The Strategic report is only part of the Annual report and accounts 2018. The Strategic report was approved by the Board on 6 March 2019 and signed on its behalf by Sir Adrian Montague, Chairman.
Non-Financial Reporting Regulations Under sections 414CA and 414CB of the Companies Act 2006, as introduced by the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, Aviva is required to include, in its Strategic Report, a non-financial statement. Information required by these Regulations is included in Key performance indicators from page 5, Business model from page 8, Our people from page 11, Risk and risk management from page 30 and Corporate responsibility from page 34.
IFRS financial statements 94 Independent auditors’ report 102 Accounting policies 116 Consolidated financial statements 242 Financial statements of the Company
Other information 254 Alternative Performance Measures 259 Shareholder services 260 Cautionary statement
A glossary explaining key terms used in this report is available on www.aviva.com/glossary.
The Company’s registered office is St Helen’s, 1 Undershaft, London, EC3P 3DQ The Company’s telephone number is +44 (0)20 7283 2000 www.aviva.com www.aviva.com/glossary
Aviva has a vital social purpose; we help people to handle life’s uncertainties with confidence. Last year we paid £32.9 billion in claims and benefits on behalf of our 33 million customers. This purpose is becoming all the more important when one considers the growing pace of global change. Whether it is economic, political, technological or environmental challenge, our customers are facing unprecedented change in the way our societies work.
Board changes We announced in January that Michael Hawker will retire from the Board as a Non-Executive Director, and as Chairman of the Risk Committee and as a member of the Audit and Nominations Committees, with effect from 31 March 2019. He has served as a Non-Executive Director since January 2010. We would like to thank Michael for his enormous contribution to Aviva over the past nine years. He has brought to the Board a wealth of knowledge and experience gained over a long career in the banking and insurance industries in both executive and non-executive roles in Europe, Asia and Australia, and has been a distinguished Chairman of the Risk Committee. The appointment of the new Risk Committee Chair is well advanced, and will be announced following the completion of the relevant regulatory approval process.
It is our people who make Aviva and who are there to deliver on our purpose, which is why a strong culture is so important. Overall our employee engagement score is consistent with 2017 at 76% globally. I’m pleased to note that in the last year, colleagues have seen significant positive shifts in the culture at Aviva with a 12-point increase in the headline culture measure which is an output of a suite of metrics including customer focus, leadership and operational simplicity. For 2019 we will work to further strengthen the culture through simplifying the way we do things and further promoting inclusive diversity, on which you can read more in the people section on page 11.
Looking ahead At the time of writing, Brexit is looming large as the biggest change that many will have experienced for a generation. We still do not know how events will play out, but our structure means that we expect Britain’s departure from the EU to have no significant operational impact on Aviva. We have put in place detailed plans to make sure we will be there for our customers, come what may.
To provide customers with security and peace of mind, it is imperative to have strong financial foundations. Our capital position makes Aviva a partner that our customers can count on. In 2018, our Solvency II capital surplus4 remained strong at £12.0 billion, equivalent to a Solvency II shareholder cover ratio2,4 of 204%. We increased our Solvency II shareholder cover ratio2,4 in 2018 despite weaker investment markets and deploying £1.5 billion to repay debt and repurchase shares. And, in 2018, Group adjusted operating profit1 rose 2% to £3.1 billion, while operating earnings per share2,3 increased 7% to 58.4 pence. IFRS profit before tax attributable to shareholders’ profits was £2,129 million (2017: £2,003 million).
In view of Aviva’s continued financial strength and steady performance, the Board of Directors has proposed a 9% increase in the full year dividend to 30.0 pence per share. We are moving to a progressive dividend policy. Moderating the rate of dividend per share growth will enhance our flexibility to repay debt and invest in business improvement. The future trajectory of the dividend will reflect performance against our strategic objectives.
There were a number of operational highlights during the year In 2018, Aviva’s businesses maintained a disciplined approach in competitive markets.
In the UK, our business has consolidated its position and we are seeing encouraging results across long-term savings, bulk purchase annuity and general insurance product lines. In 2018, a strong pipeline of workplace pension scheme wins helped to sustain longterm savings flows and we wrote our largest ever bulk purchase annuity contract, a £925 million transaction with Marks and Spencer. We launched AvivaPlus, our new subscription style insurance that offers greater flexibility and choice, giving our customers even more control and rewarding their loyalty.
In our general insurance businesses, we have continued to prioritise profitability over sales volumes. While our Canadian motor insurance portfolio is in the early stages of its recovery and an increase in weather related claims provided a headwind for profits across all of our general insurance businesses, the Group combined operating ratio2 of 96.6% remained acceptable.
In Asia, we have a mix of established and emerging businesses and we have continued to invest in their development. In our largest Asian business, Singapore, our advisory distribution network has continued to expand, providing customers with wider product choice and stimulating growth in sales and profits.
Digital remains an important element of Aviva’s strategy of improving customer experience. In the UK, the number of active customers registered on MyAviva rose 48% to 4.2 million with 700,000 customers logging into MyAviva each month to transact online or to check policy information. We have launched new propositions with AvivaPlus, MyAviva Workplace and Wealthify creating a strong platform for the future. In Hong Kong, following receipt of regulatory approval, we launched “Blue”, our digital insurance venture with Tencent and Hillhouse, which offers customers in Hong Kong a new way to buy insurance.
But we also faced a number of challenges Externally, uncertainty in the political and economic backdrop intensified during the year and this was reflected in a difficult year for investment market performance across most asset classes. In our home market, the UK, the prolonged and fraught process of negotiating Britain’s exit from the European Union has weighed down on growth in the economy. But Aviva is well placed to deal with this; our locally incorporated and locally regulated businesses in Europe have prepared to minimise the potential operational impact.
The regulatory environment also continues to evolve, requiring our businesses to adapt and, in some cases, provide remediation for past practices. The shifting external environment, coupled with competitive insurance and savings markets, has provided a challenging macro-environment in which to operate. The resilience built into Aviva’s capital position and operating model over recent years has allowed us to overcome these challenges and continue to serve customers across all our markets.
We have maintained profit momentum in our UK and European insurance businesses and Canada has responded well to the challenges in the auto insurance portfolio that emerged in 2017. Aviva Investors was set back by a difficult investment market backdrop, though we have chosen to continue investing to facilitate the long-term expansion of our third-party franchise.
In the UK, our results have continued to benefit from releases of provisions arising from changes in UK longevity trends. However, as in 2017, we continued to use this additional profitability to increase spending to advance our digital innovation agenda and accelerate the transformation programme in IT and Finance that will provide benefits to Aviva in the years to come.
Leadership and priorities In October 2018, we announced that Mark Wilson would step down from his role as Chief Executive Officer. In almost six years under Mark’s leadership, Aviva transformed its capital strength, refined its focus towards those markets with the strongest returns and growth prospects and invested in digital capabilities and propositions that will differentiate Aviva in the insurance and savings market place in the coming years.
Delivering on a clear plan of action Financial & Strategic Customers Culture and Society
For our key metrics, we have: • Increased Group adjusted operating profit1 by 2% to £3,116 million (2017: £3,068 million)
• Increased cash remittances2 to Group by 31% to £3,137 million (2017: £2,398 million)
• Increased total dividend per share by 9% to 30.00p (2017: 27.40p)
• Delivered a robust Solvency II capital position with an estimated Solvency II shareholder cover ratio2,5 that has increased by 6pp to 204% (2017: 198%), despite £1.5 billion of capital deployment. This includes operating capital generation2 in the year of £3.2 billion
• Reported total assets under management2 of £470 billion – a decrease of £17 billion on 2017
• Grown MyAviva active customer registrations to 5.3 million (2017: 3.6 million4)
Friends First in Ireland • We completed the sale of our Spanish joint ventures: Caja Murcia Vida, Caja Granada Vida and Pelayo Vida; our Taiwanese joint venture First Aviva Life; and completed the sale of our joint venture in Italy, Avipop Assicurazioni S.p.A., and its wholly owned subsidiary Avipop Vita S.p.A.
• We sold a Real Estate Multi-Manager business which was strategically noncore to our Aviva Investors business
• Launched AvivaPlus in the UK in December 2018, our new subscription style insurance that offers greater flexibility and choice, giving our customers even more control and rewarding their loyalty
• Successfully piloted “Mid-life MOT” which offers guidance and help to over 45s on the topics of wealth, work and wellbeing
• Since 2010 we have reduced carbon emissions (CO2e) from our day-to-day operations by 60% beating our 2020 target early. We are a carbon neutral company, offsetting the remaining emissions through projects that have benefitted the lives of over one million people
• Over 7,000 of our employees contributed more than 57,500 hours of volunteering time, giving and fundraising to the total of £2.1 million
• Further simplify processes and operating model, investing in modernisation to improve agility and efficiency
• Aim to repay £1.5 billion of maturing debt between 2019-2022
• Improve customer experience through simplification of customer journeys, digitisation and automation
Number of markets in 2018: at or above market average: 8
Engagement We give our people the freedom to act in line with our values to create an environment in which they can thrive through collaboration and recognition. We measure this through our annual global ‘Voice of Aviva’ survey. Engagement is up one percentage point to 76%. In the last year, colleagues have seen significant positive shifts in the culture at Aviva with a 12-point increase in the headline culture measure reflecting this although we recognise there is still plenty of opportunity to reduce complexity across the business.
Carbon emissions reduction Since 2010 we have reduced carbon emissions (CO2e) from our day-to- day operations by 60% beating our 2020 target of a 50% reduction earlier than planned. We are a carbonneutral company, offsetting the remaining emissions through projects that have benefitted the lives of over one million people since 2012. In 2018 we have continued to reduce our operational carbon emissions through energy efficient technology, buildings and development of onsite renewable electricity generation. We have also added £1.8 billion in low carbon infrastructure investments over the year. CO2e data includes emissions from our buildings, business travel, water and waste to landfill.
MyAviva active customer registrations2 We continue to make progress with our digital transformation and MyAviva remains at its heart. Active customer registrations is the number of global users of MyAviva and other digital platforms, who have at least one product and have logged-in at least once during the previous 365 days. Active customer registrations have increased by 47% to 5.3 million (2017: 3.6 million2) driven mainly by growth in the UK.
Group adjusted operating profit1 Group adjusted operating profit1 increased by 2% to £3,116 million. Major markets’ Group adjusted operating profit1 increased by 7% to £3,669 million, with all major markets except Aviva Investors and Canada experiencing earnings growth.
Operating earnings per share2,4 Operating earnings per share2,4 increased by 7% to 58.4p. This reflects the growth in Group adjusted operating profit1 and the impact of our share buy-back and debt reduction programme. We have met our target to deliver higher than 5% growth in operating earnings per share2,4 in 2018.
2 This is an Alternative Performance Measure (APM) which provides useful information to supplement an understanding of our financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
3 Cash remitted to Group is managed at a legal entity level. As Ireland constitutes a branch of the United Kingdom business, cash remittances from Ireland were not aligned to the management structure within Europe, but they were reported within the United Kingdom.
Increase in UK’s average life expectancy at birth between 2016 and 2066 6.6 years Source: Office for National Statistics, December 2017
Health across an evolving world The way people access healthcare is evolving, with many markets shifting towards a more self-reliant model and private healthcare.
No place like home Home ownership, and its place as a wealth accumulation vehicle, begins to evolve as mindsets towards ownership shift and affordability affects accessibility.
Average cost of a data breach US$3.62 million Source: EY Global Information Security Survey 2018-2019
Mobility Disruption to radically change the transport ecosystem, with consumers accessing, owning and using transport in different ways.
Blurring of sector boundaries The clear boundaries between sectors no longer exist, from technology companies offering financial services to telecom providers creating media content.
Increase in Apple Pay transactions in 2018 vs 2017 3x Source: Apple, November 2018
Strengths We have unique strengths as a business that gives us a significant competitive advantage: • Distinctive brand • Financial strength • Customer understanding • Multi-distribution • Multi-product
Strategy Our strategy focuses on the things that really matter and puts the customer at the heart of what we do: • True Customer Composite • Digital First • Not Everywhere
Health and protection Private medical, life, critical illness and income protection
Customers pay insurance premiums which we use to pay claims. Our scale enables us to pool the risks. We maintain capital strength so we can be there for our customers in the future.
£32.9 billion Paid out in benefits and claims to our customers in 2018
We create value for shareholders by using our profit to reinvest and grow the business and pay out dividends.
Since 2014, we have defined our strategy in three key areas: • True Customer Composite • Digital First • Not Everywhere
AvivaPlus In December 2018, we announced we were launching AvivaPlus, an industry-first, subscription-style insurance for our UK customers. AvivaPlus is the way insurance should be.
We are breaking free of insurance industry norms, rewarding our customers for their loyalty. We are putting the customer in control with monthly payments which can be cancelled anytime, allowing customers to get the cover they need when they need it. AvivaPlus customers pay the same or less at renewal than if they were new to AvivaPlus.
We are in an age of rapid increases in data production and availability. The ability to assess and use this data appropriately and responsibly is a key competitive advantage today, allowing us to design, create and underwrite the best possible products for our customers. Investing in our data science capabilities at Aviva Quantum ensures that we can stay ahead of the game.
How we’ve progressed In 2018, our focus on being Digital First moved from a period of significant innovation and development into launch and increasing scale, providing our customers with the right set of products through an enhanced multi-channel experience.
MyAviva Our focus on scaling digital growth in the year was best demonstrated by MyAviva in the UK, which achieved growth in active registrations to 4.2 million, representing more than a quarter of all our UK customers. MyAviva lets customers deal with us in a direct, efficient way across a wide range of product needs from general insurance, health insurance, life insurance, pensions to long-term savings and helped drive strong growth in digital interactions.
Not Everywhere Not Everywhere means that we focus our capital where we can achieve the greatest return. We do not aspire to offer everything, to everyone. We are focused in the places where we will win. Having largely reshaped the Group in recent years, we are now focused on our major markets and strategic investments.
Why it’s important We aspire to be the best at what we do in all our markets. This means being focused and committed to the right markets and the right products.
Hillhouse focused on digital disruption • Turkey – leading position in the life and pensions market and exposure to a large, young and growing population • Indonesia – bancassurance joint venture in an underpenetrated, high growth emerging market • India – continuing to assess our options • Vietnam – leading business in one of the fastest growing Asian economies • Global Corporate Solutions (GCS) – selective expansion provides a natural extension to our existing strength in retail and commercial lines
We have a clear purpose to give our customers the confidence and control to be ready for life’s opportunities and challenges. This commitment to customers, high levels of people engagement and skills, and Aviva’s values helps contribute to our strong financial performance.
The focus for 2018 has been on our culture and ensuring we are an inclusive workforce who put the customer first.
We employ 31,703 people globally and continue to support the regional economies in our home market the UK, where we employ more than 15,000 people.
Our strategy Our global people strategy sets out how we will accelerate our performance. We will: • Focus on our customers by connecting the day-to-day activities of our people with our purpose • Give our people the freedom to act in line with our values • Make leadership a way of life so all our people contribute to delivering our strategy and think independently. We want leaders who are ambitious and achieve results in everything they do
• Create an inclusive and diverse environment so that everyone can be themselves
Our values Our values guide everything we do and the decisions we take: Care More We start with the customer and prioritise delivering a great outcome for them. We do the right thing, making sure we and those around us are acting with positive intent. We don’t shrink from the tough conversations. We’re in it together.
Engaging our people In 2018 our global Voice of Aviva survey focused on key areas of insight to drive growth: engagement, culture and leadership. Employee engagement in Aviva remains strong and steady with continued notable improvements in our UK and France markets, as well as across our finance function globally, although slightly down in Canada and Ireland following integration and restructuring. Overall, however, employee engagement is consistent with 2017 at 76% globally.
Feedback on people leaders living up to Aviva’s ‘Leadership Expectations’ is mostly very positive. These are the behaviours we expect all leaders to demonstrate, with over 1,000 leaders receiving a rating of over 80% from their teams on related metrics. Leaders rate most positively on metrics related to taking action to remove barriers to their teams doing their job and encouraging them to think and make decisions from the customer’s point of view. The data also gives us clear areas to focus on. Developing great leadership and improving engagement with our strategy continue to be priorities for 2019. We are also working on fostering more of a listening culture characterised by open and honest conversations with front line teams.
At Aviva we have a positive and constructive relationship with the trade union Unite as well as a fully elected all-employee representative body (Your Forum). Within Aviva we take our responsibility to consult very seriously. The existence of Your Forum within Aviva is a key way of recognising that we all have a part to play in contributing to the debate on issues and opportunities impacting on our people and our organisation.
The representative bodies meet regularly with the Members of the Group Executive Committee (GEC) throughout the year as well as
At the end of 2018, we exceeded our target of achieving 30% female leaders (leaders are the top 1,300 employees) by 2020; we reached 31% across all markets by the end of 2018. This is being achieved through targeted female development programmes, diverse shortlists and a leadership team committed to change. We are also committed to improving ethnic diversity within our leadership population.
In November, we celebrated the first anniversary of our equal parental leave policy. This policy has seen us as a first-mover in the majority of our markets, with the result that our people can see our commitment to them outside, as well as inside the workplace.
Our drive to have an inclusive culture comes through our employee communities which were launched across all markets in 2018. There are six communities covering: race and religion, gender, sexuality, caring responsibilities, age, and mental and physical health. In the first year over 5,000 employees have joined these communities. They act as a lobby group and conscience to the organisation and are actively sponsored by members of the Group Executive. Some of the notable contributions from the communities have been the Workplace Adjustment Passport (an individual record of any adjustments an employee requires to their working arrangements, for example accessibility or caring commitments), Black History month events and a part-time transition to retirement scheme in Canada.
Health and wellbeing We remain focused on our employee health and wellbeing as a key driver to our success and growth. 2018 has been a year of embedding for our Wellbeing@Aviva strategy, and continues to deliver under our four areas – mental, physical and financial wellbeing and community connectivity. All the activities we launched in 2017 continued in 2018, but some specific highlights include: Mental wellbeing • 70% of our people leaders have now received mental health training. As a result, over 90% of leaders feel that they are comfortable having conversations about mental health with their team/peers and managers, know about and are comfortable signposting colleagues to the resources available to them
• 4,000 colleagues have taken advantage of the free access to Headspace (a global meditation app) offered, collectively completing over 66,000 sessions since launch
Physical wellbeing • 8% of colleagues have taken advantage of our discounted fitness proposition which launched in 2018, and they’ve certainly been active, clocking up over 31,000 gym visits, and the equivalent of 970 days worth of exercise!
• 21% of colleagues use our digital health checks each time they visit the office, with support then offered on an individual basis for issues identified by the health checks
• We have provided access to Aviva Financial Advice for colleagues during working hours for an initial, or more detailed discussion, to help with their personal financial planning
Our plans for 2019 In 2019, the People function’s focus will be around managing the fundamentals of our business and enabling growth to ensure Aviva and its people are best set to deliver the future strategy.
In 2019 we will continue to focus on developing an inclusive workforce which is fit for the future.
At 31 December 2018, we had the following gender split: Board membership Male 8
Overview In 2018, Aviva delivered growth while investing to improve the fundamentals of the business and maintaining a prudent approach to pricing and risk management.
Group adjusted operating profit1 increased 2% to £3,116 million (2017: £3,068 million) while operating earnings per share2,3 rose 7% to 58.4 pence (2017: 54.8 pence). IFRS profit after tax was £1,687 million (2017: £1,646 million), leading to basic earnings per share of 38.2 pence (2017: 35.0 pence). Our operating results continue to benefit from broad based growth from our major markets together with releases of longevity provisions in our UK annuity portfolio. However, as in previous years, we have used the additional profitability provided by longevity releases to accelerate investment in digital, IT and finance change initiatives and to strengthen provisions in areas related to past practices.
In late 2018, the Civil Liability Bill, which determines how personal injury compensation awards are set in the UK, received Royal Assent. While confirmation of the new “Ogden” rate will be provided in 2019, following passage of the legislation we have revised the discount rate used in determining our personal injury claims reserves in the UK to 0%, from -0.75% previously, giving rise to nonoperating profit of £190 million. Offsetting this are adverse investment variances due to widening sovereign and corporate credit spreads and a mark-to-market impact from our hedging programme, which protects Solvency II capital4. Despite heightened investment market volatility in late 2018, investment variances were broadly flat in the second half of the year despite an increase in the Brexit related property allowance to c.£400 million (2017: c.£300 million) in addition to other customary reserves.
During 2018, we repaid £0.9 billion of subordinated debt and completed a £0.6 billion share repurchase programme, leading to the cancellation of approximately 3% of our shares in issue. Despite this £1.5 billion of capital deployment, our solvency capital surplus4 remained robust at £12.0 billion (2017: £12.2 billion) and Solvency II shareholder cover ratio2,4 increased to 204% (2017: 198%).
United Kingdom Aviva is the UK’s largest insurer and is unique in operating at scale across life insurance, savings, general insurance, health insurance and retirement markets. In 2018, adjusted operating profit1 from our UK Insurance businesses increased 7% to £2,324 million (2017: £2,164 million). The UK Insurance result continued to benefit from elevated levels of reserve releases relating to the slowing rate of improvement in life expectancy in our annuity portfolio and this is reflected in a higher contribution from “other”. Excluding the contribution from “other”, our five main operating segments in the UK delivered aggregate adjusted operating profit1 of £1,974 million (2017: £1,904 million), an increase of 4%.
In long-term savings, adjusted operating profit1 rose 7% to £198 million (2017: £185 million). Net fund inflows2 were £5.0 billion (2017: £5.6 billion) equating to 4.2% of opening assets under administration2. Having integrated digital features into our workplace pension propositions, we increased new scheme wins with large corporates and delivered higher net fund flows2. This was offset by lower net fund flows2 into the adviser platform, as migration to a new IT service provider caused disruption for both IFAs and customers. Weak investment markets towards the end of 2018 constrained growth in assets under administration2, which ended the year at £116 billion (2017: £118 billion). As fee income is linked to assets under administration2, this may weigh on adjusted operating profit1 growth in 2019. Nonetheless, we see compelling long-term growth opportunities from rising participation and higher contribution rates in workplace savings.
3 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the “Other information” section of the Annual report and accounts. 4 The estimated Solvency II position represents the shareholder view. Please refer to note 57 and the ‘Other information’ section of the Annual report and accounts for more information.
Each year, our UK results include the impact of assumption changes, adjustments to provisions and management actions to increase or accelerate value emergence from our capital-intensive businesses. We ordinarily expect this to provide between £150 million and £200 million per annum benefit to our results. In 2018, the contribution remained above this range at £350 million (2017: £260 million). The largest driver of this result was the release of longevity provisions totalling £728 million (2017: £710 million) due to changes in life expectancy trends. This was partially offset by increased provisions and remediation costs, including those pertaining to historical advised sales by Friends Provident, with over 90% of cases identified being pre-2002, where we increased the amount set aside for customer redress to £250 million (2017: £75 million).
International Aviva’s International markets comprise Europe, where we have focused multi-line franchises, and Canada, where we are the second largest general insurer by premiums written. Excluding the impact of businesses divested in 2017 and 2018, adjusted operating profit1 from our International businesses increased 9% to £1,080 million (2017: £990 million).
In France, we maintained our operating momentum in 2018, delivering higher sales, improved product mix and better efficiency. Adjusted operating profit1 in France was £546 million (2017: £507 million), up 7% in local currency terms. In our life insurance business, increased demand for savings products helped to deliver 6% growth in new business volumes to £4.3 billion (2017: £4.0 billion). With higher average asset balances supporting fee revenues and operating expense2 growth of just 1%, our French life insurance business grew adjusted operating profit1 7% to £436 million (2017: £403 million). In general insurance, adjusted operating profit1 rose 5% to £110 million (2017: £104 million). Net written premiums were £1,118 million (2017: £1,053 million) with growth mainly derived from commercial lines. The combined operating ratio2 was maintained at 94.5% (2017: 94.5%) despite higher claims from weather and natural catastrophe events. Our French leadership team have begun to align our distribution channels under the Aviva brand and we expect to increase investment in brand, distribution and digitisation in 2019.
In Poland, Aviva responded to subdued trends in the life insurance market by implementing a targeted product strategy with our distribution partners, delivering record levels of customer retention and managing expenses tightly. As a result, despite lower industry sales, our life insurance business increased new business volumes by 3% and adjusted operating profit1 rose 8% to £170 million. The higher life insurance result helped propel our total adjusted operating profit1 in Poland to £190 million (2017: £177 million), an increase of 6% in local currency terms. In general insurance, adjusted operating profit1 was £20 million (2017: £21 million) due to lower profitability in motor insurance. Our general insurance business lacks scale, though we are targeting growth through multicover policies, encouraging digital engagement, utilising our existing distribution scale in life insurance and developing the price comparison website market.
Aviva recently received regulatory approval for further increases in premium rates in Ontario motor insurance which will move us toward rate adequacy. The regulatory approved premium rate increase of 8.6% in the Aviva portfolio and 16.8% in the RBC portfolio will be implemented from the first quarter of 2019 and should begin to benefit results in the latter part of this year and in 2020. In addition, we will continue to work with provincial governments and regulators to drive much needed reform in the Canadian insurance market. In summary, we expect our actions to deliver progress in our financial results in 2019 and we remain confident that we can achieve our sub-96% combined operating ratio2 goal in 2020.
‘Segmental Information’ and ‘Other Information’ within the Annual report and accounts for further information. 2 This is an Alternative Performance Measure (APM) which provides useful information to supplement an understanding of our financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
The sustained strength in sales has taken our new business share of the Italian life insurance market to approximately 6% and generated significant positive net fund flows2. As a result, life insurance adjusted operating profit1 rose 14% to £156 million (2017: £136 million). In general insurance, Aviva has a niche position in the Italian market. Net written premiums in this business fell 7% to £317 million (2017: £337 million) as we took underwriting actions on the motor insurance portfolio. These actions contributed to improved underwriting margins, which helped lift adjusted operating profit1 to £32 million (2017: £26 million).
Singapore In Singapore, we continue to grow our distribution network, including Aviva Financial Advisors with 816 advisers (2017: 673) and Professional Investment Advisory Services Pte Ltd, with 724 advisers (2017: 593). As a result, we have maintained positive momentum in life insurance. New business volumes increased 11% to £1,279 million (2017: £1,164 million) and adjusted operating profit1 from our life insurance operations grew 21% in local currency terms to £141 million (2017: £118 million). We believe the financial advisory model provides enhanced flexibility and choice for both advisers and customers and we will continue to invest in its development in 2019. In general insurance and health, adjusted operating loss1 widened to £16 million (2017: £8 million) due to adverse claims experience in our health insurance portfolio. We are taking steps to improve the health insurance portfolio and this will continue in 2019.
Strategic investments Aviva’s strategic investments include our Digital operations together with our joint venture businesses in China, Hong Kong, India,
Operating capital generation2 totalled £3.2 billion (2017: £2.6 billion). Underlying operating capital generation2 was £1.5 billion (2017: £1.7 billion), the decline resulting from business disposals, higher capital strain from new business growth and increased business investment spend. Other operating capital generation2 of £1.7 billion (2017: £0.9 billion) comprised UK longevity releases together with capital benefits from the inclusion of dynamic volatility adjustment in our Group Solvency II position and model changes in France, Poland and the UK.
Net cash remittances2 increased to £3.1 billion (2017: £2.4 billion) on the back of a significant uplift in dividends from the UK Insurance business. Special remittances from UK Insurance were £1.25 billion (2017: £500 million) and comprised £500 million related to Friends Life integration synergies and an additional £750 million that was made possible by the strength of our local entity solvency position.
In conjunction with the higher remittances, excess centre cash flow2 in 2018 was £2,437 million (2017: £1,656 million). Even after adjusting for special remittances, recurring excess centre cash flow2 was sufficient to fund Aviva’s ordinary dividend. At the end of February 2019, Group centre liquidity was £1.6 billion (2017: £2.0 billion). Our intention is to maintain the Group centre liquidity balance in a range of £1 billion to £2 billion over time. Additional cash may also be set aside at Group centre for the purpose of defeasing subordinated debt maturities in 2020 and beyond. In 2018, we raised €750 million of senior debt with maturity in 2027 and a coupon of 1.875%. This was used to redeem €350 million of maturing senior debt and reduce commercial paper balances and was therefore neutral to our net debt position, while extending our liability profile.
At Aviva, a “progressive” dividend policy means that, under ordinary circumstances, the Board of Directors would at least maintain the then-current annual ordinary dividend per share, while seeking to grow the dividend per share over time based on the Board of Directors’ periodic assessment of the Group’s financial performance and future outlook. In practice, this might result in a higher or lower dividend pay-out ratio relative to earnings, which could fluctuate, while the dividend per share remains steady or grows under ordinary circumstances. Aviva’s annual ordinary dividend per share has doubled from 2013 to 2018, and the Company expects that future percentage growth rates of the dividend per share will be more modest than those in the recent past.
Outlook Given current uncertainties, including the unknown future impacts of Brexit on the economies of the United Kingdom and Europe, our near-term outlook entering 2019 is more muted than our outlook a year ago. While we achieved 7% operating EPS2,3 growth in each of the past two years, it will be difficult to sustain this momentum in 2019.
In conjunction with the appointment of a new Chief Executive, we are reallocating resources and making changes to our priorities. This process has begun, though it will receive further impetus now that the new Chief Executive has been appointed. Areas of focus include potential changes to our business model to drive further efficiency, opportunities to optimise our product and market portfolio and the prioritisation of debt deleveraging announced in today’s results. The new Chief Executive will expand on our plans and outline refreshed targets in the near future.
In conclusion, we approach 2019 with strong fundamentals; our balance sheet is robust and resilient, our businesses are well positioned in their respective markets and overall performance has been steady. This provides a strong platform on which the incoming Chief Executive can build, with renewed focus on efficiency, complexity and customer to drive future performance.
Chief Financial Officer 6 March 2019 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 note B in the ‘Accounting Policies’ section, note 5
Overview Aviva is the UK’s largest insurer with a 17%1 share of the UK Life and savings market and a 10%2 share of the UK General insurance and health market, with 15 million customers in the UK. As a ‘multi-line’ insurer we have a clear strategic advantage, providing individual and corporate customers with a wide range of insurance and savings products, from car, home and health insurance to pensions, investments and asset management. We have a strong core capability in managing existing books of business and have one of the largest customer bases in the UK life and pensions market.
We are here to help our customers, protect what’s important to them and to help save for their long-term goals. Helping our customers provide for a more comfortable retirement and with a better understanding of the financial choices they face is a priority for us. We provide a secure income to 1.2 million customers in the form of an annuity, paying out over £2.6 billion each year. We are also a leading supplier1 of equity release (lifetime mortgages), lending over £700 million in 2018, helping people to raise money to fund whatever matters most in life.
In 2018 we published our first UK claims report, encouraging the industry to join us in publishing comprehensive information about how insurers manage customer claims, why some claims are declined and how consumers can do more themselves to understand whether the cover they have is what they need. In the UK, we paid out 96% of all claims received in 2017 and as high as 99% in motor and life insurance. That equated to £3.6 billion to help our customers across motor, home, travel, protection, health and commercial business insurance.
We are the largest UK corporate pensions provider1, servicing over 3.8 million customers, including 22%1 of the workplace pensions market. We are proud to receive external recognition3 for excellent service in the pensions marketplace. We offer pensions, protection, and bulk purchase annuity propositions to both large and small companies, as well as health and general insurance.
We also provide general insurance to a wide range of businesses, with over 650,000 policies in force. In addition to our well established Small and Medium Enterprise (SME) client base, our Global Corporate & Specialty (GCS) business is focused on building the right solutions for large corporate clients and their brokers, working together to provide a tailor-made package that meets their requirements in the UK and across the globe. In 2018 retention of our existing customer base was over 90% and we were successful in winning the multi-national business of large UK corporates. We continue to support clients in improving their risk management through our prevention agenda and our highly valued claims service.
We have 4.2 million customers in the UK actively registered on MyAviva, allowing them to manage their policies online, an increase of 48% on 2017. We are accessible to new and existing personal and corporate customers however they want to engage with us. We have an unparalleled distribution network, with a growing digital direct offering for sales and service, strong relationships with independent financial advisers, brokers, employee benefit consultants, banks and other partners such as estate agencies.
Profit UK Life adjusted operating profit1,7 increased by 8% to £1,871 million (2017: £1,728 million) due to further benefits from changes in longevity assumptions and the continued growth of long-term savings and bulk purchase annuities (BPA).
Long-term savings2 (96) 294 198 (74) 259 185 Annuities and equity release 363 416 779 335 390 725 Protection 91 135 226 130 97 227 Legacy3 — 318 318 — 331 331 Other4 — 350 350 — 260 260 Life 358 1,513 1,871 391 1,337 1,728 Underwriting result 253 246 Long-term investment return 161 163 Other5 1 2 General Insurance 415 411 Health 38 36 Total adjusted operating
The increase in adjusted operating profit1,7 is offset by an adverse movement in investment variances and economic assumption changes leading to a reduction in profit before tax attributable to shareholders’ profits7 of our life business of £1,399 million (2017: £1,619 million).
UK General Insurance adjusted operating profit1,7 was up 1% at £415 million (2017: £411 million), including a 3% increase in underwriting profit as the business has grown while maintaining a stable COR6.
Protection Protection adjusted operating profit1,7 remained stable at £226 million (2017: £227 million). The benefit of improved claims experience in Group Protection following actions taken to mitigate 2017 adverse experience was offset by an 8% reduction in new business volumes to £1,799 million PVNBP6 (2017: £1,964 million) and fall in new business profits in a competitive individual protection market including the impact of hardening reinsurance rates.
General insurance UK General Insurance adjusted operating profit1,7 was up 1% at £415 million (2017: £411 million).
Long-term investment return (LTIR) declined by £2 million to £161 million (2017: £163 million), with the reduction in the internal loan return (net neutral to Group) broadly offset by the impact of an updated investment mix.
2 Includes pensions and the savings Platforms. 3 Legacy represents products no longer actively marketed, including With-Profits and Bonds. 4 Other Life represents changes in assumptions and modelling, non-recurring items, and non-product specific items. 5 Other General Insurance includes unwind of discount and pension scheme net finance costs. 6 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements
Long-term savings 16,829 16,813 111 153 0.7% 0.9% Annuities and equity release 4,784 4,287 196 157 4.1% 3.7% Protection 1,799 1,964 140 183 7.8% 9.3% Health and Other 534 700 34 34 6.4% 4.9%
PVNBP2 increased 1% to £23,946 million (2017: £23,764 million) as the growth in BPA and workplace pensions was offset by lower Platform, Protection and Health volumes. However, VNB2 decreased by 9% to £481 million (2017: £527 million). The increase in PVNBP2 is primarily due to BPA growth, including Aviva’s largest BPA deal to date of £925 million with Marks and Spencer, while the overall reduction in VNB2 reflects falls in protection and long-term savings.
Long-term savings VNB2 reduction is mainly driven by lower Savings Platform volumes during and after service provider transition. It also reflects a reduction in workplace pension VNB2, as an increase in volumes has been offset by a change in mix towards lower margin, larger pension schemes.
Personal motor 1,125 1,142 Personal non-motor 1,369 1,359 UK Personal lines 2,494 2,501 92.4% 92.0%
NWP NWP increased 3% to £4,193 million (2017: £4,078 million), the fourth consecutive year of growth, as we continue to focus on our preferred products and channels.
UK Personal lines was broadly in line with the prior year with a 1% fall in motor reflecting lower average premiums in the softer market, while non-motor increased 1% driven by growth in home.
Operational highlights • Following the phased launch in 2018, we continue to deliver our new AvivaPlus proposition to more customers. The innovative general insurance proposition is simple to use, flexible and rewards loyalty. Our revolutionary new approach to insurance ensures existing home and motor customers get the same or better price than new customers, instant claims, no fees for paying monthly, fast quotes with fewer questions and customisable cover to ensure they stay in control.
• Our GCS business has continued to build capability that allows us to better service UK corporates with overseas exposure, delivering a multi-national proposition, which is important in futureproofing our business. Additionally, our client council is a market first, and helping to drive strong loyalty. Prevention is at the heart of our client proposition, with risk management improvements and innovative technological advancements that we have provided to our clients in 2018 having delivered over £60 million in known loss avoidance. Advancements include the use of drones, thermographic cameras and leak detection sensors.
• In January 2019 we launched our new SME Midmarket proposition, offering personalised advice, business insights based on data analytics and access to innovative technology to support mid-market brokers and customers access the right risk management expertise and insight to manage growth, as well as existing and emerging risks.
• We continue to invest in digital technology to help customers protect what’s important to them; with our award winning Aviva Drive app with DashCam functionality, customers can get a discount on their car insurance and have an independent witness on-board to help in the event of an accident. With our Alexa skill we make it easier for our pensions customers to get their latest pension value from the comfort of their sofa and we can help customers protect their home while away with smart devices that alert you to leaks, smoke and intruders via our new Connected Home app.
• In January 2018 we made a significant investment in our platform technology and migrated over 200,000 customers with 345,000 accounts and £20 billion of assets to a new provider. Despite some technical issues, our customers are now benefiting from improved reporting, extended investment choice and simpler online processes. Significant progress has been made to address the problems caused by the migration and to ensure any customers are not disadvantaged. Growth of the platform has been resilient throughout this period with assets under administration1 up 12% in 2018 to £22.6 billion and net fund flows1 continue to be positive at £3.9 billion.
• We continue to build on our defined benefit (DB) de-risking and bulk purchase annuity capabilities, supporting our business customers looking to reduce risk. In 2018 we wrote £2.6 billion of bulk purchase annuities, an increase of over 27% on 2017.
• April 2019 will see a further rise in auto-enrolment minimum contributions from 3% in 2018 to 5%, supporting better retirement prospects for all UK workers. Enquiries from small and medium sized businesses or their advisers about moving to a new auto-enrolment workplace pension provider have increased 80% year on year as companies realise the importance of workplace benefits.
• In 2018 the PRA launched a consultation process in respect of the capital required by firms offering equity release mortgages. We will continue to engage with the PRA throughout the consultation. We believe equity release is a valuable product for certain customers aged over 55, helping homeowners access money in their later life.
• We continue to improve prevention and detection of general insurance fraud for our customers. In 2018 we avoided over 15,000 fraudulent policies (20% more than 2017). We also repudiated £85 million in suspect fraudulent claims and have prosecuted 58 cases.
• We are committed to providing an excellent service for all our customers, but we know that sometimes things can go wrong. Where we fail to meet customers’ expectations our first priority is to resolve the matter as quickly as possible and to act on the feedback we receive. We constantly work to improve our customer service, taking learnings from dissatisfaction and analysing the root cause of complaints in order to improve our customer performance. Following an industry wide miscategorisation issue in 2018 we have been working to ensure we categorise our complaints correctly, which has resulted in an increase in our regulated complaint numbers.
Priorities for 2019 • To deliver growth in the UK by extending our advantage across products and intermediary partners, leveraging the power of Aviva’s breadth of offering, while investing in future growth strategies.
• Focus on simplicity for customers and build simple digital solutions using our data and analytics capabilities (Quantum) to make it easier for our customers to do business with us.
• Build on our strong position with intermediaries by striving to be their partner of choice.
CANADA Overview We are the second largest general insurance provider in the market place, providing a range of personal and commercial lines products to over 2.7 million customers with a 10% market share1. Our business is primarily intermediated, sold through a network of 1,000 independent broker partners and, following our acquisition of RBC General Insurance (RBC GI) in 2016, RBC insurance agents.
Expenses Operating expenses3 477 478 Integration and restructuring costs — 15
During 2018, adjusted operating profit2,4 remained flat compared to the prior year at £46 million (2017: £46 million). The business also continued to experience challenges in the Canadian motor market and adverse weather conditions. Towards the end of 2017, an extensive profit remediation plan was put in place with ongoing actions around pricing, indemnity management and risk selection. The impacts of our extensive profitability actions have started to flow through our 2018 results. In the second half of the year, our combined operating ratio3 for the six months to December 2018 improved to 100.2% (HY18: 104.6%).
Underwriting result (70) (64) Long-term investment return 121 115 Other5 (5) (5)
In 2018, the underwriting result was a loss of £70 million (2017: loss of £64 million), mainly driven by increased claims frequency and severity in our personal motor business, slightly adverse weather conditions compared to the long-term average and the inclusion of RBC GI integration costs within operating expenses3, partially offset by favourable prior year reserve development.
The underwriting loss, along with adverse market movements were the key drivers of the current year loss before tax attributable to shareholders’ profits4 of £74 million (2017: £54 million).
Cash Cash remittances3 during the year decreased to £28 million (2017: £55 million), reflective of our underwriting performance.
Expenses Operating expenses3 remained broadly flat at £477 million (2017: £478 million), which includes costs of £11 million related to the completion of RBC GI systems migration and staff relocation. These costs were reported within integration and restructuring costs in 2017.
1 Market Security & Analysis inc. 2017 online database 2 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 note B in the ‘Accounting Policies’ section, note 5 –
RBC GI systems and processes and successfully migrated all RBC GI policies into our Guidewire (policy and claims) system.
Priorities for 2019 • Our primary focus is to improve profitability across all lines of business. • We will diversify our products more towards commercial lines and personal property. • We will continue to invest in pricing analytics and claims management.
We are present in attractive markets where we have a competitive advantage and ability to source skills. We believe this offers us clear potential for future profitable growth.
We remain cognisant of low interest rates and challenging regulatory environments, and believe we are well positioned to succeed.
Adjusted operating profit1,2 Life 831 873 General insurance & health 220 223 1,051 1,096
General Insurance Combined operating ratio (COR)3 93.4% 93.3% Net written premiums (NWP) 1,985 2,018
Total adjusted operating profit1,2 1 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 note B in the ‘Accounting Policies’ section, note 5 ‘Segmental Information’ and ‘Other Information’ within the Annual report and accounts for further information 2 The amounts shown above in respect of adjusted operating profit and profit before tax attributable to shareholders’ profits do not reconcile to the corresponding amounts in note 5 – ‘Segmental information’ within the Annual report and accounts due to the reclassification of Other operations to Other Group activities.
Cash Cash remitted to the Group3,4 was £447 million (2017: £485 million). Higher dividends from France and Poland were offset by Italy, where the dividend was withheld to withstand the volatile market conditions experienced in the year.
Expenses Total operating expenses3 were up 2% to £847 million (2017: £820 million) due to the inclusion of the Friends First business in
Ireland for the first time and the absorption of integration costs into operating expenses3 in 2018, partly offset by a reduction due to the disposal of our Spanish businesses. Excluding these items, operating expenses3 are flat year on year.
Net written premiums (NWP) Excluding Avipop, NWP was broadly flat with growth in France offset by decreases in Poland, Italy and Ireland, as we maintained strong underwriting discipline. In France, NWP grew to £1,118 million (2017: £1,053 million) with growth mainly in commercial lines. In Poland, NWP decreased by 10% to £106 million (2017: £117 million) reflecting a change in product mix from bancassurance business. In Italy, NWP decreased by 7% due to continued underwriting action taken on segments of the motor book. In Ireland, NWP was down 2% mainly due to rate reductions in a softening motor market.
Combined operating ratio (COR)3 Excluding the disposal of Avipop, COR3 in Europe has improved by 0.4pp to 93.5% primarily reflecting an improved performance in Italy as underwriting action on the motor book takes effect.
Operational highlights • In 2018, we completed the sale of our shareholdings in Caja
Murcia Vida, Caja Granada Vida and Pelayo Vida, concluding the exit of our Spanish businesses. In Italy, we completed the sale of our shareholdings in Avipop Assicurazioni S.p.A and Avipop Vita S.p.A. (collectively known as Avipop) in March 2018. In Ireland, we completed our acquisition of Friends First Life Assurance Company in June 2018.
• In Ireland we completed the acquisition of Friends First and made significant progress with the integration. The integration programme is ahead of expectations with benefits in 2018 continuing in 2019 and 2020. Our strong brand continued to shine as we achieved the most trusted insurance brand of 20181.
• In Turkey we developed a new distribution model, launched in February 2019, that allows our direct sales force to sell general insurance and health products, manufactured by other insurers, alongside Aviva life insurance products
• In Turkey we have a life insurance business through our joint venture with Sabanci. Our business has responded well to the political instability and financial volatility in the second half of 2018.
• In Italy we will focus on brand awareness, growing the non-motor general insurance business in an under-penetrated market; invest in our direct channel to drive forward our new SME propositions, and continue growth in hybrid sales.
• In Turkey we will closely monitor the impact of current political and financial uncertainty and take action where required. We will simplify our portfolio and implement cross-sell initiatives to maximise the potential of our partnership with Sabanci.
1 Aviva Global Brand Tracker Quarter 4 2018 – Ireland 2 AFER website, UFF website and French Insurance Federation 3 Polish Insurance association. 4 Insurance Ireland Industry Statistics, GI and Milliman Temperature Gauge, Life. 5 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements
We currently provide life and health insurance solutions to over 4.5 million customers across our markets in Asia and a multi-product offering including general insurance in Singapore. We operate a multi-distribution strategy which includes tied agency, financial advisers, bancassurance, digital, affinity partnerships, telemarketing and direct sales force.
Our core strategy is to disrupt current market practices by placing a greater emphasis on our customers and offering products, individually or in tailored combinations, to meet their preferences to create real value.
Cash remitted to Group2 6 — Expenses Operating expenses2,4 186 207 Integration and restructuring costs — —
Profit before tax attributable to shareholders’ profit3 of £101 million has increased from a loss of £146 million in 2017, due in part to the improved adjusted operating profit1,3 and also to the nonrecurrence of the £118 million initial remeasurement loss recognised on FPI in 2017.
4 Operating expenses relate to subsidiaries and exclude joint ventures. 5 In July 2017, Aviva announced the sale of Friends Provident International Limited (FPI). The subsidiary has been classified as held for sale from July 2017, when management were committed to a plan to sell the business. 6 In 2018 Aviva completed the sale of our entire 49% shareholding in a joint venture in Taiwan.
Operational highlights • In May 2018, we were the first and only insurer in Singapore to launch eCall assistance service in collaboration with Bosch for our motor clients. This eCall assistance is expected to be quicker by 40% compared to the average emergency response
• In July 2018, we launched Aviva’s global data science practice in Singapore, Quantum Asia Hub, to use data and technology to better understand customer experience and provide tailored products and services to help our customers manage uncertainty
• We launched Blue, our digital insurance joint venture with Hillhouse Capital and Tencent in Hong Kong, in September 2018 to fundamentally change the traditional insurance market with zero commission, no intermediaries and easy-to-use, digital insurance.
Priorities for 2019 • We will continue to invest in our independent financial adviser model in Singapore to accelerate growth while looking to capture similar opportunities in other Asian markets
• We will continue to implement remediation actions to improve the portfolio performance of our health business in Singapore.
In a world of low interest rates and Solvency II, we provide the solutions for investors to achieve the returns they need. We offer solutions to the Group and external investors alike.
Revenue Revenue increased by 4% to £597 million (2017: £577 million) driven by sales across the business including £2.3 billion of Stewardship fund assets in 2018 which were previously externally managed.
Profit Fund management adjusted operating profit1 decreased by £18 million to £150 million (2017: £168 million) due to continued investment in capabilities (equities and real assets), expansion of our global distribution reach and absorption of regulatory costs (particularly MiFID II) which we did not pass on to our clients. Profit before tax attributable to shareholders’ profit has reduced to £170 million (2017: £188 million) due to the lower fund management adjusted operating profit1. £32 million of insurance recoveries included in 2017 adjusted operating profit1 are largely offset by the 2018 gain on disposal recognised on the transfer of the Real Estate Multi-Manager business and our interest in the management of a pan-European commercial property fund to another leading real estate global asset manager3.
Assets under management and under administration2 Assets under management2 represents all assets managed by Aviva Investors. These comprise Aviva (internal) assets which are included within the Group’s statement of financial position and those belonging to external clients outside the Aviva Group which are therefore not included in the Group’s statement of financial position. These assets under management2 exclude those funds that are managed by third parties. Assets under administration2 comprise assets managed by Aviva Investors and by third parties on platforms administered by Aviva Investors.
• We successfully onboarded the management of £2.3 billion in Stewardship funds in 2018, which had previously been outsourced.
3 On 5 November 2018, Aviva Investors completed the sale of an indirect Real Estate Multi-Manager business and our interest in the management of a pan-European commercial property fund to another leading real estate global asset manager.
Market context and challenges Brexit uncertainty continues to present challenges for the asset management industry. We continue to plan for all eventualities but believe Aviva Investors is already well placed both globally, and particularly within Europe, as we have a significant and longstanding established presence in France, Luxembourg and Poland. Our preparations are also well underway for the outcomes of the FCA’s Asset Management Market Study and the Senior Manager and Certification Regime.
Market conditions have been volatile due to uncertainty around Brexit and growing trade tensions between the US and the rest of the world. This led to investment performance in certain areas of the business not meeting expectations. We have however taken steps to enhance our investment capabilities in 2018, including adding additional resource to our Multi-Asset team and investing heavily in our Equities capability, primarily to enhance our equity performance but also idea generation into our broader solutions including AIMS. We believe we are at something of an inflection point in markets as the period of quantitative easing draws to a close and we transition to an environment of quantitative tightening. We expect global growth to ease in 2019.
Multi-Asset propositions • Continuing to build our solutions business. Our insurance DNA for both the Group and our external clients should help us win in this space
• Continuing to simplify and streamline our operating model delivering a single Middle office, reducing fund complexity and using proprietary digital tools as a foundation to enhance our client and staff experience.
Risk management is key to Aviva’s success. We accept the risks inherent to our core business lines of life, general, health and protection and asset management. We diversify these risks through our scale, geographic spread, the variety of the products and services we offer and the channels through which we sell them.
Looking forward, these risks may be magnified or dampened by current and emerging external trends (for example, climate change, cyber crime and political risks, such as Brexit) which may impact upon our current and longer term profitability and viability, in particular our ability to write profitable new business.
Our governance This includes risk policies and business standards, risk oversight committees and roles and responsibilities. Line management in the business is accountable for risk management which, together with the risk function and internal audit, form our ‘three lines of defence’. The roles and responsibilities of the Board Governance, Audit and Risk Committees and management’s Disclosure, Asset Liability and Operational Risk Committees in relation to the oversight of risk management and internal control is set out in the ‘Directors’ and corporate governance report’ in the Annual report and accounts.
Our process The processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models, and stress and scenario testing, are designed to enable dynamic risk-based decision-making and effective day-to-day risk management. Having identified and measured the risks of our business, depending on our risk appetite, we either accept these risks or take action to reduce, transfer or mitigate them.
• General insurance risk is the risk arising from loss events (fire, flooding, windstorms, accidents etc)
• Accident and Health insurance risk covers healthcare costs and loss of earnings arising from customers falling ill
Principal risk types The types of risk to which the Group is exposed, described in the table below, have not changed significantly over the year. All of the risks below, and in particular operational risks, may have an adverse impact on our brand and reputation.
• Risk selection and underwriting on acceptance of new business • Aviva’s staff pension scheme longevity swap covering approximately £5 billion of pensioner-in-payment scheme liabilities • Product design that ensures products and propositions meet customer needs • Use of reinsurance to mitigate mortality/morbidity risks and, since 2016, longevity risk for bulk purchase annuities and guaranteed annuity options General insurance risk • GI catastrophe • GI reserving (latent and non-latent) • GI underwriting • Expenses
• Product development and management framework that ensures products and propositions meet customer needs
Operational risk • Conduct • Legal & regulatory • People • Process • Data security • Technology
• Enhanced scenario-based approach to determine appropriate level of capital to be held in respect of operational risks
• On-going investment in simplifying our technology estate to improve the resilience and reliability of our systems and in IT security to protect ours and our customers’ data 1 Top three risks ranked by diversified Solvency II Solvency Capital Requirement 2 Not quantifiable in terms of economic capital
Principal risk trends and causal factors This table describes the external trends and causal factors impacting our inherent risks, their impact, future outlook and how we take action to manage these risks: Key trends and movement Risk management Outlook
Economic & credit cycle – uncertainty over prospects for future macroeconomic growth, credit and interest rates, and the response of Central Banks, could adversely impact the valuation of our investments or credit default experience as well as the level of the returns we can offer to customers.
While interest rates are still well below prefinancial crisis levels, during 2018 the US Federal Reserve raised interest rates on four occasions, in August the Bank of England raised its base rate and in December the European Central Bank ended its asset purchase programme. While rates may remain below pre-2008 financial crisis levels in the EU and UK for some time to come, there is a risk that a rapid increase in rates and a deterioration in companies’ fundamentals could result in a re-rating of financial assets leading to a collapse in bond prices, widening spreads or credit defaults and reducing asset prices.
Brexit is not expected to have a significant operational impact on Aviva. We have been actively engaged to ensure the interests of our customers, the Company and the industry are appropriately taken into account. We have addressed the loss of our ability to passport business into the EU through insurance portfolio transfers to our business in Ireland and expansion of our business in Luxembourg to serve our EEA asset management clients and funds. We have reviewed and are amending contractual terms for data sharing and transfers to allow continued uninterrupted flow of personal data between our EU businesses and the UK. Our Financial Event Response Plan ensures that we will be able to respond swiftly and effectively to any severe adverse financial event.
UK Parliamentary approval of the EU Withdrawal agreement remains uncertain and there are a number of possible alternative outcomes including departure from the EU without a deal, deferral of the UK’s departure and a renegotiated deal or even continuing membership of the EU after a second referendum.
Uncertainty over UK-EU relations will continue if as planned the UK withdraws on 29 March 2019, as the UK and EU start to negotiate their future free trade agreement. While these negotiations are intended to complete by 31 December 2020, the end of the transition period under the withdrawal agreement, there is a risk they may need to be extended.
We are not complacent. We continue to invest significantly in IT Security, introducing additional automated controls to protect our data, detect and prevent cyber-attacks. In addition to implementing secure development practices we employ our own ‘white hat’ hackers to regularly test our IT security defences. We undertake regular activities with our people to promote awareness of cyber and data security, including: employee phishing exercises, computer-based training and more regular communications about specific threats as they are identified.
Not only do we listen to our customers to ensure we meet their needs, we also seek to transform the customer experience through our digital strategy, creating an effortless customer experience. Our new vulnerable customer policy recognises the needs of our less digitally aware customers. For information on how we are mitigating this risk through the execution of Digital First and True Customer Composite strategies refer to ‘Our strategy’.
Globally, we have 50 environmental and social products or services which enable our customers to be more environmentally responsible or gives them easier access to the protection they need for themselves and their families.
For example, the ‘Build back better’ programme in Canada uses 10% of the total loss to commercial property to upgrade the rebuild and ensure it is more resilient to prevent future losses. In Poland, we launched an anti-smog campaign and funded 300 external air quality sensors. Also in Poland, we extended our cover to include cancer treatments during the early stages of the illness. In the UK, we are working in partnership with a leading cancer charity to speed up the handling of critical illness claims for cancer patients from 60 days to just 24 hours.
In 2018, we increased our community investment by 47%, totalling £17.6 million (2017: £11.9 million), helping to benefit more than 1.5 million people and supporting over 3,000 local projects. We have now helped over 7,000 projects since 2015, exceeding our target of 5,000 projects by 2020. Aviva France is incorporating La Fabrique Aviva, their local version of ACF, into their Corporate and SME strategy, offering discounts on essential insurances needed by startups. ACF applications for funding in Canada are up almost 20%, with more than 800 high-quality powerful social purpose projects submitted.
Aviva’s people continue to make a difference in communities around the world. Over 7,000 employees contributed more than 57,500 hours of volunteering time and gave or fundraised over £2.1 million.
In 2018, through the British Red Cross partnership, our #mapamillion campaign mapped buildings in North Indonesia following the devastating earthquake and tsunami. In 2018 we reached our goal of putting one million people on the map, ensuring future aid work can be channelled to the point of need.
The Community Reserve Volunteer project aims to register 10,000 volunteers by the end of 2019 to support their local communities in times of need. We have already signed up nearly 6,000 volunteers including customers and our people. In 2019, we will increase the impact of the Aviva Community Fund and BRC work across the world and aim to support over 2.5 million beneficiaries through our community activities by 2020.
Good governance and business ethics We are committed to the highest standards of ethical behaviour as outlined by our Business Ethics Code. This underscores our commitment to operate responsibly and transparently. We require all our people, at every level, to read and sign-up to our Code every year (99% of our employees did so in 2018).
The Financial Crime Business Standard guides our risk-based financial crime programmes. These seek to prevent, detect and report financial crime, including any instances of bribery and corruption, while complying fully with relevant legislation and regulation. We use risk-based training to ensure employees and others acting on Aviva’s behalf know what is expected of them and how they should manage bribery and corruption risks.
1 The percentage was calculated by dividing all paid and rejected claims by the total number of claims received between 1 January and 31 December 2017. The figure includes all insurance product lines across all our businesses and excludes benefits and pensions, which have a payout ratio of 100%. It also excludes invalid or incomplete claims, such as instances where claims were opened in error, abandoned or withdrawn by customers.
At a Group level, the Chief Risk Officer provides Aviva’s Board Governance Committee with regular reporting on financial crime matters. These include Aviva’s anti-bribery and anti-corruption programme.
Our malpractice helpline, Speak Up, makes it easy to report any concerns in confidence, with all reports referred to an independent investigation team. In 2018, 50 cases were reported through Speak Up (previously known as Right Call) (2017: 25), with zero related to bribery and corruption concerns. 37 cases reached conclusion, and 13 remain under investigation. There has been no material litigation arising from any case reported in 2018.
We conduct due diligence when recruiting and when engaging external partners. In 2018, 82% of Group and UK managed suppliers agreed to our Code of Behaviour (or had their own equivalent code of behaviour) which requires compliance with all applicable financial crime laws and regulations. In 2018, we engaged 95% of our managed suppliers on corporate responsibility issues (including modern slavery).
Our Board Governance Committee oversees our responsible and sustainable business strategy and the policies that underpin it. Aviva plc is subject to the UK Corporate Governance Code (the Code), which we aim to comply with fully.
Our human rights policy (www.aviva.com/content/dam/avivacorporate /documents/socialpurpose/pdfs/policiesresponses /20171025-Human-Rights-Policy-Final.pdf) identifies our main stakeholders as well as the most salient human rights issues for our business. The scope of this policy is group-wide and sets out the Group’s commitment to respect human rights.
Ireland, France, Italy and Singapore. Procurement teams, company secretaries, and corporate responsibility representatives from these markets were briefed on our responsibilities regarding modern slavery. We engaged our key suppliers in these markets covering areas such as diversity and inclusion, awareness of the
• Collaborated with the UN Global Compact as part of the UK working group on modern slavery (which brings together peers from across different industry sectors to share information to support our work in tackling modern slavery). We peer-reviewed participants’ modern slavery statements, received training and shared experiences from within civil society and government organisations
We have adopted the following performance indicators to track Aviva’s impact on preventing modern slavery issues.
We believe the UN Sustainable Development Goals (SDGs) can guide us, our customers and society towards a brighter, more sustainable future. In September 2018 Aviva launched the World Benchmarking Alliance, along with the Index Initiative and the United Nations Foundation. The Alliance will establish public, transparent and authoritative league tables, ranking companies on their contribution to the SDGs. The first set of benchmarks will be published in 2020 and will address food and agriculture, climate and energy, digital inclusion and gender equality and empowerment. The alliance is supported by the Governments of the UK, the Netherlands and Denmark and was named as one of the 10 winning initiatives at the November 2018 Paris Peace Forum.
1 Includes assessments, training, and other meaningful engagement with suppliers www.aviva.com/investors/corporate-governance www.aviva.com/content/dam/aviva-corporate/documents/socialpurpose/pdfs/policies-responses/20171025-Human-Rights-Policy-Final.pdf www.aviva.com/content/dam/aviva-corporate/documents/socialpurpose/pdfs/policies-responses/20171025-Human-Rights-Policy-Final.pdf www.aviva.com/content/dam/aviva-corporate/documents/socialpurpose/pdfs/policies-responses/20171025-Human-Rights-Policy-Final.pdf www.aviva.com/modernslaverystatement
In 2014 Aviva France launched Aviva Impact Investing France. It became the first financial institution in the country to create an investment fund dedicated to financing socially and environmentally responsible companies. This fund is now endowed with €30 million and has invested in 48 enterprises. At the 7th edition of the ‘Instil Invest Crowns’ Aviva France was awarded ‘Best Initiative in Impact Investing’ in the ‘Major Themes’ category. This reward recognises that investments can create social good as well as healthy financial earnings.
Leading by example on our own sustainability record As the first financial services company to be a carbon neutral company we continue to offset 100% of any remaining carbon emissions. Our offsetting projects have helped over one million people since 2012 live better lives (e.g. through provision of clean cook-stoves in Kenya, providing safe water, improving health, creating jobs and stimulating local economies).
For example, in 2017 our Canadian head office moved into a Gold LEED certified building and in 2018 we merged four other locations into one energy efficient office site. Over 1,800 employees were merged into the new office space reducing our operational footprint (square footage) by 25%.
To date globally we have achieved a 60% reduction in CO2e against our 2010 baseline, meeting our 2020 target (of 50%) early. We continue to work towards our ambitious long-term target of a 70% reduction by 2030. Under the Carbon Reduction Commitment Energy Efficiency Scheme, we reported total emissions of 82,278 tonnes of CO2e in 2018 costing £1.4 million. This mandatory scheme is limited to UK business emissions from building energy, and includes the property portfolio of our investment funds managed by Aviva Investors.
Across the UK more than 400 employees have signed up to our car share programme and there are 180 active car-sharing groups. We have also introduced electric vehicle charging points at eight UK locations and moved 30% of our car fleet to hybrid. In the past year this has helped save 4,257 kg of CO2 emissions.
More details of our environmental KPI data and our independent assurance process can be found at www. aviva.com/CRkpisandassurance2018
Operational global greenhouse gas emissions data boundaries Our carbon footprint boundaries show the scope of the data we monitor and the emissions we offset. We report on Greenhouse Gas (GHG) emission sources on a carbon dioxide emissions equivalents basis (CO2e) as required under the Companies Act 2006 (Strategic report and Directors’ reports) 2013 Regulations. We also refer to the GHG Protocol Corporate Accounting and Reporting Standard, and emission factors from the UK Government’s GHG Conversion Factors for Company Reporting 2018. The table below shows the absolute operational carbon emissions: Scope 1 16,198 17,915 19,210 Scope 2 25,012 31,280 41,008 Scope 3 17,739 19,305 19,193 Absolute CO2e* 58,949 68,500 79,410 Carbon offsetting** (58,949) (68,500) (79,410) Total net emissions — — —
The following table shows the carbon intensity of our operations: CO2e tonnes per employee
At Board level, the Board Risk Committee and Board Governance Committee oversee our management of climate-related risks and opportunities. • The Board Risk Committee met 5 times in 2018 to review, manage and monitor all aspects of risk management, including climate-related risks. Climate change is classified as an emerging risk and it is assessed for its proximity and significance to Aviva as part of our emerging risk processes.
Strategy This response focuses on the key climate-related risk factors and related opportunities (i.e. physical, transition, and liability) described in the Prudential Regulation Authority 2015 report2. The materiality and horizons over which these risks and opportunities impact our business depend on the specific insurance products, geographies and investments being considered or decisions being made.
In contrast, when developing our new product strategy and updating Aviva’s overall business plan, the impacts of these risks need to be considered over the medium term (three to five years). With respect to life and pensions, when setting premium rates and reserves for annuities in payment as well as our investment strategy to back those insurance liabilities, the impacts of these risks need to be considered over a much longer time horizon (five years plus).
In our Strategic Response to Climate Change, published in 2015, we have focused on five pillars: • Integrating climate risk into investment considerations – Aviva committed in 2012 to integrate Environmental, Social and Governance factors across all asset classes and regions, to deliver long-term sustainable and superior investment outcomes for our customers
• Supporting strong policy action – Aviva continues to provide strong and vocal support for capital market reform, to mobilise the trillions of pounds required to transition to a low carbon economy and properly correct existing market failures with respect to climate change
• Active stewardship on climate risk – Aviva actively engages with companies to achieve climate resilient business strategies
• Divestment where necessary – Aviva aims to use our shareholder influence to encourage companies to transition to a low carbon economy and divest highly carbon-intensive fossil fuel companies where they are not making sufficient progress towards the engagement goals set.
• Our exposure to flood risk for UK residential customers is managed by ceding policies to FloodRe
• Promote customer awareness and risk prevention measures of climate-related issues such as air pollution. For example, Aviva Poland has installed air monitors in local communities to enable their customers to access up to date information about air pollution levels on their smartphones.
• Help customers to build resilience to extreme weather such as the upgrade to Commercial Property Insurance in Canada which provides a ‘build back better’ element
• Provide products and services that support customers’ choices to reduce their environmental impact, such as bespoke electric vehicle policies and supporting the sharing economy
1 Aviva is an asset owner with assets under management to the value of £470 billion, an insurer with gross written premiums of £28.7 billion, and Aviva Investors has assets under management of £331 billion. 2 www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/impact-of-climate-change-on-the-uk-insurance-sector.pdf www.aviva.com/TCFD
Risk management Rigorous and consistent risk management is embedded across Aviva through our Risk Management Framework, comprising our systems of governance, risk management processes and risk appetite framework. This framework sets out how Aviva identifies, measures, manages, monitors and reports on the risks to which it is, or could be, exposed (including climate-related risks). It also defines the accountabilities of management, the risk function and internal audit with respect to enterprise-wide risk management.
In conjunction with the United Nations Environment Programme Finance Initiative (UNEP FI), Aviva has developed models and scenario analysis tools to assess the potential impact on our business of the four IPCC scenarios. Outputs include financial metrics such as direct/indirect emission costs, additional capital expenditure, and revenue implications broken down by sector and geography. Each scenario describes a potential trajectory for future levels of greenhouse gases and other air pollutants and can be mapped to likely temperature rises (levels of mitigation required): 1.5°C (emissions halved by 2050), 2°C (emissions stabilise at half today’s levels by 2060), 3°C (emissions rise to 2080 then fall) and 4°C (emissions continue rising at current rates).
In July 2018 the Financial Reporting Council introduced a revised UK Corporate Governance Code. The revised Code emphasises the requirement for boards to adopt a longer-term time horizon when considering issues and making decisions. Our company has been operating successfully for more than three hundred years because we understand the importance of long-term thinking, and the Board will continue to govern the Company in this way.
The revised Code also places emphasis on the role the Board plays in creating a positive, responsible and responsive culture and we welcome the importance the new Code affords to workforce engagement and the representation of the employee voice in the boardroom. We have a wide range of processes and mechanisms that speak to this requirement and are particularly proud of the ongoing dialogue between board members and the Evolution Council (a diverse group of high calibre leaders from across the business), and Your Forum, a broad-based body which represents UK and European employees and includes trade union representatives. A description of our stakeholder engagement activities appear later in this report.
Our Preference shareholders There were challenges of our own making during the year, including our announcement in March 2018 that we were “evaluating alternatives” for the Aviva plc and General Accident plc preference shares. While we responded quickly to certain investor concerns by confirming we would take no action, and put in place a goodwill payments scheme for eligible preference shareholders who incurred losses from selling these securities during the period, it was a disappointing episode and lessons have been learned.
Our external environment We constantly strive to make sure that our approach to risk management is effective, extending beyond financial risk to a wider range of operational risks. There is a full report on our activities in this area in our ‘Risk and risk management report.’ We have worked hard to ensure that Aviva is appropriately positioned for all eventualities in relation to Brexit. The political climate in the UK is possibly the most uncertain it has been for several decades, and we have factored that uncertainty into our Board discussions and specifically into determining how we can best position our business to continue providing excellent service to all our customers. The range of outcomes on Brexit, and the consequences of the final decision, will continue to be a focus for the Board during our strategic discussions in 2019.
During 2018 we have created the Aviva Foundation. Its goals are to promote financial capability and inclusion, develop community resilience and enable sustainable finance. To support the Foundation we have released dormant assets held on our share register for a minimum of twelve years. This is an ongoing programme, and I look forward to being able to provide further updates on the achievements of the Foundation.
Maurice joined Aviva in 1992 and was appointed to the Board of Aviva plc in June 2017. Maurice was previously Aviva’s Chief Executive Officer, International Insurance. Maurice had responsibility for Aviva’s life insurance and general insurance operations in France, Canada, Ireland, Italy, Poland, Turkey and India. Prior to that Maurice was Chief Executive Officer of Aviva UK and Ireland General Insurance, one of the largest businesses in the Aviva group.
Following the appointment of Maurice as Group CEO, I returned to my previous role of Non-Executive Chairman.
We announced in January 2019 that, following nine years on the Board, Michael Hawker would retire from the Board as a NonExecutive Director, and as Chairman of the Risk Committee and as a member of the Audit and Nomination Committees with effect from 31 March 2019. Michael has brought to the Board a wealth of knowledge and experience gained over a long career in the banking and insurance industries in both executive and non-executive roles in Europe, Asia and Australia, and was a distinguished Chairman of the Risk Committee. I would like to thank him for the enormous contribution he has made to Aviva. The appointment of the new Risk Committee Chair is well advanced, and will be announced following completion of the relevant regulatory approval process.
Insurance 7 3 8 Banking 6 3 6 Actuarial 6 3 5 Transformation 8 3 3 Law 6 3 3 Government 7 2 1 Customer 8 3 5 IT/Digital 8 2 1 Strategy 8 3 6 International experience1 Europe 8 3 8 Asia Pacific 3 1 2 The Americas 1 2 3 Middle East & Africa 1 — 1 Tenure >10 years — — — 5-10 years 5 — 4 4 years — 1 2 3 years 2 1 2 2 years 1 — — 1 year — 1 — <1 year — — 1 Age 1 Individual directors may fall into one or more categories
Future appointments to the Board and Group Executive will be made in line with the Board Diversity and Inclusion Statement, and for the Group Executive to be consistent with our Global Inclusive Diversity Strategy, which is described in the Directors’ and corporate governance report.
Maurice Tulloch n Position: Group Chief Executive Officer (CEO) Nationality: British/Canadian Committee Membership: N/A Tenure: 1 year 9 months. Appointed to the Board as an Executive Director in June 2017 and as CEO in March 2019 Qualifications: Chartered Professional Accountant (CPA, CMA); Master’s degree in Business Administration (MBA) (Heriot-Watt University, Edinburgh); BA Economics (University of Waterloo, Ontario) Skills and Experience: Maurice has more than 25 years’ experience within Aviva and most recently held the role of CEO of International Insurance. Maurice had responsibility for Aviva’s life insurance and general insurance operations in France, Canada, Ireland, Italy, Poland, Turkey and India, together with our Global Corporate and Speciality (GCS) business. He brings deep expertise of general insurance and the Group’s International businesses into the Boardroom. External Appointments: Non-Executive Director of Pool Reinsurance Company Ltd and a member of the Insurance Development Forum.
Thomas Stoddard n Position: Chief Financial Officer Nationality: American Committee Membership: N/A Tenure: 4 years 11 months. Appointed to the Board and as Chief Financial Officer in April 2014 Qualifications: BA Economics (Swarthmore College); Juris Doctor (University of Chicago Law School) Skills and Experience: Tom’s financial expertise and strategic decision-making skills play a fundamental role in driving Aviva to attain its financial goals. As a result of Tom’s work Aviva has strengthened its financial position and now has sufficient financial flexibility to withstand stress and invest in opportunity. Prior to joining Aviva, Tom worked in senior positions as an investment banker in highly respected US firms, including Blackstone Advisory Partners LP, where he was responsible for successfully driving Blackstone’s business advising banks, insurers and other financial institutions globally. External Appointments: N/A.
Glyn Barker ▲ Position: Senior Independent Non-Executive Director Nationality: British Committee Membership: Audit Committee, Nomination Committee, Risk Committee, Governance Committee, Remuneration Committee Tenure: 7 years 1 month. Appointed to the Board in February 2012 and became Senior Independent Non-Executive Director in May 2017 Qualifications: Member of the Institute of Chartered Accountants of England and Wales (ICAEW); BSc Economics and Accounting (Bristol University) Skills and Experience: Glyn’s knowledge of the Aviva Group and his in depth understanding of the issues that may affect shareholders and other stakeholders of the company provides him with the skills to fulfil the role of Senior Independent Director. His experience enables him to support the Chairman and the Board in driving the appropriate culture and values throughout the Company. Glyn was previously a Vice Chairman of PricewaterhouseCoopers LLP (PwC) and was responsible for leading the strategy and business development for Europe, the Middle East, Africa and India. External Appointments: Chairman of Irwin Mitchell Holdings Ltd and Interserve plc, Senior Independent Non-Executive Director of Berkeley Group Holdings plc and Non-Executive Director of Transocean Ltd.
Patricia Cross ▲ Position: Independent Non-Executive Director Nationality: Australian Committee Membership: Remuneration Committee (Chair), Audit Committee, Nomination Committee Tenure: 5 years 3 months. Appointed to the Board in December 2013 Qualifications: BSc (Hons), International Economics (Georgetown University); Life fellow of the Australian Institute of Company Directors Skills and Experience: Patricia is an experienced company director with over 20 years’ experience of serving on multiple ASX-30 Boards including Macquarie Group Ltd and Macquarie Bank Ltd, National Australia Bank, Wesfarmers Ltd, AMP Ltd, and Qantas Airways Ltd. She is the founding Chair of the 30% Club in Australia. Patricia has held a number of Australian government positions, including with the Financial Sector Advisory Council, Companies and Securities Advisory Committee, Panel of Experts to Australia as a Financial Centre Forum and Sydney APEC Business Advisory Council. Patricia has served on a wide range of not for profit boards, including the Murdoch Children’s Research Institute, and she was a founding Director of The Grattan Institute. In 2001, Patricia received the Australian Centenary Medal for service to Australian society through the finance industry and was awarded Life Fellowship of the Australian Institute of Company Directors in 2018. Having started her career in the U.S. Government working in foreign affairs, Patricia had a long career in senior executive roles in very large international banking and investment management organisations. She has lived and worked in seven countries in Europe, the U.S. and Australia. External Appointments: Chair of the Commonwealth Superannuation Corporation, and Ambassador for the Australian Indigenous Education Foundation.
Belén Romana García ▲ Position: Independent Non-Executive Director Nationality: Spanish Committee Membership: Governance Committee, Nomination Committee, Risk Committee Tenure: 3 years 8 months. Appointed to the Board in June 2015 Qualifications: BSc, Business and Economics (Universidad Autonomo de Madrid) Skills and Experience: Belén has extensive governmental and regulatory experience and a detailed knowledge of the financial services industry and European regulation and she brings this expertise to the Boardroom. Belén has held senior positions at the Spanish Treasury and represented the Spanish government at the Organisation for Economic Co-operation and Development. External Appointments: Independent Non-Executive Director of Banco Santander.
Keith Williams ▲ Position: Independent Non-Executive Director Nationality: British Committee Membership: Audit Committee (Chair), Governance Committee, Nomination Committee, Risk Committee Tenure: 2 years 7 months. Appointed to the Board in August 2016 Qualifications: Associate member of the Institute of Chartered Accountants (ICAEW) Skills and Experience: Keith has significant financial experience including a detailed knowledge of business planning, capital projects and project finance gained in a number of industries. Keith has more than ten years of executive experience as CFO and CEO at British Airways plc until 2016 and, during that time, Keith transformed the company into a customer focused organisation. External Appointments: Non-Executive Chairman of Halfords Group plc, Non-Executive Deputy Chairman of the John Lewis Partnership, Non-Executive Director of Royal Mail plc and member of the Audit Committee of the British Museum. Keith is also Independent Chair of the UK Transport Department’s Rail Review.
Kirstine Cooper u Position: Group General Counsel and Company Secretary Nationality: British Committee Membership: N/A Tenure: 8 years 3 months. Appointed as Company Secretary in December 2010 and a member of the Group Executive in May 2012 Qualifications: Bachelor of Laws degree (Glasgow University); Qualified Solicitor; Graduate of the General Manager Programme (INSEAD) Skills and Experience: Kirstine has over 25 years’ experience at Aviva and is a trusted advisor to the Board. As a qualified solicitor Kirstine is able to execute the role of Company Secretary by advising the Board on governance issues and the regulatory environment. Kirstine established the legal and secretarial function as a global team and is responsible for the provision of legal services to the Group. She also leads the team on public policy and corporate responsibility. During March 2016 to March 2017, Kirstine was the Commissioner on the Cabinet Office’s Dormant Assets Commission which was tasked with identifying new pools of dormant assets and working with industry to encourage the contribution of these assets to good causes. External Appointments: Trustee of the Royal Opera House and NonExecutive Director of HM Land Registry. Kirstine is also Insurance and Pension champion for the Dormant Assets Commission.
The full biographies for all our Board and Group Executive committee members are available online at www.aviva.com/about-us
The UK Corporate Governance Code As a UK Premium Listed company, Aviva’s governance structure is based on the principles of the 2016 UK Corporate Governance Code (2016 Code). Details of how we have applied the principles of the 2016 Code and complied with its provisions are set out in this report and the Directors’ Remuneration Report. The Board can confirm that the Company was compliant with the 2016 Code throughout the financial year under review, with the exception of the interim change in status for Sir Adrian Montague from Non-Executive Chairman to Executive Chairman from 9 October 2018 until the appointment of Maurice Tulloch as our new Group Chief Executive Officer (Group CEO) on 4 March 2019. As a result, the company was non-compliant with Provision A.2.1 of the 2016 Code for this interim period. Further details of the role of the Executive Chairman are given below.
The Board welcomes the introduction of the 2018 UK Corporate Governance Code (2018 Code) which applies to the Company for its financial year beginning 1 January 2019. The Company will report on its compliance with the 2018 Code in the 2019 Annual report and accounts.
Changes to the Board On 9 October 2018, Mark Wilson stepped down as the Group CEO. Sir Adrian Montague, the Non-Executive Chairman of Aviva, assumed the role of Executive Chairman whilst the search for a new Group CEO was undertaken. The Board considered a number of options for the interim leadership of the Group, and agreed that the appointment of the Chairman as Executive Chairman would provide continuity in the leadership of the Group and would support the transition of responsibilities to the new Group CEO. Whilst discharging these responsibilities, Sir Adrian led a Chairman’s Committee comprised of the three executive directors, Andy Briggs (CEO, UK Insurance), Tom Stoddard (Chief Financial Officer) and Maurice Tulloch (CEO, International Insurance). Sir Adrian Montague reverted to the role of Non-Executive Chairman of Aviva upon appointment of the new Group CEO. These interim arrangements were discussed and agreed with our regulators.
The Nomination Committee led the process to appoint a new Group CEO and interviewed a number of excellent internal and external candidates for the position in a thorough and highly competitive process. The Nomination Committee ensured that there was a diverse selection of candidates and that all the candidates aligned with the culture and values set of the company. This process led to a unanimous conclusion with the appointment of Maurice Tulloch as Group Chief Executive.
The approach to Board diversity is monitored by the Nomination Committee which reviews the balance of skills, knowledge, experience and diversity on the Board; leads on succession planning for appointments to the Board and the senior executive team; and oversees the talent development and broader talent pipeline across the Group. The Board’s approach to NED succession planning was refreshed during the year to further enhance the periodic review of tenure, skills and capabilities, delivering a more continuous succession review cycle. The Board’s skills matrix supports this approach by enabling us to map the broad diversity of skills, knowledge and experience of the Board and to link these to our strategy. The Nomination Committee continued to review the internal and external talent pipeline for senior executive positions, both for immediate readiness to take on roles, and for the medium term. This included making progress in the development programmes that supported the talent development pipeline.
We recognise that the Board sets the tone for inclusion and diversity across the Group and believe that a diverse leadership team supports good decision making. At Aviva, diversity encompasses a broad range of factors including experience, skills, tenure, age, www.aviva.com/committees www.aviva.com/corporate-governance
Strategic report Governance IFRS financial statements Other information geographical expertise, professional background, ethnicity, disability and sexual orientation. As at the date of this report, the percentage of women Board members has increased to 27%. We continue to support our target of at least 33% women on the Board by 2020, as evidenced from our participation in initiatives such as the Women in Finance Charter and the 30% Club. The diversity charts in the Chairman’s Governance Letter show that the Board has a broad mix of financial services experience, relevant professional skills and international business exposure.
– Discussed reports from the Governance Committee on customer conduct issues
– Reviewed and agreed our investor relations strategy • Government and regulators – Discussed and provided input into dialogue with regulatory and governmental authorities in the UK – Engaged with the regulatory authorities in our key markets
• Our people – Discussed reports from the Evolution Council on various matters including strategy, cyber risk and Aviva’s products, and held several informal discussions with the Council
• Monitored reports on the migration to a cloud based IT architecture
Corporate governance • Discussed regular updates from Board committees and management on legislation and proposed consultations that will affect the Group’s legal and regulatory obligations, including the 2018 Code
• Discussed and agreed strategies around the management of the Group’s preference shares, and the subsequent goodwill payment programme launched in July 2018
Financial reporting and controls, capital structure and dividend policy • Monitored the Group’s financial performance, financial results, and approved dividend payments • Assessed the Group capital and liquidity requirements, arising from the Group’s strategy and Group Plan • Discussed reports provided by its committees on key matters of financial reporting, providing the opportunity for the Board to input and challenge where necessary
• Undertook an external evaluation of the Board’s effectiveness, the effectiveness of each committee and individual directors and implemented an action plan in accordance with its recommendations
• Reviewed the results of the 2018 Voice of Aviva survey, and discussed them in respect of culture
• Regularly discussed the current Group culture, its alignment with strategy, and how it has been further strengthened during the year
Board independence The Nomination Committee, having considered the matter carefully, is of the opinion that the current NEDs remain independent, in line with the definition set out in the 2016 Code, and are free from any relationship or circumstances that could affect, or appear to affect, their independent judgement. Over half of the Board members, excluding the Chairman, are independent NEDs.
The review of the directors’ other interests, examined the ‘cross directorships’ of Keith Williams and Claudia Arney who both sat on the Board of Halfords plc (Keith Williams is Non-Executive Chairman). The Nomination Committee was satisfied that the cross directorships did not impact the independence of either Claudia
Arney or Keith Williams or their ability to carry out their role as directors of the Company and Claudia Arney stepped down from the board of Halfords plc on 1 March 2019. The Nomination Committee also examined the cross directorships of Patricia Cross and Michael Hawker on the board of Macquarie Group and was satisfied that the cross directorships did not impact the independence of either Patricia Cross or Michael Hawker or their ability to carry out their role as directors of the Company. Patricia Cross stepped off the Macquarie Group Board during 2018. The Nomination Committee examined Glyn Barker’s former position as a partner at the Group’s current auditors and was satisfied this did not affect the judgement or independence of Glyn Barker as a director.
Prior to accepting the role of interim Executive Chairman, Sir Adrian discussed how he would discharge the role with the Executive and Non-Executive Directors, and also with our regulators. This included the creation of a Chairman’s Committee, composed of the Executive Chairman and Executive Directors, to advise the Executive Chairman on the strategic, monitoring and control aspects of the day to day management of the Group. In addition the role of the
The Board’s procedure is to review and approve actual and potential conflicts of interest as they arise. This procedure operated effectively during the year, including the review of Mark Wilson’s appointment as a Non-Executive Director of BlackRock, Inc. in March 2018, and the review of any potential conflicts resulting from Sir Adrian Montague’s assumption of the Executive Chairman role in October 2018. In both cases, nothing was found to exist to prevent acceptance of these roles, with appropriate mitigation being put in place should any conflict arise which would include being recused from certain discussions that could give rise to a conflict.
Independent advice All directors have access to the advice and services of the Group Company Secretary and directors wishing to do so may take independent professional advice at the Company’s expense. During the year, the Board took independent advice to further inform and support its discussions with management on the Company’s strategy. The Company arranges appropriate insurance cover in respect of legal actions against its directors. The Company has also entered into indemnities with its directors as described in the Other Statutory Information section in this report.
Executive Chairman, non-Executive Chairman, and Group Chief Executive Officer Consistent with the Board Terms of Reference and those of the Chairman’s Committee while it operated, and separately with the Senior Insurance Managers Regime (SIMR), there are role profiles for the Non-Executive Chairman, Executive Chairman (when appointed), and the Group CEO which set out the duties of each role. The Non-Executive Chairman’s priority is to lead the Board, monitor the Group’s culture and ensure its effectiveness. The priority of the Group CEO and the interim Executive Chairman is the management of the Group. The Board has delegated the day-to-day running of the Group to the Group CEO or the interim Executive Chairman within certain limits, above which matters must be escalated to the Board for determination. Summaries of the role profiles for the Chairman, Executive Chairman, SID, Group CEO and NEDs are available on the Company’s website at www.aviva.com/about-us/roles.
Senior independent director (SID) The SID’s role is to act as a sounding board for the Chairman, to serve as an intermediary for the other directors where necessary and to be available to shareholders should they have concerns they have been unable to resolve through normal channels, or when such channels would be inappropriate. In addition, Glyn Barker met each NED from time to time, providing a forum in which they could raise matters. The SID role profile was also amended to enhance his role in managing any potential conflicts of interest following the appointment of an Executive Chairman.
The Board visits different markets each year and during 2018 held a Board meeting at our Italian head office. This gave the Board the opportunity to meet the senior management teams and to gain a deeper understanding of the operations and performance of the Italian market. In June 2018, the Board held its annual two-day strategy meeting offsite in the UK to set and monitor progress against the Group’s strategic plan.
Keith Williams 14/14 7/7 4/4 3/3 — 5/5 1 During the year there were 14 Board meetings, of which 9 were scheduled meetings and 5 were called at short notice. In addition, there were two further Board sub-committee meetings held at short notice and attended by the Chairman and the NEDs. 2 Sir Adrian Montague assumed executive responsibilities on 9 October 2018 immediately after Mark Wilson stepped down as Group CEO. He reverted to the role of Non-Executive Chairman upon appointment of the new Chief Executive Officer on 4 March 2019. 3 Mark Wilson stepped down as the Chief Executive Officer of the Group on 9 October 2018. 4 The Board meeting on 22 March 2018 was called at short notice and, due to this, Glyn Barker, Michael Hawker, and Belén Romana García were unable to attend due to other prior commitments. The Board meeting on 8 October 2018 was also called at short notice and due to this Glyn Barker was unable to attend due to other prior commitments. Papers were circulated to all directors before the meetings and those unable to attend could raise issues and give comments to the Chairman in advance of the meetings taking place.
5 Patricia Cross was unable to attend the Audit Committee meeting on 8 May 2018 due to medical reasons. 6 Claudia Arney was unable to attend the Remuneration Committee meeting on 2 October 2018, and Glyn Barker was unable to attend the Remuneration Committee meeting on 6 October 2018, both due to other prior commitments as the meetings were called at short notice. 7 Michael Hawker will retire from the Board of Aviva on 31 March 2019.
The Board continued to monitor customer metrics to ensure that we deliver on our purpose to Defy Uncertainty through our comprehensive product offering and customer service. The Board also engaged, challenged and worked with management when the Group did not meet our customer and stakeholder expectations, such as in the migration of some of our digital platforms to a new vendor system.
Consistent with our Digital First ambition and linking to our customer agenda, in October 2018 we launched Blue, our Hong Kong digital insurance joint venture together with Hillhouse Capital and Tencent Holdings Limited. These items were in addition to the Board’s routine standing agenda which includes financial reporting and strategic planning.
During the year, the Board was supported by the Evolution Council, made up of high calibre developing leaders from across the business, which provided insights from an employee perspective on digital, brand and customer.
Board evaluation The effectiveness of the Board is vital to the success of the Group. The Board undertakes a rigorous evaluation process each year to assess how it, its committees and individual directors are performing. During 2017, an external evaluation was conducted, with a series of outcomes reported during 2018. A follow up external evaluation was conducted in 2018, with the outcomes reported in 2019. Both external evaluations were facilitated by Independent Board Evaluation (IBE). IBE is an external board evaluation facilitator which has no other connection with Aviva. Although the 2016 Code only requires an externally facilitated evaluation every three years, the Board considered that an externally facilitated evaluation in 2018 would support its strategic thinking, and further develop its effectiveness. Interviews were conducted with every Board member, according to a set agenda tailored for the Board, which had been agreed with the Chairman and the Group Company Secretary. In addition, interviews were held with senior managers and advisers. Following the final report, recommendations were considered by the Board and shared with each committee, and a further action plan for areas of focus was agreed. The 2018 actions are outlined in the table below. These will be reviewed during 2019.
Outcomes and steps taken in 2018 Focus area Theme Feedback/actions Strategic focus Focussing on strategic themes and incorporating investors’ input
Our stakeholders The Board understands that the long-term sustainable success of Aviva is dependent on effective engagement with our key stakeholders. We recognise the role that each stakeholder group plays in our success and our responsibilities towards them. Building strong stakeholder engagement mechanisms, based on dialogue and participation, is a foundational part of our social ‘licence to operate.’ The table below identifies those key stakeholders and sets out how the Board engages with them.
Our people Our people are essential to meeting our purpose to help our customers to Defy Uncertainty and deliver simple, innovative and customer centric products and services.
Our business suppliers and partners provide us with the tools and services we need to deliver for our customers.
Our Procurement function conducts supplier surveys and supports a programme of supplier engagement, some of which is linked to our annual statement on Modern Slavery. During 2019 the Board will continue to review this engagement activity.
Shareholders Our shareholders are the ultimate owners of the Company and are involved with certain stewardship activities.
Regulators Aviva is subject to financial services regulations in all the markets it operates and requires regulatory approval to operate.
Aviva is subject to close and continuous supervision from its regulators. This includes a programme of regular meetings between Board members and our regulators.
Communities Aviva approaches business in a responsible and sustainable way that aligns with our purpose and values and supports the communities in which we operate.
Risk management framework The Risk Management Framework (RMF) is designed to identify, measure, manage, monitor and report the principal risks to the achievement of the Group’s business objectives and is embedded throughout the Group. It is codified through risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements and controls for the Group’s worldwide operations. Further detail is set out in note 59.
In 2018, the Group was focused on reinforcing its operational resilience by driving major control improvements in a number of areas, including continued investment in the Group’s IT estate, disaster recovery capability and the strengthening of its cyber security controls. This work will continue through 2019. More broadly, the Group seeks to continue to monitor and further enhance its control frameworks across the business, including financial crime prevention and data privacy. Further information can be found in the Audit and Risk Committee reports.
First line – management monitoring The Group Executive members and each market Chief Executive Officer are responsible for the application of the RMF, for implementing and monitoring the operation of the system of internal control and for providing assurance to the Audit, Governance and Risk Committees and the Board.
Second line – risk management, compliance and actuarial functions The Risk Management function is accountable for the quantitative and qualitative oversight and challenge of the identification, measurement, monitoring and reporting of principal risks and for developing the RMF.
The Actuarial function is accountable for the Group wide actuarial methodology, reporting to the relevant governing body on the adequacy of reserves and capital requirements, as well as underwriting and reinsurance arrangements. The Compliance function supports and advises the business on the identification, measurement and management of its regulatory, financial crime and conduct risks. It is accountable for maintaining the compliance standards and framework within which the Group operates, and monitoring and reporting on its compliance risk profile.
Works closely with the Risk Committee and is responsible for assisting the Board in its oversight of operational risk across the Group, particularly the risk of not delivering good customer outcomes and compliance with our corporate governance principles.
Works closely with the Risk Committee and is responsible for assisting the Board in discharging its responsibilities for the integrity of the Company’s financial statements, the effectiveness of the system of internal controls and for monitoring the effectiveness, performance and objectivity of the internal and external auditors.
Assessment of effectiveness of risk management Each business unit Chief Executive Officer and Chief Risk Officer is required to make a declaration that the Group’s governance and system of internal controls are effective and are fit for purpose for their business and that they are kept under review through the year.
The Audit Committee, working closely with the Risk Committee on behalf of the Board, carried out a full review of the effectiveness of the systems of internal control and risk management in March 2018 covering all material controls, including financial, operational and compliance controls and the Risk Management Framework (RMF). There has been regular reporting to the committee throughout the year to ensure that outstanding areas of improvement are both identified and remediated. Whilst there has been substantial progress during the year there remains a number of areas where significant work is still required. The reports to the committee refer to the need to embed controls in a number of areas and the need to make significant improvement in areas which represent key aspects of the Group’s control environment, such as cyber security, IT resilience and disaster recovery, as well as financial crime prevention, data management, UK Insurance complaints management (including data migrations) and ongoing improvements in Canada. The Audit Committee on behalf of the Board will continue to monitor progress throughout 2019.
2019 AGM The 2019 AGM will be held on Thursday 23 May 2019 and the Notice of AGM and related papers will, unless otherwise noted, be sent to shareholders at least 20 working days before the meeting. The AGM provides a valuable opportunity for the Board to communicate with private shareholders. All serving directors attended the Company’s 2018 AGM, and plan to attend the 2019 AGM. A presentation on the Group’s performance will be given at the 2019 AGM and made available on the Company’s website after the meeting at www.aviva.com/agm.
Shareholders are invited to ask questions related to the business of the meeting at the AGM and have an opportunity to meet with the directors following the conclusion of the meeting. Further details on the AGM are provided in the Shareholder Services section of this report.
During the year, the Committee reviewed and refreshed the NonExecutive Director succession process and reviewed the succession and talent development framework for senior executives.
Committee Purpose The main purpose of the Committee is to monitor and maintain an appropriate balance of skills, knowledge, experience and diversity amongst the Directors. To assist in identifying and nominating candidates for the Board, the Committee oversees succession planning for the Executive and Non-Executive Directors and Senior Management. The Nomination Committee also has responsibility for the oversight of talent development throughout the Group.
The Committee determines a Non-Executive Director’s independence by evaluating their character and judgement, in line with the 2016 UK Corporate Governance Code.
The Committee conducted a rigorous review of Glyn Barker, who has served on the Board for more than six years, and concluded that he remains independent. Glyn has a deep understanding of accounting and regulatory issues and extensive experience as a business leader and continues to provide independent oversight and challenge in the boardroom.
Board and executive succession planning In July 2018, the Financial Reporting Council introduced the revised UK Corporate Governance Code (the 2018 Code). The new Code places greater emphasis on succession planning and, in preparation for the 2018 Code, the Committee has built on its existing processes to enhance its focus in this area. To support effective future succession and appointments, the Committee will continue to engage with external stakeholders (including shareholders and regulators) when appropriate.
Talent Management The Committee also maintains close involvement in the managing and strengthening of the talent pipeline across the Group. During the year the Committee reviewed the Group talent development framework and discussed executive succession, senior leadership capability, and the Group’s leadership development programmes. The framework also aims to improve diversity in our talent pipeline: for example, through our ‘Women in Leadership’ programme, we target development of future female leaders. Members of the Committee have also been involved in various initiatives including an ongoing programme of ‘Talent Breakfasts’ where high potential employees meet the Board.
Diversity We believe at Aviva that a diverse board better understands its customer base and its business. The Board is committed to having a diverse and inclusive leadership team which provides a range of perspectives, insights and the challenge needed to support good decision making. Diversity at Aviva is not limited to gender; but is inclusive of all strands of diversity including skills and experience, geographical expertise, ethnicity, disability, and sexual orientation. The Board is supportive of the recommendations set out in the Parker Review and we aim to increase the ethnic diversity of the Board by 2021, as well as monitoring ethnic diversity in our leadership pipeline. As a global business Aviva recognises the importance of reflecting the diversity of the customers we serve in the composition of our Board and the senior management of the markets we operate in.
At the date of the report the representation of women on the Board was 27%. As part of our goal for diversity, we actively support women advancing into senior roles, with the Chairman an active member of the 30% Club. We are a charter signatory of HM Treasury’s Women in Finance Charter, which commits financial services companies to a range of measures to improve gender diversity amongst senior management. During 2018, Aviva sponsored ‘The Female FTSE Board Report 2018’ produced by Cranfield University, examining changes in women’s representation on Boards and measures that could be used to accelerate progress.
• Reviewed and made recommendations to the Board in respect of each Directors actual, potential or perceived conflicts of interests
• Provided oversight of talent development throughout the Group and ensured there is a sufficient and diverse pipeline of talent available to execute the Company’s current and future strategy www.aviva.com/corporate-governance www.aviva.com/corporate-governance
Committee focus during 2018 I am pleased to present the Committee’s report for the year ended 31 December 2018.
During the year the Committee’s focus remained on the political environment, in particular Brexit planning, economic outlook, outsourcer contagion risk, the emerging strategic risks posed by technology changes, risks posed by climate change, the heightened risk of cyber threats and data security, together with ongoing regulatory change.
The Company’s overall risk profile has remained fairly constant throughout 2018. The Committee continued to review and oversee the strengthening of the Group’s operational risk environment and ongoing monitoring of the businesses’ capacity to deliver a number of mandatory and strategic change projects underway.
The Committee continues to monitor the current risk environment, with IT and operational risk remaining as significant themes. This aligns to the Committee’s focus on cyber and IT, which includes cyber security, transformation of IT infrastructure, and the ability to deliver data digitally to meet the needs of our customers.
Due to the ongoing Brexit negotiations between the United Kingdom and the European Union, the political landscape has remained volatile in 2018, with the Committee continuing to monitor the political environment, Brexit planning and preparation activities.
Cyber Given the importance of cyber security to the Group, all cyber activity is governed in one portfolio of transformation activity to ensure efficiency, transparency and the ongoing ability to manage the holistic execution alongside specific people, process and technology delivery. During the year the Committee reviewed the linkage between the Group’s cyber environment and customer satisfaction, which remained a key theme of the Cyber Major Control Improvement Topic (MCIT).
Work is progressing to further strengthen the cyber and disaster recovery controls, which the Committee will monitor closely to ensure they continue to evolve with changes in the shifting environment and threats as they emerge.
IT infrastructure and security A particular focus for the Committee during 2018 was the monitoring of the IT security culture within the Group and it was recognised that the culture had further improved through the delivery of a refreshed training programme and strengthened security awareness. Service improvement was also a key area of focus in 2018 with significant effort on identifying, understanding and addressing the underlying causes of IT service matters. In recognition of the fundamental and long-term nature of the challenges around IT security, the Committee continues to review the strategic approach to IT service remediation and improvement.
Brexit During the year the Committee monitored the ongoing Brexit negotiations between the UK and EU, and reviewed the Group’s operational readiness planning ahead of the scheduled UK departure on 29 March 2019. Specifically, this included reviewing progress in executing the necessary insurance portfolio transfers to subsidiaries in the Republic of Ireland and establishing our fund management business in Luxembourg, which will be the Group’s hub to serve clients located in the European Economic Area (EEA). More generally the Committee has also reviewed the Group’s contingency plans to ensure continuous service to customers in the event of a hard Brexit, and considered the impact on supply chain. The Committee also considered the potential risk that Brexit could trigger an early general election in the UK. Brexit will remain on the Committee’s agenda throughout 2019, whilst we monitor developments and the impacts, both on the external environment and on our business.
• Reviewed and recommended the Group’s risk policies for Board approval
• Reviewed reports on the updated audit approach under the Group’s ORCM Methodology
• Received the scenarios for group-wide stress testing to support the Group Recovery Plan
Internal model • Undertook a review of the internal model components, reviewed internal model validation reports and governance updates
• Monitored the potential impact of Brexit, in particular the exit scenarios and regularly reviewed updates regarding the potential impact on our customers and capital and liquidity
• Reviewed the most significant emerging risk scenarios affecting the delivery of the Company’s strategy, including EU GDPR
Regulatory, governance and internal audit • Received updates from the UK Business Units • Reviewed the Group Own Risk and Solvency Assessment
• Received quarterly reports from the Chief Audit Officer (CAO) on internal audit which included progress on improving the control environment, progress on MCITs, and the review of the Internal Audit function
The Committee continued to provide oversight on behalf of the Board of all the Major Control Improvement Topics (MCITs) on Cyber Security, Compliance Effectiveness, Data Governance, Disaster Recovery, Outsourcing and Fraud Management. The Committee has specific accountability for the Fraud Management MCIT. Four MCITs were closed during 2017 and are now monitored as part of our business as usual processes. The remaining Cyber Security and Disaster Recovery MCITs remain in operation and will continue to be overseen by the Risk Committee. The MCIT programme was designed to assist management in providing even greater focus on enhancing our control environment around the six thematic areas identified.
Michael Hawker2 01/09/2011 7 1 Chair 2 Michael Hawker will retire from the Committee with effect from 31 March 2019.
Committee purpose The main purpose of the Committee is to assist the Board in discharging its responsibilities for monitoring the: • integrity of the Company’s financial statements; • adequacy and effectiveness of our systems of internal control including whistleblowing provisions; and, • monitoring the effectiveness, performance and objectivity of our internal and external auditors.
New IFRS Prepared for the implementation of new IFRS, including IFRS 17, the new insurance accounting standard, IFRS 15, in respect of revenue from contracts, IFRS 9 on financial instruments, and IFRS 16 on leases. The Committee assessed the impact of each on the Group’s financial position, processes, systems and data. While the impact of adopting IFRS 17 has yet to be fully assessed it is expected that it will have a significant impact on the measurement and disclosure of insurance contracts. It is not yet possible to assess the effect of adopting IFRS 9 as the Group has elected to apply the deferral approach permitted by IFRS 4 (with the result that the Standard will be considered alongside IFRS 17). The adoption of IFRS 15 in 2018 and IFRS 16 in 2019 does not have a significant impact on the Group.
Global Finance for The Future The Committee reviewed and challenged management’s plans for the creation of a ‘Global Finance for the Future’ (GFF) model for the Group’s internal finance functions. The primary objective of GFF is to simplify and consolidate finance systems and operations to a single model and underlying IT systems, driving simplicity and lower cost.
Internal controls The Committee continued to challenge and drive the ongoing implementation of the Operational Risk and Control Management framework (ORCM) to ensure ORCM is adopted across the Group and to further support a risk aware culture.
Preference shares The Committee received and reviewed the disclosures relating to our ability to cancel our preference shares following a shareholder and court approved reduction of capital.
The Committee also receives quarterly control reports from the Internal Audit function and reviews and challenges management on the actions being taken to improve the quality of the overall control environment and the risk control culture across the Group.
For the financial year under review, the Company met the relevant provisions of the 2016 Code relating to internal controls, and the FRC’s 2014 ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’.
Committee activities during 2018 Financial Statements and accounting policies • Recommended to the Board for approval the 2018 half and full year results • Approved the IFRS and SII technical provisions with the 2018 half and full year results • Recommended to the Board for approval the SII Solvency and
Financial Condition Report • Reviewed and challenged the reserve positions relating to our
External audit, auditor engagement and policy • Reviewed the effectiveness of the External Auditor and was satisfied that the services it provided remained effective, objective and fit for purpose
• Reviewed the External Auditor’s compliance with the independence criteria set out in the Code
Business Standard • Reviewed and approved our Internal Audit Plan • Assessed the independence of the CAO • Held private meetings with the CAO without management present • Reviewed the objectives of the CAO
During 2018, the Committee considered and monitored a range of matters which included our treatment of our customers, our corporate responsibility agenda, our governance operations, and stakeholder engagement. The customer conduct oversight for Aviva UK Digital (UKD) transitioned during the year from the Committee to the UKD Board following the establishment of a Conduct Committee, with Non-Executive Director membership, to monitor and review conduct and governance matters relating to the UKD business.
The Committee also reviewed the outcomes of the board evaluations completed by subsidiaries across the Group, and monitors the action plans developed by subsidiary boards to reflect those outcomes.
Aviva is committed to behaving as a responsible corporate citizen and the Committee sets the guidance, direction and policies for the Group’s corporate responsibility agenda. We supported the launch of the World Benchmarking Alliance with the aim of helping businesses to do more to achieve the UN Sustainable Development Goals. Further information on our integrated responsibility and sustainable business approach can be found on the Company’s website at: www.aviva.com/socialpurpose.
Corporate responsibility • Continued to drive the corporate responsibility agenda and monitored compliance with the Group’s corporate responsibility strategy
Secretary on governance matters, legal and litigation risks which had the potential to impact the reputation of the Group
• Discussed the outcomes of the 2018 effectiveness review • Considered succession planning for material subsidiaries around the Group
People • Reviewed the results of the Voice of Aviva surveys • Reviewed and considered the talent development programmes for leadership across the Group, with particular focus on diversity
Regulatory and financial crime • Regularly reviewed updates from the Group Compliance
UK Digital (UKD) • Reviewed the Chief Risk Officer’s report and Internal Audit
Report on UKD • During 2018 the UKD Board established a conduct committee and the Committee’s role and oversight of the conduct agenda for UKD was transitioned to the UKD Board www.aviva.com/social-purpose www.aviva.com/social-purpose
The directors submit their annual report and accounts for Aviva plc, together with the consolidated financial statements of the Aviva group of companies, for the year ended 31 December 2018.
The Directors’ report required under the Companies Act 2006 comprises this Directors’ and Corporate Governance report, the Directors’ Remuneration Report and the following disclosures in the Strategic report: • Corporate responsibility – Disclosure of our greenhouse gas emissions • Our people – Inclusive diversity – details of our employment policies • Our people – Engaging with our people – details of employee engagement • Our strategy – Delivering on a clear plan of action • Important events since the financial year end
The management report required under Disclosure and Transparency Rule 4.1.5R comprises the Strategic report (which includes the principal risks relating to our business) and details of material acquisitions and disposals made by the Group during the year which are included in notes 3 and 4. This Directors’ and Corporate Governance report fulfils the requirements of the corporate governance statement under Disclosure and Transparency Rule 7.2.1.
Dividends Dividends for ordinary shareholders of Aviva plc are as follows: • Paid interim dividend of 9.25 pence per ordinary share
(2017: 19.00 pence) • Total ordinary dividend of 30.00 pence per ordinary share
(2017: 27.40 pence) • Total cost of ordinary dividends paid in 2018 was £1,128 million
Under UK company law, we may only pay dividends if the Company has ‘distributable profits’ available. ‘Distributable profits’ are accumulated, realised profits/(losses) not previously distributed or capitalised, less accumulated, unrealised losses not previously written off based on IFRS. Even if distributable profits are available, we pay dividends only if the amount of our net assets is not less than the aggregate of our called-up share capital and undistributable reserves and the payment of the dividend does not reduce the amount of our net assets to less than that aggregate.
As a holding company, the Company is dependent upon dividends and interest from our subsidiaries to pay cash dividends. Many of the Company’s subsidiaries are subject to insurance regulations that restrict the amount of dividends that they can pay to us.
Interim dividends have previously been paid in November of each year. Following feedback from shareholders, to bring Aviva’s practice in line with its peers and to reduce the gap between the interim results announcement and dividend payment, from 2018 interim dividends are paid in September, subject to declaration by the Board. A final dividend is typically proposed by the Company’s Board after the end of the relevant year and generally paid in May. The following table shows certain information regarding the dividends that we paid on ordinary shares.
Distributable reserves Under UK company law, dividends can only be paid if a company has distributable reserves sufficient to cover the dividend. At 31 December 2018, Aviva plc itself had distributable reserves of greater than £4.1 billion. In UK Life, our largest operating subsidiary, distributable reserves, which could be paid to Aviva plc via its intermediate holding company, are based on the updated Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 which uses an adjusted Solvency II Own Funds measure in determining profits available for distribution. While the
Share capital During the year, 119,491,188 ordinary shares were cancelled following re-purchase by the Company as outlined above, and 9,160,708 ordinary shares were allotted to satisfy amounts under the Group’s employee share and incentive plans. At 31 December 2018 the: • issued ordinary share capital totalled 3,902,352,211 shares of 25 pence each (83% of total share capital) • issued preference share capital totalled 200,000,000 shares of £1 each (17% of total share capital)
Further details on the ordinary share capital of the Company are shown in note 32.
Disclosure guidance and transparency rule 5 – major shareholders The table below shows the holdings of major shareholders in the Company’s issued ordinary share capital in accordance with the Disclosure Guidance and Transparency Rules as at 31 December 2018 and 6 March 2019.
The Company has also executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. The Articles allow such indemnities to be granted. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company are set out in the Directors’ Remuneration Report.
Political donations Aviva did not make any political donations during 2018.
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the strategic report. The performance review includes the Risk and risk management section. In addition, the financial statements sections include notes on the Group’s borrowings (note 52); its contingent liabilities and other risk factors (note 55); its capital management (note 57); management of its risks including market, credit and liquidity risk (note 59); and derivative financial instruments (note 60).
Against this background, the directors have assessed the prospects of the Group in accordance with provision C.2.2 of the 2016 Code, with reference to the Group’s current position and prospects, its strategy, risk appetite, and the potential impact of the principal risks and how these are managed (as detailed in the ‘Risk and risk management’ section of the Strategic report as well as note 59 of the IFRS financial statements).
The assessment of the Group’s prospects by the directors covers the three years to 2021 and is underpinned by management’s 20192021 business plan which includes projections of the Group’s capital, liquidity and solvency.
• Comprehensive reviews of drafts of the annual report and accounts are undertaken by members of the Group Executive and
Strategic report Governance IFRS financial statements Other information other members of senior management and, in relation to certain parts of the report external legal advisers and the External Auditor
Directors’ responsibilities The directors are responsible for preparing the Annual report and accounts, the directors’ remuneration report and the financial statements in accordance with applicable law and regulations.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and Group and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Each of the current Directors, whose names and functions are detailed in the ‘Our Board of Directors’ section in the Directors’ and Corporate Governance report confirm that, to the best of their knowledge: the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and the Strategic report and the Directors’ and Corporate Governance report in this Annual report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Listing requirements For the purposes of Listing Rule (LR) 9.8.4C R, the information required to be disclosed by LR 9.8.4 R can be found in the following locations: Section in LR 9.8.4C R Topic
Location in the Annual report and accounts 12 Shareholder waivers of dividends IFRS Financial Statements – note 34 13 Shareholder waivers of future dividends IFRS Financial Statements – note 34
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 note B in the ‘Accounting Policies’ section and
On behalf of the Remuneration Committee (Committee), I am pleased to present the Directors’ Remuneration Report (DRR), for the year ended 31 December 2018.
There were certain challenges of our making during the year, including our announcement in March 2018 that we were “evaluating alternatives” for the Aviva plc and General Accident plc preference shares. While we responded quickly to certain investor concerns by confirming we would take no action, and put in place a goodwill payments scheme for eligible preference shareholders who incurred losses from selling these securities during this period, it was a disappointing episode and lessons have been learned.
In addition, there were operational challenges in the UK savings business, with UK platform migration issues adversely affecting service standards for customers, although our team worked quickly to resolve these challenges.
The Committee has carefully taken Group, business unit and the individual performance of the Executive Directors (ED) into account in reaching their decisions on remuneration for 2018. At all times we have sought to ensure that executive pay is aligned with Aviva’s overall performance during the year.
As a result of this performance, the formulaic outcome against the 2018 bonus scorecard prior to downward adjustments was 137.8% (out of a maximum of 200%).
In its assessment of the individual performance of the EDs during the year, while the Committee recognised that strong performance was delivered in a number of areas with notable financial, strategic and other achievements across their scorecards, the Group experienced several events during 2018 which had an impact on our customers, our shareholders, and our broader stakeholder community. Firstly, we recognise the negative impact that our March 2018 announcement on preference shares had on the Group. Secondly, our UK savings business encountered disruption during the migration of our independent financial advisor platform to a new supplier, which adversely affected our service standards. Thirdly, the Committee is conscious that our oversight in some areas of the Canadian business fell below our high standards and contributed to the issues in financial performance experienced.
Taking these issues into account, the Committee applied a downward adjustment under the individual assessment of 17.5% of the scorecard outcome for all EDs.
As a result, annual bonuses for the EDs were 84% of salary.
As a final check, the Committee reviewed whether the proposed annual bonuses aligned with the wider circumstances and performance context of the Group during 2018. The Committee were satisfied that no further adjustments were required, noting that there has been a 43% reduction in the overall annual bonus amount paid to the EDs (when measured on a like-for-like basis to reflect part-year service). The actions taken by the Committee to address the events of 2018 provide us with a strong platform for Maurice to take the Group forward in 2019.
• For 2019, Maurice will be eligible for the grant of an award under the LTIP of 300% of basic salary
• Maurice is also subject to the Group CEO shareholding requirement of 300% of salary
Departure of Mark Wilson On 9 October 2018, Mark stepped down as the Group CEO. The Committee carefully considered the treatment to be applied to Mark’s remuneration arrangements as a result of his departure.
Mark received an annual bonus in respect of 2018, pro-rated to reflect the period prior to being placed on garden leave, for six months, from 9 October 2018. His annual bonus was calculated in the same manner as for the continuing EDs, as outlined above. Mark is not eligible to receive an annual bonus in relation to 2019.
Upon appointment as Executive Chairman following the departure of Mark, Sir Adrian Montague assumed executive responsibilities. No changes were made to his existing remuneration arrangements or conditions during this period, and as such he was not eligible for an annual bonus or LTIP award in respect of 2018 or 2019.
• Pensions: as outlined above the Committee took into account the new guidance around pension provision in setting arrangements for Maurice upon appointment in March 2019, aligning his provisions with that for the majority of our UK workforce. We will continue to keep the position under review for our other EDs during 2019 and beyond.
CEO Pay Ratio In addition to the changes introduced by the 2018 Code, last year also saw the introduction of the Companies (Miscellaneous Reporting) Regulations 2018, requiring UK companies to publish information on the pay ratio of the Group CEO to UK employees from 2019. We have chosen to voluntarily disclose this information for 2018 and further details can be found on page 81.
Strategic report Governance IFRS financial statements Other information inclusivity across the Group. This continues to be central to our values and critical to the success of our business. We welcomed the introduction of gender pay gap reporting last year and released our second GPGR in January 2019, along with details of actions we are taking to drive change and close the gender pay gap. The report can be found at www.aviva.com/gpgr.
30% will remain subject to customer-focused measures. For 2019, we have revised these measures to align them with our current areas of focus as follows: • Growth in MPH is retained as 10% of the overall annual bonus, as it is a key measure of our most valuable customers. Our research demonstrates that customers with more than one product tend to stay with us for longer.
• Relationship Net Promoter Score (RNPS) is introduced as the second measure in place of MyAviva active customers, accounting for 20% of the bonus. RNPS is an important measure of the quality of our interactions with customers, reflecting the extent to which our customers are willing to be an advocate for the Group and our brand. Performance will be measured in each of our key markets. The higher weighting of RNPS is to ensure that the primary driver for understanding progress in customer outcomes is derived from the views of our customers.
2019 LTIP Award levels under the LTIP for EDs in 2019 will be in line with those in previous years. The Committee considers that the current performance measures remain fit for purpose and no changes are proposed for this year. As detailed in last year’s report, as we move forward the Committee continues to keep under review the potential to base a portion of the LTIP award on strategic measures, with a view to supporting our focus in this area. Any change would only be made following appropriate consultation with our shareholders.
2019 focus areas 2019 promises to be another busy year for the Committee. We continue to place a strong emphasis on ensuring that remuneration at Aviva aligns with the overall performance of the Group and the experience of our shareholders. In addition, we will continue to develop our implementation of the 2018 Code, with a view to ensuring that any changes we make are fully aligned with the spirit of the Code’s provisions and are appropriate for Aviva.
In terms of the broader remuneration framework, the current intention is to continue with our current Policy until the 2021
Annual General Meeting (AGM). Nevertheless, we will take on board the view of the new Group CEO on our current remuneration framework and whether it supports Maurice’s vision for the next stage of Aviva’s development. If, as a result of this, there is appetite to make any changes a year early in 2020 we would of course consult with shareholders on any proposals ahead of this.
Patricia Cross Chair of the Remuneration Committee 6 March 2019 www.aviva.com/gpgr
The full terms of reference for the Committee can be found on the Company’s website at www.aviva.com/remuneration-committee and are also available from the Group General Counsel and Company Secretary.
Committee membership The members of the Committee are shown below. There have been no changes during 2018.
The Committee met seven times during 2018, of which four were scheduled meetings and three were additional meetings outside of the normal timetable. Details of attendance at Committee meetings are shown on page 48.
The Group Chairman attended all meetings of the Committee. The Group General Counsel and Company Secretary acted as secretary to the Committee. The Chair of the Committee reported to subsequent meetings of the Board on the Committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the Committee.
Committee activities during 2018 Governance, regulatory issues and reporting policy • Formulated and delivered a proposed new Policy, approved by shareholders at the 2018 AGM • Focused on the alignment of the Policy with an appropriate risk culture and to appropriate sustainability metrics • Engaged external advisors to advise on changes in the regulatory environment including the 2018 Code, and to benchmark the Company’s remuneration policies and practices against industry best practice
• Considered and agreed the remuneration package for the departing Group CEO and associated regulatory disclosures
remuneration in relation to their performance in 2018 and against both a FTSE 50 and a financial services peer group
• Reviewed the Risk and Internal Audit 2018 Performance Opinion in relation to remuneration
Scheme 2018 (SAYE) and the Aviva Ireland Save as You Earn Scheme, the Ireland Profit Share Scheme, and the invitation terms for eligible employees
• Reviewed and approved the Aviva Investors Carried Interest Plan, Deferred Plan rules and Code Staff list
Remuneration Committee terms of reference Sets out the Committee’s scope and responsibilities, including authorities which may be delegated but which still retain Committee oversight Remuneration Business Standard
Approved by the shareholders, applies to the Directors of Aviva plc
Mark Wilson6 Tom Stoddard Andy Briggs Maurice Tulloch7 Total emoluments of
3 Bonus payable in respect of the financial year including any deferred element at the face value at the date of award. The deferred element is made under the ABP. 4 The value of the LTIP for 2018 relates to the 2016 award, which had a three-year performance period ending 31 December 2018. 50% of the award will vest in March 2019. An assumed share price of 415.20 pence has been used to determine the value of the award based on the average share price over the final quarter of the 2018 financial year. In a similar manner, the LTIP amounts shown in last year’s report in respect of the LTIPs awarded in 2015 were calculated with an assumed share price of 502.19 pence. The actual share price at vesting was 493.78 pence, and the table has been updated to reflect this change. The estimated value of the awards for the EDs was £2,046,000; the actual value was £2,013,000 (decrease of £33,000). Additional information on these awards can be found in Table 18.
Additional disclosures in respect of the single total figure of remuneration table Malus and clawback As part of the annual pay review process, the Committee has considered whether any recovery or withholding under the malus and clawback provisions of Aviva’s incentive plans is required by any current circumstances. No incidents concerning the EDs are currently subject to action under Aviva’s malus and clawback policy.
2018 annual bonus outcomes The chart below summarises how our annual bonus operates.
EPS1 25% Operating capital generation1 remittances1 15% Multiple product holdings 15% MyAviva active customers St ra te gi c m ea su re s
The bonus scorecard outcome as determined under step 1 may be modified by consideration of performance in these areas.
2 2018 performance against bonus scorecard for Executive Directors’ bonuses 1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
MPH (% growth) 15.0% 3.0% 6.0% 9.0% 0.4% 0.4% 0.0% MyAviva active customers (m) 15.0% 4.9m 5.7m 6.5m 5.3m 5.3m 11.0% Total strategic measures 30.0% — — — — — 11.0% Scorecard outcome 100.0% 106.5%
Employee engagement is up one percentage point to 76% with continued notable improvements in UK Insurance (UKI), France and Finance, although slightly down in Canada and Ireland after integration and restructuring in those markets. There have been strong improvements in culture in many parts of the business through initiatives taken to tackle complexity, simplify ways of working and develop innovative solutions that improve the customer experience.
Our RNPS survey shows three years of sustained high levels of customer advocacy, with modest improvements in the last 12 months. We are working hard to recognise customer loyalty by keeping things simple for customers and putting them in control, for example, with the launch of AvivaPlus.
2 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
• Drove the implementation of Zero Based Budgeting concepts into the organisation to benefit future results
• Led the finance functional change programme in response to IFRS 17 and the need to modernise finance IT systems
• Sponsored the new Aviva ‘Origins’ community to promote diversity and inclusion in respect of race, ethnicity, religion, and social mobility
Andy Briggs Maurice Tulloch Andy is the CEO of Aviva UKI combining our UK based life, General Insurance (GI) and health businesses. Andy provided strong leadership in the UK throughout 2018 and key deliveries included: • Strong financial performance in UKI with adjusted operating profit1 growth of 7% strong capital generation and cash remittances2 up 42% to £2.6 billion despite market headwinds in personal lines
• Launched AvivaPlus, which will provide a solution to the UK market practice of pricing new business below that of renewing business
As CEO International, Maurice provided strong leadership, with some notable achievements: • Achieved 9% adjusted operating profit1 growth across International markets • Appointed new CEOs and rolled out new strategies in Italy and
• Contined growth and execution of our strategy in France with a significantly improved capital position and balance sheet, new customer proposition (“Client Unique”), and a single customer point serving all customer demands
• Improved employee engagement and oversaw a positive shift in our culture across European markets; France, Italy and Poland. Maintained engagement through periods of change in other markets
Bonus scorecard (0% – 200%) Pre-Ogden1 137.8% 137.8% 137.8% 137.8% – Ogden (31.3%) (31.3%) (31.3%) (31.3%) – Non-financial modifiers (5.0%) (5.0%) (5.0%) (5.0%) – Individual adjustment (17.5%) (17.5%) (17.5%) (17.5%)
– % of salary 84.0% 84.0% 84.0% 84.0% – % of maximum 42.0% 56.0% 56.0% 56.0% – £ amount £691,6082 £616,022 £631,596 £602,817 1 This outcome includes the financial impact of the goodwill payment scheme in relation to preference shareholders, which had the effect of reducing IFRS operating EPS by 0.2p and the overall bonus scorecard outcome by 0.7% (from 138.5% to 137.8%).
2016 LTIP vesting in respect of performance period 2016-2018 All references to adjusted RoE relate to the 2016 LTIP award only and represent RoE calculated as IFRS profit after tax and non-controlling interest but excluding investment variances, economic assumption changes, pension scheme income/ charge over average IFRS equity (excluding pension scheme net surplus/ deficit). The adjusted RoE1 and TSR2 outcome for the 2016 LTIP are detailed in the table below. 50% of the award will vest in March 2019.
Adjusted RoE Performance 50% 24.5% 30% 31.8% 100% Relative TSR Performance 50% Median Upper quintile and above 13/14 0% 1 2016 adjusted RoE performance outcome excludes the positive impact of the £300m share buy-back, increasing shareholders’ equity, and further excludes the re-measurement loss on Friends Provident International which will be recognised in 2019 upon completion of the sale. 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 preceeding the start of the three year performance period.
1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section fo the annual report and accounts.
Strategic report Governance IFRS financial statements Other information 6 Awards granted during the year (audited information) Share and option awards granted to EDs during the year are set out below.
Tom Stoddard 11 May 2018 LTIP 225% £1,601,999 20% 100% 31 Dec 2020 26 Mar 2023 26 Mar 2018 ABP 93% £664,529 N/A 26 Mar 2021
3 Mark’s 2018 LTIP award ceased to be capable of vesting on 9 October 2018 when he stepped down as Group CEO and will lapse when he leaves the Company.
Any vesting of the operating EPS1 element of the LTIP is subject to two gateway hurdles – RoE1 and Solvency II shareholder cover ratio1. The RoE1 hurdle is 12% p.a. and the Solvency II shareholder cover ratio1 is to meet or exceed the minimum of the stated working range (in 2018, this was 150% to 180%).
Below median 0% Median 10% Between median and upper quintile Pro-rata between 10% and 50% on a straight line basis Upper quintile and above 50%
Mark’s unvested LTIP awards ceased to be capable of vesting on 9 October 2018 and no further LTIP awards will be made. Mark’s 2015 LTIP award, which had already vested at the point of departure remains subject to the additional holding period. His outstanding deferred share awards under the ABP will continue and will vest on the normal vesting dates. All awards will remain subject to malus and clawback.
In line with Policy, Mark will be entitled to a capped contribution of £10,000 (excluding VAT) towards legal fees incurred in connection with his departure.
Subsidiary company board memberships During the year, the following NEDs were appointed as directors of subsidiary companies to support and further enhance the flow of information between material subsidiaries and the Group. The additional emoluments received in respect of these roles are detailed below: • Claudia Arney received an additional fee of £78,346 (2017: £40,000) in respect of her duties as Non-Executive Chairman and Conduct
% change in basic salary 2017-2018 % change in bonus 2017-2018 % change in benefits 2017-2018
Historical TSR performance and Group CEO remuneration outcomes Table 11 compares the TSR performance of the Company over the past ten years against the TSR of the FTSE 100. This index has been chosen because it is a recognised equity market index of which Aviva is a member. In addition, median TSR performance for the LTIP comparator group has been shown. The companies which comprise the current LTIP comparator group for TSR purposes are listed above Table 8.
11 Aviva plc ten-year TSR performance against the FTSE 100 and the median of the comparator group
The table below summarises the historical Group CEO single figure for total remuneration, and annual bonus and LTIP oucomes as a percentage of maximum over this period.
1 Mark joined the Board as an ED with effect from 1 December 2012 and became Group CEO on 1 January 2013. Mark stepped down as Group CEO and left the Board on 9 October 2018. 2 Andrew resigned from the Board with effect from 8 May 2012 and left the Company on 31 May 2012.
Sir Adrian Montague remained on his Non-Executive Chairman remuneration arrangements while acting as Executive Chairman for the period 9 October 2018 to 31 December 2018. Given that he was not performing the role of Group CEO and did not receive a typical CEO remuneration package, he is not shown in this table.
Strategic report Governance IFRS financial statements Other information 13 Pay ratio table
• The lower quartile, median and upper quartile employees were calculated based on full-time equivalent data as at 31 December 2018 • 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
As referred to above, we recognise that 2018 is an unusual year for Aviva resulting in a Group CEO pay ratio which is likely to be lower than we might typically expect. Shareholders may find it helpful to consider what the ratio might have been in a more normal year, recognising that the ratio may well vary significantly from year-to-year. Specifically, we have considered the ratio if Mark had been employed for the full year and had received an on-target annual bonus of 100% of salary (half of maximum) and LTIP vesting at 150% of salary (half of maximum).
At Aviva, we consider that we are equally focused on our colleagues as we are on our customers. We work hard to recognise the individual needs of colleagues, in just the same manner as we do for our customers. In this context, we are proud of the reward, benefits and overall career packages that we offer our colleagues: • In the UK, we have been an accredited Living Wage employer since April 2014 • We have a structured salary progression scheme for our frontline colleagues, providing incremental salary increases over the first few years in role as individuals develop and gain experience • We conduct regular market reviews of our salary ranges in order to maintain competitiveness to market rates, and we move everyone who is below a band to at least the minimum of that range each year • We have a comprehensive flexible benefits offering, providing colleagues with the opportunity to select the benefits that matter most to them • Our competitive pension scheme provides a top rate employer contribution of 14% of salary (subject to the level of employee contribution). Above this level, we share employer National Insurance savings with our colleagues • Our broader Wellbeing offering aims to promote health and wellness among our colleagues. We listen to colleagues and focus in-depth on a new area each year depending on the feedback we receive. During 2018, for example, our programme had a particular emphasis on financial education
• UK colleagues are eligible to participate in our SAYE and AESOP offerings. These are tax-efficient share plans that allow our UK colleagues to share in the success of Aviva. We also have similar plans operating for many of our overseas colleagues. We are proud of the participation rates in these plans, with over 50% of UK employees participating in the SAYE and over 70% in the AESOP
External board appointments • Andy Briggs was appointed a Senior Independent Director of the Association of British Insurers on 7 June 2018, after having been
Chairman since 14 September 2011. He is Chairman of the NSPCC’s Fundraising Committee and on the Board of Trustees of the NSPCC, and is the Government’s Business Champion for Older Workers. He received no fees in respect of these appointments
• Maurice Tulloch is a NED of Pool Reinsurance Company Limited. He received fees of £41,500 (2017: £41,500) in respect of this appointment during 2018. He is also a member of the Insurance Development Forum
Statement of directors’ shareholdings and share interests EDs share ownership requirements 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 five-year period • Unvested share awards, including shares held in connection with bonus deferrals, are not taken into account in applying this test • In response to the new provisions of the 2018 Code, during 2019 we will implement post-cessation shareholding guidelines for our EDs.
The current expectation is that EDs will be required to retain their full guideline holding for two years following cessation of employment (or their holding on departure if lower). The Committee will retain the discretion to waive part or all of the guideline where considered appropriate, for example in exceptional or compassionate circumstances.
Mark Wilson6 728,532 1,793,397 733,540 6,179 — 300 257 No Tom Stoddard 312,532 926,154 370,530 — — 200 160 No Andy Briggs 331,301 949,396 344,225 5,128 — 200 165 No Maurice Tulloch7 348,797 906,232 259,237 — — 200 183 No 1 Directors’ beneficial holdings in the ordinary shares of the Company. This information includes holdings of any connected persons. For Andy Briggs it also includes partnership shares purchased under the AESOP, under which participants can currently contribute up to £150 every month. Shares are purchased on a monthly basis, and have to be held in the AESOP trust for three years. These vest after three years providing the ED does not leave and the related partnership shares are not withdrawn from the AESOP trust.
2 Awards granted under the Aviva LTIPs which vest only if the performance conditions are achieved. 3 Awards arising through the ABP. Under this plan, some of the earned bonuses are paid in the form of conditional shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if the ED leaves service before the end of the period. 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 2018 of 375.5 pence. The closing middle-market price of an ordinary share of the Company during the year ranged from 364.6 pence to 552.0 pence. 6 Mark’s outstanding LTIPs ceased to be capable of vesting on 9 October 2018 when he stepped down as Group CEO, and they will lapse upon leaving. 7 Maurice’s basic salary and benefits are set in Canadian dollars and have been converted to sterling using an average exchange rate for 2018 of CAD $1.73.
Share awards and share options Details of the EDs who were in office for any part of the 2018 financial year and hold or held outstanding share awards or options over ordinary shares of the Company pursuant to the Company’s share based incentive plans are set out in table 18. EDs are eligible to participate in the Company’s broad-based employee share plans on the same basis as other eligible employees. Details of awards and options granted to EDs under these plans are also included in tables 1, 6 and 16 (and SAYE options are included in table 18). More information around HMRC tax-advantaged plans can also be found in note 33.
Tom Stoddard LTIP3,4 2015 269,281 — 112,2207 169,918 — 535.00 493.10 Mar-18 2016 313,144 — — — 313,144 475.20 — Mar-19 2017 295,153 — — — 295,153 523.00 — Mar-20 2018 — 317,857 — — 317,857 542.60 — Mar-21 ABP 2015 62,228 — 70,2807 — — 535.00 493.10 Mar-18 2016 120,618 — — — 120,618 475.20 — Mar-19 2017 118,061 — — — 118,061 523.00 — Mar-20 2018 — 131,851 — — 131,851 494.10 — Mar-21
Andy Briggs LTIP3,4 2015 276,014 — 115,0267 174,165 — 535.00 493.10 Mar-18 2016 320,972 — — — 320,972 475.20 — Mar-19 2017 302,532 — — — 302,532 523.00 — Mar-20 2018 — 325,892 — — 325,892 542.60 — Mar-21 ABP 2016 92,510 — — — 92,510 475.20 — Mar-19 2017 116,530 — — — 116,530 523.00 — Mar-20 2018 — 135,185 — — 135,185 494.10 — Mar-21 SAYE6 2016 5,128 — — — 5,128 — 351.00 — Dec 19 – May-20 Maurice Tulloch LTIP3,4 2015 212,765 — 94,8407 134,256 — 535.00 493.10 Mar-18 2016 309,278 — — — 309,278 475.20 — Mar-19 2017 286,091 — — — 286,091 523.00 — Mar-20 2018 — 310,863 — — 310,863 542.60 — Mar-21 ABP 2015 43,439 — 50,2627 — — 535.00 493.10 Mar-18 2016 63,144 — — — 63,144 475.20 — Mar-19 2017 85,564 — — — 85,564 523.00 — Mar-20 2018 — 110,529 — — 110,529 494.10 — Mar-21 Mark Wilson LTIP3,4,5 2015 521,276 — 217,2397 328,925 — 535.00 493.10 Mar-18 2016 606,185 — — — 606,185 475.20 — Mar-19 2017 571,538 — — — 571,358 523.00 — Mar-20 2018 — 615,854 — — 615,854 542.60 — Mar-21 ABP 2015 150,591 — 170,0767 — — 535.00 493.10 Mar-18 2016 245,168 — — — 245,168 475.20 — Mar-19 2017 231,082 — — — 231,082 523.00 — Mar-20 2018 — 257,290 — — 257,290 494.10 — Mar-21 SAYE6 2014 3,615 — — — 2,564 — 419.00 — Dec 19 – May 20 2016 2,564 — — — 2,564 — 351.00 — Dec 19 – May 20 1 The aggregate net value of share awards granted to the EDs in the period was £11.1 million (2017: £10.6 million). The net value has been calculated by reference to the closing middle-market price of an ordinary share of the
• Measures largely unchanged from 2018, although customer metrics were refined to ensure they are aligned with and support our strategic focus on driving continuous improvement in our customer performance
Customer-focused strategic measures (30% of total): • 20% – RNPS • 10% – MPH • A quality of earnings assessment will be undertaken by the
• Personal performance during the year will be taken into account
Performance measures unchanged from 2018: • 50% operating EPS2 growth subject to two gateway hurdles
Less than 4.0% p.a. 0% Below median 0% 4.0% p.a 10% Median 10%
(where possible), can be found in the ‘Other Information’ section of the Annual report and accounts. 3 2019 LTIP Comparator Group: 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. 4 The target ranges are considered by the Board to be commercially sensitive, although will be disclosed in the 2019 DRR.
LTIP vesting – gateway hurdle conditions for the element linked to Operating EPS1
Any vesting of the operating EPS1 element of the LTIP is subject to two gateway hurdles – RoE1 and Solvency II shareholder cover ratio1. For the 2019 awards, the RoE1 hurdle is 12% p.a. and the Solvency II shareholder cover ratio1 is to meet or exceed the minimum of the stated working range (currently 160% to 180%).
Approval by the Board This Directors’ Remuneration Report was reviewed and approved by the Board on 6 March 2019.
Alignment of Group strategy with executive remuneration The Committee considers that alignment between Group strategy and the remuneration of its EDs is critical. Our Remuneration Policy provides market competitive remuneration, and incentivises EDs to achieve both the annual business plan and the longer-term strategic objectives of the Group. Significant levels of deferral and an aggregate shareholding requirement align EDs’ interests with those of shareholders and aid retention of key personnel. As well as rewarding the achievement of objectives, variable remuneration can be zero if performance thresholds are not met.
Operation Awards are based on performance in the year. Targets are set annually and pay-out levels are determined by the Committee based on performance against those targets and a quality of earnings assessment and risk review.
Maximum opportunity 200% of basic salary for Group CEO 150% of basic salary for other EDs
Assessment of performance Performance is assessed against a range of relevant financial, employee, customer and risk targets designed to incentivise the achievement of our strategy, as well as individual strategic objectives as set by the Committee.
Performance measures Awards will vest based on a combination of financial, strategic and TSR performance metrics. For the 2018 awards the measures and weightings will be: • 50% Operating EPS1 growth subject to two gateway hurdles – RoE1 and Solvency II shareholder cover ratio1 • 50% TSR against a comparator group
Operation EDs are eligible to participate in a defined contribution plan up to the annual limit.
Any amounts above annual or lifetime limits are paid in cash.
Maximum opportunity Set at a level which the Committee considers appropriate against comparable roles in companies of a similar size and complexity to provide a reasonable level of benefit.
Costs would normally be limited to providing a cash car allowance, private medical insurance, life insurance, and reasonable travel benefits (including the tax cost where applicable). In addition, there may be one-off or exceptional items on a case by case basis, which would be disclosed in the DRR.
The Committee would reward no more than it judged reasonably necessary, in the light of all applicable circumstances.
1 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other information’ section of the annual report and accounts.
Differentiation in reward outcomes based on performance and behaviour that is consistent with the Aviva values is a feature of how Aviva operates its annual bonus plan for its senior leaders and managers globally. A disciplined approach is taken to moderation across the Company in order to recognise and reward the key contributors. The allocation of LTIP awards also involves strong differentiation, with expected contribution and ability to collaborate effectively in implementation of the strategy driving award levels.
Legacy payments The Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above, where the terms of the payment were agreed (i) before May 2014 (the date the Company’s first Policy came into effect), (ii) before the Policy set out above came
Where considered appropriate the Committee may make awards on hiring an external candidate to ‘buyout’ remuneration arrangements forfeited on leaving a previous employer. In doing so, the Committee would take account of relevant factors including any performance conditions attached to these awards, the form in which it was paid (e.g. cash or shares) and the timeframe of awards. Buyout awards would be awarded on a ‘like for like’ basis compared to remuneration being forfeited, and would be capped to reflect the value being forfeited. The Committee considers that a buyout award is a significant investment in human capital by Aviva, and any buyout decision will involve careful consideration of the contribution that is expected from the individual.
• Maximum – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 200% and an LTIP of 300% of basic salary (with notional LTIP vesting at maximum) for the Group CEO; and – A bonus of 150% and an LTIP of 225% of basic salary (with notional LTIP vesting at maximum) for the CFO and CEO UKI.
Maurice Tulloch Tom Stoddard Andy Briggs Potential earnings by pay element
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 LTIP and 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. LTIP as awarded in 2019.
Termination Payment Pay in lieu of notice up to a maximum of 12 months’ basic salary. Any payment is subject to phasing and mitigation requirements. An ED would be expected to mitigate the loss of office by seeking alternative employment. Any payments in lieu of notice would be reduced, potentially to zero, by any salary received from such employment.
Date current contract commenced 4 March 2019 28 April 2014 13 April 2015
Consideration of wider employee pay and shareholder views When determining the Policy and arrangements for our EDs, the Committee considers: • Pay and employment conditions elsewhere in the Group to ensure that pay structures are suitably aligned and that levels of remuneration remain appropriate. The Committee reviews levels of basic salary increases for other employees and executives based in their respective locations. It reviews changes in overall bonus pool funding and long-term incentive grants. The Committee considers feedback on pay matters from sources including the employee opinion survey and employee forums. The Committee also takes into account information provided by the people function and external advisers and the Committee Chair has in place a programme of consultation and meetings with employee forums including the Evolution Council and Your Forum to discuss remuneration.
Purpose To attract individuals with the required range of skills and experience to serve as a Chairman or as a NED.
Purpose To reimburse NEDs for appropriate business travel and accommodation, including attending Board and committee meetings.
Provision Policy Period In line with the requirement of the Code, all NEDs, including the Chairman, are subject to annual re-election by shareholders at each AGM. Termination By the director or the Company at their discretion without compensation upon giving one month’s written notice for NEDs and three months written notice for the Chairman of the Company. Fees As set out in table 20. Expenses Reimbursement of travel and other expenses reasonably incurred in the performance of their duties. Time commitment Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively.
Glyn Barker ✓ ✓ ✓ ✓ ✓ 27 February 2012 AGM 2019
In this section Independent auditors’ report to the members of Aviva plc 94 Accounting policies 102
Consolidated income statement 116 Consolidated statement of comprehensive income 117 Reconciliation of Group adjusted operating profit to profit for the year
Notes to the consolidated financial statements 1 Presentation changes 123 2 Exchange rates 123 3 Subsidiaries, joint ventures and associates –
Income statement 242 Statement of comprehensive income 242 Statement of changes in equity 243 Statement of financial position 244 Statement of cash flows 245 Notes to the Company’s financial statements 246
Key audit matter How our audit addressed the key audit matter Valuation of life insurance contract liabilities (Group) Refer to the Audit Committees’ Report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 42 Insurance liabilities (b) Long-term business liabilities.
For UK Life insurance contract liabilities, the Directors’ valuation of the provisions for the settlement of future claims, involves complex and subjective judgements about future events, both internal and external to the business, for which small changes in assumptions can result in material impacts to the valuation of these liabilities.
• We tested the key judgements and controls over the preparation of the liability, including manually calculated components. We focused on the consistency in treatment and methodology period-on-period and with reference to recognised actuarial practice.
As part of our consideration of the entire set of assumptions, we focused particularly on the 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. We have also evaluated the implementation of a new actuarial model used to calculate certain life insurance contract liabilities for the UK Life component. These aspects of our work have been considered in greater detail below.
Annuitant mortality assumptions 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.
In respect of the annuitant mortality assumptions, we performed the following: • We tested the methodology used by management to derive the assumptions with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience. This included evaluating management’s choice of, and fitting to, the CMI or equivalent base tables and the adoption of the CMI 2017 model and dataset for improvements, together with associated parameters and the margin for prudence.
In addition to the procedures above, in respect of the credit default assumptions, we performed the following: • We tested the methodology and credit risk pricing models used by management for commercial and equity release mortgages to derive the assumptions with reference to relevant rules and actuarial guidance, including the adoption of an appropriate prudence margin and by applying our industry knowledge and experience.
Expense assumptions (Group) Refer to the Audit Committees’ Report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 43 Insurance liabilities methodology and assumptions (a) Long-term business.
UK Life has implemented a new actuarial modelling system for non-profit business. During the year ended 31 December 2018, annuities and certain protection products were transferred onto this new modelling system.
• We performed independent testing of the new model by developing our own independent model and recalculating the insurance liabilities for a proportion of the transferred liabilities.
Valuation of non-life insurance contract liabilities (Group) Refer to the Audit Committees’ Report, Accounting policy (L) Insurance and participating investment contract liabilities – General insurance and health provisions and note 43 Insurance liabilities methodology and assumptions (b) General insurance and health.
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 2018, whether reported or not, together with the related claims handling costs.
• Using our actuarial specialist team members, we independently estimated the reserves on selected classes of business, particularly focusing on the largest and most uncertain reserves. For these classes we compared our estimated reserves to those booked by management, and sought to understand any significant differences.
Valuation for hard to value investments (Group) Refer to Audit Committees’ Report, Accounting policies (F), (T) and (U) and note 23 Fair Value methodology, note 25 Securitised mortgages and related assets and note 27 Financial Investments.
• Using our valuation experts, we performed independent valuations for a sample of collateralised loans, non-recourse loans and structured bonds.
Key audit matter How our audit addressed the key audit matter Valuation of a specific UK Life provision (Group) Refer to Audit Committees’ Report, Accounting policies (AA) and note 50 Pension deficits and other provisions (b) Movements on restructuring and other provisions.
The valuation of this provision involves a high degree of judgement and estimation uncertainty due to the time that has elapsed since the advice was given. This increases the potential for the valuation to change as investigations continue.
We assessed the Directors’ approach to valuation for this provision by performing the following procedures: • We agreed data inputs to underlying documentation on a sample basis. • We evaluated the methodology and key assumptions used by management, including populations of policies impacted. • We tested the calculation of the provision based on the assumptions applied. • We assessed the disclosures in the financial statements.
How we tailored the audit scope We tailored the scope of our audit to ensure that we performed sufficient 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 industry in which they operate.
Using the outputs of our risk assessment, along with our understanding of Aviva, we scoped our audit based on the significance of the results and financial position of individual components relative to the Group result and financial position. In doing so, we also considered qualitative factors and ensured we had obtained sufficient coverage across all financial statement line items in the consolidated financial statements. Our scoping provided us with audit coverage of over 80% for both IFRS profit before tax and Group adjusted operating profit before tax and after the deduction of integration and restructuring costs (2017: 80%). We also obtained audit coverage of 83% for Gross Written Premiums (2017: 80%) and 82% for Total Assets (2017: 84%).
The Group’s primary reporting format aggregates individual operating segments into market reporting lines with supplementary information being given by business activity. The operating segments or ‘markets’ of the Group are ‘United Kingdom’ (Life and General Insurance), France, Poland, ‘Italy, Ireland, Spain and Other’, Canada, Asia, Aviva Investors and ‘Other group activities’. Individual components that are used in our risk assessment are a more granular subset of the Group’s operating segments. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at each of the components by us, as the Group audit team, or auditors of the components within PwC UK or from other PwC network firms operating under our instructions.
As the Group audit team, we determined the level of involvement required at those components to be able to conclude whether sufficient and appropriate audit evidence had been obtained as a basis for our opinion on the financial statements as a whole. In our role as Group auditors, we exercised oversight over the work performed by auditors of the components including performing the following procedures: • Maintained an active dialogue with reporting component audit teams throughout the year, including holding a workshop for those teams in London during the planning phase of the audit; • Visited all in-scope components and undertook a detailed review of audit working papers; • Attended meetings with local management; and • Attended certain component Audit Committee meetings
Overall materiality £156.0 million (2017: £147.0 million). £105.0 million (2017: £55.5 million). How we determined it 5% of Group adjusted operating profit before tax attributable to shareholders’ profits after the deduction of integration and restructuring costs (rounded up to the nearest £’million).
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £20 million and £120 million. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality.
Going concern In accordance with ISAs (UK) we report as follows: Reporting obligation Outcome We are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Group’s and the Company’s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements.
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 on which the United Kingdom may withdraw from the European Union, which is currently due to occur on 29 March 2019, are not clear, and, in common with other companies, it is difficult to evaluate all of the potential implications on the Group and Company’s business, customers, suppliers and the wider economy.
Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors’ and Corporate Governance Report. (CA06)
Other Code Provisions We have nothing to report in respect of our responsibility to report when: • The statement given by the directors, on page 66, that they consider the Annual report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and the Company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and the Company obtained in the course of performing our audit.
• The directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
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 67, 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.
Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration specified by law are not made; or • the Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns.
Marcus Hine (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 6 March 2019 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.