amortised cost. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment made to the carrying amount of the hedged item is amortised to the income statement, based on a recalculated effective interest rate over the residual period to maturity. In cases where the hedged item has been derecognised, the cumulative adjustment is released to the income statement immediately.
The Company calculates expected credit losses for all financial assets held at either amortised cost or fair value through other comprehensive income. Expected credit losses are calculated on either a 12-month or lifetime basis depending on the extent to which credit risk has increased significantly since initial recognition.
Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these future margins. Deferred acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset.
Deferred acquisition costs are reviewed by category of business at the end of each reporting period and are written-off where they are no longer considered to be recoverable.
(Z) Leases Where the Group is the lessee, a lease liability equal to the present value of outstanding lease payments and a corresponding right-ofuse asset equal to cost are initially recognised. The right-of-use asset is subsequently measured at amortised cost and depreciated on a straight-line basis over the length of the lease term. Depreciation on lease assets and interest on lease liabilities is recognised in the income statement.
The Group has made use of the election available under IFRS 16 to not recognise any amounts on the balance sheet associated with leases that are either deemed to be short term, or where the underlying asset is of low value. A short-term lease in this context is defined as any arrangement which has a lease term of 12 months or less. Lease payments associated with such arrangements are recognised in the income statement as an expense on a straight-line basis. The Group’s total short term and low value lease portfolio is not material.
Comparative figures Prior period comparatives have not been restated to reflect the adoption of IFRS 16. The accounting policy relating to leases applied to comparatives is set out below.
Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Where the Group is the lessee, payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the term of the relevant leases.
(AB) Employee benefits Pension obligations The Group operates a number of pension schemes, whose members receive benefits on either a defined benefit or defined contribution basis. Under a defined contribution plan, the Group’s legal or constructive obligation is limited to the amount it agrees to contribute to a fund and there is no obligation to pay further contributions if the fund does not hold sufficient assets to pay benefits. A defined benefit pension plan is a pension plan that is not a defined contribution plan and typically defines the amount of pension benefit that an employee will receive on retirement.
Strategic report Governance IFRS financial statements Other information assets exceeds the present value of the defined benefit obligation, the resultant asset is limited to the asset ceiling defined as present value of economic benefits available in the form of future refunds from the plan or reductions in contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group.
Equity compensation plans The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’ Remuneration Report and in note 33.
The Group accounts for options and awards under equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value based method of accounting (the ‘fair value method’). Under this method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to the equity compensation reserve, part of shareholders’ funds. In certain jurisdictions, awards must be settled in cash instead of shares, and the credit is taken to liabilities rather than reserves. The fair value of these cash-settled awards is recalculated each year, with the income statement charge and liability being adjusted accordingly.
In addition to paying tax on shareholders’ profits (‘shareholder tax’), the Group’s life businesses in the UK, Ireland and Singapore pay tax on policyholders’ investment returns (‘policyholder tax’) on certain products at policyholder tax rates. The incremental tax borne by the Group represents income tax on policyholder’s investment return. In jurisdictions where policyholder tax is applicable, the total tax charge in the income statement is allocated between shareholder tax and policyholder tax. The shareholder tax is calculated by applying the corporate tax rate to the shareholder profit. The difference between the total tax charge and shareholder tax is allocated to policyholder tax. This calculation methodology is consistent with the legislation relating to the calculation of tax on shareholder profits. The Group has decided to show separately the amounts of policyholder tax to provide a meaningful measure of the tax the Group pays on its profit.
(AG) Earnings per share Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of treasury shares.
Earnings per share has also been calculated on Group adjusted operating profit attributable to ordinary shareholders, net of tax, non-controlling interests, preference dividends, the direct capital instrument (the DCI) and tier one notes as the directors believe this figure provides a better indication of operating performance. Details are given in note 15.
Consolidated income statement For the year ended 31 December 2019 £m £m
Net earned premiums H 27,471 26,252 Fee and commission income I & J 2,141 2,178 Net investment income/(expense) K 40,577 (10,912) Share of profit after tax of joint ventures and associates 85 112 (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 4(a) (22) 102
Expenses 7 Claims and benefits paid, net of recoveries from reinsurers (23,096) (23,142) Change in insurance liabilities, net of reinsurance 42(b) (5,702) 6,246 Change in investment contract provisions (24,095) 5,321 Change in unallocated divisible surplus 49 (3,985) 3,237 Fee and commission expense (5,536) (3,326) Other expenses (3,329) (3,843) Finance costs 8 (576) (573) (66,319) (16,080)
Profit before tax attributable to shareholders’ profits 3,374 2,129 Tax (expense)/credit AC & 14 (1,270) 35 Less: tax attributable to policyholders’ returns 14(d) 559 (477) Tax attributable to shareholders’ profits 14(d) (711) (442)
Earnings per share AG & 15 Basic (pence per share) 63.8 38.2 Diluted (pence per share) 63.1 37.8 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Other comprehensive income: Items that may be reclassified subsequently to income statement Investments classified as available for sale
Share of other comprehensive income/(loss) of joint ventures and associates 39 22 (10) Foreign exchange rate movements 39, 41 (219) 5 Aggregate tax effect – shareholder tax on items that may be reclassified subsequently to income statement 14(b) 6 8
Owner-occupied properties – fair value gains 39 3 1 Remeasurements of pension schemes 40 (867) (279) Aggregate tax effect – shareholder tax on items that will not be reclassified subsequently to income statement 14(b) 103 43
Attributable to: Equity holders of Aviva plc 1,655 1,310 Non-controlling interests 76 124
The accounting policies (identified alphabetically) on pages 117 to 131 and notes (identified numerically) on pages 139 to 263 are an integral part of the financial statements.
Reconciliation of Group adjusted operating profit to profit for the year For the year ended 31 December 2019 £m £m
Group adjusted operating profit before tax attributable to shareholders’ profits Life business 3,000 2,976 General insurance and health 644 651 Fund management 92 143 Other: Other operations (114) (270) Corporate centre (183) (216) Group debt costs and other interest (255) (280)
Profit for the year 2,663 1,687 1 During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note 1(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax attributable to shareholders’ profit.
2 Other in 2019 relates to a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (see note 44(b)) and a charge of £2 million relating to negative goodwill which arose on the acquisition of Friends First (see note 3). Other in 2018 includes a movement in the discount rate used for estimating lump sum payments in the settlement of bodily injury claims which resulted in a gain of £190 million, a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First, a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirements to equalise members’ benefits of the effects of Guaranteed Minimum Pension and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs.
United Kingdom 1,848 421 — — 2,269 Canada — 26 — 1 27 France 436 109 — (35) 510 Poland 170 20 — 8 198 Italy, Ireland, Spain and Other 225 90 — (15) 300 Asia 300 (16) (4) (19) 261 Aviva Investors 1 — 147 — 148 Other Group activities (4) 1 — (210) (213) 2,976 651 143 (270) 3,500
Consolidated statement of changes in equity For the year ended 31 December 2019
Balance at 1 January 1,003 200 10,195 (14) 1,141 (274) 4,918 731 17,900 1,235 19,135 Profit for the year — — — — — — 1,568 — 1,568 119 1,687 Other comprehensive income — — — — 28 (50) (236) — (258) 5 (253) Total comprehensive income for the year — — — — 28 (50) 1,332 — 1,310 124 1,434 Dividends and appropriations — — — — — — (1,189) — (1,189) — (1,189) Non-controlling interests share of dividends declared in the year — — — — — — — — — (90) (90) Reclassification of tier 1 notes to financial liabilities — — — — — — — — — — — Reserves credit for equity compensation plans — — — — — 64 — — 64 — 64 Shares issued under equity compensation plans 2 — 7 (1) — (55) 49 — 2 — 2 Treasury shares held by subsidiary companies — — — — — — — — — — — Forfeited dividend income — — — — — — 4 — 4 — 4 Changes in non-controlling interests in subsidiaries — — — — (7) — 1 — (6) (306) (312) Change in equity accounted option — — — — — — — — — — — Shares purchased in buy-back2 (30) — 30 — — — (600) — (600) — (600) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — (40) 36 — — (4) — (4) Capital contributions from non-controlling interests — — — — — — — — — 3 3 Aggregate tax effect – shareholder tax — — — — — — 8 — 8 — 8
Balance at 31 December 975 200 10,232 (15) 1,122 (279) 4,523 731 17,489 966 18,455 1 Capital reserves consist of share premium of £1,214 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million. 2 On 1 May 2018, the Group announced a share buy-back of ordinary shares for an aggregate purchase price of up to £600 million. On completion in 2018 of this buy-back, £600 million of shares had been purchased and shares with a nominal value of £30 million have been cancelled, giving rise to an additional capital redemption reserve of an equivalent amount. See note 33 for further details of the shares purchased in buy-back.
Consolidated statement of financial position As at 31 December 2019 £m £m £m
Ordinary share capital 33 980 975 1,003 Preference share capital 36 200 200 200
Share premium 33(b) 1,239 1,214 1,207 Capital redemption reserve 33(b) 44 44 14 Merger reserve D & 38 8,974 8,974 8,974 10,257 10,232 10,195 Treasury shares 35 (7) (15) (14) Currency translation reserve 39 814 1,122 1,141 Other reserves 39 (101) (279) (274) Retained earnings 40 5,065 4,523 4,918 Equity attributable to shareholders of Aviva plc 17,208 16,758 17,169 Direct capital instrument and tier 1 notes 37 500 731 731
Equity excluding non-controlling interests 17,708 17,489 17,900 Non-controlling interests 41 977 966 1,235
Total equity 18,685 18,455 19,135 Liabilities Gross insurance liabilities L & 43 149,338 144,077 148,650 Gross liabilities for investment contracts M & 45 222,127 202,468 203,986 Unallocated divisible surplus L & 49 9,597 5,949 9,082 Net asset value attributable to unitholders D 16,610 16,338 18,176 Pension deficits and other provisions AA, AB & 51 1,565 1,399 1,429 Deferred tax liabilities AC & 50 2,155 1,885 2,377 Current tax liabilities 569 254 290 Borrowings AD & 53 9,039 9,420 10,286 Payables and other financial liabilities S & 54 18,138 17,681 16,676 Other liabilities 55 3,094 3,074 2,856 Liabilities of operations classified as held for sale AH & 4(b) 9,126 8,521 9,873
The cash flows presented in this statement cover all the Group’s activities and include flows from both policyholder and shareholder activities. All cash and cash equivalents are available for use by the Group.
Total net cash from operating activities 5,968 5,401 Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 59(b) (19) 192 Disposals of subsidiaries, joint ventures and associates, net of cash transferred 59(c) 12 381 Purchases of property and equipment 21 (84) (87) Proceeds on sale of property and equipment 4 15 Purchases of intangible assets (63) (64)
Total net increase in cash and cash equivalents 3,628 2,373 Cash and cash equivalents at 1 January 16,051 13,617 Effect of exchange rate changes on cash and cash equivalents (245) 61 Cash and cash equivalents at 31 December 59(d) 19,434 16,051 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Strategic report Governance IFRS financial statements Other information 1 – Changes to comparative amounts (a) Presentation of consolidated investment funds Following a review of the Group’s presentation of consolidated investment funds, corrections to previous reported values on the consolidated statement of financial position and consolidated income statement have been identified (with corresponding impacts on the consolidated statement of cash flows) and comparative amounts have been restated. There has been no impact on profit for the period or equity for any of the periods presented. The nature of the restatements are as follows: • Fixed maturity securities, loans, derivatives and receivables held indirectly through certain majority-owned fund investments in the UK and
France, which in 2018 were presented as cash and cash equivalents, are now presented as financial investments, loans, receivables and payables and other financial liabilities which reflect the classification of the underlying holdings; • Corrections to the calculation of minority ownership of certain fund investments have resulted in a restatement of net asset value attributable to unitholders and an adjustment to de-consolidate two investment funds where the Group was incorrectly deemed to have been the controlling entity in 2018; • Corrections to the calculation of minority ownership have resulted in a restatement of the investment income attributable to minority shareholders recorded in fee and commission expense, net investment expense and fee and commission income for the period ending 31 December 2018; and
• Accrued interest on certain fixed maturity securities held indirectly through certain majority-owned funds, which in 2018 was presented within financial investments, is now presented in prepayments and accrued income (consistent with accrued interest on the Group’s directly held fixed maturity securities).
The impact of the changes above on the following captions in the income statement for the prior period presented is shown below: As reported £m
Additionally, following the review, £33,050 million of fixed maturity securities previously included within level 1 have been reclassified to level 2 at 31 December 2018.
(b) Amendment to Group adjusted operating profit For 2019, the Group adjusted operating profit APM has been amended and now includes amortisation and impairment of internally generated intangible assets to provide more relevant information by better reflecting their operational nature. These assets include advisor platforms, digital distribution channels and claims and policy administration systems which are used to support operational activities. Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations as these items principally relate to merger and acquisition activity which we view as strategic in nature. The effect of this change is to move £112 million relating to amortisation of internally generated intangible assets into Group adjusted operating profit for 2018. The 2018 comparative figures have been restated in the Reconciliation of Group adjusted operating profit to profit for the year and the Segmental income statement (see note 5). The relevant EPS metrics (operating EPS and diluted operating EPS) for 2018 have also been restated (see note 15). There is no impact from this change on profit before tax attributable to shareholders’ profit.
Strategic report Governance IFRS financial statements Other information 4 – Subsidiaries, joint ventures and associates – disposals and held for sale continued (b) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2019 are as follows: £m
Assets Acquired value of in-force business and intangible assets 526 660 Interests in, and loans to, joint ventures and associates 8 — Property and equipment 8 5 Loans 1 — Financial investments 7,824 7,251 Reinsurance assets 75 45 Other assets 290 206 Cash and cash equivalents 780 688 Total assets 9,512 8,855
(i) FPI On 19 July 2017, Aviva announced the sale of FPI to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited, for a total consideration of £340 million, and FPI has been reported as held for sale by the Group since 31 December 2017. The conditions defined in IFRS 5 for a subsidiary to be classified as held for sale include the presumption that the sale will be completed within 12 months of the date of reclassification. However, if events or circumstances extend the period to complete the sale beyond 12 months, a held for sale classification continues to be appropriate if certain conditions are met.
(c) Significant restrictions In certain jurisdictions the ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations and solvency requirements. There are no protective rights of non-controlling interests which significantly restrict the Group’s ability to access or use the assets and settle the liabilities of the Group.
Canada The principal activity of our operation in Canada is general insurance. In particular it provides personal and commercial lines insurance products principally distributed through insurance brokers.
Italy, Ireland and Other These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8 Operating Segments. The principal activities of our operations in Italy and Ireland are long-term business and general insurance. Our ‘Other’ operations include our life operations in Turkey. This segment also includes Friends First, which was acquired on 1 June 2018. The comparative results include our operations within Spain up to the date of disposal (Caja Murcia Vida and Caja Granada Vida on 11 July 2018 and Pelayo Vida on 1 October 2018), the principal activity of which was the sale of accident and health insurance and a selection of savings products. The comparative results also include Avipop, part of our operations in Italy, up to the date of disposal on 29 March 2018.
Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in ‘Other Group activities’. The results of our internal reinsurance operations and the Group’s interest in Wealthify are also included in this segment, as are the elimination entries for certain inter-segment transactions and group consolidation adjustments.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2018 – restated1,2
As a result of the review, there have been reclassifications between operating segments to ensure a consistent presentation of investment fund consolidation entries in the Other Group Activities segment. These consolidation adjustment reclassifications relate to UK property funds (£66 million reclassified to Other Group Activities, which predominately includes net investment expense (£78 million), other expenses (£24 million credit) and finance costs (£15 million)). This segmental restatement has had no impact on the consolidated income statement. See note 1(a) for further information.
4 Aviva Investors adjusted operating profit includes £1 million profit relating to the Aviva Investors Pensions Limited business. 5 Other Group activities include internal reinsurance and net expenses of £180 million (restated) in relation to the UK digital business. 6 Other includes a movement in the discount rate used for estimating lump sum payments in settlement of bodily injury claims which resulted in a gain of £190 million, a provision release of £78 million relating to the sale of Aviva
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (b) Further analysis by products and services The Group’s results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities.
(b) (i) Segmental income statement – products and services for the year ended 31 December 2019
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (b) (ii) Segmental income statement – products and services for the year ended 31 December 2018 – restated1, 2
Gross written premiums3 18,140 10,519 — — 28,659 Premiums ceded to reinsurers (1,775) (551) — — (2,326) Premiums written net of reinsurance 16,365 9,968 — — 26,333 Net change in provision for unearned premiums — (81) — — (81)
Net earned premiums 16,365 9,887 — — 26,252 Fee and commission income 1,496 138 365 179 2,178 17,861 10,025 365 179 28,430 Net investment (expense)/income (10,453) 63 (1) (521) (10,912) Inter-segment revenue — — 263 — 263 Share of profit of joint ventures and associates 178 — — (66) 112 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 84 — 27 (9) 102 Segmental income 7,670 10,088 654 (417) 17,995
Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 2,976 651 143 (766) 3,004 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
As a result of the review, there have been reclassifications between operating segments to ensure a consistent presentation of investment fund consolidation entries in the Other segment. These consolidation adjustment reclassifications relate to property funds (£66 million reclassified from Long-term business to Other, which predominately includes net investment expense (£78 million), other expenses (£24 million credit) and finance costs (£15 million)). This segmental restatement has had no impact on the consolidated income statement. See note 1(a) for further information.
2 During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note 1(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax attributable to shareholders’ profit.
Gross written premiums Long-term: Insurance contracts 12,906 11,064 Participating investment contracts 7,429 7,076
General insurance and health 10,908 10,519 31,243 28,659 Less: premiums ceded to reinsurers (3,563) (2,326) Gross change in provision for unearned premiums (note 43(c)(v)) (231) (98) Reinsurers’ share of change in provision for unearned premiums (note 47(c)(iii)) 22 17 Net change in provision for unearned premiums (209) (81) Net earned premiums 27,471 26,252
Fee and commission income Fee income from investment contract business 1,064 1,059 Fund management fee income 439 527 Other fee income 451 403 Reinsurance commissions receivable 32 26 Other commission income 175 164 Net change in deferred revenue (20) (1) 2,141 2,178
From financial instruments designated as trading and other than trading 5,950 5,716 From AFS investments and financial instruments at amortised cost 49 54 5,999 5,770 Dividend income 5,614 4,881 Other income from investments designated as trading
Realised gains/(losses) on disposals 1,388 (803) Unrealised gains and losses (see accounting policy K)
Gains/(losses) arising in the year 1,866 (1,887) (Losses)/gains recognised now realised (1,388) 803 478 (1,084) 1,866 (1,887) Other income from investments designated as other than trading
Realised gains on disposals 9,130 8,044 Unrealised gains and losses (see accounting policy K)
Rent 555 583 Expenses relating to these properties (158) (121) Realised gains on disposal 58 69 Fair value gains on investment properties (note 22) 93 307 548 838 Foreign exchange (losses)/gains on investments other than trading (454) 192 Other investment expenses (65) (27)
Total income 70,252 17,732 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Strategic report Governance IFRS financial statements Other information 7 – Details of expenses This note gives further detail on the items appearing in the expenses section of the income statement.
Insurance contracts 13,017 12,163 Participating investment contracts 5,333 6,117 Non-participating investment contracts 7 8
Claims and benefits paid to policyholders on general insurance and health business 6,765 6,913 25,122 25,201 Less: Claim recoveries from reinsurers
Claims and benefits paid, net of recoveries from reinsurers 23,096 23,142
Impairments Net impairment on loans 4 1 Net impairment on receivables and other financial assets 10 9 Other net foreign exchange losses (109) 28
Other expenses were £1,345 million (2018: £1,729 million) which included costs relating to property, IT and a charge of £2 million relating to negative goodwill on the acquisition of Friends First. Other expenses in 2018 included a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First, a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirement to equalise members’ benefits for the effects of Guaranteed Minimum Pension (see note 52(b)) and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs.
Interest expense on core structural borrowings Subordinated debt 336 364 Long term senior debt 16 6 Commercial paper (1) (2)
Strategic report Governance IFRS financial statements Other information 9 – Life business investment variances and economic assumption changes (a) Definitions Group adjusted operating profit for life business is based on expected long-term investment returns on financial investments backing shareholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Group adjusted operating profit includes the effect of variance in experience for operating items, such as mortality, persistency and expenses, and the effect of changes in operating assumptions. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit, in investment variances and economic assumption changes.
(c) Assumptions The expected rate of investment return is determined using consistent assumptions at the start of the period between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.
The ten-year mid-price swap rates at the start of the period are set out in the table below: For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risk (assessed on a best estimate basis). This includes an adjustment for credit risk on all eurozone sovereign debt. Where such securities are classified as available for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
The variance in 2018 was primarily due to negative variances in the UK and Italy. In the UK, these variances were mainly due to an increase in yields, the widening of corporate bond spreads and an increase in the allowance for the possible adverse impact of the decision for the UK to leave the European Union, partially offset by the beneficial impact of our equity hedges. The negative variance in Italy was primarily driven by a widening of sovereign credit spreads and a fall in equity markets.
Short-term fluctuations in investment return (see (d) below) 167 (476) Economic assumption changes (see (e) below) (54) 1
Market value movements which give rise to variances between actual and long-term investment returns are disclosed separately in shortterm fluctuations outside Group adjusted operating profit.
(c) Assumptions The principal assumptions underlying the calculation of the long-term investment return are: Long-term rates of return Equities Long-term rates of return
The long-term rates of return on equities and investment properties have been calculated by reference to the ten-year mid-price swap rate for an AA rated bank in the relevant currency plus a risk premium. The underlying reference rates and risk premiums for the United Kingdom and Eurozone are shown in note 9.
Strategic report Governance IFRS financial statements Other information 10 – Non-life business: short-term fluctuations in return on investments continued (d) Analysis of investment return The total investment income on our non-life business, including short-term fluctuations, are as follows: Non-life business 2019 £m
(e) Economic assumption changes In the general insurance and health business, there is a negative impact of £54 million (2018: £1 million positive) primarily as a result of a decrease in interest rates used to discount claims reserves for both periodic payment orders and latent claims.
As explained in accounting policy L, provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the duration of the expected settlement of the claims. The discount rate is set at the start of the accounting period, with any change in rates between the start and end of the accounting period being reflected below Group adjusted operating profit as an economic assumption change. The range of discount rates used is disclosed in note 44.
Strategic report Governance IFRS financial statements Other information 11 – Employee information This note shows where our staff are employed throughout the world, excluding staff employed by our joint ventures and associates, and analyses the total staff costs.
United Kingdom 15,335 15,746 15,863 15,414 Canada 4,264 4,334 4,338 4,330 France 3,911 3,928 3,925 3,911 Poland 1,648 1,708 1,696 1,716 Italy, Ireland, Spain and Other 1,969 1,950 1,933 1,864 Asia 1,876 1,832 1,842 1,817 Aviva Investors 1,495 1,471 1,485 1,460 Other Group activities 683 734 709 720
Wages and salaries 1,321 1,260 Social security costs 239 233 Post-retirement obligations
Defined benefit schemes (note 52(d)) 22 23 Defined contribution schemes (note 52(d)) 164 163
Fees payable to PwC LLP and its associates for the statutory audit of the Aviva Group and Company financial statements 1.8 1.9 Fees payable to PwC LLP and its associates for other services
Audit of Group subsidiaries 13.7 13.4 Additional fees related to the prior year audit of Group subsidiaries 0.8 0.4
Fees payable to Mazars LLP and its associates for the statutory audit of Group subsidiaries in Italy 0.3 —
Fees payable to PwC LLP, BDO LLP, Mazars LLP and their associates for services to Group companies 22.7 22.5
Fees payable to PwC LLP and its associates for Group occupational pensions scheme audits 0.3 0.3
Audit related assurance comprises services in relation to statutory and regulatory filings. These include fees for the audit of the Group’s Solvency II regulatory returns for 2019, services for the audit of other regulatory returns of the Group’s subsidiaries and review of interim financial information under the Listing Rules of the UK Listing Authority. Total audit fees (excluding additional fees relating to the prior year audits of Group subsidiaries) and audit-related assurance fees were £20.4 million (2018: £20.0 million).
Other assurance services in 2019 of £0.7 million (2018: £0.9 million) mainly include fees relating to providing an annual Audit and Assurance Faculty (AAF) report for Aviva Investors to give internal and external clients and their auditors comfort over the operating effectiveness of internal controls and review of the information security business protection standard and associated controls.
(a) Tax charged/(credited) to the income statement (i) The total tax charge/(credit) comprises: £m
Deferred tax Origination and reversal of temporary differences 402 (531) Changes in tax rates or tax laws (6) (13) Write back of deferred tax assets (9) (1)
(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Ireland and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £559 million (2018: credit of £477 million).
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax charge by £nil and £11 million (2018: £nil and £nil), respectively.
(b) Tax credited to other comprehensive income (i) The total tax credit comprises: £m
Deferred tax In respect of pensions and other post-retirement obligations (56) 16 In respect of fair value gains on owner-occupied properties 1 — In respect of unrealised gains/(losses) on investments 5 (7)
Total tax charged/(credited) to income statement 711 559 1,270 442 (477) (35)
The tax charge/(credit) attributable to policyholder returns is removed from the Group’s total profit before tax in arriving at the Group’s profit before tax attributable to shareholders’ profits. As the net of tax profits attributable to with-profits and unit-linked policyholders is zero, the Group’s pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge/(credit) attributable to policyholders included in the total tax charge.
During 2019 changes were made in France to alter the reduction in corporation tax rates, delaying the reduction to 32.02% to 1 January 2020 and amending the rate to take effect from 1 January 2021 to 28.41%. These revised rates have been used in the calculation of France’s deferred tax assets and liabilities as at 31 December 2019.
Strategic report Governance IFRS financial statements Other information 15 – Earnings per share This note shows how to calculate earnings per share on profit attributable to ordinary shareholders, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our Group adjusted operating profit as we believe this gives an important indication of operating performance. Consideration of both these measures gives a full picture of the performance of the business in the period.
Profit before tax attributable to shareholders’ profits 3,184 190 3,374 3,004 (875) 2,129 Tax attributable to shareholders’ profit (668) (43) (711) (625) 183 (442) Profit for the year 2,516 147 2,663 2,379 (692) 1,687 Amount attributable to non-controlling interests (98) (17) (115) (100) (19) (119) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes
Group adjusted operating profit attributable to ordinary shareholders 3,184 2,367 60.5 3,004 2,226 56.2 Adjusting items: Life business: Investment variances and economic assumption changes 654 535 13.7 (197) (198) (5.0) Non-life business: Short-term fluctuation in return on investments 167 129 3.3 (476) (378) (9.6) General insurance and health business: Economic assumption changes (54) (33) (0.8) 1 (1) — Impairment of goodwill, joint ventures, associates and other amounts expensed (15) (15) (0.4) (13) (13) (0.3) Amortisation and impairment of intangibles acquired in business combinations2 (87) (61) (1.6) (97) (82) (2.1) Amortisation and impairment of acquired value of in-force business (406) (356) (9.1) (426) (371) (9.4) Profit on disposal and remeasurement of subsidiaries, joint ventures and associates (22) (23) (0.6) 102 102 2.6 Other3 (47) (46) (1.2) 231 230 5.8
3 Other in 2019 relates to a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (see note 44(b)) and a charge of £2m relating to negative goodwill which arose on the acquisition of Friends First (see note 3). Other in 2018 includes a movement in the discount rate used for estimating lump sum payments in the settlement of bodily injury claims which resulted in a gain of £190 million, a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First, a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirements to equalise members’ benefits of the effects of Guaranteed Minimum Pension and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs.
Diluted group adjusted operating profit per share 2,367 3,956 59.8 2,226 4,010 55.5 1 During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note 1(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax attributable to shareholders’ profit. Following the change in the definition of Group adjusted operating profit, comparative amounts for diluted earnings per share have also been restated resulting in a reduction in prior period diluted group adjusted operating profit per share of 2.2 pence.
16 – Dividends and appropriations This note analyses the total dividends and other appropriations paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements.
Interest on the direct capital instrument and tier 1 notes is treated as an appropriation of retained profits and, accordingly, is accounted for when paid. This year’s tax relief is obtained at a rate of 19% (2018: 19%).
Strategic report Governance IFRS financial statements Other information 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.
Goodwill from acquisitions and additions in 2019 arose from small acquisitions in Canada and the UK (see note 3). Goodwill from acquisitions and additions in 2018 arose on the acquisition of Wealthify. In 2018, negative goodwill of £36 million arose on the purchase of Friends First, this was recognised immediately in the income statement.
Disposals in 2019 relate to a small disposal in Canada. Disposals in 2018 include those related to the disposal of the Italy Avipop business as well as the remainder of the business in Spain.
The total impairment of goodwill in 2019 is a charge of £6 million comprised of impairments of goodwill relating to businesses in Asia and Canada. The total impairment of goodwill in 2018 was a charge of £13 million relating to businesses in the UK, Asia and Poland. Impairment tests on goodwill were conducted as described in note 17(b) below.
Carrying amount of intangibles with indefinite useful lives (detailed in note 18) Total £m
Cash flows beyond that three-year period are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to past experience and relevant available market statistics.
United Kingdom general insurance and health 1 1 6.8 6.3 Ireland general insurance and health Nil Nil 6.8 6.9 Italy general insurance and health Nil Nil 10.3 12.5 Canada general insurance 4 4 8.0 7.8
Indefinite life intangible asset France The recoverable amount of the indefinite life intangible asset has been assessed based on the fair value less costs to sell of the cash generating unit to which it relates. The fair value less costs to sell was determined based on the quoted market value of Aviva’s share of the subsidiary to which it relates.
Results of impairment testing Management’s impairment review of the Group’s cash generating units identified the need to impair goodwill by a total amount of £6 million (£4 million of which relates to one of the cash generating units within the Asia operating segment, and £2 million to one of the cash generating units within the Canada operating segment). This impairment is due to current and forecast performance of the related cash generating units being below the original financial plan. Impairment in 2018 totalling £13 million related to one of the cash generating units in the UK within the Other Group Activities operating segment, one of the cash generating units within the Asia operating segment and one of the cash generating units within the Poland operating segment.
Strategic report Governance IFRS financial statements Other information 18 – Acquired value of in-force business (AVIF) and intangible assets This note shows the movements in cost, amortisation and impairment of the acquired value of in-force business and intangible assets during the year.
At 31 December 2018 2,692 2,726 1,623 134 7,175 Additions and transfers — — 136 2 138 Disposals — — (36) (1) (37) Foreign exchange rate movements (21) (1) (6) (7) (35) At 31 December 2019 2,671 2,725 1,717 128 7,241 Accumulated amortisation At 1 January 2018 (1,060) (838) (544) (57) (2,499) Amortisation for the year (183) (243) (209) — (635) Disposals and transfers — — 48 57 105 Foreign exchange rate movements (4) — 2 — (2) At 31 December 2018 (1,247) (1,081) (703) — (3,031) Amortisation for the year3 (180) (226) (212) — (618) Disposals and transfers — — 28 — 28 Foreign exchange rate movements 18 1 — — 19 At 31 December 2019 (1,409) (1,306) (887) — (3,602) Accumulated Impairment At 1 January 2018 (27) (134) (46) (71) (278) Impairment charges — (13) — — (13) Disposals — — 8 — 8 Foreign exchange rate movements — — — — —
In 2019, an impairment charge of £28 million (2018: £13 million) was recognised in relation to the AVIF on non-participating investment contracts relating to FPI, to write down the AVIF balance to its recoverable amount measured at the estimated fair value less costs to sell.
At 1 January 46 1,168 1,214 57 1,164 1,221 Share of results before tax — 27 27 — 99 99 Share of tax — (4) (4) — (3) (3)
Share of results after tax — 23 23 — 96 96 Amortisation of intangibles1 (5) — (5) (5) — (5) Share of (loss)/profit after tax (5) 23 18 (5) 96 91 Reclassification from subsidiary — — — — 5 5 Additions — 131 131 — 33 33 Disposals — (96) (96) — (79) (79) Share of gains/(losses) taken to other comprehensive income — 22 22 — (10) (10) Dividends received from joint ventures — (27) (27) — (35) (35) Foreign exchange rate movements (3) (24) (27) (6) (6) (12) At 31 December 38 1,197 1,235 46 1,168 1,214
Additions and disposals during 2019 relate mainly to the Group’s holdings in property management undertakings.
Strategic report Governance IFRS financial statements Other information 19 – Interests in, and loans to, joint ventures continued (ii) The carrying amount at 31 December comprised: Goodwill and intangibles £m
Property management undertakings — 792 792 — 797 797 Long-term business undertakings 38 397 435 46 363 409 General insurance and health undertakings — 8 8 — 8 8
(iv) From time to time group joint ventures may receive liability claims or become involved in actual or threatened related litigation. At 31 December 2019 this includes a contingent liability in respect of a dispute where the Group’s maximum exposure is approximately £95 million. In the opinion of the directors it is unlikely that the Group will suffer financial loss arising from this dispute. The joint ventures have no other contingent liabilities to which the Group has significant exposure. The Group has commitments to provide funding to property management joint ventures of £13 million (2018: £13 million).
Strategic report Governance IFRS financial statements Other information 20 – Interests in, and loans to, associates This note analyses our interests in entities which we do not control but where we have significant influence.
(ii) No associates are considered to be material from a Group perspective (2018: none). All investments in principal associates are held by subsidiaries. The Group’s principal associates are as follows: Proportion of ownership interest
Aviva Life Insurance Company India Limited Life insurance India 49.00% 49.00% SCPI Logipierre 1 Property Management France 44.46% 44.46% Lend Lease JEM Partners Fund Limited Investment holding Singapore 22.50% 22.50% SCPI Ufifrance Immobilier Property Management France 20.40% 20.40% AI UK Commercial Real Estate Debt Fund1 Property Management UK 17.53% 17.16% 1 The Group has significant influence over AI UK Commercial Real Estate Debt Fund so it is therefore accounted for as an associate.
At 31 December 2018 — 359 4 175 306 844 Adjustment at 1 January for adoption of IFRS 161 — 1,149 — — — 1,149 At 1 January 2019 restated — 1,508 4 175 306 1,993 Additions — 53 — 19 12 84 Disposals — (6) — (16) (16) (38) Fair value losses — (3) — — — (3) Foreign exchange rate movements — (18) — (3) (6) (27) At 31 December 2019 — 1,534 4 175 296 2,009 Depreciation and impairment At 1 January 2018 — (3) (2) (125) (120) (250) Depreciation charge for the year — — (1) (14) (25) (40) Disposals — — — 6 2 8 Impairment charge — — — — — — Foreign exchange rate movements — — — (4) (5) (9)
At 31 December 2018 — (3) (3) (137) (148) (291) Adjustment at 1 January for adoption of IFRS 161 — (739) — — — (739) At 1 January 2019 restated — (742) (3) (137) (148) (1,030) Depreciation charge for the year — (62) — (16) (20) (98) Disposals — 1 — 16 15 32 Impairment charge — (22) — — — (22) Foreign exchange rate movements — — — 2 4 6 At 31 December 2019 — (825) (3) (135) (149) (1,112)
The fair value of investment properties leased to third parties under operating leases at 31 December 2019 was £10,931 million (2018: £11,172 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 23.
23 – Lease assets and liabilities From 1 January 2019 the Group has adopted IFRS 16 Leases, the standard which replaces IAS 17 Leases. Adoption of the standard has resulted in assets previously held under operating leases (and their corresponding lease liabilities) being recognised on the statement of financial position for the first time. Adoption of the standard resulted in the following assets and liabilities being included within the statement of financial position for the first time at 1 January 2019: • £410 million owner-occupied property assets, included within Property and equipment (see note 21); • £24 million deferred tax assets; and • £544 million lease liabilities, included within Payables and other financial liabilities (see note 54).
The Group’s leased assets primarily consist of properties occupied by Group companies carried at amortised cost (see note 21) and leasehold investment properties carried at fair value (see note 22) which are sublet to third parties. Leasehold investment properties are measured in accordance with IAS 40 Investment Property (see accounting policy Q) and there have been no changes to their classification or measurement arising from the adoption of IFRS 16.
Interest expense on lease liabilities 14 Total lease expenses recognised in the income statement 14
(ii) The following table analyses the right-of-use assets relating to leased properties occupied by Group companies.
Balance at 1 January 410 Additions 42 Disposals (1) Foreign exchange rate movements (4) Depreciation (62) Balance at 31 December 385
There were no gains arising from sale and leaseback transactions during the year. Included within the income statement is £2 million of income in respect of sublets of right-of-use assets.
Within 1 year 89 Later than 1 year and not later than 5 years 296 Later than 5 years 237 622
The lease agreements do no impose any covenants other than the security interest in the leased assets that are held by the lessor.
(iv) Future contractual aggregate minimum lease rentals receivable under non-cancellable operating leases are as follows: £m
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology This note explains the methodology for valuing our assets and liabilities measured at fair value, and for fair value disclosures. It also provides an analysis of these according to a ‘fair value hierarchy’, determined by the market observability of valuation inputs.
Level 2 Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include the following: • Quoted prices for similar assets and liabilities in active markets. • Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. • Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, implied volatilities, and credit spreads). • Market-corroborated inputs.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued The majority of the Group’s assets and liabilities measured at fair value are based on quoted market information or observable market data. Of the total assets and liabilities measured at fair value 16.8% (2018: 16.6%) of assets and 3.1% (2018: 3.4%) of liabilities are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the thirdparty price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.
3 Within the fair value total, the estimated fair value has been provided for the portion of borrowings that are carried at amortised cost as disclosed in note 24 (h).
Fair value of the following assets and liabilities approximate to their carrying amounts: • Receivables • Cash and cash equivalents • Loans at amortised cost • Payables and other financial liabilities
As set out in accounting policy A, the Group has chosen to defer application of IFRS 9 due to its activities being predominantly connected with insurance. To facilitate comparison with entities applying IFRS 9 in full, the table below splits the Group’s financial instruments as at the reporting date between those which are considered to have contractual terms which are solely payments of principal and interest (SPPI) on the principal amount outstanding (excluding instruments held for trading or managed and evaluated on a fair value basis), and all other instruments not falling into this category.
Total 31,000 390,366 27,193 363,975 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as loans, fixed maturity securities and equity securities in the table above. The restatement has had no impact on the profit for the year or equity. See note 1a for further information.
2 Instruments within this category include financial assets that meet the definition of held for trading, financial assets that are managed and evaluated on a fair value basis, and instruments with contractual terms that do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
There has been a £24 million increase (2018: £7 million decrease) in the fair value of SPPI instruments, and a £20,090 million increase (2018: £23,645 million decrease) in the fair value of non-SPPI instruments during the reporting period.
Fixed maturity securities 67,638 113,599 17,595 198,832 — 198,832 Equity securities 98,850 — 720 99,570 — 99,570 Other investments (including derivatives) 32,465 6,878 5,673 45,016 — 45,016
Non-participating investment contracts1 (note 45(a)) 129,323 42 — 129,365 — 129,365 Net asset value attributable to unit holders 16,498 — 112 16,610 — 16,610 Borrowings (note 53(a)) — — 1,233 1,233 7,806 9,039 Derivative liabilities (note 61(b)) 418 5,444 655 6,517 — 6,517
The disclosure above relates to those owner-occupied properties which have been measured at fair value. Owner-occupied properties held under lease arrangements are stated at amortised cost and are amortised on a straight-line basis over the lease term. For further information on the Group’s lease arrangements see note 23.
Recurring fair value measurements Investment property (note 22) — — 11,482 11,482 — 11,482 Loans (note 25(a)) — 518 25,008 25,526 10,658 36,184 Financial investments measured at fair value (note 28(a))
Financial liabilities classified as held for sale 5,241 — 3,100 8,341 — 8,341 Total 133,986 5,525 4,884 144,395 8,195 152,590 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as loans, fixed maturity securities and equity securities in the table above. The restatement has had no impact on the profit for the year or equity. See note 1a for further information.
3 In addition to the balances in this table, included within reinsurance assets in the statement of financial position and note 47 are £4,009 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets
(e) Valuation approach for fair value assets and liabilities classified as Level 2 Please see note 24(a) for a description of typical Level 2 inputs.
Debt securities, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced from brokers.
Opening balance at 1 January 2019 11,482 25,008 16,503 414 5,182 1,992 — (25) (534) (1,225) (3,100) Total net gains/(losses) recognised in the income statement1 151 844 505 (66) 6 134 — — (86) (52) (134) Purchases 1,131 3,461 2,090 427 1,350 185 (100) (56) (128) — (134) Issuances — 190 12 — — — — — — — — Disposals (1,294) (1,170) (1,454) (39) (532) (262) 100 (31) 88 44 261 Settlements — — (50) — — — — — — — — Transfers into Level 3 — — 1,449 1 — 49 — — — — (49) Transfers out of Level 3 — — (919) — (142) (112) — — — — 111 Foreign exchange rate movements (267) (14) (541) (17) (191) — — — 5 — — Balance at 31 December 2019 11,203 28,319 17,595 720 5,673 1,986 — (112) (655) (1,233) (3,045) 1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued Assets Liabilities
(ii) Loans • Commercial mortgage loans and Primary Healthcare loans held by our UK Life business are valued using a Portfolio Credit Risk Model. This model calculates a Credit Risk Adjusted Value for each loan. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 65 bps to 80 bps (2018: 65 bps to 195 bps).
• Equity release mortgage loans held by our UK Life business are valued using an internal model, with fair value initially being equal to the transaction price. The value of these loans is dependent on the expected term of the mortgage and the forecast property value at the end of the term, and is calculated by adjusting future cash flows for credit risk and discounting using a yield curve plus an allowance for illiquidity. At 31 December 2019 the illiquidity premium used in the discount rate was 160 bps (2018: 210 bps).
(iii) Fixed maturity securities • Structured bond-type and non-standard debt products held by our business in France have no active market. These debt securities are valued either using counterparty or broker quotes and validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the third-party models include a significant unobservable liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model are sufficiently significant to result in a Level 3 classification.
(vii) Liabilities The principal liabilities classified as Level 3, and the valuation techniques applied to them, are: • £3,045 million (2018: £3,100 million) of non-participating investment contract liabilities which are included within financial liabilities of operations classified as held for sale. These are classified as Level 3, either because the underlying unit funds are classified as Level 3 or because the liability relates to unfunded units or other non-unit adjustments which are based on a discounted cash flow analysis using unobservable market data and assumptions. These liabilities are included within the relevant asset category within the sensitivity table below.
• Securitised mortgage loan notes, presented within Borrowings, are valued using a similar technique to the related Level 3 securitised mortgage assets.
Sensitivities Where possible, the Group tests the sensitivity of the fair values of Level 3 assets and liabilities to changes in unobservable inputs to reasonable alternatives. Level 3 valuations are sourced from independent third parties when available and, where appropriate, validated against internally-modelled valuations, third-party models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations, the Group undertakes, where feasible, sensitivity analysis on the following basis: • For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity of the internally-modelled valuation to changes in unobservable inputs to a reasonable alternative is determined. • For third-party valuations either not validated or validated against a third-party model or broker quote, the third-party valuation in its entirety is considered an unobservable input. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the third-party valuation. For example, for a fixed income security the implied yield would be the rate of return which discounts the security’s contractual cash flows to equal the third-party valuation.
Loans Commercial mortgage loans and Primary Healthcare loans 11.5 Illiquidity premium +/- 20 bps 0.2 (0.2) Equity release mortgage loans 9.7 Base property growth rate3 +/- 10% 0.3 (0.3) Current property market values +/- 10% 0.3 (0.4) Infrastructure and Private Finance Initiative (PFI) loans 3.4 Illiquidity premium +/- 25 bps1 0.1 (0.1) Other 0.4 Illiquidity premium +/- 25 bps1 — — Fixed maturity securities Structured bond-type and non-standard debt products 6.6 Market spread (credit, liquidity and other) +/- 25 bps 0.1 (0.1) Privately placed notes 1.6 Credit spreads +/- 25 bps1 0.1 — Other debt securities4 8.7 Credit and liquidity spreads +/- 20-25 bps 0.4 (0.4)
Other investments Property Funds 0.8 Market multiples applied to net asset values +/- 15-20% 0.1 (0.1) Other investments (including derivatives)4 6.0 Market multiples applied to net asset values +/- 10-40%2 0.7 (0.6)
The above tables demonstrate the effect of a change in one unobservable input while other assumptions remain unchanged. In reality, there may be a correlation between the unobservable inputs and other factors. It should also be noted that some of these sensitivities are nonlinear, and larger or smaller impacts should not be interpolated or extrapolated from these results.
(h) Liabilities not carried at fair value for which fair value is disclosed The table below shows the fair value and fair value hierarchy for those liabilities not carried at fair value.
Liabilities not carried at fair value Borrowings 53(a) 7,834 8,583 235 217 9,035
Less: Assets classified as held for sale — (1) (1) — — —
The cumulative change in fair value of loans attributable to changes in credit risk to 31 December 2019 was a £1,224 million loss (2018: £1,304 million loss).
Healthcare, infrastructure and PFI other loans of £6,467 million (2018: £5,358 million) are secured against the income from healthcare and educational premises.
Loans at amortised cost The carrying amount of these loans at both 31 December 2019 and 31 December 2018 was a reasonable approximation for their fair value.
Policy loans 684 — 684 769 — 769 Loans to banks 8,528 — 8,528 9,019 — 9,019 Non-securitised mortgage loans 12 (12) — 9 (9) — Other loans 1,050 (1) 1,049 871 (1) 870
Total 10,274 (13) 10,261 10,668 (10) 10,658 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents that are now presented as loans to banks carried at amortised cost in the table above. The restatement has had no impact on the profit for the year or equity. See note 1(a) for further information.
At 1 January (10) (9) Increase during the year (4) (1) Foreign exchange rate movements 1 —
Strategic report Governance IFRS financial statements Other information 25 – Loans continued (c) Collateral Loans to banks include cash collateral received under stock lending arrangements (see note 62 for further discussion regarding these collateral positions). The obligation to repay this collateral is included in payables and other financial liabilities (see note 54).
AER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. In addition, Group companies have invested £224 million (2018: £239 million) in loan notes issued by the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the statement of financial position.
Securitised mortgage loans (note 25) and loan notes issued 2,432 (1,457) 2,437 (1,464) Other securitisation assets/(liabilities) 282 (1,257) 266 (1,239) 2,714 (2,714) 2,703 (2,703)
The Group holds redeemable shares or units in investment vehicles, which consist of: • Debt securities comprising securitisation vehicles that Aviva does not originate. These investments are comprised of a variety of debt instruments, including asset-backed securities and other structured securities. • Investment funds which include: hedge funds, liquidity funds, private equity funds, unit trusts, mutual funds and Private Finance Initiatives
The Group has also given support to five special purpose securitisation companies (the ERF companies) that are consolidated structured entities. As set out in note 26, at the inception of the securitisation vehicles, the UK subsidiary, Aviva Equity Release UK Limited (AER), has granted subordinated loan facilities to some of the ERF companies. AER receives various fees in return for the services provided to the entities. AER receives cash management fees based on the outstanding loan balance at the start of each quarter for the administration of the loan note liabilities. AER receives portfolio administration fees as compensation for managing the mortgage assets. Refer to note 26 for details of securitised mortgages and related assets as at 31 December 2019.
As at 31 December 2019, a summary of the Group’s interest in unconsolidated structured entities is as follows: £m £m
Structured debt securities2 — — 4,746 — 4,746 — — 4,662 — 4,662 Other investments and equity securities 792 209 44,669 — 45,670 797 217 41,055 — 42,069
Loans3 — — — 8,103 8,103 — — — 6,886 6,886 Total 792 209 49,415 8,103 58,519 797 217 45,717 6,886 53,617 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented as unit trusts and other investment vehicles that are either now presented as structured debt securities or which are no longer presented as unconsolidated structured entities in the table above. The restatement has had no impact on the profit for the year or equity. See note 1(a) for further information.
The Group’s maximum exposure to loss related to the interests in unconsolidated structured entities is £58,519 million (2018 restated: £53,617 million).
Specialised investment vehicles: 3,108 10 3,541 6 Analysed as: OEICs 33 — 944 1 PLPs 3,075 10 2,597 5 Total 9,993 42 11,014 44 1 Investment funds relate primarily to the Group’s Polish pension funds.
Other investments2 Unit trusts and other investment vehicles — 41,835 1 41,836 — 38,603 1 38,604 Derivative financial instruments (note 61) 7,097 — — 7,097 5,357 — — 5,357 Deposits with credit institutions — 169 — 169 — 155 — 155 Minority holdings in property management undertakings — 2,395 — 2,395 — 1,975 — 1,975 Other investments – long-term — 437 — 437 — 475 — 475 Other investments – short-term — — 1 1 — 1 — 1
Of the above total, £172,649 million (2018 restated: £154,746 million) is due to be recovered in more than one year after the statement of financial position date.
Other debt securities of £7,378 million (2018 restated: £6,710 million) include residential and commercial mortgage-backed securities, as well as other structured credit securities.
Strategic report Governance IFRS financial statements Other information 28 – Financial investments continued (b) Cost, unrealised gains and fair value The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments: Cost/ amortised cost £m
Unit trusts and other investment vehicles 34,872 7,648 (684) 41,836 33,093 10,203 (4,692) 38,604 Derivative financial instruments 3,413 4,517 (833) 7,097 1,547 4,942 (1,132) 5,357 Deposits with credit institutions 169 — — 169 155 — — 155 Minority holdings in property management undertakings 2,226 259 (90) 2,395 1,784 241 (50) 1,975 Other investments – long-term 404 63 (30) 437 473 33 (31) 475 Other investments – short-term 1 — — 1 1 — — 1
Strategic report Governance IFRS financial statements Other information 28 – Financial investments continued (d) Non-UK Government debt securities (gross of non-controlling interests) The following is a summary of non-UK government debt by issuer as at 31 December 2019, analysed by policyholder, participating and shareholder funds.
At 31 December 2019, the Group’s total government (non-UK) debt securities stood at £61,702 million (2018 restated: £56,455 million). The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.
The participating funds exposure to (non-UK) government debt amounts to £39,408 million (2018 restated: £38,626 million). The primary exposures, relative to total (non-UK) government debt exposures included within our participating funds, are to the (non-UK) government debt securities of France (37%), Italy (28%), Germany (5%), Belgium (2%), Singapore (2%) and Ireland (2%).
Amounts owed by contract holders 2,187 2,142 Amounts owed by intermediaries 1,379 1,318 Deposits with ceding undertakings 68 93 Amounts due from reinsurers 347 311 Amounts due from brokers for investment sales 274 181 Amounts receivable for collateral pledged 2,786 2,752 Amounts due from government, social security and taxes 812 741 Other receivables 1,211 1,112
Strategic report Governance IFRS financial statements Other information 30 – Deferred acquisition costs (a) Deferred acquisition costs – carrying amount The carrying amount of deferred acquisition costs was as follows: £m
Carrying amount at 1 January 931 101 1,036 1,088 — 3,156 Acquisition costs deferred during the year 248 13 174 2,543 — 2,978 Amortisation (149) 2 (90) (2,482) — (2,719) Impact of assumption changes (16) 4 — — — (12) Effect of portfolio transfers, acquisitions and disposals — — — — — — Foreign exchange rate movements (20) (4) (9) (8) — (41) Other movements (1) — (3) — — (4) Carrying amount at 31 December 993 116 1,108 1,141 — 3,358 Less: Classified as held for sale — — (202) — — (202) 993 116 906 1,141 — 3,156
Less: Classified as held for sale — — (191) — — (191)
Strategic report Governance IFRS financial statements Other information 31 – Pension surpluses, other assets, prepayments and accrued income (a) Pension surpluses and other assets – carrying amount The carrying amount comprises: £m
(b) Prepayments and accrued income Prepayments and accrued income of £3,151 million (2018 restated: £3,153 million) include assets classified as held for sale of £8 million (2018: £4 million) and £30 million (2018: £9 million) that is expected to be recovered more than one year after the statement of financial position date.
32 – Assets held to cover linked liabilities The assets which back unit-linked liabilities are included within the relevant balances in the statement of financial position, while the liabilities are included within insurance and investment contract provisions. This note analyses the carrying values of assets backing these liabilities.
178,012 157,074 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as loans, fixed maturity securities and equity securities in the table above. The restatement has had no impact on the profit for the year or equity. See note 1(a) for further information.
2 Following a review of the classification of financial assets, comparative amounts have been amended from those previously reported. The effect of this change is to reclassify £1,444 million of assets from other investments to fixed maturity securities.
The reinsurance assets balance in the table above includes £4,006 million (2018: £4,009 million) of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
The allotted, called up and fully paid share capital of the Company at 31 December 2019 was: 3,921,129,145 (2018: 3,902,352,211) ordinary shares of 25 pence each 980 975
At the 2019 Annual General Meeting, the Company was authorised to allot up to a further maximum nominal amount of: • £652,537,894 of which £326,268,947 can be in connection with an offer by way of a rights issue • £100 million of new ordinary shares in relation to any issue of Solvency II compliant capital instruments
(b) During 2019, a total of 18,776,934 were allotted and issued by the Company as follows: Number of shares
On 18 September 2018, the Company announced that it had successfully completed the share buy-back programme (the 2018 programme) which was notified to the market on 1 May 2018. As a result of the 2018 programme, Aviva acquired 119,491,188 shares at an average price of £5.0213 per share. These shares with a nominal value of £30 million were bought back and subsequently cancelled during the year, giving rise to a capital redemption reserve of an equivalent amount as required by the Companies Act 2006. The aggregate consideration paid was £600 million which is reflected in retained earnings (see note 40).
(iii) Aviva annual bonus plan awards These awards have been made under the Aviva Annual Bonus Plan 2011 (ABP), and are described in section (b) below and in the directors’ remuneration report.
Weighted average exercise price p Number of awards Number of options
Outstanding at 1 January 28,658,026 375.13 40,574,481 25,096,578 370.81 39,524,150 Granted during the year 26,798,392 284.00 17,713,898 8,139,367 387.00 16,213,056 Exercised/ released during the year (7,340,420) 359.44 (12,308,712) (2,111,514) 361.96 (7,653,460) Forfeited during the year (8,112,308) 382.94 (10,557,632) (1,855,638) 385.00 (7,509,266) Cancelled during the year (240,979) 372.02 — (495,646) 364.93 — Expired during the year (472,417) 379.66 — (115,121) 381.97 —
(e) Fair value of options and awards granted after 7 November 2002 The weighted average fair values of options and awards granted during the year, estimated by using the Binomial option pricing model and Monte Carlo Simulation model, were £0.50 and £3.86 (2018: £0.78 and £4.84) respectively.
(i) Share options The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2019 2018
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. 7,340,420 options granted after 7 November 2002 were exercised during the year (2018: 2,111,514).
(ii) Share awards The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions: Weighted average assumption 2019 2018
Strategic report Governance IFRS financial statements Other information 35 – Treasury shares The following table summarises information about treasury shares at 31 December 2019: Number £m Number £m
Cost debited to ‘shareholders’ funds At 1 January 455,986 2 295,906 1 Acquired in the year 2,165,032 9 765,582 4 Distributed in the year (906,730) (4) (605,502) (3)
These shares were either purchased in the market or, in 2015, new shares were issued to the trust and are carried at weighted average cost. At 31 December 2019, they had an aggregate nominal value of £428,572 (2018: £113,997) and a market value of £7,177,724 (2018: £1,712,227). The trustees have waived their rights to dividends on the shares held in the trusts.
36 – Preference share capital This note gives details of Aviva plc’s preference share capital.
On 30 April 2018 Aviva announced a charge of £14 million relating to a provision for the goodwill payment scheme to those preference shareholders who sold preference shares in the period from 8 and 22 March (inclusive) at a share price that was lower than the price that the preference shares returned to following the announcement on 23 March 2018. The total cost of the goodwill payment scheme was £10 million relating to the goodwill payments to preference shareholders, and associated administration costs, against our initial estimate of £14 million. The nature of these costs and the restricted time-period that defines eligibility to receive a payment demonstrates that they were nonrecurrent and were not reflective of the Group’s ongoing financial performance.
The Company has the option to defer coupon payments on the DCI on any relevant payment date. Deferred coupons shall only be satisfied should the Company exercise its sole option to redeem the instruments.
The balance of the merger reserve at 31 December 2019 is £8,974 million (2018: £8,974 million).
Balance at 1 January 2018 1,141 26 65 (476) 111 (274) Arising in the year through other comprehensive income: Fair value gains — 1 57 — — 58 Fair value gains transferred to profit on disposals — — (78) — — (78) Share of other comprehensive income of joint ventures and associates — — (10) — — (10) Foreign exchange rate movements1 27 — — (27) — (27) Aggregate tax effect – shareholders’ tax 1 — 7 — — 7
Total other comprehensive income for the year 28 1 (24) (27) — (50) Fair value gains transferred to retained earnings on disposals — — — — — — Transfer to profit on disposal of subsidiaries, joint ventures and associates (40) — (1) 37 — 36 Changes in non-controlling interests in subsidiaries (7) — — — — — Reserves credit for equity compensation plans — — — — 64 64 Shares issued under equity compensation plans — — — — (55) (55) Balance at 31 December 2018 1,122 27 40 (466) 120 (279) Arising in the year through other comprehensive income: Fair value gains — 3 39 — — 42 Fair value gains transferred to profit on disposals — — (19) — — (19) Share of other comprehensive income of joint ventures and associates — — 22 — — 22 Foreign exchange rate movements1 (318) — — 138 — 138 Aggregate tax effect – shareholders’ tax 10 (1) (4) — — (5) Total other comprehensive income for the year (308) 2 38 138 — 178 Fair value gains transferred to retained earnings on disposals — — — — — — Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — — Transfers to non-controlling interests — — — — — — Changes in non-controlling interests in subsidiaries — — — — — — Reserves credit for equity compensation plans — — — — 62 62 Shares issued under equity compensation plans — — — — (62) (62) Balance at 31 December 2019 814 29 78 (328) 120 (101) 1 Foreign exchange rate movements recorded in the consolidated statement of comprehensive income of £(219) million (2018: £5 million) relate to the currency translation reserve of £(318) million (2018: £27 million), the hedging instrument reserve of £138 million (2018: £(27) million) and non-controlling interests (see note 41) of £(39) million (2018: £5 million).
Balance at 1 January 4,523 4,918 Adjustment at 1 January for adoption of IFRS 16 (110) —
Balance at 1 January restated 4,413 4,918 Profit for the year attributable to equity shareholders 2,548 1,568 Remeasurements of pension schemes1 (note 52) (867) (279) Dividends and appropriations (note 16) (1,244) (1,189) Shares purchased in buy-back (note 33) — (600) Net shares issued under equity compensation plans 55 49 Effect of changes in non-controlling interests in existing subsidiaries — 1 Forfeited dividend income2 4 4 Change in equity accounted option 22 — Reclassification of tier 1 notes to financial liabilities3 (note 37) 21 — Aggregate tax effect 113 51
41 – Non-controlling interests This note gives details of the Group’s non-controlling interests and shows the movements during the year.
Equity shares in subsidiaries 273 288 Share of earnings 441 415 Share of other reserves 13 13
The Group has no subsidiaries whose non-controlling interest is material on the basis of their share of profit or loss.
Long-term business Insurance liabilities (131,182) 6,369 (124,813) (125,829) 5,836 (119,993) Liabilities for participating investment contracts (92,762) 1 (92,761) (90,455) 1 (90,454) Liabilities for non-participating investment contracts (137,689) 4,006 (133,683) (120,354) 4,009 (116,345)
Less: Liabilities classified as held for sale 9,011 (75) 8,936 8,462 (45) 8,417
Long-term business Change in insurance liabilities (note 43(b)(iii)) 6,600 (1,030) 5,570 Change in provision for outstanding claims 4 (8) (4) 6,604 (1,038) 5,566 General insurance and health Change in insurance liabilities (note 43(c)(iv) and 47(c)(ii))1 234 (94) 140 Less: Unwind of discount (14) 10 (4) 220 (84) 136 Total change in insurance liabilities (note 7) 6,824 (1,122) 5,702 1 Includes £45 million in the UK General Insurance and Health business relating to a change in the discount rate used for estimating lump sum payments of bodily injury claims from 0.00% to -0.25%.
(a) Carrying amount Insurance liabilities (gross of reinsurance) at 31 December comprised: £m £m
149,338 144,077 1 Comparative amounts at full year 2018 have been revised. In the UK, £5,928 million has been reclassified from other non-participating insurance liabilities to participating insurance liabilities. 2 Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations, where applicable, are included in other line items. At 31 December 2019 this provision is £nil (2018: £nil) for the life operations.
(b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: • In the UK, long-term business is mainly written in the ‘Non-Profit’ fund and in a number of ‘With-Profits’ sub-funds. In the ‘Non-Profit’ fund shareholders are entitled to 100% of the distributed profits. In the ‘With-Profits’ sub-funds the with-profits policyholders are entitled to between 40% and 100% of distributed profits, depending on the fund rules. There is also the Reattributed Inherited Estate External Support Account (RIEESA), which does not itself underwrite any business, but provides capital support to one of the with-profits sub-funds and receives any surplus or deficit emerging from it. In the RIEESA, shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the ‘lock-in’ criteria set by the Reattribution Scheme have been met; • In France, the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders; and
A description of the main methodology and most material valuation assumptions has been provided (see note 44).
Carrying amount at 1 January 125,829 130,972 Liabilities in respect of new business 6,988 6,190 Expected change in existing business (6,452) (7,952) Variance between actual and expected experience 3,212 (1,844) Impact of operating assumption changes (961) (1,456) Impact of economic assumption changes 3,766 (959) Other movements recognised as an expense1 47 (263) Change in liability recognised as an expense (note 42(b)) 6,600 (6,284) Effect of portfolio transfers, acquisitions and disposals2 — 788 Foreign exchange rate movements (1,775) 413 Other movements3 528 (60)
Carrying amount at 31 December 131,182 125,829 1 Other movements recognised as an expense during 2019 relate primarily to: a special bonus distribution to with-profits policyholders and model changes in UK Life; the reclassification of health liabilities in Singapore; and methodology changes in Ireland. The movement in 2018 relates to a special bonus distribution to with-profits policyholders in UK Life. 2 The movement during 2018 includes the acquisition of Friends First in Ireland offset by the disposal of Spain and Avipop in Italy. 3 Other movements during 2019 mainly relate to the reclassification in UK from participating investment contracts to insurance contracts (£972 million) and following a review of the presentation of negative reinsurance assets in the UK, £(427) million of negative reinsurance assets have been reclassified from insurance liabilities to reinsurance assets. 2018 includes the reclassification in France from insurance to participating investment contracts (£(56) million).
For participating insurance liabilities, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the year (see note 48), together with the impact of movements in related non-financial assets.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities continued The gross outstanding claims provision before discounting was £11,205 million (2018: £10,955 million). Details of the range of discount rates used along with other material assumptions are available (see note 44(b)).
Claims payments made in the period, net of recoveries (6,765) (6,913) Unwind of discounting 14 8
Changes in claims reserve recognised as an expense (note 42(b)) 234 (313) Effect of portfolio transfers, acquisitions and disposals1 — (29) Foreign exchange rate movements (138) (53) Other movements 1 —
(v) Movements in general insurance and health unearned premiums The following changes have occurred in the liabilities for unearned premiums (UPR) during the year: £m
Carrying amount at 1 January 4,946 4,980 Premiums written during the year 10,908 10,519 Less: Premiums earned during the year (10,677) (10,421)
Changes in UPR recognised as an expense 231 98 Gross portfolio transfers and acquisitions1 — (103) Foreign exchange rate movements (39) (29)
Carrying amount at 31 December 5,138 4,946 1 The movement during 2018 relates to the disposal of Avipop in Italy.
Key elements of the development of prior accident year general insurance and health net provisions during 2019 were: • £134 million release from the UK due to favourable claims experience in personal and commercial motor partly offset by a strengthening in commercial property and a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (for further details see note 44); • £58 million release from Canada primarily due to favourable claims experience on personal and commercial motor and large reinsurance recoverable on two catastrophe events from August 2018 in personal and commercial property lines; and
Key elements of the development of prior accident year general insurance and health net provisions during 2018 were: • £372 million release from the UK due to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (for further details see note 44) and favourable claims experience in personal and commercial motor; • £78 million release from Canada primarily due to favourable claims experience on personal motor and aligning RBC claims practices with that of the Aviva book; and • £127 million release from Europe mainly due to continued favourable development in France.
Gross of reinsurance Before the effect of reinsurance, the loss development table is: Accident year All prior years £m Total £m
Estimate of gross ultimate claims At end of accident year 6,911 6,428 6,201 6,122 5,896 5,851 6,947 6,894 7,185 6,979 One year later 7,006 6,330 6,028 6,039 5,833 5,930 6,931 6,796 7,175 Two years later 6,950 6,315 6,002 6,029 5,865 5,912 6,864 6,756 Three years later 6,914 6,292 5,952 6,067 5,842 5,814 6,817 Four years later 6,912 6,262 6,002 6,034 5,772 5,785 Five years later 6,906 6,265 5,979 5,996 5,756 Six years later 6,926 6,265 5,910 5,956 Seven years later 6,913 6,223 5,902 Eight years later 6,877 6,205 Nine years later 6,861
Estimate of gross ultimate claims 6,861 6,205 5,902 5,956 5,756 5,785 6,817 6,756 7,175 6,979 Cumulative payments (6,740) (6,078) (5,718) (5,739) (5,406) (5,198) (5,781) (5,388) (5,239) (3,617)
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities continued Net of reinsurance After the effect of reinsurance, the loss development table is: Accident year All prior years £m Total £m
Net cumulative claim payments At end of accident year (3,386) (3,300) (2,925) (2,905) (2,972) (2,867) (3,309) (3,483) (3,718) (3,565) One year later (5,242) (4,578) (4,166) (4,240) (4,079) (4,061) (4,591) (4,843) (5,117) Two years later (5,637) (4,963) (4,575) (4,649) (4,432) (4,452) (5,012) (5,255) Three years later (5,905) (5,263) (4,870) (4,918) (4,720) (4,725) (5,329) Four years later (6,137) (5,485) (5,110) (5,159) (4,973) (4,919) Five years later (6,278) (5,626) (5,289) (5,324) (5,132) Six years later (6,361) (5,740) (5,371) (5,417) Seven years later (6,411) (5,798) (5,439) Eight years later (6,440) (5,842) Nine years later (6,458)
Estimate of net ultimate claims At end of accident year 6,650 6,202 5,941 5,838 5,613 5,548 6,489 6,714 6,997 6,774 One year later 6,751 6,103 5,765 5,745 5,575 5,635 6,458 6,591 6,944 Two years later 6,685 6,095 5,728 5,752 5,591 5,608 6,377 6,569 Three years later 6,644 6,077 5,683 5,733 5,559 5,517 6,334 Four years later 6,634 6,034 5,717 5,689 5,490 5,495 Five years later 6,614 6,005 5,680 5,653 5,472 Six years later 6,624 6,003 5,631 5,612 Seven years later 6,615 5,967 5,600 Eight years later 6,590 5,952 Nine years later 6,569
Estimate of net ultimate claims 6,569 5,952 5,600 5,612 5,472 5,495 6,334 6,569 6,944 6,774 Cumulative payments (6,458) (5,842) (5,439) (5,417) (5,132) (4,919) (5,329) (5,255) (5,117) (3,565) 922 111 110 161 195 340 576 1,005 1,314 1,827 3,209 9,770 Effect of discounting (121) (15) 3 (1) 5 — — — — — — (129) Present value 801 96 113 160 200 340 576 1,005 1,314 1,827 3,209 9,641 Cumulative effect of foreign exchange movements — (3) (2) 1 4 18 70 (15) (23) (17) — 33 Effect of acquisitions 10 1 7 9 12 23 42 38 — — — 142 Present value recognised in the
The loss development tables above include information on asbestos and environmental pollution claims provisions from business written more than 10 years ago. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2019 were £88 million (2018: £94 million). The movement in the year reflects a reduction of £7 million due to favourable claims development, claim payments net of reinsurance recoveries and foreign exchange movements.
Annuities Conventional immediate and deferred annuities 0.9% to 2.3% 1.2% to 3.0%
The risk allowances made for corporate bonds (including overseas government bonds and structured finance assets), mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets), and equity release equated to 45-47 bps, 31-35 bps, and 124 bps respectively at 31 December 2019 (2018: 50 bps, 39-41 bps, and 112 bps respectively).
The total valuation allowance in respect of corporate bonds and mortgages, including healthcare mortgages but excluding equity release, was £1.8 billion (2018: £1.9 billion) over the remaining term of the portfolio at 31 December 2019. The total valuation allowance in respect of equity release assets was £1.5 billion at 31 December 2019 (2018: £1.3 billion). Total liabilities for the annuity business were £57.6 billion at 31 December 2019 (2018: £53.7 billion).
Strategic report Governance IFRS financial statements Other information 44 – Insurance liabilities methodology and assumptions continued Mortality Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality tables used 2019 2018
Assurances Non-profit AM00/AF00 or TM08/TF08 adjusted for smoker status and age/sex specific factors
AM00/AF00 or TM08/TF08 adjusted for smoker status and age/sex specific factors
Pure endowments and deferred annuities before vesting AM00/AF00 adjusted AM00/AF00 adjusted Annuities in payment Pensions business and general annuity business PMA08 HAMWP /PFA08 HAMWP
The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.
Provisions for guarantees and options within realistic liabilities are measured using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions. Non-market-related assumptions (for example, persistency, mortality and expenses) are assessed on a best estimate basis with reference to Company and wider industry experience, adjusted to take into account future trends.
The with-profits business is valued by adjusting Solvency II Best Estimate Liabilities and results in a valuation in accordance with FRS 27.
Future investment return A risk-free rate equal to the spot yield on UK swaps is used for the valuation of with-profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2019 of 1.02% (2018: 1.44%) for a policy with ten years outstanding.
The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a ten-year term.
Strategic report Governance IFRS financial statements Other information 44 – Insurance liabilities methodology and assumptions continued Future regular bonuses Annual bonus assumptions for 2020 have been set consistently with the year-end 2019 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.
Expenses Maintenance fee assumptions for with-profits business are generally expressed as a fixed per policy charge in line with a memorandum of understanding between the with-profits funds and the non-profit fund within the company. The memorandum of understanding specifies the charges for a five-year period ending in 2023, and specifies a level of charge inflation during that period of CPI+2% or CPI+3% depending on the product type. After the end of the period covered by the memorandum of understanding we assume that the charges will remain unchanged, and a level of charge inflation of RPI+1% for all products will apply. Any excess of expenses charged by Aviva Life Services UK Limited (UKLS) to Aviva Life & Pensions UK Limited (AVLAP) over the charges specified by the memorandum of understanding is borne by the non-profit fund.
Guarantees and options The provisions held in respect of guaranteed annuity options for the with-profits and the non-profit business 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. For further details see note 46.
H_AVDBS,F_AVDBS Life assurances 0% to 4.5% 0% to 4.5% H_SSDBS, F_SSDBS Annuities 0% to 1.5% 0% to 2% TGF05/TGH05
The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range.
Reinsured London Market business 0.8% to 2.2% 1.0% to 2.9% 9 years 10 years Latent claims 0.8% to 2.2% 1.0% to 2.6% 10 to 12 years 11 to 18 years Structured settlements -0.2% to 2.7% 1.0% to 3.0% 11 to 35 years 9 to 37 years
UK mesothelioma claims The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group’s latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees.
Lump sum payments in settlement of bodily injury claims that are decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes. Following the announcement by the Lord Chancellor on 15 July 2019 to increase the Ogden discount rate from the -0.75% set in 2017 to -0.25% (rate retained at -0.75% in Scotland), balance sheet reserves in the UK have been calculated using a discount rate of -0.25% at 31 December 2019. This has resulted in a strengthening of claims reserves in the UK of £45 million. At December 2018, balance sheet reserves were calculated using a rate of 0.00%. The Ogden discount rate is expected to be reviewed by the Lord Chancellor within five years.
Long-term business Liabilities for participating investment contracts 92,762 90,455 Liabilities for non-participating investment contracts 137,689 120,354 Total 230,451 210,809
(b) Group practice Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.
Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology for long-term business liabilities (see note 44). They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB deferred consideration of participating contracts to the IFRS 17 insurance standard, which is expected to apply to annual reporting periods beginning on or after 1 January 2022.
The movement in 2018 primarily relates to a special bonus distribution to with-profits policyholders in UK Life. 2 Total interest expense for participating investment contracts recognised in profit or loss is £5,269 million (2018: £(419) million). 3 The movement during 2018 relates to the acquisition of Friends First in Ireland. 4 Other movements during 2019 include the reclassification in UK from participating investment to insurance contracts (£(972) million) and from participating investment to outstanding claims reserves (£(32) million).
The movement during 2018 relates to the reclassification in France from non-participating investment contracts to participating investment contracts (£151 million) and from insurance to participating investment contracts (£56 million) and to a reclassification from non-participating investment contracts to participating investment contracts in the UK (£853 million).
The variance between actual and expected experience in 2019 of £4.8 billion is primarily the result of the impact of strong global equity performance.
The impact of assumption changes in the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 48, together with the impact of movements in related non-financial assets.
Carrying amount at 1 January 120,354 124,995 Liabilities in respect of new business 5,520 4,869 Expected change in existing business (3,742) (5,509) Variance between actual and expected experience 16,345 (5,539) Impact of operating assumption changes (22) (10) Impact of economic assumption changes (1) (81) Other movements recognised as an expense 2 6 Change in liability 18,102 (6,264) Effect of portfolio transfers, acquisitions and disposals1 — 2,494 Foreign exchange rate movements (575) 133 Other movements2 (192) (1,004)
Carrying amount at 31 December 137,689 120,354 1 The movement during 2018 relates to the acquisition of Friends First in Ireland. 2 Other movements during 2019 mainly relate to the reclassification in UK from non-participating investment to outstanding claims reserves (£(180) million). Other movements during 2018 relates to the reclassification in
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non-participating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note 48, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.
Strategic report Governance IFRS financial statements Other information 46 – Financial guarantees and options This note details the financial guarantees and options inherent in some of our insurance and investment contracts.
(i) Guaranteed annuity options The Group’s UK non-profit funds have written contracts which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. Provision for these guarantees do not materially differ from a provision based on a market-consistent stochastic model, and amounts to £82 million at 31 December 2019 (2018: £87 million).
(b) UK with-profits business The Group’s UK with-profits liabilities are evaluated by reference to FRS 27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. Under the PRA’s rules, provisions for guarantees and options within realistic liabilities are measured using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
Non-AFER contracts with guaranteed surrender values had liabilities of £11 billion at 31 December 2019 (2018: £11 billion) and all guaranteed annual bonus rates are between 0% and 4.5% (2018: 0% to 4.5%). For non-AFER business the accounting income return exceeded guaranteed bonus rates in 2019 (2018: the accounting income return exceeded guaranteed bonus rates).
In addition, there are a small proportion of contracts with a switch-loss option. Consistent with previous years, the risks associated with switch-loss options are allowed for in the liabilities in accordance with local regulations and IFRS 4.
Guaranteed death and maturity benefits The Group has also sold a small proportion of unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated statement of financial position is calculated on a prudent basis and is in excess of the economic liability.
(c) Movements The following movements have occurred in the reinsurance assets during the year: (i) Long-term business liabilities £m
Carrying amount at 1 January 1,611 1,729 Impact of changes in assumptions 73 (22) Reinsurers’ share of claim losses and expenses
Incurred in current year (53) (54) Incurred in prior years (227) (259)
Carrying amount at 31 December 1,687 1,611 1 The movement during 2018 relates to the proportion of reinsurance assets held by Avipop which was sold by Italy in 2018.
Carrying amount at 1 January 254 257 Premiums ceded to reinsurers in the year 683 392 Less: Reinsurers’ share of premiums earned during the year (661) (375) Changes in reinsurance asset recognised as income 22 17 Reinsurers’ share of portfolio transfers and acquisitions1 — (21) Foreign exchange rate movements (1) 1
The impact of persistency on long-term business relates primarily to the UK. Reserves have increased by £127 million following a review of recent experience, driven by the introduction of age-dependent retirement rates for pension business and unfavourable lapse experience.
The impact of mortality for annuitant contracts on long-term business relates primarily to the UK. In 2019, there has been a reduction in reserves due to longevity assumptions and modelling which include: • Updates to base mortality to reflect recent experience for individual annuities of £81 million; • Updates to the rate of mortality improvements for individual annuities, including CMI 2018 and a change in smoothing parameter, of £410 million; • Refinements to modelling of bulk purchase annuities together with a change to base mortality, improvements and a change in smoothing parameter, of £231 million; • Refinements to modelling of enhanced annuities of £58 million; and • Other less significant movements of £19 million.
In 2018 the impact of mortality for annuitant contracts on long-term business relates primarily to the UK. This resulted in a reduction in reserves due to longevity assumptions and modelling which included: • Updates to base mortality to reflect recent experience including the 2008 series tables for individual annuities of £345 million; • Updates to the rate of mortality improvements including CMI 2017 of £251 million; • Refinements to modelling of bulk purchase annuities together with a change to base mortality and improvements of £132 million; and • Other less significant movements of £24 million.
Carrying amount at 1 January 5,949 9,101 Change in participating fund assets 9,411 (4,139) Change in participating fund liabilities (5,426) 902 Change in liability recognised as an expense 3,985 (3,237) Effect of portfolio transfers, acquisition and disposals1 — 48 Foreign exchange rate movements (337) 37
Carrying amount at 31 December 9,597 5,949 1 The movement during 2018 relates to the acquisition of Friends First (£66 million), and the disposal of the remainder of the Spanish business (£18 million).
Strategic report Governance IFRS financial statements Other information 50 – Tax assets and liabilities This note analyses the tax assets and liabilities that appear in the statement of financial position and explains the movements in these balances in the year.
Long-term business technical provisions and other insurance items 1,752 663 Deferred acquisition costs (198) (199) Unrealised gains on investments (2,875) (1,430) Pensions and other post-retirement obligations (425) (499) Unused losses and tax credits 103 147 Subsidiaries, associates and joint ventures (13) (9) Intangibles and additional value of in-force long-term business (413) (475) Provisions and other temporary differences 76 102
Net liability at 31 December (1,993) (1,700) 1 The movement during 2018 relates mainly to the disposal of Avipop Assicurazioni SpA and Avipop Vita SpA.
The Group has unrecognised gross tax losses (excluding capital losses) and other temporary differences of £1,270 million (2018: £798 million) to carry forward against future taxable income of the necessary category in the companies concerned. Of these, trading losses of £38 million will expire within the next 20 years. The remaining losses have no expiry date.
There are no temporary differences in respect of unremitted overseas retained earnings for which deferred tax liabilities have not been recognised at 31 December 2019 (2018: £nil).
Strategic report Governance IFRS financial statements Other information 51 – Pension deficits and other provisions This note details the non-insurance provisions that the Group holds, and shows the movements in these during the year.
Total IAS 19 obligations to main staff pension schemes (note 52(a)) 770 693 Deficits in other staff pension schemes 66 65
Other provisions primarily include amounts set aside throughout the Group relating to product governance rectification and staff entitlements.
Charge to income statement 2 245 247 1 141 142 Utilised during the year (37) (118) (155) (29) (89) (118) Acquisition of subsidiaries — — — — 5 5 Foreign exchange rate movements — (4) (4) — 5 5
Other provisions include a £229 million provision (2018: £250 million) in respect of a product governance issue in our UK Life business. This provision 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. We have completed a thorough and detailed review of the suitability of the advice given, and we will ensure that no affected customers are financially disadvantaged. There has been no significant change to the provision estimate or estimation methodology since 31 December 2018. The most significant assumption in relation to the calculation of the provision is the estimated average redress per customer. Each 10% reduction/increase in the average redress per customer would reduce/increase the estimate of the provision by £23 million. The valuation of this provision involves a high degree of judgement due to the time that has elapsed since the advice was given (in particular the assumptions used to calculate how external defined benefit pension arrangements specific to each impacted policyholder would have performed over time), and therefore the possible range of outcomes is significant. The reduction in the value of the provision during 2019 of £21 million is due to utilisation in the period. 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.
Net IAS 19 surpluses/(deficits) in the schemes 2,255 (202) (77) 1,976 2,813 (175) (75) 2,563
This note relates to the defined benefit pension schemes included in the table above. There are a number of smaller schemes that are also measured under IAS 19. These are included as a total within Deficits in other staff pension schemes (see note 51). Similarly, while the charges to the income statement for the main schemes are shown in section (b)(i) below, the total charges for all pension schemes are disclosed in section (d) below.
Under the IAS 19 valuation basis, the Group applies the principles of IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, whereby a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. The Group has determined that it can derive economic benefit from the surplus in the ASPS via a reduction to future employer contributions for DC members, which could theoretically be paid from the surplus funds in the ASPS. In the RAC and FPPS, the Group has determined that the rules set out in the schemes’ governing documentation provide for an unconditional right to a refund from any future surplus funds in the schemes.
The assets of the UK, Irish and Canadian schemes are held in separate trustee-administered funds to meet long-term pension liabilities to past and present employees. In all schemes, the appointment of trustees of the funds is determined by their trust documentation and they are required to act in the best interests of the schemes’ beneficiaries. The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes.
A funding actuarial valuation of each of the defined benefit schemes is carried out at least every three years for the benefit of scheme trustees and members. Actuarial reports have been submitted for each scheme within this period, using appropriate methods for the respective countries on local funding bases.
(ii) Other schemes In Ireland, the Group operates two main pension schemes, the Aviva Ireland Staff Pension Fund (AISPF) and the Friends First Group Retirement and Death Benefits Scheme (FFPS) which was acquired as part of the Friends First acquisition in June 2018. Future accruals for the AISPF and FFPS schemes ceased with effect from 30 April 2013 and 1 April 2014 respectively. The Irish schemes are regulated by the Pensions Authority in Ireland.
The Canadian defined benefit schemes ceased accruals with effect from 31 December 2011. The main Canadian plan is a Registered Pension Plan in Canada and as such is registered with the Canada Revenue Agency and Financial Services Regulatory Authority of Ontario and is required to comply with the Income Tax Act of Canada and the various provincial Pension Acts within Canada.
Remeasurements: Actual return on these assets 1,141 — 1,141 Less: Interest income on scheme assets (479) — (479) Return on scheme assets excluding amounts in interest income 662 — 662 Losses from change in financial assumptions — (1,824) (1,824) Gains from change in demographic assumptions — 165 165 Experience gains — 130 130 Total recognised in other comprehensive income 662 (1,529) (867)
The present value of unfunded post-retirement benefit obligations included in the table above is £118 million at 31 December 2019 (2018: £115 million). During the period the ASPS completed a bulk annuity buy-in transaction with Aviva Life & Pensions UK Limited, a Group Company. Due to different measurement bases applying for accounting purposes, the premium paid by the scheme exceeded the valuation of the plan asset recognised. This is the primary reason for the reduction in the scheme surplus over the year and has been recognised as an actuarial loss in the actual return on assets within other comprehensive income. The plan asset recognised is transferable and so has not been subject to consolidation within the Group’s financial statements.
Total IAS 19 fair value of scheme assets 17,671 833 264 18,768 17,059 775 249 18,083 1 Cash and other assets comprise cash at bank, receivables, payables and repurchase agreements. At 31 December 2019, cash and other assets primarily consist of repurchase agreements of £3,078 million (2018: £3,741 million). 2 As at 31 December 2019, the FPPS asset includes an insurance policy of £646 million (2018: £620 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 £1,331 million as at 31 December 2019 (2018: £156 million) included in the ASPS asset are transferable and so are not subject to consolidation.
IAS 19 plan assets include investments in Group-managed funds in the consolidated statement of financial position of £2,575 million (2018: £2,730 million) and transferable insurance policies with other Group companies of £1,331 million (2018: £156 million) in the ASPS. Where the investments are in segregated funds with specific asset allocations, they are included in the appropriate line in the table above, otherwise they appear in ‘Cash and other’. There are no significant judgements involved in the valuation of the scheme assets. Insurance policies are valued on the same basis as the pension scheme liabilities, as required by IAS19.
Strategic report Governance IFRS financial statements Other information 52 – Pension obligations continued Financial assumptions The main financial assumptions used to calculate scheme liabilities under IAS 19 are: UK Ireland Canada
Basis of discount rate AA-rated corporate bonds AA-rated corporate bonds AA-rated corporate bonds 1 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. In 2019, CPI is now derived as RPI less 100bps pre 2030 and RPI less 60bps post 2030 (2018: RPI less 110bps at all terms).
The discount rate and pension increase rate are the two assumptions that have the largest impact on the value of the liabilities, with the difference between them being known as the net discount rate. For each country, the discount rate is based on current average yields of highquality debt instruments taking account of the maturities of the defined benefit obligations.
– FFPS 88%/91% ILT15 with allowance for future improvements 65 86.6 89.0 89.0 91.1 (21.6) (24.0) (24.0) (26.1)
Maturity profile of the defined benefit obligation The discounted scheme liabilities have an average duration of 19 years in ASPS, 21 years in FPPS, 19 years in the RAC scheme, 19 years in AISPF, 28 years in FFPS and 11 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below: Undiscounted benefit payments (£m)
Total employer contributions for all defined benefit schemes in 2020 are currently expected to be £0.2 billion.
(c) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their risk appetite and their retirement plans. Members of this section contribute at least 2% of their pensionable salaries, and depending on the percentage chosen, the Group contributes up to a maximum 14%, together with the cost of the death-in-service benefits. These contribution rates remained unchanged until June 2017. From 1 July 2017, for every 1% additional employee contribution, the Group will contribute an additional 0.1% employer contribution. The amount recognised as an expense for defined contribution schemes is shown in section (d) below.
There were no significant contributions payable or prepaid in the consolidated statement of financial position as at either 31 December 2019 or 2018.
Subordinated debt 6.125% £700 million subordinated notes 2036 695 694 6.125% £800 million undated subordinated notes 797 797 6.875% £600 million subordinated notes 2058 594 594 12.000% £162 million subordinated notes 2021 179 191 8.250% £500 million subordinated notes 2022 545 563 6.625% £450 million subordinated notes 2041 449 449 6.125% €650 million subordinated notes 2043 549 582 3.875% €700 million subordinated notes 2044 591 625 5.125% £400 million subordinated notes 2050 395 395 3.375% €900 million subordinated notes 2045 756 799 4.500% C$450 million subordinated notes 2021 261 257 4.375% £400 million subordinated notes 2049 395 394 6,206 6,340 Senior notes 0.625% €500 million senior notes 2023 422 446 1.875% €750 million senior notes 2027 630 667
Strategic report Governance IFRS financial statements Other information 53 – Borrowings continued (ii) The contractual maturity dates of undiscounted cash flows for these borrowings are: £m
Within one year 238 372 610 251 376 627 1 to 5 years 1,347 1,255 2,602 1,370 1,353 2,723 5 to 10 years 636 1,451 2,087 673 1,490 2,163 10 to 15 years — 1,417 1,417 — 1,441 1,441 Over 15 years 5,257 2,636 7,893 5,365 2,923 8,288
Total contractual undiscounted cash flows 7,478 7,131 14,609 7,659 7,583 15,242
Borrowings are considered current if the contractual maturity dates are within a year. Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £49 million (2018: £49 million).
All the above borrowings are stated at amortised cost, except for the loan notes issued in connection with the UK lifetime mortgage business of £1,233 million (2018: £1,225 million). These loan notes are carried at fair value, their values are modelled on risk-adjusted cash flows for defaults discounted at a risk-free rate plus a market-determined liquidity premium, and are therefore classified as ‘Level 3’ in the fair value hierarchy. The risk allowances are consistent with those used in the fair value asset methodology, as described in note 24. These have been designated at fair value through profit and loss in order to present the relevant mortgages, borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch.
(ii) The contractual maturity dates of undiscounted cash flows for these borrowings are: £m
Total contractual undiscounted cash flows 1,516 592 2,108 1,663 693 2,356
(ii) Senior notes All senior notes are at fixed rates and their total fair value at 31 December 2019 was £1,134 million (2018: £1,113 million).
(iii) Commercial paper The commercial paper consists of £238 million issued by the Company (2018: £251 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.
Non-recourse Loans to property partnerships 64 61 UK Life reassurance — 177 Other non-recourse loans 52 52
As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property funds and structures (the ‘Property Funds’), some of which have raised external debt, secured on the relevant Property Fund’s property portfolio. The lenders are only entitled to obtain payment of interest and principal to the extent there are sufficient resources in the relevant Property Fund and they have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £64 million (2018: £61 million) included in the table above relate to Property Funds.
Other non-recourse loans primarily include external debt raised by special purpose vehicles in the UK long-term business. The lenders have no recourse whatsoever to the shareholders’ funds of any companies in the Group. The outstanding balance of these loans at 31 December 2019 was £52 million (2018: £52 million).
Strategic report Governance IFRS financial statements Other information 53 – Borrowings continued (e) Movements during the year Movements in borrowings during the year were: £m
Core Structural £m Operational £m Total £m Core Structural £m Operational £m Total £m
Movements in the year (203) (150) (353) (941) 75 (866) Balance at 1 January 7,699 1,721 9,420 8,640 1,646 10,286 Balance at 31 December 7,496 1,571 9,067 7,699 1,721 9,420 1 On 17 October 2019, notification was given that the Group would redeem the 6.875% £210 million tier 1 notes. At that date, the instruments were reclassified as a financial liability of £210 million, representing the fair value at that date. On 21 November 2019 the instruments were redeemed in full at a cost of £210 million. The difference of £21 million between the carrying amount of £231 million and fair value of £210 million has been charged to retained earnings. See note 37 for further details.
All movements in fair value in 2018 and 2019 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
Expiring within one year — — Expiring beyond one year 1,650 1,650 54 – Payables and other financial liabilities This note analyses our payables and other financial liabilities at the end of the year.
Expected to be settled within one year 13,856 11,599 Expected to be settled in more than one year 4,309 6,108 18,165 17,707 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Strategic report Governance IFRS financial statements Other information 55 – Other liabilities This note analyses our other liabilities at the end of the year.
(a) Uncertainty over claims provisions Note 44 gives details of the estimation techniques used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities.
(b) Asbestos, pollution and social environmental hazards In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents they cover and the uncertainties associated with establishing liability, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims and substantial reinsurance cover now in place, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.
(c) Guarantees on long-term savings products As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate guarantees, in respect of certain long-term insurance and investment products. Note 46 gives details of these guarantees and options. In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, property values and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. The directors continue to believe that the existing provisions for such guarantees and options are sufficient.
Strategic report Governance IFRS financial statements Other information 56 – Contingent liabilities and other risk factors continued (e) Structured settlements The Group has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Group is exposed to credit risk to the extent that any of the life insurers fail to fulfill their obligations. The Group’s maximum exposure to credit risk for these types of arrangements is approximately £707 million as at 31 December 2019 (2018: £710 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December 2019, no information has come to the Group’s attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.
Contractual commitments for acquisitions or capital expenditures of infrastructure loans, equity funds, investment property and property and equipment, which have not been recognised in the financial statements, are as follows: £m
58 – Group capital management (a) Group capital The Group is required to measure and monitor its capital resources on a regulatory basis and to comply with the minimum capital requirements of regulators in each territory in which it operates. At a Group level, we have to comply with the requirements established by the Solvency II Framework Directive, as adopted by the PRA at the balance sheet date.
The Group Solvency II capital requirements are calculated using a Partial Internal Model (PIM) which assesses the risks the Group is exposed to on an Internal Model basis approved by the PRA. The Solvency II capital regime requires insurers to calculate regulatory capital adequacy at both individual regulated subsidiaries and an aggregate Group level. Non-EEA entities have been included in Group solvency in line with Solvency II requirements. Other financial sector entities (including fund management) are included at their proportional share of the capital requirement according to the relevant sectoral values. In addition, non-EEA businesses including Canada, Hong Kong and Singapore, are subject to the locally applicable capital requirements in the jurisdictions in which they operate.
Estimated Solvency II regulatory own funds as at 31 December1 28,347 27,567 Adjustments for: Fully ring-fenced with-profits funds (2,501) (2,634) Staff pension schemes in surplus (1,181) (1,142) Notional reset of TMTP — (127) Pro forma adjustments (117) (113) Estimated Solvency II shareholder own funds at 31 December 24,548 23,551 1 Regulation was introduced in France that allows French insurers to place the Provision pour Participation aux Excedents (PPE) into Solvency II own funds. The PPE has been included in the France local regulatory own funds in 2019 but it is not included in the Group regulatory own funds.
Solvency II own funds are comprised of a combination of shareholders’ funds, preference share capital, direct capital instruments, tier 1 notes, subordinated debt, and deferred tax assets measured on a Solvency II basis. During the year, the Group redeemed its £210 million 6.875% Step-Up Tier I Insurance Capital Securities subordinated debt instruments in full.
The Group manages capital in conjunction with solvency capital requirements, and seeks to, on a consistent basis: • Match the profile of our assets and liabilities, taking into account the risks inherent in each business; • Maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength. See note 60 for more information about the Group’s risk management approach; • Retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines; • Allocate capital rigorously to support value adding growth and repatriate excess capital where appropriate; and • Declare dividends with reference to factors including growth in cash flow and earnings.
(a) The reconciliation of profit before tax to the net cash inflow from operating activities is: £m £m
Changes in working capital (Increase)/decrease in reinsurance assets (1,141) 2,191 Increase in deferred acquisition costs (244) (98) Increase/(decrease) in insurance liabilities and investment contracts2 32,535 (12,031) Increase in other assets2 (435) (2,884) 30,715 (12,822) Net purchases of operating assets Net purchases of investment property (1,131) (791) Net proceeds on sale of investment property 1,294 959 Net purchases of financial investments (4,988) (3,579) (4,825) (3,411)
Total cash generated from operating activities 6,517 5,848 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents that are now presented as loans and financial investments. The restatement has had no impact on the profit for the year or equity. See note 1(a) for further information. 2 Comparative amounts have been reclassified from those previously reported to disclose the impact of the change in the Ogden discount rate from Increase in other assets to Increase/(decrease) in insurance liabilities and investment contracts.
Strategic report Governance IFRS financial statements Other information 59 – Statement of cash flows continued (c) Cash flows in respect of the disposal of subsidiaries, joint ventures and associates comprised: £m
19,434 16,051 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Cash and cash equivalents (excluding bank overdrafts) 20,304 16,614 Less: Assets classified as held for sale (780) (688)
60 – Risk management This note sets out the major risks our businesses and our shareholders face and describes the Group’s approach to managing these. It also gives sensitivity analysis around the major economic and non-economic assumptions that can cause volatility in the Group’s earnings and capital position.
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. For those risk types managed through the holding of capital, being our principal risk types except for liquidity risk, we measure and monitor our risk profile on the basis of the SCR.
Strategic report Governance IFRS financial statements Other information 60 – Risk management continued 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 risk identification, measurement, monitoring, management and reporting processes and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes.
Risk appetites, requiring management action if breached, are also set for interest rate and foreign exchange risk (calculated on the basis of the SCR), and liquidity risk (based on stressing forecast central liquid assets and cash inflows and outflows over a specified time horizon). For other risk types the Group sets Solvency II capital tolerances. The Group’s position against risk appetite and capital tolerances is monitored and reported to the Board on a regular basis. Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva has a risk preference that we will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee, which focuses on business and financial risks, and the Operational Risk Committee 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) to (h) below.
(b) Credit risk Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result of changes in expectations related to these risks. Credit risk is taken so that we can provide the returns required to satisfy policyholder liabilities and to generate returns for our shareholders. In general we prefer to take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities.
Fixed maturity securities2 10.0% 36.6% 18.1% 23.9% 5.9% 5.5% 192,072 (397) 191,675 Reinsurance assets — 83.1% 10.0% 2.7% — 4.2% 11,800 (45) 11,755 Other investments2 0.2% 0.1% 0.4% 0.1% — 99.2% 46,567 (6,644) 39,923 Loans 17.4% 7.5% — — — 75.1% 36,184 — 36,184 Total 286,623 (7,086) 279,537 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as loans and fixed maturity securities in the table above. The restatement has had no impact on the profit for the period or equity. See note 1(a) for further information. 2 Following a review of the classification of financial assets, comparative amounts have been amended from those previously reported. The effect of this change is to reclassify £2,201 million of assets from fixed maturity securities to other investments.
Loans 6,299 2,720 — — — 894 Receivables 6 213 294 214 — 4,882 Accrued income and interest — — 18 — — 175 Other financial assets — — 10 — — —
We use loan to value, interest and debt service cover, and diversity and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our stock lending activities. Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies.
Strategic report Governance IFRS financial statements Other information 60 – Risk management continued (v) Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group Capital and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.
(i) Equity price risk The Group is subject to direct equity price risk arising from changes in the market values of its equity securities portfolio. Our most material indirect equity price risk exposures are to policyholder unit-linked funds, which are exposed to a fall in the value of the fund thereby reducing the fees we earn on those funds, and participating contracts, which are exposed to a fall in the value of the funds thereby increasing our costs for policyholder guarantees. We also have some equity exposure in shareholder funds through equities held to match inflation-linked liabilities.