Amendments to IFRS 10 and IAS 28 clarify that for transactions between an investor and its associate or joint venture, full gains are to be recognised where the assets sold or contributed constitute a business as defined in IFRS 3 Business Combinations. Where the assets sold or contributed do not constitute a business, gains and losses are recognised only to extent of other investors’ interests in associate or joint venture. The adoption of these amendments is not expected to have significant implications for the Group’s consolidated financial statements. In December 2015, the IASB postponed the effective date of these amendments indefinitely pending the outcome of its research project on the equity method of accounting.
(ix) IFRS 16 Leases In January 2016, the IASB published IFRS 16 Leases which will replace IAS 17 Leases. IFRS 16 introduces a definition of a lease with a single lessee accounting model eliminating the classification of either operating or finance leases. Lessees will be required to account for all leases in a similar manner to the current financial lease accounting recognising lease assets and liabilities on the statement of financial position. Lessor accounting remains similar to current practice. The impact of the adoption of IFRS 16 has yet to be fully assessed by the Group. This standard applies to annual reporting periods beginning on or after 1 January 2019 and has not yet been endorsed by the EU.
The revisions to IAS 12 Income Taxes clarify the accounting for deferred tax assets on unrealised losses and state that deferred tax assets should be recognised when an asset is measured at fair value and that fair value is below the asset’s tax base. It also provides further clarification on the estimation of probable future taxable profits that may support the recognition of deferred tax assets. The adoption of this amendment is not expected to have an impact on the consolidated financial statements as the clarifications to IAS 12 are consistent with our existing interpretation. The amendment is effective from 1 January 2017 and has not yet been endorsed by EU.
(xi) Amendments to IAS 7 – Disclosure initiative The amendments to IAS 7, Statement of Cash Flows, which form part of the IASB’s Disclosure Initiative, require disclosure of the movements in liabilities arising from financing activities with cash and non-cash changes presented separately. The adoption of this amendment is not expected to have an impact on the consolidated financial statements as the Group already voluntarily discloses this information in note 49. The amendment is effective from 1 January 2017 and has not yet been endorsed by EU.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure (also referred to as adjusted operating profit) that incorporates an expected return on investments supporting its long-term and non-long-term businesses.
Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. Further details of this analysis and the assumptions used are given in notes 8 and 9.
These include broker quotes and models using both observable and unobservable market inputs.
When evaluating whether a provision or a contingent liability should be recognised the Group assesses the likelihood of a constructive or legal obligation to settle a past event and whether the amount can be reliably estimated. The amount of provision is determined based on the Group’s estimation of the expenditure required to settle the obligation at the statement of financial position date
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries are consolidated from the date the Group obtains control and are excluded from consolidation from the date the Group loses control. All intercompany transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated. Accounting policies of subsidiaries are aligned on acquisition to ensure consistency with Group policies.
136 | Aviva plc Annual report and accounts 2015 acquiree. For each business combination, the Group has the option to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see accounting policy O below). Acquisition-related costs are expensed as incurred.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. When assessing control over investment vehicles, along with the factors determining control outlined above, the Group considers the scope of its decisionmaking authority including its ability to direct the relevant activities of the fund and exposure to variability of returns from the perspective of an investor in the fund and of the asset manager. In addition, the Group assesses rights held by other parties including substantive removal rights that may affect the Group’s ability to direct the relevant activities and indicate that the Group does not have power. Where the Group is deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position.
As part of their investment strategy, the UK and certain European and Asian long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary.
Other than investments in investment vehicles which are carried at fair value through profit or loss, investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in accounting policy O, the cost includes goodwill identified on acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of postacquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence or joint control over the investment.
The Company’s investments In the Company’s statement of financial position, subsidiaries, associates and joint ventures are stated at their fair values, estimated using applicable valuation models underpinned by the Company’s market capitalisation. These investments are classified as available for sale (AFS) financial assets, with 136 | Aviva plc Annual report and accounts 2015
changes in their fair value being recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity.
(H) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are recognised at the date when payments are due. Premiums are shown before deduction of commission and before any salesbased taxes or duties. Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
General insurance and health premiums written reflect business incepted during the year, and exclude any sales-based taxes or duties. Unearned premiums are those proportions of
Initiation and other ‘front-end’ fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised cost, these fees are deferred and recognised over the expected term of the policy by an adjustment to the effective yield. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided.
(K) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on fair value through profit or loss investments (as defined in accounting policy T). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis, and is recognised on a straight line basis unless there is compelling evidence that benefits do not accrue evenly over the period of the lease.
Embedded derivatives Embedded derivatives that meet the definition of an insurance contract or correspond to options to surrender insurance contracts for a set amount (or based on a fixed amount and an 138 | Aviva plc Annual report and accounts 2015
interest rate) are not separately measured. All other embedded derivatives are separated and measured at fair value if they are not considered closely related to the host insurance contract or do not meet the definition of an insurance contract. Fair value reflects own credit risk to the extent the embedded derivative is not fully collateralised.
The liability’s fair value is determined in accordance with IAS 39, using a valuation technique to provide a reliable estimate of the amount for which the liability could be transferred in an orderly transaction between market participants at the measurement date, subject to a minimum equal to the surrender value. For unit-linked contracts, the fair value liability is equal to the current unit fund value, including any unfunded units. In addition, if required, non-unit reserves are held based on a discounted cash flow analysis. For non-linked contracts, the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price for risk.
Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance and investment contract liabilities. This includes balances in respect
140 | Aviva plc Annual report and accounts 2015 of investment contracts which are legally reinsurance contracts but do not meet the definition of a reinsurance contract under IFRS. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying contract liabilities, outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
If the AVIF results from the acquisition of an investment in a joint venture or an associate, it is held within the carrying amount of that investment. In all cases, the AVIF is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value.
Non-participating investment contract AVIF is reviewed for evidence of impairment, consistent with reviews conducted for other finite life intangible assets. Insurance and participating investment contract AVIF is reviewed for impairment at each reporting date as part of the liability adequacy requirements of IFRS 4 (see accounting policy L). AVIF is reviewed for evidence of impairment and impairment tested at product portfolio level by reference to a projection of future profits arising from the portfolio.
Borrowing costs directly attributable to the acquisition and construction of property and equipment are capitalised. All repair and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and the renovation 140 | Aviva plc Annual report and accounts 2015
replaces an identifiable part of the asset. Major renovations are depreciated over the remaining useful life of the related asset.
(Q) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value. Changes in fair values are recorded in the income statement in net investment income.
• The Group has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
In general, the other than trading category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group acquires with the intention to resell in the short-term, are classified as trading, as are non-hedge derivatives (see accounting policy U below). The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations.
For securities identified as being impaired, the cumulative unrealised loss previously recognised within the investment valuation reserve is transferred to realised losses for the year, with a corresponding movement through other comprehensive income. Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve unless this increase represents a decrease in the impairment loss that can be objectively related to an event occurring after the impairment loss was recognised in the income statement. In such an event, the reversal of the impairment loss is recognised as a gain in the income statement.
All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the statement of financial position at the date of purchase, representing their fair value at that date.
The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions. These amounts are disclosed in note 58(b).
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income 142 | Aviva plc Annual report and accounts 2015
statement. The gain or loss on the hedged item that is attributable to the hedged risk is recognised in the income statement. This applies even if the hedged item is an available for sale financial asset or is measured at amortised cost. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment made to the carrying amount of the hedged item is amortised to the income statement, based on a recalculated effective interest rate over the residual period to maturity. In cases where the hedged item has been derecognised, the cumulative adjustment is released to the income statement immediately.
(X) Deferred acquisition costs and other assets Costs relating to the acquisition of new business for insurance and participating investment contracts are deferred in line with existing local accounting practices, to the extent that they are expected to be recovered out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these contracts is calculated in accordance with the PRA’s realistic capital regime and FRS 27 (see accounting policy L). For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred.
Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these future margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset.
(Y) Statement of cash flows Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other shortterm highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are those with less than three months’ maturity from the date of acquisition, or which are redeemable on demand with only an insignificant change in their fair values.
144 | Aviva plc Annual report and accounts 2015 origination of insurance and investment contracts, net of payments of related benefits and claims.
When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable. The Group has not entered into any material finance lease arrangements either as lessor or lessee.
Pension obligations The Group operates a number of pension schemes, whose members receive benefits on either a defined benefit or defined contribution basis. Under a defined contribution plan, the Group’s legal or constructive obligation is limited to the amount it agrees to contribute to a fund and there is no obligation to pay further contributions if the fund does not hold sufficient assets to pay benefits. A defined benefit pension plan is a pension plan that is not a defined contribution plan and typically defines the amount of pension benefit that an employee will receive on retirement.
Share issue costs Incremental external costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds of the issue and disclosed where material.
Treasury shares Where the Company or its subsidiaries purchase the Company’s share capital or obtain rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders’ equity. Gains and losses on own shares are charged or credited to the treasury share account in equity.
Earnings per share has also been calculated on the adjusted operating profit before impairment of goodwill and other adjusting items, after tax, attributable to ordinary shareholders, as the directors believe this figure provides a better indication of operating performance. Details are given in note 14.
Tax expense AC & 13 (93) (983) Less: tax attributable to policyholders’ returns 13d (218) 382 Tax attributable to shareholders’ profits 13d (311) (601)
Attributable to: Equity holders of Aviva plc 918 1,569 Non-controlling interests 38 161 169
Continuing operations – Basic (pence per share) 22.6p 48.4p Continuing operations – Diluted (pence per share) 22.3p 47.7p 1 Discontinued operations relates to the US Life and related internal asset management businesses (US Life) sold in 2013.
Consolidated statement of comprehensive income For the year ended 31 December 2015 £m
Profit for the year from continuing operations 1,079 1,680 Profit for the year from discontinued operations1 — 58
Fair value (losses)/gains (9) 62 Fair value losses transferred to profit on disposals — (7)
Attributable to: Equity holders of Aviva plc 460 2,642 Non-controlling interests 116 90 1 Discontinued operations relates to the US Life and related internal asset management businesses (US Life) sold in 2013.
Reconciliation of Group operating profit to profit for the year For the year ended 31 December 2015 £m
Operating profit before tax attributable to shareholders’ profits after integration and restructuring costs 2,286 2,073
Profit before tax attributable to shareholders’ profits 1,390 2,281 Tax on operating profit 14a(i) (598) (563) Tax on other activities 14a(i) 287 (38) (311) (601)
Profit after tax 1,079 1,680 Profit from discontinued operations3 — 58
Profit for the year 1,079 1,738 1 Operating profit has been restated to exclude amortisation and impairment of acquired value of in-force business, which is now shown as a non-operating item. See note 1 for further details. There is no impact on the result or the total equity for any period presented as a result of this restatement.
2 Other items represents a day one loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £53 million loss comprises £712 million in premiums ceded less £659 million in reinsurance recoverables recognised.
3 Discontinued operations relates to the US Life and related internal asset management businesses (US Life) sold in 2013.
Reconciliation of Group operating profit to profit for the year continued Operating profit can be further analysed into the following segments (details of segments can be found in note 4): Year ended 31 December 2015
United Kingdom & Ireland 1,049 499 6 — 1,554 France 412 78 — (20) 470 Poland 183 9 — 3 195 Italy, Spain and Other 287 26 — (9) 304 Canada — 189 — 2 191 Asia 87 (2) 1 (8) 78 Aviva Investors 2 — 79 (18) 63 Other Group activities (1) 9 — (55) (47)
Consolidated statement of changes in equity For the year ended 31 December 2015
Balance at 1 January 737 200 1,172 3,271 (8) 229 4,617 10,218 892 1,166 12,276 Profit for the year — — — — — — 918 918 — 161 1,079 Other comprehensive income — — — — — (316) (142) (458) — (45) (503) Total comprehensive income for the year — — — — — (316) 776 460 — 116 576 Issue of share capital - acquisition of Friends
Balance at 1 January 736 200 1,165 3,271 (31) 475 2,348 8,164 1,382 1,471 11,017 Profit for the year — — — — — — 1,569 1,569 — 169 1,738 Other comprehensive income — — — — — (242) 1,315 1,073 — (79) 994 Total comprehensive income for the year — — — — — (242) 2,884 2,642 — 90 2,732 Owner-occupied properties fair value gains transferred to retained earnings on disposals — — — — — (2) 2 — — — —
Dividends and appropriations — — — — — — (551) (551) — — (551) Non-controlling interests share of dividends declared in the year — — — — — — — — — (189) (189) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — (13) 2 (11) — — (11) Changes in non-controlling interests in subsidiaries — — — — — — (36) (36) — (206) (242) Reserves credit for equity compensation plans — — — — — 39 — 39 — — 39 Shares issued under equity compensation plans 1 — 7 — 23 (28) 6 9 — — 9 Aggregate tax effect – shareholder tax — — — — — — 19 19 — — 19 Redemption of direct capital instrument2 — — — — — — (57) (57) (490) — (547)
Consolidated statement of financial position As at 31 December 2015 £m
Assets Goodwill O & 16 1,955 1,302 Acquired value of in-force business and intangible assets O & 17 5,731 1,028 Interests in, and loans to, joint ventures D & 18 1,590 1,140 Interests in, and loans to, associates D & 19 329 404 Property and equipment P & 20 449 357 Investment property Q & 21 11,301 8,925 Loans V & 23 22,433 25,260 Financial investments S, T, U & 26 274,217 202,638 Reinsurance assets N & 43 20,918 7,958 Deferred tax assets AC & 46 131 76 Current tax assets 114 27 Receivables 27 6,875 5,933 Deferred acquisition costs and other assets X & 28 5,061 5,091 Prepayments and accrued income X & 28 3,094 2,466 Cash and cash equivalents Y & 55d 33,676 23,105 Assets of operations classified as held for sale AH & 3c — 9
Equity attributable to shareholders of Aviva plc 15,964 10,218 Direct capital instrument and tier 1 notes 34 1,123 892
Equity excluding non-controlling interests 17,087 11,110 Non-controlling interests 38 1,145 1,166
Liabilities Gross insurance liabilities L & 40 140,556 113,445 Gross liabilities for investment contracts M & 41 181,173 117,245 Unallocated divisible surplus L & 45 8,811 9,467 Net asset value attributable to unitholders D 11,415 9,482 Provisions AA, AB & 47 1,416 879 Deferred tax liabilities AC & 46 2,074 1,091 Current tax liabilities 177 169 Borrowings AD & 49 8,770 7,378 Payables and other financial liabilities S & 50 12,448 12,012 Other liabilities 51 2,802 2,273 Liabilities of operations classified as held for sale AH & 3c — 2
Net cash from/(used in) operating activities - continuing operations 4,755 (544)
Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 55b 7,783 (79) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 55c (3) 110 New loans to joint ventures and associates 18a(i) (21) (73) Repayment of loans to joint ventures and associates 18 & 19 — 33 Net new loans to joint ventures and associates (21) (40) Purchases of property and equipment (58) (116) Proceeds on sale of property and equipment 51 19 Other cash flow related to intangible assets (111) (122)
Net cash from/(used in) investing activities - continuing operations 7,641 (228) Net cash from/(used in) investing activities - discontinued operations2 — (20)
Cash flows from financing activities Redemption of Direct Capital Instrument — (547) Proceeds from issue of ordinary shares 16 8 Treasury shares purchased for employee trusts (1) — New borrowings drawn down, net of expenses 2,049 2,383 Repayment of borrowings3 (1,979) (2,442) Net drawdown/(repayment) of borrowings 49 70 (59) Interest paid on borrowings (588) (527) Preference dividends paid 15 (17) (17) Ordinary dividends paid4 15 (635) (447) Coupon payments on the direct capital instruments and tier 1 notes 15 (72) (88) Capital contributions from non-controlling interests of subsidiaries 38 5 — Dividends paid to non-controlling interests of subsidiaries5 38 (142) (189) Changes in controlling interest in subsidiaries (1) (89)
Total net increase/(decrease) in cash and cash equivalents 11,031 (2,747) Cash and cash equivalents at 1 January 22,564 25,989 Effect of exchange rate changes on cash and cash equivalents (425) (678)
(a) Acquisitions (i) Friends Life On 10 April 2015, the Group completed the acquisition of 100% of the outstanding ordinary shares of Friends Life Group Limited (‘Friends Life’) through an all share exchange which gave Friends Life shareholders 0.74 Group shares for every Friends Life share held. In total, 1,086,326,606 Group shares were issued and commenced trading on 13 April 2015.
£768 million of the shares transferred to the shareholders of Friends Life represents the fair value of the liabilities, based on discounted cash flows substantiated against internally modelled and external market values, held by the Group related to the settlement of a pre-existing insurance contract between the Group and Friends Life held by the Friends Provident pension scheme (refer to note 48). The remaining £5,207 million represents the consideration exchanged for £4,536 million of net assets of Friends Life and £671 million of goodwill, as follows: 154 | Aviva plc Annual report and accounts 2015
Assets Acquired value of in-force business and intangible assets 3,055 2,219 5,274 Investment property 2,685 — 2,685 Financial investments 97,580 (11,314) 86,266 Reinsurance assets 1,254 11,251 12,505 Deferred tax assets 51 54 105 Other assets 2,619 (854) 1,765 Cash and cash equivalents 7,878 — 7,878
Acquired value of in-force business and intangible assets An asset of £4,790 million was recognised upon acquisition representing the present value of future profits from the acquired inforce business (‘AVIF’) as of 10 April 2015. This will be amortised in accordance with the Group’s accounting policies. Deferred acquisition costs (‘DAC’) are not recognised upon acquisition.
Intangible assets of £484 million represent Friends Life’s distribution agreements and customer contracts. These assets have been assessed as having a useful life of between five and ten years and will be amortised over that period in accordance with the Group’s accounting policies, along with the corresponding release of the applicable deferred tax provision.
The adjustments to other liabilities are primarily related to a Group insurance contract held within the Friends Provident pension scheme (refer to note 48(b)(i)).
The adjustment to non-controlling interests represents the fair value adjustment of the 2003 and 2005 Step-up Tier one Insurance Capital Securities (‘STICS’) issuances based on the market quoted price which were classified as equity instruments within NCI on acquisition (refer to note 38).
Spain – long-term business — 132 Italy – long-term business — (6) Korea — 2 Turkey – general insurance — (16) Aviva Investors — 35 Turkey – long-term business 1 15 Indonesia — (3) Other small operations 1 15
On 9 March 2016 the Group agreed to sell its entire 70% stake in its Irish private medical insurance business, Aviva Health Insurance Ireland Limited, to Irish Life Group Limited. The proposed transaction will be subject to customary closing conditions including receipt of required regulatory approvals and is expected to complete in the third quarter of 2016. The subsidiary has been classified as held for sale from 9 March 2016.
Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in ‘Other Group activities’, along with central operations of Friends Life, central core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our internal reinsurance operations are also included in this segment.
Premiums written net of reinsurance 4,042 3,339 5,702 477 2,687 1,992 783 — 13 19,035 Net change in provision for unearned premiums (1) (53) (11) (13) (7) (15) (14) — 3 (111)
Profit/(loss) before tax attributable to shareholders’ profits from continuing operations 717 140 420 139 191 142 70 81 (510) 1,390
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest 7 (1) 20 — — 6 — 4 (36) — Investment return variances and economic assumption changes on long-term business — — (17) — 14 — (11) — — (14) Short-term fluctuation in return on investments backing non-long-term business 53 84 2 (2) 31 47 — — (131) 84 Economic assumption changes on general insurance and health business — 98 — — — 2 — — — 100 Impairment of goodwill, joint ventures and associates and other amounts expensed — — — — 9 — 13 — — 22 Amortisation and impairment of intangibles 84 14 — 2 14 10 9 10 12 155 Amortisation and impairment of AVIF 350 — 5 2 5 — 136 — — 498 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates (2) — — — 1 — (1) — — (2) Integration and restructuring costs 215 26 19 — 3 7 7 11 91 379 Adjusted for non-operating items from discontinued
2 Aviva Investors operating profit includes £1 million profit relating to the Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 Other items represents a day one loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £53 million loss comprises £712 million in premiums ceded less £659 million in reinsurance recoverables recognised.
Net earned premiums 3,538 4,071 5,657 488 3,454 2,050 778 — 21 20,057 Fee and commission income 398 160 203 87 115 15 9 243 — 1,230 3,936 4,231 5,860 575 3,569 2,065 787 243 21 21,287 Net investment income/(expense) 13,301 362 5,174 147 2,392 180 125 267 (59) 21,889 Inter-segment revenue — — — — — — — 158 — 158 Share of profit/(loss) of joint ventures and associates 139 — 7 4 9 — (12) — — 147 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — — 125 14 (1) 35 1 174
Profit/(loss) before tax from continuing operations 1,337 406 462 196 489 253 63 83 (626) 2,663 Tax attributable to policyholders’ returns (357) — — — — — (25) — — (382)
Profit/(loss) before tax attributable to shareholders’ profits from continuing operations 980 406 462 196 489 253 38 83 (626) 2,281
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest — 11 16 — 1 — — — (28) — Investment return variances and economic assumption changes on long-term business 13 — 9 (4) (101) — 11 — — (72) Short-term fluctuation in return on investments backing non-long-term business — (82) (50) (1) 13 (65) — — (76) (261) Economic assumption changes on general insurance and health business — 145 — — — 3 — — (3) 145 Impairment of goodwill, joint ventures and associates and other amounts expensed — — — — — — 24 — — 24 Amortisation and impairment of intangibles 31 1 — — 17 10 3 11 17 90 Amortisation and impairment of AVIF5 10 — 18 3 9 — — — — 40 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — — (125) (14) 1 (35) (1) (174) Integration and restructuring costs 28 11 15 1 1 4 1 4 75 140 Adjusted for non-operating items from discontinued
Operating profit/(loss) before tax attributable to shareholders5 1,062 492 470 195 304 191 78 63 (642) 2,213 1 Total reported income, excluding inter-segment revenue, includes £20,816 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written.
2 Aviva Investors operating profit includes £2 million profit relating to Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 In 2014 the Group paid a settlement of £200 million related to the purchase price adjustment relating to the disposal of the US Life business in 2013. The settlement and the aggregate development of other provisions related to the discontinued operations in 2014 resulted in a net £58 million gain which has been presented as profit on disposal of discontinued operations. 5 Operating profit has been restated to exclude amortisation and impairment of acquired value of in-force business, which is now shown as a non-operating item. See note 1 for further details. There is no impact on the result or the total equity for any period presented as a result of this restatement.
Insurance liabilities Long-term business and outstanding claims provisions 99,435 5,439 16,487 2,308 7,699 2,058 2,865 — 18 136,309 Unearned premiums 226 2,083 393 45 237 1,016 48 — — 4,048 Other insurance liabilities — 76 44 — — 77 — — 2 199
4 – Segmental information continued (a) (iv) Segmental statement of financial position as at 31 December 2014
Liability for investment contracts 57,201 — 48,316 10 9,867 — — 1,851 — 117,245 Unallocated divisible surplus 1,879 — 6,104 71 1,202 — 211 — — 9,467 Net asset value attributable to unitholders 19 — 2,928 — 317 — — — 6,218 9,482 External borrowings 2,016 — — — 52 — — — 5,310 7,378 Other liabilities, including inter-segment liabilities 9,539 (1,787) 3,673 120 662 404 388 377 3,048 16,424 Liabilities of operations classified as held for sale — — — — — — — — 2 2
(b) Further analysis by products and services The Group’s results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities.
Long-term business Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business. Long-term business also includes our share of the other life and related business written in our associates and joint ventures, as well as lifetime mortgage business written in the UK.
Gross written premiums1 13,187 8,738 — — 21,925 Premiums ceded to reinsurers (1,529) (1,361) — — (2,890)
Claims and benefits paid, net of recoveries from reinsurers (16,809) (5,176) — — (21,985) Change in insurance liabilities, net of reinsurance 6,205 476 — — 6,681 Change in investment contract provisions (1,487) — — — (1,487) Change in unallocated divisible surplus 984 — — — 984 Fee and commission expense (1,121) (2,118) (23) (85) (3,347) Other expenses (1,663) (368) (367) (386) (2,784) Inter-segment expenses (190) (11) — — (201) Finance costs (202) (5) — (411) (618)
Profit/(loss) before tax from continuing operations 1,381 369 80 (658) 1,172 Tax attributable to policyholder returns 218 — — — 218
Operating profit/(loss) before tax attributable to shareholders’ profits from continuing operations 2,419 765 106 (625) 2,665
Premiums written net of reinsurance 11,756 8,300 — — 20,056 Net change in provision for unearned premiums — 1 — — 1
Net earned premiums 11,756 8,301 — — 20,057 Fee and commission income 705 54 256 215 1,230 12,461 8,355 256 215 21,287 Net investment income/(expense) 21,295 666 5 (77) 21,889 Inter-segment revenue — — 158 — 158 Share of profit of joint ventures and associates 144 3 — — 147 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 140 (16) 35 15 174
Claims and benefits paid, net of recoveries from reinsurers (13,861) (5,613) — — (19,474) Change in insurance liabilities, net of reinsurance (5,604) 34 — — (5,570) Change in investment contract provisions (6,518) — — — (6,518) Change in unallocated divisible surplus (3,364) — — — (3,364) Fee and commission expense (977) (2,247) (26) (139) (3,389) Other expenses (920) (402) (321) (336) (1,979) Inter-segment expenses (148) (10) — — (158) Finance costs (191) (11) (2) (336) (540)
Operating profit/(loss) before tax attributable to shareholders’ profits3 2,019 808 86 (700) 2,213 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £164 million, of which £81 million relates to property and liability insurance and £83 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,146 million relating to health business. The remaining business relates to property and liability insurance. 3 Operating profit has been restated to exclude amortisation and impairment of acquired value of in-force business, which is now shown as a non-operating item. See note 1 for further details. There is no impact on the result or the total equity for any period presented as a result of this restatement. .
164 | Aviva plc Annual report and accounts 2015 4 – Segmental information continued (b) (iii) Segmental statement of financial position – products and services as at 31 December 2015
Goodwill 862 1,035 — 58 1,955 Acquired value of in-force business and intangible assets 5,369 309 15 38 5,731 Interests in, and loans to, joint ventures and associates 1,878 34 — 7 1,919 Property and equipment 299 95 1 54 449 Investment property 10,582 335 — 384 11,301 Loans 22,292 141 — — 22,433 Financial investments 258,995 10,280 23 4,919 274,217 Deferred acquisition costs 1,647 812 5 — 2,464 Other assets 52,844 7,315 769 6,477 67,405 Assets of operations classified as held for sale — — — — —
(b) (iv) Segmental statement of financial position – products and services as at 31 December 2014
Total equity and liabilities 285,719 164 | Aviva plc Annual report and accounts 2015
From financial instruments designated as trading and other than trading 5,219 4,945 From AFS investments and financial instruments at amortised cost 49 36 5,268 4,981 Dividend income 2,238 1,444 Other income from investments designated as trading
Losses/(gains) recognised in prior periods as unrealised in equity — 7
Rent 590 521 Expenses relating to these properties (52) (42) Realised (losses)/gains on disposal 120 49 Fair value gains on investment properties (note 21) 778 678 1,436 1,206 Realised gains/(losses) on loans (10) (4) Foreign exchange gains and losses on investments other than trading 176 146 Other investment expenses (111) (89)
Income from continuing operations 23,728 43,497 Income from discontinued operations — 58
Claims and benefits paid, net of recoveries from reinsurers 21,985 19,474
Change in insurance liabilities Change in insurance liabilities (note 40) (6,442) 5,890 Change in reinsurance asset for insurance provisions (note 40) (239) (320)
Change in investment contract provisions Investment income allocated to investment contracts 1,958 2,629 Other changes in provisions
Commission expenses for insurance and participating investment contracts 2,220 2,103 Change in deferred acquisition costs for insurance and participating investment contracts (127) (59) Deferrable costs for non-participating investment contracts 30 63 Other acquisition costs 819 828 Change in deferred acquisition costs for non-participating investment contracts (11) 38
Staff costs (note 10b) 944 848 Central costs and sharesave schemes 181 132 Depreciation 24 19 Impairment of goodwill on subsidiaries (note 16) 22 — Amortisation of acquired value of in-force business on insurance/investment contracts 496 37 Amortisation of intangible assets 131 76 Impairment of intangible assets 18 10 Integration and restructuring costs (see below) 379 140 Other expenses 764 773
Other net foreign exchange (gains)/losses (182) (53) Finance costs (note 7) 618 540
7 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 49) and similar charges.
Interest expense on core structural borrowings Subordinated debt 335 289 Long-term senior debt 14 19 Commercial paper 1 2
Investment variances were £14 million positive (2014: £72 million positive) with positive movements in France and Asia, partially offset by a negative variance in Italy. The positive variance in France reflects realised bond gains and equity outperformance, while the positive variance in Asia is driven by increasing interest rates in Singapore, which have reduced liabilities by more than asset values. The negative variance in Italy is driven by widening credit spreads. The investment variance was largely neutral in the UK, reflecting the positive variance from the reduction in equity release asset default provisions following favourable property market performance, offset by the negative impact of widening credit spreads.
In 2014, positive variances were mainly driven by lower risk-free rates and narrowing credit spreads on government and corporate bonds in Italy and Spain. Negative variances in the UK were due to the adverse impact of falling reinvestment yields net of improved underlying property values on commercial mortgages partly offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities that they back.
(d) Assumptions The expected rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS.
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-long-term business result and reported outside operating profit were as follows: Non-long-term business 2015
(b) The longer-term investment return and short-term fluctuation are as follows: Non-long-term business 2015 £m
Analysis of investment income: Net investment income 327 754 Foreign exchange gains/losses and other charges (10) (8)
9 – Longer-term investment return and economic assumption changes for non-long-term business continued Market value movements which give rise to variances between actual and longer-term investment returns are disclosed separately in short term fluctuations outside operating profit. The impact of realised and unrealised gains and losses on Group centre investments, including the centre hedging programme which is designed to economically protect the total Group’s capital against adverse equity and foreign exchange movements, is included in short-term fluctuations on other operations. The adverse movement in short-term fluctuations during 2015 compared with 2014 is mainly due to an increase in risk-free rates reducing fixed income security market values.
(d) The total assets supporting the general insurance and health business, which contribute towards the longer-term return, are: Debt securities 9,608 10,858 Equity securities 217 251 Properties 335 223 Cash and cash equivalents 969 1,300 Other1 3,008 3,767
To calculate the longer-term investment return for its non-long-term business in 2014 and 2015, the Group has applied the same economic assumptions for equities and properties as are used under MCEV principles.
(f) The table below shows the sensitivity of the Group’s non-long-term business operating profit before tax to changes in the longer-term rates of return: Movement in investment return for By Change in 2015 £m
Equities 1% higher/lower Group operating profit before tax 3 3 Properties 1% higher/lower Group operating profit before tax 2 1
Defined benefit schemes (note 48d) 13 30 Defined contribution schemes (note 48d) 123 110
Profit sharing and incentive plans 188 145 Equity compensation plans (note 31d) 48 40 Termination benefits 19 16
Staff costs are charged within: Acquisition costs 447 478 Claims handling expenses 131 131 Central costs and sharesave schemes 76 61 Other operating expenses 944 848 Integration and restructuring costs 30 16
12 – Auditors’ remuneration This note shows the total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to our principal auditors, PricewaterhouseCoopers LLP.
Total audit fees 16.7 12.4 Audit related assurance 2.6 2.3 Other assurance services 13.3 9.8
Tax compliance services 0.1 0.1 Tax advisory services 0.1 0.1 Services relating to corporate finance transactions 0.2 — Other non audit services not covered above 1.5 1.5
Fees payable for the audit of the Group’s subsidiaries include fees for the statutory audit of the subsidiaries, both inside and outside the UK, and for the work performed by the principal auditors in respect of the subsidiaries for the purpose of the consolidated financial statements of the Group.
172 | Aviva plc Annual report and accounts 2015 13 – Tax This note analyses the tax charge for the year and explains the factors that affect it.
Current tax For the year 500 680 Prior period adjustments (68) 12
(iii) The tax charge above, comprising current and deferred tax, can be analysed as follows: £m
(v) Deferred tax (credited)/charged to the income statement represents movements on the following items: £m
In respect of pensions and other post-retirement obligations (49) 424 In respect of unrealised (losses)/gains on investments (6) 21
Different basis of tax – policyholders — (174) (174) — 302 302 Adjustment to tax charge in respect of prior periods (46) — (46) (36) — (36) Non-assessable income and items not taxed at the full statutory rate 19 — 19 (22) — (22) Non-taxable loss/(profit) on sale of subsidiaries and associates 1 — 1 (31) — (31) Disallowable expenses 67 — 67 76 — 76 Different local basis of tax on overseas profits 126 — 126 138 (2) 136 Change in future local statutory tax rates (82) — (82) (17) — (17) Movement in deferred tax not recognised (52) — (52) 3 — 3 Tax effect of profit from joint ventures and associates (6) — (6) (4) — (4) Other 3 — 3 (9) — (9)
Total tax charged/(credited) to income statement 311 (218) 93 601 382 983
The tax (credit)/charge attributable to policyholder returns is removed from the Group’s total profit before tax in arriving at the Group’s profit before tax attributable to shareholders’ profits. As the net of tax profits attributable to with-profit and unit-linked policyholders is zero, the Group’s pre-tax profit attributable to policyholders is an amount equal and opposite to the tax (credit)/charge attributable to policyholders included in the total tax charge. The difference between the policyholder tax (credit)/charge and the impact of this item in the tax reconciliation can be explained as follows: £m
Different basis of tax - policyholders per tax reconciliation (174) 302
UK legislation was substantively enacted in July 2013 to reduce the main rate of corporation tax from 21% to 20% from 1 April 2015, resulting in an effective rate for the year ended 31 December 2015 of 20.25%. As legislated in Finance (No 2) Act 2015, which was substantively enacted on 26 October 2015, the UK corporation tax rate will reduce further to 19% from 1 April 2017 and to 18% from 1 April 2020. The reductions in rate from 20% to 19% and then to 18% have been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2015. In addition, the calculation of deferred tax assets and liabilities in France and Italy reflect the reduction in corporation tax rates from 38% to 34.43% (effective 1 January 2016) and from 34.3% to 30.8% (effective 1 January 2017) respectively. The effect of the reduction in the future corporation tax rates in the UK, France and Italy on the Group’s net deferred tax liabilities is £120 million, comprising an £82 million credit included in the income statement and a £38 million credit included in the statement of comprehensive income.
Profit for the year 2,067 (988) 1,079 1,650 30 1,680 Amount attributable to non-controlling interests (152) (9) (161) (143) (26) (169) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes
Profit/(loss) attributable to ordinary shareholders from continuing operations 1,841 (997) 844 1,421 4 1,425
Net of tax, noncontrolling interests, preference dividends and DCI2 £m Per share p Before tax £m
Profit on disposal and remeasurement of subsidiaries, joint ventures and associates 2 2 0.1 174 170 5.8 Integration and restructuring costs and other (432) (301) (8.0) (140) (130) (4.4)
Profit attributable to ordinary shareholders from continuing operations 1,390 844 22.6 2,281 1,425 48.4 Profit attributable to ordinary shareholders from discontinued operations — — — 58 58 2.0
(iii) The calculation of basic earnings per share uses a weighted average of 3,741 million (2014: 2,943 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2015 was 4,048 million (2014: 2,950 million) and 4,042 million (2014: 2,948 million) excluding treasury shares.
14 – Earnings per share continued (b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: Total £m
Diluted earnings per share from continuing operations 844 3,780 22.3 1,425 2,987 47.7
Profit attributable to ordinary shareholders — 3,741 — 58 2,943 2.0 Dilutive effect of share awards and options — 39 — — 44 (0.1)
Diluted earnings per share from discontinued operations — 3,780 — 58 2,987 1.9
Diluted operating profit per share 1,841 3,780 48.7 1,421 2,987 47.6 1 Operating profit has been restated to exclude amortisation and impairment of acquired value of in-force business, which is now shown as a non-operating item. See note 1 for further details. There is no impact on the result or the total equity for any period presented as a result of this restatement.
Subsequent to 31 December 2015, the directors proposed a final dividend for 2015 of 14.05 pence per ordinary share (2014: 12.25 pence), amounting to £569 million (2014: £362 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 2016 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2016.
Interest on the direct capital instrument and tier 1 notes is treated as an appropriation of retained profits and, accordingly, is accounted for when paid. Tax relief is obtained at a rate of 20.25% (2014: 21.50%).
Gross amount At 1 January 1,503 1,770 Acquisitions and additions 694 3 Disposals — (191) Movements in contingent consideration — (39) Foreign exchange rate movements (27) (40)
Movements in contingent consideration in 2014 relate to contingent consideration received in respect of acquisitions of subsidiaries made prior to 1 January 2010.
Carrying amount of intangibles with indefinite useful lives (detailed in note 17) Total
United Kingdom - long-term business 663 — — — 663 — United Kingdom - general insurance and health 924 924 — — 924 924 Ireland - general insurance and health 102 107 — — 102 107 France - long-term business 5 — 46 48 51 48 Poland 23 8 6 — 29 8 Italy - long-term business 7 14 — — 7 14 Italy - general insurance and health 24 28 — — 24 28 Spain - long-term business 141 148 — — 141 148 Canada 21 23 — — 21 23 Asia 45 50 — — 45 50
Long-term business Value in use is calculated as an actuarially determined appraisal value, based on the embedded value of the business calculated in accordance with market consistent embedded value (‘MCEV’) principles, together with the present value of expected profits from future new business. If the embedded value of the business tested is sufficient to demonstrate goodwill recoverability on its own, then it is not necessary to estimate the present value of expected profits from future new business.
16 – Goodwill continued Future new business profits for the remainder of the given period beyond the initial three years are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to management estimates, past experience and relevant available market statistics.
Embedded value basis Future new business profits growth rate Future new business profits discount rate
Cash flows beyond that three year period are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to past experience and relevant available market statistics.
The goodwill of £13 million associated with Hong Kong was fully impaired in the first half of the year as management concluded that goodwill was no longer recoverable based on revised estimates.
178 | Aviva plc Annual report and accounts 2015 17 – Acquired value of in-force business (AVIF) and intangible assets This note shows the movements in cost, amortisation and impairment of the acquired value of in-force business and intangible assets during the year.
Gross amount At 1 January 2014 562 140 1,378 118 2,198 Additions — — 161 — 161 Disposals (70) (21) (67) — (158) Foreign exchange rate movements (27) (1) (51) (8) (87)
At 31 December 2014 465 118 1,421 110 2,114 Additions 2,205 2,585 596 6 5,392 Disposals (21) — (20) — (41) Foreign exchange rate movements (18) — (49) (5) (72)
At 31 December 2014 (363) (61) (468) — (892) Amortisation for the year (259) (237) (131) — (627) Disposals 21 — 13 — 34 Foreign exchange rate movements 15 — 12 — 27
At 31 December 2014 (43) (24) (65) (62) (194) Impairment losses charged to expenses — — (18) — (18) Disposals — — 5 — 5 Foreign exchange rate movements — — — 3 3
Carrying amount At 1 January 2014 94 38 884 52 1,068 At 31 December 2014 59 33 888 48 1,028 1 On insurance and participating investment contracts. 2 On non-participating investment contracts.
(b) Other intangible assets with finite useful lives consist mainly of the value of bancassurance and other distribution agreements and capitalised software.
Additions of intangibles with finite lives primarily relate to distribution agreements and customer lists acquired as part of Friends Life and capitalised software in the UK and Canadian general insurance businesses.
At 1 January 87 980 73 1,140 60 1,145 24 1,229 Share of results before tax — 174 — 174 — 138 — 138 Share of tax — (4) — (4) — (3) — (3)
Share of results after tax — 170 — 170 — 135 — 135 Amortisation of intangibles1 (8) — — (8) (6) — — (6)
Share of (loss)/profit after tax (8) 170 — 162 (6) 135 — 129 Reclassification (to)/from subsidiary — (1) — (1) 43 21 — 64 Reclassification from associate — 9 — 9 — — — — Additions 21 587 21 629 — 7 73 80 Disposals — (292) — (292) — (311) — (311) Reduction in Group interest (1) (1) — (2) (10) (26) — (36) Share of gains/(losses) taken to other comprehensive income — (14) — (14) — 22 — 22 Loans repaid — — — — — — (25) (25) Dividends received from joint ventures — (28) — (28) — (22) — (22) Foreign exchange rate movements (9) (4) — (13) — 9 1 10 1 Comprises amortisation of AVIF on insurance contracts of £2 million (2014: £3 million) and other intangibles of £6 million (2014: £3 million).
Additions and disposals primarily relate to the Group’s holdings in property management undertakings. The Group also increased its holdings in two Polish operations from 34% to 51%, as a result of which the entities have been reclassified from associates to joint ventures reflecting the Group’s joint control. This transaction gave rise to £21 million of additions to goodwill and intangibles.
The property management undertakings perform property ownership and management activities, and are incorporated and operate in the UK. All such investments are held by subsidiary entities. The loans are not secured and no guarantees were received in respect thereof. They are interest-bearing and are repayable on termination of the relevant partnership.
The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted with the exception of Aviva SA Emklilik ve Hayat A.S. which has issued publicly a minority portion of shares. All investments in such undertakings are held by subsidiaries, except for the shares in the Chinese joint venture, Aviva-COFCO Life Insurance Co. Limited, which are held by Aviva plc. The Group’s share of net assets of that company is £214 million (2014: £208 million) and has a fair value of £322 million (2014: £208 million).
180 | Aviva plc Annual report and accounts 2015 18 – Interests in, and loans to, joint ventures continued (iii) No joint ventures are considered to be material from a Group perspective (2014: none). The Group’s principal joint ventures are as follows: Proportion of ownership interest
1 During 2015, the Group increased its interest in Poland and the associate holdings were reclassified to joint ventures reflecting the Group’s joint control.
(iv) The joint ventures have no significant contingent liabilities to which the Group is exposed. The Group has commitments to provide funding to property management joint ventures of £47 million (2014: £70 million).
b) Impairment testing Joint ventures are tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill or intangible relates to the recoverable value of that cash generating unit.
Share of results after tax — 18 — 18 — 42 — 42 Impairment — — — — (24) — — (24)
b) Impairment testing The addition of goodwill relates to Aviva Life Insurance Company India Limited (‘Aviva India‘). There is no impairment of goodwill in 2015 (2014: £24 million).
The recoverable amount of property management undertakings is the fair value less costs to sell of the associate, measured in accordance with the Group’s accounting policy for Investment Property (see accounting policy Q).
Reclassification to joint venture relates to the increase in the Group’s interest in Poland from an associate. The Group’s share of total comprehensive income related to associates is £18 million (2014: £18 million).
(i) No associates are considered to be material from a Group perspective (2014: none). All investments in principal associates are held by subsidiaries. The Group’s principal associates are as follows: Proportion of ownership interest
If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £361 million (2014: £329 million).
21 – Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation.
Carrying value At 1 January 7,521 1,404 8,925 8,207 1,244 9,451 Additions1 2,813 685 3,498 606 56 662 Capitalised expenditure on existing properties 94 22 116 57 6 63 Fair value gains/(losses) 638 140 778 545 133 678 Disposals (1,549) (318) (1,867) (1,733) (29) (1,762) Transfers (to)/from property and equipment (note 20) (42) — (42) — — — Foreign exchange rate movements (103) (4) (107) (161) (6) (167)
The fair value of investment properties leased to third parties under operating leases at 31 December 2015 was £11,149 million (2014: £8,828 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 53(b)(i).
22 – Fair value methodology This note explains the methodology for valuing our assets and liabilities measured at fair value, and for fair value disclosures. It also provides an analysis of these according to a ‘fair value hierarchy’, determined by the market observability of valuation inputs.
(b) Changes to valuation techniques There were no changes in the valuation techniques during the year compared to those described in the 2014 annual consolidated financial statements, other than those noted below.
(c) Comparison of the carrying amount and fair values of financial instruments Set out below is a comparison of the carrying amounts and fair values of financial assets and liabilities. These amounts may differ where the asset or liability is carried on a measurement basis other than fair value, e.g. amortised cost.
Financial assets Loans1 (note 23 (a)) 22,307 22,433 25,135 25,260 Financial Investments (note 26 (b)) 274,217 274,217 202,638 202,638
Fixed maturity securities 162,964 162,964 131,661 131,661 Equity securities 63,558 63,558 35,619 35,619 Other investments (including derivatives) 47,695 47,695 35,358 35,358
Financial liabilities Non-participating investment contracts (note 41(a)) 103,125 103,125 50,013 50,013 Net asset value attributable to unitholders 11,415 11,415 9,482 9,482 Borrowings1 (note 49 (a)) 9,091 8,770 8,080 7,378 Derivative liabilities (note 58 (b)) 3,881 3,881 3,481 3,481 1 Within the fair value total, the estimated fair value has been provided for the portion of loans and borrowings that are carried at amortised cost as disclosed in note 22 (h).
Fixed maturity securities 89,158 59,203 14,603 162,964 — 162,964 Equity securities 62,622 — 936 63,558 — 63,558 Other investments (including derivatives) 39,485 4,057 4,153 47,695 — 47,695
Fixed maturity securities 75,078 45,274 11,309 131,661 — 131,661 Equity securities 35,460 — 159 35,619 — 35,619 Other investments (including derivatives) 25,139 7,153 3,066 35,358 — 35,358
Transfers between Level 1 and Level 2 For the year ended 31 December 2015, changes in the level of market activity for certain investments funds have resulted in transfers of financial assets from Level 1 to Level 2 of £0.1 billion and transfers from Level 2 to Level 1 of approximately £20 million.
Transfers of liabilities into and out of Level 3 (£(62) million and £13 million respectively) relate to non-participating investment contract liabilities where the underlying assets have been transferred due to a change in the observability of the inputs.
(g) Further information on Level 3 assets and liabilities: The table below shows movement in the Level 3 assets and liabilities measured at fair value: Assets Liabilities
Net asset value attributable to unitholders Derivative liabilities Borrowings 2015 £m £m £m £m £m £m £m £m £m £m
Opening balance at 1 January 2015 8,925 17,000 11,309 159 3,066 — — (19) (991) (560) Total net gains/(losses) recognised in the income statement1 898 (467) 172 29 236 — 42 4 26 (60) Purchases2 3,627 — 4,909 993 2,227 — (3,644) (5) (145) — Issuances — 2,464 — — — — (79) (2) — — Disposals (2,042) (2,275) (1,916) (242) (1,373) — 253 — 16 1 Settlements3 — (1,461) (161) — — — 69 — — 92 Transfers into Level 3 — 2,868 1,302 6 75 — (62) — — — Transfers out of Level 3 — — (624) (2) (22) — 13 — — — Foreign exchange rate movements (107) — (388) (7) (56) — (13) — 1 —
1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals. 2 Purchases include Friends Life’s Level 3 assets and liabilities at the date of acquisition. 3 Settlements include effective settlements of Group holdings.
Opening balance at 1 January 2014 9,451 15,362 8,879 441 3,017 148 — — (201) (482) Total net gains/(losses) recognised in the income statement1 727 829 209 (2) 74 — — — (135) (92) Purchases 725 1,675 1,550 28 1,017 — — — (400) — Issuances — — — — — — — — (20) — Disposals (1,811) (1,049) (1,482) (292) (998) (148) — — 56 12 Settlements — — — — — — — — — — Transfers into Level 3 — 183 3,169 2 19 — — (19) (292) — Transfers out of Level 3 — — (469) — — — — — — 2 Foreign exchange rate movements (167) — (547) (18) (63) — — — 1 —
Total net gains recognised in the income statement in the year ended 31 December 2015 in respect of Level 3 assets measured at fair value amounted to £868 million (2014: net gains of £1,837 million) with net gains in respect of liabilities of £12 million (2014: net losses of £227 million). £901 million of net gains (2014: net gains of £1,733 million) attributable to assets and £27 million net gains (2014: net losses of £227 million) attributable to liabilities relate to those still held at the end of the year.
(ii) Loans • Commercial mortgage loans, Primary Healthcare, Infrastructure and PFI loans held by our UK Life business amounting to £10.8 billion (2014: £10.4 billion), were valued using a Portfolio Credit Risk Model (PCRM). This model calculates a Credit Risk Adjusted Value (CRAV) for each loan. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve, and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 110 bps to 280 bps.
• Equity release and securitised mortgage loans held by our UK Life business amounting to £6.7 billion (2014: £5.9 billion) comprise: - £4.3 billion (2014: £3.6 billion) of equity release mortgages held by our UK Life annuity business valued using an internal model. Inputs to the model include property growth rates, mortality and morbidity assumptions, cost of capital and liquidity premium which are not deemed to be market observable. The assumed property growth is approximately 2% per annum.
- £2.4 billion (2014: £2.3 billion) of securitised and equity release mortgages are valued using a discounted cash flow model. The inputs include liquidity risk and property risk premium which are deemed unobservable. The liquidity premium used ranges between 158 bps to 185 bps.
(iii) Debt securities • Privately placed notes held by our UK Life business of £3.3 billion (2014: £1.8 billion) have been valued using broker quotes or a discounted cash flow model using discount factors based on swap curves of similar maturity, plus internally derived spreads for credit risk. As these spreads have been deemed to be unobservable these notes have been classified as Level 3.
• Collateralised loan obligations of £0.4 billion (2014: £0.4 billion) have been valued using internally developed discounted cash flow models incorporating a significant number of modelling assumptions and unobservable market data including assumptions regarding correlation among the underlying loans, a probability of default and liquidity premium.
(v) Other investments • The following Other investments are valued based on external valuation reports received from fund managers: - Private equity investment funds amounting to £1.4 billion (2014: £1.0 billion); - Other investment funds including property funds amounting to £1.0 billion (2014: £0.5 billion); - External hedge funds held principally by businesses in the UK and France amounting to £0.5 billion (2014: £1.2 billion); and - Discretionary managed funds held in Asia amounting to £1.2 billion (2014: £nil); Where these valuations are at a date other than balance sheet date, as in the case of some private equity funds, we make adjustments for items such as subsequent draw-downs and distributions and the fund manager’s carried interest.
188 | Aviva plc Annual report and accounts 2015 22 – Fair value methodology continued Where possible, the Group tests the sensitivity of the fair values of Level 3 investments to changes in unobservable inputs to reasonable alternatives. Valuations for Level 3 investments are sourced from independent third parties when available and, where appropriate, validated against internally-modelled valuations, third-party models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations, the Group undertakes, where feasible, sensitivity analysis on the following basis: • For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity of the internally modelled valuation to changes in unobservable inputs to a reasonable alternative is determined. • For third-party valuations either not validated or validated against a third-party model or broker quote, the third-party valuation in its entirety is considered an unobservable input. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the third-party valuation. For example, for a fixed income security the implied yield would be the rate of return which discounts the security’s contractual cash flows to equal the third-party valuation.
On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £49.0 billion of the Group’s Level 3 assets. For these Level 3 assets, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by + £2.0 billion / – £2.1 billion. Of the £0.1 billion Level 3 assets for which sensitivity analysis is not provided, it is estimated that a 10% change in valuation assumptions downwards of these assets would result in a change in fair value of approximately £10 million.
• £0.5 billion (2014: £0.6 billion) of securitised mortgage loan notes, presented within Borrowings, are valued using a similar technique to the related Level 3 securitised mortgage assets.
On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £5.1 billion of the Group’s Level 3 liabilities. For these Level 3 liabilities, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by approximately ± £0.5 billion.
Asset and liabilities not carried at fair value Loans — 1,046 2,181 3,227 Borrowings 7,295 176 312 7,783
Asset and liabilities not carried at fair value Loans — 984 3,256 4,240 Borrowings 5,928 402 378 6,708
Policy loans 1 778 779 1 835 836 Loans to banks 572 2,151 2,723 599 3,164 3,763 Healthcare, infrastructure & PFI other loans1 1,246 — 1,246 1,107 — 1,107 UK securitised mortgage loans (see note 24) 2,452 — 2,452 2,406 — 2,406 Non-securitised mortgage loans1 14,808 — 14,808 16,782 77 16,859 Loans to brokers and other intermediaries — 135 135 — 123 123 Other loans — 290 290 — 166 166 1 Following a review of classification of mortgage loans £1.1 billion in 2014 has been reclassified from Non-securitised loans to Healthcare, Infrastructure and PFI other loans. The net impact on total loans is £nil.
Loans at fair value Fair values have been calculated by discounting the future cash flows using appropriate current interest rates for each portfolio of mortgages. Further details of the fair value methodology are given in note 22. The cumulative change in fair value of loans attributable to changes in credit risk to 31 December 2015 was a £1,994 million loss (2014: £3,070 million loss). The significant reduction in this figure of £1,076 million (2014: £361 million increase) is predominantly owing to UK Life’s commercial mortgage loans restructure and recovery programme, which completed in October 2015 with the sale of £2.2 billion of commercial mortgage loans to Lone Star.
Healthcare, Infrastructure and PFI other loans of £1.2 billion (2014 Restated1: £1.1 billion) are secured against the income from healthcare and educational premises.
Policy loans 778 — 778 835 — 835 Loans to banks 2,151 — 2,151 3,164 — 3,164 Non-securitised mortgage loans 6 (6) — 138 (61) 77 Loans to brokers and other intermediaries 135 — 135 123 — 123 Other Loans 290 — 290 166 — 166
The movements in the impairment provisions on these loans for the years ended 31 December 2015 and 2014 were as follows: At 1 January (61) (151) (Decrease)/increase during the year (2) 9 Write back following sale or reimbursement 57 81
(c) Collateral Loans to banks include cash collateral received under stock lending arrangements (see note 59 for further discussion regarding these collateral positions). The obligation to repay this collateral is included in payables and other financial liabilities (note 50).
190 | Aviva plc Annual report and accounts 2015 24 – Securitised mortgages and related assets The Group, in its UK Life business has loans receivable, secured by mortgages, which have then been securitised through nonrecourse borrowings. This note gives details of the relevant transactions.
Loan notes held by third parties (note 49(c)(i)) 1,308 1,372 25 – Interests in structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. The Group has interests in both consolidated and unconsolidated structured entities as described below.
The Group’s holdings in investment vehicles are subject to the terms and conditions of the respective investment vehicle’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those investment vehicles. The investment manager makes investment decisions after extensive due diligence of the underlying investment vehicle including consideration of its strategy and the overall quality of the underlying investment vehicle’s manager.
25 – Interests in structured entities continued (a) Interests in consolidated structured entities The Group has determined that where it has control over investment vehicles, these investments are consolidated structured entities. As at 31 December 2015 the Group has granted loans to consolidated PLPs for a total of £174 million (2014: £210 million). The purpose of these loans is to assist the consolidated PLPs to purchase or construct properties within the funds business activity. The Group has also provided support, without having a contractual obligation to do so, to certain consolidated PLPs via letters of support amounting to £121 million (2014: £124 million). The Group has commitments to provide funding to consolidated structured entities of £53 million (2014: £9 million).
(b) Interests in unconsolidated structured entities As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2015, the Group’s total interest in unconsolidated structured entities was £49.6 billion (2014: £34.4 billion) on the Group’s statement of financial position, which are classified as financial investments held at fair value through profit or loss. The increase in the balance is due primarily to the acquisition of Friends Life.
The Group does not sponsor any of the unconsolidated structured entities. As at 31 December 2015, a summary of the Group’s interest in unconsolidated structured entities is as follows: Interest in, and loans to, joint ventures
Analysed as: Unit trust and other investment vehicles — — 42,641 42,641 — — 29,640 29,640 PLPs and property funds 1,191 258 960 2,409 765 361 754 1,880 Other funds — — 306 306 — — 337 337 1 Reported within ‘other debt securities’ in note 26a.
At 31 December 2015 the Group has granted loans to PLPs classified as joint ventures and associates totalling £94 million (2014: £73 million). This amount has been provided for the purpose of short-term liquidity funding. For commitments to property management joint ventures and associates, please refer to Notes 18 and 19, respectively. The Group has not provided any other financial or other support in addition to that described above as at the reporting date, and there are no intentions to provide support in relation to any other unconsolidated structured entities in the foreseeable future.
In relation to risk management, disclosures on debt securities and investment vehicles are given in note 57(b)(iii). In relation to other guarantees and commitments that the Group provides in the course of its business, please refer to Note 52(f) ‘Contingent liabilities and other risk factors’.
192 | Aviva plc Annual report and accounts 2015 25 – Interests in structured entities continued (c) Other interests in unconsolidated structured entities The Group receives management fees and other fees in respect of its asset management businesses. The Group does not sponsor any of the funds or investment vehicles from which it receives fees. Management fees received for investments that the Group manages but does not have a holding in also represent an interest in unconsolidated structured entities. As these investments are not held by the Group, the investment risk is borne by the external investors and therefore the Group’s maximum exposure to loss relates to future management fees. The table below shows the assets under management of entities that the Group manages but does not have a holding in and the fees earned from those entities. The reduction in total assets under management is primarily the result of a reduction in total pension fund assets managed by Poland.
Specialised investment vehicles: 2,886 11 2,831 12 Analysed as: OEICs 812 6 1,185 5 PLPs 2,042 5 1,609 7 SICAVs 32 — 37 —
1 Investment funds relate primarily to the Group’s Spanish and Polish pension funds.
26 – Financial investments This note analyses our financial investments by type and shows their cost and fair value. These will change from one period to the next as a result of new business written, claims paid and market movements.
Equity securities Ordinary shares Public utilities — 3,367 — 3,367 — 2,929 — 2,929 Banks, trusts and insurance companies — 14,016 10 14,026 — 7,267 8 7,275 Industrial miscellaneous and all other — 45,961 3 45,964 — 25,127 2 25,129
Other investments Unit trusts and other investment vehicles — 42,641 — 42,641 — 29,636 4 29,640 Derivative financial instruments (note 58) 3,328 — — 3,328 4,088 — — 4,088 Deposits with credit institutions — 460 — 460 — 539 — 539 Minority holdings in property management undertakings — 960 — 960 — 754 — 754 Other investments – long-term — 305 — 305 — 335 1 336 Other investments – short-term — 1 — 1 — 1 — 1
(c) Impairment of financial investments The movements in impairment provisions on available-for-sale financial investments for the years ended 31 December 2015 and 2014 were as follows: Fixed maturity securities £m
(ii) Other arrangements In carrying on its bulk purchase annuity business, the Group’s UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits. At 31 December 2015, £1,501 million (2014: £1,447 million) of financial investments were restricted in this way.
26 – Financial investments continued (f) Exposure to worldwide banks – debt securities Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)
Australia 0.2 — 0.2 0.9 0.2 1.1 Denmark — — — 1.1 — 1.1 France 0.5 — 0.5 2.8 0.6 3.4 Germany 0.1 — 0.1 0.4 0.2 0.6 Ireland — — — — — — Italy 0.1 — 0.1 0.2 — 0.2 Netherlands 0.3 0.2 0.5 1.2 0.3 1.5 Spain 0.7 — 0.7 0.7 0.1 0.8 Switzerland — — — 1.2 — 1.2 United Kingdom 1.3 0.5 1.8 1.2 1.0 2.2 United States 1.0 0.2 1.2 1.7 0.1 1.8 Other 0.7 0.1 0.8 1.5 0.3 1.8
Direct shareholder and participating fund assets exposures to worldwide bank debt securities (gross of non-controlling interests, excluding policyholder assets)
Australia 0.2 — 0.2 0.9 0.3 1.2 Denmark — — — 1.1 — 1.1 France 0.5 — 0.5 3.3 0.6 3.9 Germany 0.1 — 0.1 0.5 0.2 0.7 Ireland — — — — — — Italy 0.1 — 0.1 0.3 — 0.3 Netherlands 0.3 0.2 0.5 1.2 0.3 1.5 Spain 0.8 — 0.8 0.8 0.1 0.9 Switzerland — — — 1.3 — 1.3 United Kingdom 1.3 0.5 1.8 1.3 1.0 2.3 United States 1.0 0.2 1.2 1.9 0.1 2.0 Other 0.7 0.1 0.8 1.6 0.3 1.9
Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £6.0 billion (2014: £3.9 billion). The majority of our holding (83%) is in senior debt. The primary exposures are to UK (30%), US (20%) and Spanish (13%) banks. Gross of non-controlling interests, our direct shareholder asset exposure to worldwide bank equity securities is £100 million (2014: £75 million).
Gross of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £17.1 billion (2014: £14.9 billion). The majority of the exposure (83%) is in senior debt. Participating funds are the most exposed to French (23%), UK (13%) and US (12%) banks.
196 | Aviva plc Annual report and accounts 2015 27 – Receivables This note analyses our total receivables.
Expected to be recovered in less than one year 6,773 5,833 Expected to be recovered in more than one year 102 100
Total deferred acquisition costs 2,464 2,378 Surpluses in the staff pension schemes (note 48(a)) 2,523 2,695 Other assets 74 18
Deferred acquisition costs (DAC) on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year. Of the above total, £1,426 million (2014: £1,277 million) is expected to be recovered more than one year after the statement of financial position date. For long-term business where amortisation of the DAC balance depends on projected profits, the amount expected to be recovered is estimated and actual experience will differ.
Carrying amount at 1 January 1,519 852 7 2,378 1,525 868 10 2,403 Acquisition costs deferred during the year 240 1,952 — 2,192 173 2,107 — 2,280 Amortisation (167) (1,950) (2) (2,119) (81) (2,102) (3) (2,186) Impact of assumption changes 73 — — 73 (73) — — (73) Effect of portfolio transfers, acquisitions and disposals — — — — — (4) — (4) Foreign exchange rate movements (18) (42) — (60) (25) (17) — (42)
28 – Deferred acquisition costs, other assets, prepayments and accrued income continued The balance of deferred acquisition costs for long-term business increased over 2015, as acquisition costs deferred during the year were partially offset by amortisation.
29 – Assets held to cover linked liabilities Certain unit-linked products have been classified as investment contracts, while some are included within the definition of an insurance contract. The assets backing these unit-linked liabilities are included within the relevant balances in the consolidated statement of financial position, while the liabilities are included within insurance and investment contract provisions. This note analyses the carrying values of assets backing these liabilities.
198 | Aviva plc Annual report and accounts 2015 31 – Group’s share plans This note describes various equity compensation plans operated by the Group, and shows how the Group values the options and awards of shares in the Company. Details of other share plans where shares are acquired and held in trust for the participant from the outset are not set out here but described in the shareholder information section of page 318.
(a) Description of the plans The Group maintains a number of active share option and award plans and schemes (the Group’s share plans). These are as follows: (i) Savings-related options These are options granted under the tax-advantaged save as you earn (SAYE) share option scheme in the UK and Irish revenueapproved SAYE share option scheme in Ireland. The SAYE allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant.
Options are normally exercisable during the six-month period following either the 3rd, 5th or 7th anniversary of the start of the relevant savings contract, subject to a statutory savings limit, currently £500 per month. From 2012, only 3 and 5 year contracts have been offered and Aviva’s current policy is to apply a savings limit of £250 per month in the UK and €500 per month in Ireland.
(ii) Aviva long-term incentive plan awards These awards have been made under the Aviva long-term incentive plan 2011 (LTIP), and are described in section (b) below and in the directors’ remuneration report.
(vi) Aviva Investors deferred share award plan awards These awards have been made under the Aviva Investors Deferred Share Award Plan (AI DSAP), where employees can choose to have the deferred element of their bonus deferred into awards over Aviva shares. The awards vest in three equal tranches on the 2nd, 3rd and 4th year following the year of grant.
31 – Group’s share plans continued The following table summarises information about options outstanding at 31 December 2015: Range of exercise prices
(ii) Share awards At 31 December 2015, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva long-term incentive plan 2011 Number of shares Year of vesting
The Aviva Chief Financial Officer Award 2014 Number of shares Year of vesting
• 561,887 of the shares which vest in 2017 are linked to the same performance conditions that apply to the 2014 grant - 22,222 of the shares which vest in 2017 are subject to the performance conditions relating to the performance of the participant’s previous employer. • 39,349 of the shares which vest in 2018 are linked to the same performance conditions that apply to the 2015 grant.
(d) Expense charged to the income statement The total expense recognised for the year arising from equity compensation plans was as follows: Equity-settled expense 40 39 Cash-settled expense 8 1
(i) Share options The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2015 2014
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. 5,011,905 options granted after 7 November 2002 were exercised during the year (2014: 4,626,781).
32 – Treasury shares The following table summarises information about treasury shares at 31 December 2015: Number £m Number £m
Shared held by employee trusts 1,918,088 2 2,585,824 8 Shares held by subsidiary companies 5,258,525 27 — —
(b) Shares held by subsidiary companies During 2015, the Group acquired Friends Life, which holds shares in Aviva plc. The cost of these shares is included within treasury shares and deducted from total shareholders’ equity in accordance with accounting policy AE. At 31 December 2015, the balance of 5,258,525 shares (2014: nil) had an aggregate nominal value of £1,314,631 (2014: £nil) and a market value of £27,133,991 (2014: £nil).
33 – Preference share capital This note gives details of Aviva plc’s preference share capital.
At the 2015 Annual General Meeting, the Company was authorised to allot the following: • Sterling New Preference Shares, as defined in the Company’s articles of association, up to a maximum nominal value of £500 million
Direct capital instrument 500 500 8.25% US $650 million fixed rate tier 1 notes – issued May 2012 392 392 6.875% £210 million STICS – issued November 2003 (note 38) 231 —
The fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012 and also qualify as Innovative Tier 1 capital as at 31 December 2015. The FxdRNs are perpetual but the Company may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on any respective coupon payment date thereafter.
The Step-up Tier one Insurance Capital Securities (‘STICS’) were issued on 21 November 2003 by Friends Life Holdings plc, and also qualify as innovative tier 1 capital as at 31 December 2015. The STICS are irrevocably guaranteed on a subordinated basis by Friends Life Limited. On 1 October 2015 Aviva plc replaced Friends Life Holdings plc as issuer which resulted in a reclassification of the STICS from non-controlling interests. The STICS have no fixed redemption date but the Company may, at its sole option, redeem the instrument (in whole or in part) on 21 November 2019, or on the coupon payment date falling on successive fifth anniversaries from this date. For each coupon period beginning 21 November 2019, the STICS will bear interest reset every five years at the rate per annum which is the aggregate of 2.97% and the Gross Redemption Yield of the Benchmark Gilt.
The Company has the option to defer coupon payments on the DCI, FxdRNs or STICS on any relevant payment date. In relation to the DCI, deferred coupons shall only be satisfied should the Company exercise its sole option to redeem the instruments. In relation to the FxdRNs, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons on the FxdRNs upon redemption. In relation to the STICS, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons upon the earliest of the following: • Resumption of payment of coupons on the STICS; or • Redemption; or • The commencement of winding up of the issuer.
35 – Merger reserve Prior to 1 January 2004, certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account.
Balance at 1 January 2014 907 74 18 (578) 54 475 Arising in the year through other comprehensive income: Fair value gains — 7 62 — — 69 Fair value gains transferred to profit on disposals — — (7) — — (7) Share of other comprehensive income of joint ventures and associates — — 22 — — 22 Foreign exchange rate movements (373) — — 56 — (317) Aggregate tax effect – shareholders’ tax 12 — (21) — — (9)
Total other comprehensive income for the year (370) 27 (17) 44 — (316) Fair value gains transferred to retained earnings on disposals — (33) — — — (33) Transfer to profit on disposal of subsidiaries, joint ventures and associates 1 — — — — 1 Reserves credit for equity compensation plans — — — — 40 40 Shares issued under equity compensation plans — — — — (35) (35)
Balance at 1 January 4,617 2,348 Profit for the year attributable to equity shareholders 918 1,569 Remeasurements of pension schemes (235) 1,662 Dividends and appropriations (note 15) (724) (551) Net shares issued under equity compensation plans 19 6 Realised loss on redemption of direct capital instrument — (57) Effect of changes in non-controlling interests in existing subsidiaries — (36) Fair value gains realised from other reserves 33 2 Transfer from other reserves on disposal of subsidiaries, joint ventures and associates — 2 Aggregate tax effect 108 (328)
204 | Aviva plc Annual report and accounts 2015 38 – Non-controlling interests This note gives details of the Group’s non-controlling interests and shows the movements during the year.
Movements in the year comprised: Balance at 1 January 1,166 1,471 Profit for the year attributable to non-controlling interests 161 169 Foreign exchange rate movements (45) (79) Total comprehensive income attributable to non-controlling interests 116 90 Capital contributions from non-controlling interests 5 — Non-controlling interests share of dividends declared in the year (142) (189) Non-controlling interests in acquired subsidiaries1 504 — Reclassification of non-controlling interests to liabilities2 (272) — Reclassification of non-controlling interests to DCI and Tier 1 notes (note 34) (231) — Changes in non-controlling interests in subsidiaries (1) (206)
The Group has no subsidiaries whose non-controlling interest (NCI) is material on the basis of their share of profit or loss.
Long-term business (1,702) 38 (1,664) (1,343) 43 (1,300) General insurance and health (7,063) 988 (6,075) (7,298) 724 (6,574)
(8,765) 1,026 (7,739) (8,641) 767 (7,874) Provisions for claims incurred but not reported (2,383) 607 (1,776) (2,578) 373 (2,205)
(317,669) 20,629 (297,040) (226,574) 7,708 (218,866) Provision for unearned premiums (4,048) 289 (3,759) (4,107) 250 (3,857) Provision arising from liability adequacy tests3 (12) — (12) (10) — (10)
40 – Insurance liabilities This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.
Long-term business provisions Participating 53,875 — 53,875 44,834 — 44,834 Unit-linked non-participating 14,768 — 14,768 7,963 — 7,963 Other non-participating 56,705 — 56,705 45,313 — 45,313
Provision for unearned premiums — 4,048 4,048 — 4,107 4,107 Provision arising from liability adequacy tests — 12 12 — 10 10
General insurance and health liabilities Change in insurance liabilities (note 40c(iv) and 43 c(ii)) 29 (504) (475) Less: Unwind of discount on GI reserves and other (10) 9 (1)
1 The change in reinsurance assets for general insurance and health business includes the impact of the £659 million reinsurance asset recognised on completion of an outward reinsurance contract by the UK general insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
General insurance and health liabilities Change in insurance liabilities (note 40c(iv) and 43 c(ii)) (76) 49 (27) Less: Unwind of discount on GI reserves and other (9) 3 (6)
- The Friends Life Company Limited New With-Profits Fund (FLC New WPF), the Friends Life Company Limited Old With-Profits Fund (FLC Old WPF), the Friends Life WL Limited (formally known as Winterthur Life UK Limited) With-Profits Fund (WL WPF) and Friends Life Assurance Society With-Profits Fund (FLAS WPF) which are closed to new business and where policyholders are entitled to 90% of the distributed profits aside from certain policies in the FLC New WPF and the FLC Old WPF with guaranteed bonus rates, where the shareholders do not receive one-ninth of the bonus.
The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience.
For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses.
The principal assumptions underlying the cost of future policy-related liabilities are as follows: Future investment return A ‘risk-free’ rate equal to the spot yield on UK swaps is used for the valuation of With-Profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2015 of 2.04% (2014: 1.88%) for a policy with ten years outstanding.
Equity returns 22.6% 22.3% Property returns 16.0% 15.0% Fixed interest yields 30.6% 27.2%
The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a ten-year term. Fixed interest yield volatility is also dependent on term and money-ness. The figure shown is for a ten-year swap option with ten-year term, currently at the money.
Income Protection Active lives 2.0% 1.8% Claims in payment – level 2.0% 1.8%
AM00/AF00 or TM00/TF00 adjusted for smoker status and age/sex specific factors
Pure endowments and deferred annuities before vesting AM00/AF00 adjusted AM00/AF00 adjusted
PCMA00/PCFA00 adjusted plus allowance for future mortality improvement 208 | Aviva plc Annual report and accounts 2015
40 – Insurance liabilities continued For the main pensions annuity business in Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 101.5% of PCMA00 (2014: 101.5% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 96.5% of PCFA00 (2014: 96.5% of PCFA00) with base year 2000. Improvements are based on CMI_2013 with a long-term improvement rate of 1.75% (2014:1.75%) for males and 1.5% (2014: 1.5%) for females, both with an addition of 0.5% (2014: 0.5%) to all future annual improvement. Year-specific adjustments are made to allow for selection effects due to the development of the Enhanced Annuity market.
For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The impact of operating assumption changes of £(0.7) billion in 2015 reduces the carrying value of insurance liabilities and relates mainly to expense and mortality releases in the UK business (with the impact on profit significantly offset by a corresponding reduction in reinsurance assets).
(c) General insurance and health liabilities (i) Provisions for outstanding claims Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
The discount rate that has been applied to latent claims reserves is based on the relevant swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 6 and 15 years depending on the geographical region. Any change in discount rates between the start and the end of the accounting period is reflected outside of operating profit as an economic assumption change.
(iii) Assumptions Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claim technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation.
No adjustments are made to the claims technicians’ case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate.
Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.
The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £30 million (2014: £245 million) greater than the best estimate, or £60 million (2014: £75 million) lower than the best estimate. The upper scenario has reduced significantly during 2015 due to reinsurance purchased by the UK general insurance business to cover a large proportion of these liabilities. These scenarios do not, however, constitute an upper or lower bound on these liabilities.
Interest rates used to discount latent claim liabilities The discount rates used in determining our latent claim liabilities are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of latent claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2015, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £60 million (2014: £120 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact has reduced significantly during 2015 due to reinsurance purchased by the UK general insurance business to cover a large proportion of these liabilities. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note 57.
Allowance for risk and uncertainty The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.
Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the Ogden Tables. The Ogden Tables contain a discount rate that is set by the Lord Chancellor and that is applied when calculating the present value of loss of earnings for claims settlement purposes. The process for setting this discount rate is under review.
Carrying amount at 1 January 9,876 10,298 Impact of changes in assumptions 115 211 Claim losses and expenses incurred in the current year 5,889 5,950 Decrease in estimated claim losses and expenses incurred in prior periods (463) (329)
Incurred claims losses and expenses 5,541 5,832 Less: Payments made on claims incurred in the current year (3,153) (3,253) Payments made on claims incurred in prior periods (2,650) (2,933) Recoveries on claim payments 281 269
Claims payments made in the period, net of recoveries (5,522) (5,917) Unwind of discounting 10 9
212 | Aviva plc Annual report and accounts 2015 40 – Insurance liabilities continued (d) Loss development tables (i) Description of tables The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2006 to 2015. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2006, by the end of 2015 £7,077 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £7,533 million was re-estimated to be £7,207 million at 31 December 2015.
There was also a £659 million reduction in net claim reserves due to the reinsurance purchased during 2015 covering a large proportion of the Group’s latent claim liabilities.
Ontario. • £15 million release from Europe mainly due to favourable development in France and Italy, partly offset by strengthening of motor third party claims in Turkey.
Gross cumulative claim payments At end of accident year (3,653) (4,393) (4,915) (3,780) (3,502) (3,420) (3,055) (3,068) (3,102) (2,991) One year later (5,525) (6,676) (7,350) (5,464) (5,466) (4,765) (4,373) (4,476) (4,295) Two years later (5,971) (7,191) (7,828) (6,102) (5,875) (5,150) (4,812) (4,916) Three years later (6,272) (7,513) (8,304) (6,393) (6,163) (5,457) (5,118) Four years later (6,531) (7,836) (8,607) (6,672) (6,405) (5,712) Five years later (6,736) (8,050) (8,781) (6,836) (6,564) Six years later (6,936) (8,144) (8,906) (6,958) Seven years later (7,015) (8,224) (8,986) Eight years later (7,062) (8,257) Nine years later (7,077)
Present value 1,922 118 120 217 240 325 553 828 1,111 1,538 2,860 9,832 Cumulative effect of foreign exchange
Net cumulative claim payments At end of accident year (3,612) (4,317) (4,808) (3,650) (3,386) (3,300) (2,925) (2,905) (2,972) (2,867) One year later (5,442) (6,542) (7,165) (5,286) (5,242) (4,578) (4,166) (4,240) (4,079) Two years later (5,881) (7,052) (7,638) (5,885) (5,637) (4,963) (4,575) (4,649) Three years later (6,181) (7,356) (8,094) (6,177) (5,905) (5,263) (4,870) Four years later (6,434) (7,664) (8,356) (6,410) (6,137) (5,485) Five years later (6,625) (7,852) (8,515) (6,568) (6,278) Six years later (6,724) (7,942) (8,626) (6,657) Seven years later (6,789) (8,004) (8,682) Eight years later (6,831) (8,033) Nine years later (6,853)
Estimate of net ultimate claims 6,948 8,133 8,894 6,908 6,614 6,034 5,683 5,752 5,575 5,548 Cumulative payments (6,853) (8,033) (8,682) (6,657) (6,278) (5,485) (4,870) (4,649) (4,079) (2,867)
Present value recognised in the statement of financial position 652 92 98 180 201 274 490 733 1,027 1,423 2,681 7,851
Changes in UPR recognised as an (income)/expense 125 8 Gross portfolio transfers and acquisitions — (31) Foreign exchange rate movements (184) (96)
(a) Carrying amount The liability for investment contracts (gross of reinsurance) at 31 December comprised: £m
(b) Long-term business investment liabilities Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.
Of the non-participating investment contracts measured at fair value, £101,216 million in 2015 are unit-linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.
For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 28 and the deferred income liability is shown in note 51.
For non-participating investment contracts, deposits collected and amounts withdrawn are not shown on the income statement, but are accounted for directly through the statement of financial position as an adjustment to the gross liabilities for investment contracts. The associated change in investment contract provisions shown on the income statement consists of the attributed investment return. Participating investment contracts are treated consistently with insurance contracts with the change in investment contract provisions primarily consisting of the movement in participating investment contract liabilities (net of reinsurance) over the reporting period.
41 – Liability for investment contracts continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
Carrying amount at 1 January 50,013 48,140 Provisions in respect of new business 2,644 2,273 Expected change in existing business provisions (2,726) (1,442) Variance between actual and expected experience (2,906) 1,575 Impact of operating assumption changes 32 2 Impact of economic assumption changes 3 11 Other movements 38 8 Change in liability (2,915) 2,427 Effect of portfolio transfers, acquisitions and disposals1 56,401 (20) Foreign exchange rate movements (374) (534)
Carrying amount at 31 December 103,125 50,013 1 The movement during 2015 relates to Friends Life, as at the acquisition date and the movement during 2014 relates to the disposal of Eurovita.
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £2.9 billion is primarily driven by the impact of adverse equity returns in the UK.
42 – Financial guarantees and options This note details the financial guarantees and options that the Group has given for some of our insurance and investment products.
(a) UK and Ireland Life with-profit business In the UK, life insurers are required to comply with the PRA’s realistic reporting regime for their with-profit funds for the calculation of PRA liabilities. Under the PRA’s rules, provision for guarantees and options within realistic liabilities are measured at fair value, using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
The material guarantees and options to which this provision relates are: (i) Maturity value guarantees Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products. For some unitised with-profit life contracts the amount paid after the fifth policy anniversary is guaranteed to be at least as high as the premium paid increased in line with the rise in RPI/CPI.
Certain unitised with-profit policies containing ‘no MVR’ guarantees, similar to those in the UK, have been sold in Ireland. These guarantees as at 31 December 2015 are ‘out-of-the-money’ (2014: £0.1 million ‘in-the-money’). This has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees. The value of these guarantees is usually sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies.
Realistic liabilities for GAOs in the UK with-profit funds were £2,043 million at 31 December 2015, which includes £968 million relating to the recently acquired Friends Life business (2014: £1,198 million). With the exception of the New With-Profits Sub Fund (NWPSF), movements in the realistic liabilities in the with-profit funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in the NWPSF were £196 million at 31 December 2015 (2014: £197 million).
These GAOs in Ireland are ‘in-the-money’ at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of derivatives (receiver swaps and payer swaptions).
(i) France Guaranteed surrender value and guaranteed minimum bonuses Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, ‘Provision pour Aléas Financiers’ (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at full year 2015.
42 – Financial guarantees and options continued Guaranteed death and maturity benefits In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated statement of financial position at the end of 2015 for this guarantee is £29 million (2014: £28 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2015, total sums at risk for these contracts were £44 million (2014: £70 million) out of total unit-linked funds of £16 billion (2014: £15 billion). The average age of policyholders was approximately 54. It is estimated that this liability would increase by £45 million (2014: £36 million) if yields were to decrease by 1% per annum and by £10 million (2014: £12 million) if equity markets were to decline by 10% from year end 2015 levels. These figures do not reflect our ability to review the tariff for this option.
General insurance and health Outstanding claims provisions3 988 724 Provisions for claims incurred but not reported3 607 373 1 Reinsurance assets at 31 December 2015 for long-term non-participating investment contracts includes £11,927 million for Friends Life business. 2 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss. 3 Reinsurance assets at 31 December 2015 for General insurance and health business include the impact of the £659 million reinsurance asset recognised on completion of an outward reinsurance contract by the UK general insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
218 | Aviva plc Annual report and accounts 2015 43 – Reinsurance assets continued (c) Movements The following movements have occurred in the reinsurance assets during the year: (i) In respect of long-term business provisions
Change in assets (38) 862 Effect of portfolio transfers, acquisitions and disposals2 12,504 (13) Foreign exchange rate movements (38) (65)
Carrying amount at 1 January 1,097 1,164 Impact of changes in assumptions 14 65 Reinsurers’ share of claim losses and expenses
Reinsurers’ share of incurred claim losses and expenses 828 187 Less: Reinsurance recoveries received on claims
Incurred in current year (121) (131) Incurred in prior years (225) (173)
Reinsurance recoveries received in the year (346) (304) Unwind of discounting 8 3
Carrying amount at 31 December 1,595 1,097 1 The change in reinsurance assets includes the impact of the £659 million reinsurance asset recognised on completion of an outward reinsurance contract by the UK general insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
Carrying amount at 31 December 289 250 1 Includes £712 million of premiums ceded on completion of the outward reinsurance contract taken out by the UK general insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
44 – Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2014 to 2015, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.
Tax and other assumptions includes an impact of £48 million driven by a reduction in the best estimate allowance for the cost of the Mortgage Protection Guarantee in the UK.
45 – Unallocated divisible surplus An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore the expected duration for settlement of the UDS is not defined.
This note shows the movements in the UDS during the year.
Carrying amount at 1 January 9,467 6,709 Change in participating contract assets (935) 3,087 Change in participating contract liabilities (36) 299 Other movements (13) (22) Change in liability recognised as an expense (984) 3,364 Effect of portfolio transfers, acquisition and disposals 724 (131) Foreign exchange rate movements (396) (444) Other movements — (31)
The amount of UDS has decreased to £8.8 billion at 31 December 2015 (2014: £9.5 billion), despite the acquisition of Friends Life in April 2015 which increased the UDS balance by £724 million. The reduction is driven primarily by adverse investment market movements in Continental Europe, mainly caused by the increase in interest rates and corporate bond yields during the year. In addition, the UDS has reduced by £396 million due predominantly to the weakening of the euro.
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £4 million and £50 million (2014: £15 million and £13 million), respectively.
(ii) The net deferred tax liability arises on the following items: Long-term business technical provisions and other insurance items 1,433 2,263 Deferred acquisition costs (205) (251) Unrealised gains on investments (2,571) (2,885) Pensions and other post-retirement obligations (354) (499) Unused losses and tax credits 247 227 Subsidiaries, associates and joint ventures (16) (12) Intangibles and additional value of in-force long-term business (814) (170) Provisions and other temporary differences 337 312
In addition, the Group has unrecognised gross capital losses of £509 million (2014: £434 million). These have no expiry date. There are no temporary differences in respect of unremitted overseas retained earnings for which deferred tax liabilities have not been recognised at 31 December 2015 (2014: £nil). As legislated in Finance (No 2) Act 2015, which was substantively enacted on 26 October 2015, the UK corporation tax rate will reduce to 19% from 1 April 2017 and to 18% from 1 April 2020. The reductions in rate from 20% to 19% and then to 18% have been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2015. In addition, the calculation of deferred tax assets and liabilities in France and Italy reflect the reduction in corporation tax rates from 38% to 34.43% (effective 1 January 2016) and from 34.3% to 30.8% (effective 1 January 2017) respectively. The reduction in the future corporation tax rates in the UK, France and Italy has resulted in a reduction in the Group’s net deferred tax liabilities of £120 million, comprising a £82 million credit included in the income statement and a £38 million credit included in the statement of comprehensive income.
47 – Provisions This note details the non-insurance provisions that the Group holds, and shows the movements in these during the year.
At 1 January 97 348 445 140 437 577 Additional provisions 382 112 494 74 150 224 Unused amounts reversed (7) (130) (137) — (118) (118) Change in the discounted amount arising from passage of time 1 1 2 — 2 2
Charge/(release) to income statement 376 (17) 359 74 34 108 Utilised during the year (307) (108) (415) (115) (112) (227) Acquisition/(disposal) of subsidiaries — 297 297 — (7) (7) Foreign exchange rate movements — (2) (2) (2) (4) (6)
Movements during 2015 primarily relate to the acquisition of Friends Life. Of the total restructuring and other provisions, £199 million (2014: £103 million) is expected to be settled more than one year after the statement of financial position date.
48 – Pension obligations (a) Introduction The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland, and Canada with the main UK scheme being the largest. The assets and liabilities of these defined benefit schemes as at 31 December 2015 are shown below.
Total fair value of scheme assets (see b(ii) below) 15,445 484 232 16,161 14,733 483 258 15,474 Present value of defined benefit obligation (13,344) (673) (307) (14,324) (12,079) (748) (343) (13,170) Net IAS19 surpluses/(deficits) in the schemes 2,101 (189) (75) 1,837 2,654 (265) (85) 2,304
Net IAS19 surpluses/(deficits) in the schemes 2,101 (189) (75) 1,837 2,654 (265) (85) 2,304
222 | Aviva plc Annual report and accounts 2015 48 – Pension obligations continued The number of scheme members was as follows: United Kingdom Ireland Canada
(i) UK schemes In the UK, the Group operates three main pension schemes, the Aviva Staff Pension Scheme (ASPS), the smaller RAC (2003) Pension Scheme which was retained after the sale of RAC Limited in September 2011 and the Friends Provident Pension Scheme (FPPS) which was acquired during the year as part of the Friends Life acquisition. As the defined benefit section of the UK schemes is now closed to both new members and future accrual, existing deferred members in active service and new entrants participate in the defined contribution section of the ASPS. The UK schemes operate within the UK pensions’ regulatory framework.
Total pension cost charged to net operating expenses — (14) (14) Net interest credited/(charged) to investment income /(finance costs)2 584 (504) 80
Remeasurements: Actual return on these assets 99 — 99 Less: Interest income on scheme assets (584) — (584)
Return on scheme assets excluding amounts in interest income (485) — (485) Gains from change in financial assumptions — 234 234 Gains from change in demographic assumptions — 3 3 Experience gains — 13 13
Net IAS 19 surplus in the schemes at 1 January 12,398 (12,159) 239 Administrative expenses1 — (27) (27)
Total pension cost charged to net operating expenses — (27) (27) Net interest credited/(charged) to investment income /(finance costs)2 542 (522) 20
Total recognised in other comprehensive income from continuing operations 2,593 (931) 1,662
Employer contributions 391 — 391 Plan participant contributions — — — Benefits paid (385) 385 — Administrative expenses paid from scheme assets1 (27) 27 — Foreign exchange rate movements (38) 57 19
Total scheme assets are comprised by scheme as follows: UK £m
Total IAS 19 fair value of scheme assets 15,445 484 232 16,161 14,733 483 258 15,474 1 Cash and other assets comprise cash at bank, insurance policies, receivables and payables. 2 FPPS assets are included in the UK balances. As at 31 December 2015, the FPPS’s cash and other balances includes an insurance policy of £546 million issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group’s IAS 19 scheme assets.
224 | Aviva plc Annual report and accounts 2015 48 – Pension obligations continued Total scheme assets are analysed by those that have a quoted market price in active market and other as follows: Total Quoted £m
Bonds Fixed interest 2,796 3,095 5,891 2,907 2,955 5,862 Index-linked 5,436 436 5,872 5,240 450 5,690
Total fair value of assets 9,131 7,576 16,707 8,761 6,713 15,474 Less: consolidation elimination for non-transferable Group
Financial assumptions The main financial assumptions used to calculate scheme liabilities under IAS 19 are: UK Ireland Canada
Ireland 89% PNA00 with allowance for future improvements 61 88.0 91.3 90.9 94.1 (27.0) (30.3) (29.9) (33.1)
The assumptions above are based on commonly used mortality tables. The tables make allowance for observed variations in such factors as age, gender, pension amount, salary and postcode-based lifestyle group, and have been adjusted to reflect recent research into mortality experience. However, the extent of future improvements in longevity is subject to considerable uncertainty and judgement is required in setting this assumption. In ASPS, which is the most material to the Group, the allowance for mortality improvement is per the actuarial professions’ CMI 2013 model, with assumed long-term rates of improvement of 1.75% p.a. for males, and 1.50% p.a. for females.
226 | Aviva plc Annual report and accounts 2015 48 – Pension obligations continued (iv) Risk management and asset allocation strategy As noted above, the long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long-term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, the schemes’ assets are invested in a portfolio, consisting primarily (approximately 75%) of debt securities as detailed in section (b)(ii). The investment strategy will continue to evolve over time and is expected to match the liability profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched to interest rate risk relative to the funding basis.
Main UK scheme The Company works closely with the trustee, who is required to consult it on the investment strategy.
(c) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their attitude to risk and their retirement plans. Members of this section contribute at least 2% of their pensionable salaries and, depending on the percentage chosen, the Company contributes up to a maximum 14%, together with the cost of the death-in-service benefits. These contribution rates are unchanged for 2016. The amount recognised as an expense for defined contribution schemes is shown section (d) below.
Total defined benefit schemes (note 10b) 13 30 UK defined contribution schemes 108 94 Overseas defined contribution schemes 15 16
Core structural borrowings, at amortised cost 6,912 5,310 Operational borrowings, at amortised cost 550 696 Operational borrowings, at fair value 1,308 1,372 1,858 2,068
Within one year 204 60 264 342 65 407 1 to 5 years 204 269 473 199 278 477 5 to 10 years 551 283 834 508 307 815 10 to 15 years 652 185 837 702 212 914 Over 15 years 498 132 630 625 144 769
Total contractual undiscounted cash flows 2,109 929 3,038 2,376 1,006 3,382
(d) Description and features (i) Subordinated debt A description of each of the subordinated notes is set out in the table below: Notional amount Issue date Redemption date Callable at par at option of the Company from In the event the Company does not call the notes, the coupon will reset at each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% €500 million1 29 Sep 2003 Undated 29 Sep 2015 3 month Euribor + 2.35% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40% £600 million 20 May 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% €500 million 20 May 2008 22 May 2038 22 May 2018 3 month Euribor + 3.35% £162 million 21 May 2009 21 May 2021 N/A N/A £500 million 21 April 2011 21 April 2022 N/A N/A £450 million 26 May 2011 3 June 2041 3 June 2021 6 Month LIBOR + 4.136% $400 million 22 November 2011 1 December 2041 1 December 2016 8.25%(fixed) $575 million 8 November 2012 Undated 8 November 2018 6 year USD mid-swaps + 6.828% €650 million 5 July 2013 5 July 2043 5 July 2023 5 year EUR mid-swaps + 5.13% €700 million 3 July 2014 3 July 2044 3 July 2024 5 year EUR mid-swaps + 3.48% £400 million 4 June 2015 4 June 2050 4 December 2030 3 month Euribor + 4.022% €900 million 4 June 2015 4 December 2045 4 December 2025 3 month Euribor + 3.55%
Subordinated notes issued by the Company rank below its senior obligations and ahead of its preference shares and ordinary share capital. The dated subordinated notes rank ahead of the undated subordinated notes. The fair value of notes at 31 December 2015 was £6,810 million (2014: £5,188 million), calculated with reference to quoted prices.
(ii) Debenture loans The 9.5% guaranteed bonds were redeemed in full on 18 September 2015, ahead of their 20 June 2016 maturity date, at a redemption price of £218 million including accrued interest. The guaranteed bonds were issued by the Company in 1996 at a discount of £1.1 million.
(iii) Commercial paper The commercial paper consists of £485 million issued by the Company (2014: £516 million) and is considered core structural funding.
Non-recourse Loans to property partnerships (see (a) below) 62 199 UK Life reassurance (see (b) below) 160 178 Other non-recourse loans (see (c) below) 208 219
All movements in fair value in 2014 and 2015 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
Expiring within one year 575 350 Expiring beyond one year 1,075 1,200
Expected to be settled within one year 9,300 10,731 Expected to be settled in more than one year 3,148 1,281
Deferred income 175 159 Reinsurers’ share of deferred acquisition costs 18 12 Accruals 1,159 1,167 Other liabilities 1,450 935
(b) Asbestos, pollution and social environmental hazards In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising there from, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims and substantial reinsurance cover now in place, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2014: £nil). Note 18 sets out the commitments the Group has to its joint ventures.
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases 45 47 232 | Aviva plc Annual report and accounts 2015
Accounting basis and capital employed by segment The table below shows how our capital, on an IFRS basis, is deployed by segment and how that capital is funded.
2 On 1 October 2015 Friends Life Holdings plc was replaced by Aviva plc as the issuer of the 2003 Step-up Tier 1 Insurance Capital Securities of £231 million. Following this, these have been included within direct capital instrument & tier 1 notes.
3 Subordinated debt excludes amounts held by Group companies of £42 million.
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and other borrowings. At the end of 2015 the Group had £25.1 billion (2014: £17.6 billion) of total capital employed in our trading operations measured on an IFRS basis. The increase in capital employed is driven mainly by the acquisition of Friends Life (see note 3 for further details).
234 | Aviva plc Annual report and accounts 2015 55 – Statement of cash flows This note gives further detail behind the figures in the statement of cash flows.
Changes in working capital (Increase) / Decrease in reinsurance assets 180 (818) (Increase) in deferred acquisition costs (139) (21) Increase / (Decrease) in insurance liabilities and investment contracts (7,950) 11,552 (Increase) in other assets (1,133) (1,495) (9,042) 9,218 Net sales/(purchases) of operating assets Net purchases of investment property (929) (725) Net proceeds on sale of investment property 1,953 1,811 Net sales / (purchases) of financial investments 6,932 (1,973) 7,956 (887)
Total cash flow on acquisitions and additions (7,783) 79 234 | Aviva plc Annual report and accounts 2015
Cash flows on disposals – continuing operations (3) 110 Cash flows on disposal – discontinued operations — (20)
(d) Cash and cash equivalents in the statement of cash flows at 31 December comprised: Cash at bank and in hand 4,496 2,855 Cash equivalents 29,180 20,259
56 – Capital statement This statement sets out the financial strength of our Group entities and provides an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital statement also provides a reconciliation of shareholders’ funds to regulatory capital.
Total shareholders’ funds — (1,174) 9 — — (1,165) 12,226 5,203 16,264 1,968 18,232 12,276 Other sources of capital1 — — — — — — 200 36 236 6,003 6,239 4,623 Unallocated divisible surplus2 221 — 1,685 186 484 2,576 (2) 6,237 8,811 — 8,811 9,467 Adjustments onto a regulatory basis: Shareholders’ share of accrued bonus (38) 419 (119) (34) (447) (219) — — (219) — (219) 227 Goodwill and other intangibles3 — — — (8) — (8) (4,255) (2,038) (6,301) (1,501) (7,802) (2,417) Regulatory valuation and admissibility
Available capital resources at 1 January 253 2,111 1,583 — — 3,947 2,684 13,269 19,900 Effect of new business — 6 (4) — — 2 127 (96) 33 Expected change in available capital resources 7 85 159 3 4 258 630 587 1,475 Variance between actual and expected experience (3) (84) (59) 11 114 (21) 250 (1,075) (846) Effect of operating assumption changes 2 12 (29) (165) (118) (298) 495 88 285 Effect of economic assumption changes (15) (70) 14 (5) 71 (5) 90 (11) 74 Effect of changes in management policy1 1 5 (191) — — (185) (1,352) 2 (1,535) Transfers, acquisitions and disposals2 — — 164 183 3 350 2,196 (398) 2,148 Foreign exchange movements — — 12 — — 12 (31) (625) (644) Other movements (7) 8 (110) 125 (70) (54) (1,043) (300) (1,397)
Available capital resources at 31 December 238 2,073 1,539 152 4 4,006 4,046 11,441 19,493 1 Changes in management policy in other UK life operations include £(1,356) million of internal subordinated debt reclassified from capital to liabilities during the year. 2 Included within transfers, acquisitions and disposals is £2,076 million reflecting the available capital resources of Friends Life at acquisition.
NWPSF is fully supported by the reattributed estate of £2,073 million (this is known as RIEESA) at 31 December 2015 (31 December 2014: £2,111 million) held within NPSF (Non-Profit Sub-Fund within UKLAP included within other UK life operations) in the form of a capital support arrangement. This support arrangement will provide capital to NWPSF to ensure that the value of assets of NWPSF are at least equal to the value of liabilities calculated on a realistic regulatory basis, therefore it forms part of the NWPSF available capital resources.
The with-profits funds and the RIEESA use internal hedging to limit the impacts of equity market volatility. In aggregate, the Group has at its disposal total available capital of £24.2 billion (2014: £22.2 billion), representing the aggregation of the solvency capital of all of our businesses. This capital is available to meet risks and regulatory requirements set by reference to local guidance and EU directives. After effecting the year end transfers to shareholders, the UK with-profits funds have available capital of £4.0 billion (2014: £3.9 billion) (including amounts held in RIEESA). Subject to certain conditions, the RIEESA capital can be used to write new nonprofit business, but the primary purpose of this capital is to provide support for the UK with-profits business. The capital (including RIEESA) is comfortably in excess of the required capital margin, and therefore no further support is required by shareholders.
The total available capital of £24.2 billion is arrived at on the basis of local regulatory guidance, which evaluates assets and liabilities prudently and includes the Group’s unallocated divisible surplus of overseas life operations. This is a limitation of the Group Capital Statement which, to be more meaningful, needs to evaluate available capital on an economic basis and compare it with the risk capital required for each individual operation, after allowing for the considerable diversification benefits that exist in our Group.
The liabilities included in the balance sheet for the with-profits funds do not include the amount representing the shareholders’ portion of future bonuses. However, the shareholders’ portion is treated as a deduction from capital that is available to meet regulatory requirements and is therefore shown as a separate adjustment in the capital statement.
1 Realistic liabilities include the shareholders’ share of accrued bonuses of £0.8 billion (31 December 2014: £(0.2) billion). Realistic liabilities adjusted to eliminate the shareholders’ share of accrued bonuses are £48.5 billion (31 December 2014: £33.0 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4 billion, £0.3 billion, £3.2 billion, and £0.8 billion for NWPSF, OWPSF, WPSF and FP WPF respectively (31 December 2014: £1.4 billion, £0.3 billion and £3.0 billion for NWPSF, OWPSF and WPSF respectively).
Under the PRA regulatory regime, UK life with-profits business is required to hold capital equivalent to the greater of their regulatory requirement based on EU Directives (regulatory peak) and the PRA realistic bases (realistic peak) described above.
• (iii) Overseas life operations – the capital requirements and corresponding regulatory capital held by overseas businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses are subject to local regulatory restrictions which may constrain management’s ability to utilise these in other parts of the Group. In several business units, Group companies and other parties jointly control certain entities; these joint venture operations may constrain management’s ability to utilise the capital in other parts of the Group. Any transfer of available capital may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
238 | Aviva plc Annual report and accounts 2015 57 – Risk management This note sets out the major risks our businesses and its shareholders face and describes the Group’s approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in the Group’s earnings and capital position.
Further information on the types and management of specific risk types is given in sections (b) to (j) below. The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva’s framework. Aviva completed the acquisition of Friends Life in April 2015. The Friends Life risk management framework was very similar to that of Aviva, but a formal gap analysis was carried out and the former Friends Life businesses formally adopted the Aviva risk policies and business standards at the end of 2015.
The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £2.2 billion (2014: £2.5 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.
(ii) Financial exposures to peripheral European countries and worldwide banks Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2015 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain. Information on our exposures to peripheral European sovereigns and banks is provided in notes 26(e) and 26(f). We continue to monitor closely the situation in the eurozone and have had additional restrictions on further investment in place since late 2009 as well as taking actions to reduce exposure to higher risk assets.
(iv) Loans The Group loan portfolio principally comprises: • Policy loans which are generally collateralised by a lien or charge over the underlying policy; • Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; and • Mortgage loans collateralised by property assets.
(vi) Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group Capital and ALM and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.
The Group’s largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit linked contracts. At 31 December 2015, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £12,660 million (2014: £2,048 million), which has increased significantly during the year as a result of the acquisition of Friends Life. Whilst the risk of default is considered remote due to the nature of the arrangement and the counterparty, the Group is currently considering alternative ways to structure the agreements with BlackRock Life Ltd to reduce or remove this exposure.
(vii) Securities finance The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by over-collateralisation and minimum counterparty credit quality requirements.
Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £162.0 billion of debt securities (2014: £130.6 billion), £47.7 billion of other investments (2014: £35.4 billion), £19.1 billion of loans (2014: £20.9 billion) and £14.0 billion of reinsurance assets (2014: £2.5 billion).
The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group Capital and ALM is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements.
We continue to limit our direct equity exposure in line with our risk preferences, albeit the acquisition of Friends Life has resulted in an increase in our equity price risk exposure relative to other risk types. At a business unit level, investment limits and local investment regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.
Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. At 31 December 2015 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure, and has increased these hedges during 2015.
The low interest rate environment in a number of markets around the world has resulted in our current reinvestment yields being lower than the overall current portfolio yield, primarily for our investments in fixed income securities and commercial mortgage loans. We anticipate that interest rates may remain below historical averages for an extended period of time and that financial markets may continue to have periods of high volatility. Investing activity will continue to decrease the portfolio yield as long as market yields remain below the current portfolio level. We expect the decline in portfolio yield will result in lower net investment income in future periods.
(v) Currency risk The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contract liabilities or hedging.
The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 58% of the Group’s premium income arises in currencies other than sterling and the Group’s net assets are denominated in a variety of currencies, of which the largest are euro, sterling and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group’s business and meet local regulatory and market requirements.
Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group’s regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set.
euro rate £m 10% increase in sterling / CAD$ rate £m 10% decrease in sterling / CAD$ rate £m
Impact on profit before tax 31 December 2015 8 23 25 (46) Impact on profit before tax 31 December 2014 (44) (25) (15) 20
(vi) Derivatives risk Derivatives are used by a number of the businesses. Activity is overseen by the Group Capital and ALM and Group Risk teams, which monitor exposure levels and approve large or complex transactions. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products.
Maturity analyses The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets held to meet them. A maturity analysis of the contractual amounts payable for borrowings and derivatives is given in notes 49 and 58, respectively. Contractual obligations under operating leases and capital commitments are given in note 53.
Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date.
Debt securities 131,661 19,097 37,404 75,006 154 Equity securities 35,619 — — — 35,619 Other investments 35,358 29,011 940 3,553 1,854 Loans 25,260 1,489 2,517 21,249 5 Cash and cash equivalents 23,105 23,105 — — —
57 – Risk management continued The acquisition of Friends Life has resulted in an increase in the Group’s relative exposure to UK Life insurance risks, in particular persistency risk. Adjusting for the impact of the Friends Life acquisition, the underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2015, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. Our economic exposure to longevity risk was reduced as a result of the RAC Staff Pension Scheme entering into a longevity swap covering £0.6 billion of pensioner in payment scheme liabilities during 2015, while any significant reduction in individual annuity new business volumes as a result of the UK Government’s pension reforms, including changes to compulsory annuitisation, will reduce our longevity risks exposure over the longer-term to the extent not offset by increased bulk purchase annuity volumes. Despite this, longevity risk remains the Group’s most significant life insurance risk due to the Group’s existing annuity portfolio.
Persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal economic capital model and subject to sensitivity and stress and scenario testing. The assumption and management of life and health insurance risks is governed by the group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life and health insurance risks are managed as follows: • Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitor that the aggregation of risk ceded is within credit risk appetite.
Aviva has a preference for general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. The majority of the general insurance business underwritten by the Group continues to be short tail in nature such as motor, household and commercial property insurances. The Group’s underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. General insurance risk is managed primarily at business unit level with oversight at the Group level. Claims reserving is undertaken by local actuaries in the various general insurance businesses and is also subject to periodic external reviews. Reserving processes are further detailed in note 40 ‘insurance liabilities’.
246 | Aviva plc Annual report and accounts 2015 57 – Risk management continued Management of general insurance risks Significant insurance risks will be reported under the risk management framework. Additionally, the economic capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements.
Long-term business Sensitivities as at 31 December 2015 2015 Impact on profit before tax (£m)
248 | Aviva plc Annual report and accounts 2015 57 – Risk management continued Sensitivities as at 31 December 2014 2014 Impact on profit before tax (£m)
Changes in sensitivities between 2015 and 2014 reflect inclusion of Friends Life in 2015 for the first time and movements in market interest rates, portfolio growth, changes to asset mix and the relative durations of assets and liabilities and asset liability management actions. The sensitivities to economic movements relate mainly to business in the UK. In general, a fall in market interest rates has a beneficial impact on non-participating business, due to the increase in market value of fixed interest securities and relative durations of assets and liabilities; similarly a rise in interest rates has a negative impact. Mortality and expense sensitivities also relate primarily to the UK.
General insurance and health business sensitivities as at 31 December 2015 2015 Impact on profit before tax (£m)
For general insurance and health, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision.
58 – Derivative financial instruments and hedging This note gives details of the various financial instruments we use to mitigate risk.
The fair values do not provide an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA (International Swaps and Derivatives Association, Inc.) master agreements or their equivalent. Such agreements are designed to provide a legally enforceable set-off in the event of default, which reduces credit exposure. In addition, the Group has collateral agreements in place between the individual Group entities and relevant counterparties. Refer to note 59 for further information on collateral and net credit risk of derivative instruments.
250 | Aviva plc Annual report and accounts 2015 58 – Derivative financial instruments and hedging continued (ii) Cash flow hedges At the end of 2015 the Group entered into a cash flow hedge using a foreign exchange forward to hedge the currency exposure related to the acquisition of additional shares in its associate Aviva Life Insurance Company India expected to be completed in the first half of 2016. The fair value of the hedge as of 31 December 2015 was a £2 million derivative asset. The gain of £2 million has been recognised in the hedging instruments reserve in shareholders’ equity. The hedge was fully effective in the year.
(b) Derivatives not qualifying for hedge accounting Certain derivatives either do not qualify for hedge accounting under IAS 39 or the option to hedge account has not been taken. These are referred to below as non-hedge derivatives.
(i) The Group’s non-hedge derivative activity at 31 December 2015 and 2014 was as follows: Contract/ notional amount £m
Within 1 year 484 336 Between 1 and 2 years 564 698 Between 2 and 3 years 251 313 Between 3 and 4 years 227 240 Between 4 and 5 years 291 234 After 5 years 2,613 3,627
59 – Financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar arrangements (a) Offsetting arrangements Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously.
Derivative transactions requiring Aviva or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit default swaps. These transactions are conducted under terms that are usual and customary to standard long-term borrowing, derivative, securities lending and securities borrowing activities. The derivative assets and liabilities in the table below are made up of the contracts described in detail in note 58.
Financial liabilities Derivative financial liabilities (4,030) 836 (3,194) 1,884 388 543 (379) Other financial liabilities (2,219) — (2,219) — — 2,219 —
60 – Related party transactions This note gives details of the transactions between Group companies and related parties which comprise our joint ventures, associates and staff pension schemes.
Associates 9 (7) — — 7 (2) — — Joint ventures 27 — — 192 28 — — 154 Employee pension schemes 13 — — 3 11 — — 3
Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by Group Companies on equivalent terms to those available to all employees of the Group. In 2015 and 2014, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.
Our UK fund management companies manage most of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Groupmanaged funds and insurance policies with other Group companies, as explained in note 48(b)(ii). As at 31 December 2015, the Friends Provident Pension Scheme (“FPPS”), acquired during the year as part of the acquisition of the Friends Life business, held an insurance policy of £546 million issued by a Group Company, which eliminates on consolidation.
The related parties’ receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties provided on behalf of related parties are given in note 52(f).
Salary and other short-term benefits 13.3 8.9 Other long-term benefits 5.2 4.1 Post-employment benefits 1.7 1.0 Equity compensation plans 10.6 1.9 Termination benefits 2.0 — Total 32.8 15.9
61 – Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2015. Aviva plc is the holding company of the Group.
* Incorporated in England and Wales ** Incorporated in People’s Republic of China *** Incorporated in Scotland
United Kingdom Aviva Annuity UK Limited Aviva Central Services UK Limited Aviva Employment Services Limited Aviva Equity Release UK Limited Aviva Health UK Limited Aviva Insurance Limited Aviva International Insurance Limited Aviva Investors Global Services Limited Aviva Investors Pensions Limited Aviva Investors UK Fund Services Limited Aviva Investors UK Funds Limited Aviva Life & Pensions UK Limited Aviva Life Services UK Limited Aviva Pensions Trustees UK Limited Aviva UK Digital Limited Aviva Wrap UK Limited Gresham Insurance Company Limited The Ocean Marine Insurance Company Limited Friends Life Limited Friends Life and Pensions Limited Friends Life Management Services Limited Friends Life Services Limited Friends Provident International Limited
Canada Aviva Canada Inc. and its principal subsidiaries: Aviva Insurance Company of Canada Elite Insurance Company Pilot Insurance Company Scottish & York Insurance Co. Limited S&Y Insurance Company Traders General Insurance Company
France Aviva France SA (99.99%) and its principal subsidiaries: Antarius S.A. (50%) Aviva Assurances S.A. (99.9%) Aviva Investors France S.A. (99.9%) Aviva Vie SA (99.9%) Aviva Epargne Retraite (99.9%) Union Financière de France Banque (Banking) (74.3%)
254 | Aviva plc Annual report and accounts 2015 61 – Organisational structure continued Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Avipop Assicurazioni S.p.A (50%) Avipop Vita S.p.A (50%) Aviva S.p.A (51%) Aviva Assicurazioni Vita S.p.A (80%) Aviva Italia S.p.A Aviva Life S.p.A Aviva Vita S.p.A (80%)
Refer to accounting policies (D) Consolidation principles for further detail on principles of consolidation and definition of joint ventures.
(a) The direct related undertakings of the Company as at 31 December 2015 are listed below. Name of undertaking Country of incorporation Share class % held
Ordinary 'B' Shares 76 21/2 Devonshire Square General Partner Limited United Kingdom Ordinary Shares 100 2-10 Mortimer Street (GP No 1) Limited3 United Kingdom Ordinary Shares 50 2-10 Mortimer Street GP Limited3 United Kingdom Ordinary Shares 50 2-10 Mortimer Street LP3 United Kingdom Limited Partnership 50 30 Warwick Street LP3 United Kingdom Limited Partnership 50 30 Warwick Street Nominee 1 Limited3 United Kingdom Ordinary Shares 50 30 Warwick Street Nominee 2 Limited3 United Kingdom Ordinary Shares 50 30 Warwick Street Unit Trust3 Jersey Unit Trust 50 30-31 Golden Square LP3 United Kingdom Limited Partnership 50 30-31 Golden Square Nominee 1 Limited3 United Kingdom Ordinary Shares 50 30-31 Golden Square Nominee 2 Limited3 United Kingdom Ordinary Shares 50 30-31 Golden Square Unit Trust3 Jersey Unit Trust 50 400 Caledonian Road Management Company Limited United Kingdom Company Limited by Guarantee 50 41-42 Lowndes Square Management Company Limited United Kingdom Ordinary ‘A’ Shares
Ai Inflation Euro Hd Fcp France Mutual Fund 100 AI Special PFI SPV Limited United Kingdom Ordinary Shares 100 AIEREF Holding 1 S.a.r.l Luxembourg Equity Shares 100 AIEREF Holding 2 S.a.r.l Luxembourg Issued Capital Shares 100 AIEREF Renewable Energy s.r.o. Czech Republic Ordinary Shares 99 AI Recap Carry I, LP United States Sole Member 81 AI-RECAP GP I, LLC United States Sole Member 100 AIREF SGP France Ordinary Shares 100 Airport Property GP (No. 2) Limited3 United Kingdom Ordinary A Shares
Area Life Ltd Italy Ordinary Shares (Shares Class ‘A’ and Class ‘B’) 100 Artemis Global Growth Fund United Kingdom Unit Trust 23 Ascot Real Estate Investments GP LLP United Kingdom Limited Liability Partnership 50 Ascot Real Estate Investments LP United Kingdom Limited Partnership 50 ASF German Retail GmbH & Co. KG Germany Ordinary Shares 94 Ashtenne (AIF) Limited United Kingdom Ordinary Shares 67 Ashtenne (Severnside) Limited United Kingdom Ordinary Shares 67 Ashtenne Caledonia Limited United Kingdom Ordinary A Shares 67 Ashtenne Industrial (General Partner) Limited United Kingdom Ordinary A Shares 67 Ashtenne Industrial Fund Nominee No.1 Limited United Kingdom Ordinary Shares 67 Ashtenne Industrial Fund Nominee No.2 Limited United Kingdom Ordinary Shares 67 ASL Caravel Limited Partnership United Kingdom Limited Partner 100 ASL Clipper Limited Partnership United Kingdom Limited Partner 100 ASL Mainsail Limited Partnership United Kingdom Limited Partner 100 ASL Schooner Limited Partnership United Kingdom Limited Partner 100 ASL/ SLAS Xebec Limited Partnership United Kingdom Limited Partner 100 Aspire Financial Management Limited United Kingdom Ordinary Shares 47 Atlantic Industrial Nominees Limited United Kingdom Ordinary Shares 100 Atlas Park Management Company Limited United Kingdom Guarantee transferred pursuant to the Part VII
Autolog Speditions-und Logistik Gesellschaft mbH & Co OG Austria Ordinary Shares 100 Av Structure Idx 4 C. France Mutual Fund 100 Avipop Assicurazioni SpA Italy Ordinary Shares 50 Avipop Vita SpA Italy Ordinary Shares 50 Aviv.Inv.Sm.&Mid Cap.Eur. France Mutual Fund 100 Aviva (Peak No.1) UK Limited United Kingdom Ordinary Shares 100 Aviva (Peak No.2) UK Limited United Kingdom Ordinary Shares 100 Aviva Actions Croissance France Mutual Fund 100 Aviva Actions Euro France Mutual Fund 97 Aviva Actions Europe France Mutual Fund 100 Aviva Actions France France Mutual Fund 81 Aviva Agency Services Inc. Canada Class A Common Shares 100 Aviva Amerique France Mutual Fund 99 Aviva Annuity UK Limited United Kingdom Ordinary Shares 100 Aviva Asia Holdings Private Limited Singapore Ordinary Shares 100 Aviva Asia Pte Ltd Singapore Ordinary Shares 100 Aviva Asie France Mutual Fund 100 Aviva Assicurazioni Vita SpA Italy Ordinary Shares 80 Aviva Assurances, Société Anonyme d'Assurances Incendie, Accidents et Risques Divers
Aviva Investors Polish Retail GP Limited United Kingdom Ordinary Shares 100 Aviva Investors Polish Retail Limited Partnership United Kingdom Ordinary shares 100 Aviva Investors Polish Retail S.à r.l. Luxembourg Ordinary Shares 100 Aviva Investors Polskich Akcji Poland UCITs 42 Aviva Investors Portefeuille France Mutual Fund 100 Aviva Investors Private Equity Programme 2008 Partnership United Kingdom Limited Partner 40 Aviva Investors Property Developments Limited United Kingdom Ordinary Shares 100 Aviva Investors Property Fund Management Limited United Kingdom Ordinary Shares 100 Aviva Investors Real Estate Finance Limited United Kingdom Ordinary Shares 100 Aviva Investors Real Estate France S.A. France Ordinary Shares 100 Aviva Investors Real Estate Limited United Kingdom Ordinary Shares 100 Aviva Investors Realm Energy Centres GP Limited United Kingdom Ordinary Shares 100 Aviva Investors Realm Ground Rent GP Limited United Kingdom Ordinary Shares 100 Aviva Investors Realm Infrastructure No.1 Limited United Kingdom Ordinary Shares 100 Aviva Investors Realm Infrastructure No.2 Limited United Kingdom Ordinary Shares 100 Aviva Investors Realm Infrastructure No.3 Limited United Kingdom Ordinary Shares 100 Aviva Investors Realm Infrastructure No.4A Limited United Kingdom Ordinary Shares 100 Aviva Investors Realm Infrastructure No.4B Limited United Kingdom Ordinary Shares 100 Aviva Investors Reference Div France Mutual Fund 100 Aviva Investors Reserve Europe France Mutual Fund 66 Aviva Investors Schweiz GmbH Switzerland Interest Shares 100 Aviva Investors Securities Investment Consulting Company Limited Taiwan Ordinary 'A' Shares 100 Aviva Investors Selection France Mutual Fund 100 Aviva Investors Short Duration Global High Yield Bond Fund Luxembourg SICAV 60 Aviva Investors Short Term European Bond Fund Luxembourg SICAV 96 Aviva Investors Short Term European Bond Fund –A Italy SICAV 58 Aviva Investors Small & Mid Ca France Mutual Fund 100 Aviva Investors Social Housing GP Limited United Kingdom Ordinary Shares 100 Aviva Investors Social Housing Limited United Kingdom Company limited by guarantee 100 Aviva Investors Spółek Dywidendowych Poland OEIC 100 Aviva Investors Sterling Government Liquidity Fund Ireland ICVC 88 Aviva Investors Sterling Liquidity Fund Ireland ICVC 81 Aviva Investors Sterling Strategic Liquidity Fund Ireland ICVC 100 Aviva Investors Strategic Bond Share Class 3 United Kingdom OEIC 100 Aviva Investors Sustainable Future Absolute Growth Share Class 3 United Kingdom OEIC 83 Aviva Investors Sustainable Future Euro Growth Share Class 3 United Kingdom OEIC 72 Aviva Investors Sustainable Future Global Growth Share Class 3 United Kingdom OEIC 62 Aviva Investors Sustainable Future Managed Share Class 3 United Kingdom OEIC 97 Aviva Investors Sustainable Future UK Equity Monthly 1 United Kingdom OEIC 81 Aviva Investors Sustainable Future UK Growth Share Class 3 United Kingdom OEIC 65 Aviva Investors UK Commercial Real Estate Senior Debt LP United Kingdom Limited Partnership 21 Aviva Investors UK CRESD GP Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Equity Focus Fund Luxembourg SICAV 86 Aviva Investors UK Ethical 3 Income (SF ICVC) GBP United Kingdom OEIC 84 Aviva Investors UK Focus Share Class 3 United Kingdom OEIC 100 Aviva Investors UK Fund Services Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Funds Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Growth Class 3 United Kingdom OEIC 100 Aviva Investors UK LT RED GP Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Nominees Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Real Estate Recovery (General Partner) Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Real Estate Recovery (Nominee Two) Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Real Estate Recovery (Nominee) Limited United Kingdom Ordinary Shares 100 Aviva Investors UK Smaller Companies Share Class 3 United Kingdom OEIC 95 Aviva Investors US Equity Income Fund Luxembourg SICAV 99 Aviva Investors US Equity Income Fund Cl.A Italy SICAV 29 Aviva Investors Valeurs France Mutual Fund 100 Aviva Investors Valeurs Europe France Mutual Fund 94 Aviva Investors Valorisation France Mutual Fund 100 Aviva Ireland Blackrock Global Absolute Return Bond Fund United Kingdom OEIC 61 Aviva Italia Holding S.p.A Italy Ordinary Shares 100 Aviva Italia S.p.A Italy Ordinary Shares 100 Aviva Italia Servizi Scarl Italy Ordinary Shares 85 Aviva Japon France Mutual Fund 99 Aviva Life & Pensions UK Limited United Kingdom Ordinary Shares 100 Aviva Life Holdings Ireland Limited Ireland Ordinary Shares 92 Aviva Life Holdings UK Limited United Kingdom Ordinary Shares 100 Aviva Life Insurance Company India Limited India Ordinary Shares 26 Aviva Life Insurance Company Limited Hong Kong Ordinary Shares 100 Aviva Life International Limited Ireland Ordinary Shares 100 Aviva Life Services Ireland Limited Ireland Ordinary Shares 92 Aviva Life Services UK Limited United Kingdom Ordinary Shares 100 Aviva Life SPA Italy Ordinary Shares 100 Aviva Ltd Singapore Ordinary Shares 100 Aviva Messine 5 France Mutual Fund 100 Aviva Monetaire Isr (A) France Mutual Fund 97 Aviva Monetaire Isr (I) France Mutual Fund 57 Aviva Multigestion France Mutual Fund 98 Aviva Multigestion A Inter France Mutual Fund 100 Aviva Oblig International France Ordinary Shares 90 Aviva Oblirea France Ordinary Shares 96 Aviva Overseas Holdings Limited United Kingdom Ordinary Shares 100 Aviva Participations France Ordinary € 9.00 Shares 100 Aviva Patrimoine France Ordinary Shares 97 Aviva Patrimoine Immoblier France Ordinary Shares 100 Aviva Pension Trustees UK Limited United Kingdom Ordinary Shares 100 Aviva Performance France Mutual Fund 100 Aviva Performance Divers.Fcp France Mutual Fund 100 Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A. Poland Ordinary A 90 Aviva Professional Services (Pty) Limited South Africa One Ordinary Of One Rand Shares 100 Aviva Public Private Finance Limited United Kingdom Ordinary Shares 100 Aviva Re Limited Bermuda Ordinary Shares 100 Aviva Rebond Part A France Mutual Fund 98
Deferred Shares* Shares Blackrock Aquila Life Market Advantage Historic Priced United Kingdom OEIC 26 Blackrock Global Funds (BGF) China Fund2 Luxembourg OEIC 99 Blackrock Global Index Funds Japan Equity Open Ended2 Luxembourg OEIC 50 Blackrock Global Index Funds North America Open Ended Luxembourg OEIC 49 Blackrock Global Japan Equity Index Fund Open Ended2 Luxembourg OEIC 50 Blackrock Global North American Equity Index Fund Open Ended2 Luxembourg OEIC 57 Bluecycle.com Limited United Kingdom Ordinary Shares 100 Blueprint (General Partner) Limited United Kingdom Ordinary Shares 25 Blueprint (Nominees) Limited United Kingdom Ordinary Shares 25 Blueprint Limited Partnership United Kingdom Limited Partnership 25 BMG (Livingston) General Partner Limited United Kingdom Ordinary Shares 50 BMG (Mansfield) General Partner Limited United Kingdom Ordinary Shares 50 BMG (Mansfield) LIMITED United Kingdom Ordinary Shares 50 BMG (York) General Partner Limited United Kingdom Ordinary Shares 50 BMG (York) Limited United Kingdom Ordinary Shares 50 BMG (York) Partnership Trustco Limited United Kingdom Ordinary Shares 50 Boston Wood Recovery Limited United Kingdom Ordinary Shares 100 Box Hill Investments Limited United Kingdom Ordinary Shares 100 Bristol and Bath Science Park Estate Management Company Limited United Kingdom Ordinary 'D' Shares 25 Building a Future (Newham Schools) Limited United Kingdom Ordinary Shares 100 BZ WBK-Aviva Towarzystwo Ubezpieczen Ogolnych S.A. 3 Poland Ordinary Shares 90 BZ WBK-Aviva Towarzystwo Ubezpieczeń na Życie S.A. 3 Poland Ordinary A Shares
Caja Espana Vida, Compania de Seguros y Reaseguros Spain Ordinary Shares 50 Caja Granada Vida, Compañía de Seguros y Reaseguros Sociedad Anonima Spain Ordinary Shares 25 Caja Murcia Vida y Pensiones de Seguros y Reaseguros SA Spain Ordinary Shares 50 Candriam Bd Euro Hi Yi S France Mutual Fund 37 Capital Planete France Mutual Fund 88 Capital Residential Fund United Kingdom Ordinary Shares 88 Cardiff Bay (CPS) Limited United Kingdom Ordinary Shares 100 CARDIFF BAY GP LIMITED United Kingdom Ordinary Shares 100 Cardiff Bay LP United Kingdom Limited Partnership 100 Cardiff Bay Nominee 1 Limited United Kingdom Ordinary Shares 100 Cardiff Bay Nominee 2 Limited United Kingdom Ordinary Shares 100 Cargo Nord Objekt 10 - 12 GmbH & Co OG Austria Ordinary Shares 100 Cargo Nord Objekt 3 GmbH & Co OG Austria Ordinary Shares 100 Carillion-Igloo Limited United Kingdom Ordinary Shares 25 Carillion-Igloo Limited Partnership United Kingdom Limited Partnership 25 Carillion-Igloo Nominees Limited United Kingdom Ordinary Shares 25 Catalina Islands, SLU Spain Ordinary Shares 100 CEIF Industrial Epsilon SRL Romania Ron 10 Shares 100 CEIF Industrial Gamma SRL Romania Ron 10 Shares 100 CEIF Luxembourg Sarl Luxembourg Ordinary Shares 100 CEIF Properties Sarl Luxembourg Ordinary Shares 100 Centaurus CER (Aviva Investors) Sarl Luxembourg Ordinary Shares 100 Central European Industrial Fund FCP- SIF Luxembourg FCP 33 CGNU Life Assurance Limited United Kingdom Ordinary Shares 100 CGP Entrepreneurs France Ordinary Shares 74 CGU Equilibre2 France OEIC 100 CGU Gestion Patrimoniale2 France OEIC 100 CGU Group B.V. Netherlands Ordinary Shares 100 CGU International Holdings BV Netherlands Ordinary Eur 0.45 Each Shares 100 CGU Project Services Private Limited India Rs.10 Shares 100 CGWM Select Global Affinity A USD Acc Ireland OEIC 57 CGWM Select Global Diversity A USD Acc Ireland OEIC 31 CGWM Select Global Opportunity A USD Acc Ireland OEIC 53 CGWM Select Opportunity A Acc Ireland OEIC 35 Chancery House London LP3 United Kingdom Limited Partnership 50 Chancery House London Nominee 1 Limited3 United Kingdom Ordinary Shares 50 Chancery House London Nominee 2 Limited3 United Kingdom Ordinary Shares 50 Chancery House London Unit Trust3 Jersey Unit Trust 50 Chichester Health (Holdings) Limited United Kingdom Ordinary Shares 100 Chichester Health plc United Kingdom Ordinary Shares 100 Church Street Nominee No.1 Limited United Kingdom Ordinary Shares 100 Church Street Nominee No.2 Limited United Kingdom Ordinary Shares 100 Church Street Nominee No.3 Limited United Kingdom Ordinary Shares 100 Colby Investments Sp Z.o.o. Poland Ordinary of 500 Zlo Shares 100 Colonial Management Limited United Kingdom Guarantee transferred pursuant to the Part VII
Countrywide Independent Advisers Limited United Kingdom Ordinary £1 Shares 82 County Mall (Crawley) Management Limited United Kingdom Ordinary Shares 100 Cpr Silver Age E France Mutual Fund 32 Crane Investment Holdings PTE. Ltd. Singapore Ordinary 'A' Shares 100 Croissance Immo France Ordinary Shares 46 Croissance Pierre II France Ordinary Shares 100 Croissance Pme Maitre France Mutual Fund 90 Crystal Clear Financial Advice Limited United Kingdom Ordinary Shares 100 Cs Nova Lux Globseniorloanfd Y France Mutual Fund 21 Cumberland Place Management Company Limited United Kingdom Ordinary Shares 67 Darla Investments Spolka z.o.o. Poland Ordinary Of 500 Zlo Shares 100 DBS Financial Management Limited United Kingdom Ordinary Shares 82 DBS Management Limited United Kingdom 5p Ordinary Shares 100 Defined Returns Limited United Kingdom Ordinary Shares 29
Designer Retail Outlet Centres (Livingston) Unit Trust Jersey Ordinary Shares 97 Designer Retail Outlet Centres (Mansfield) Unit Trust United Kingdom Unit Trust 97 Designer Retail Outlet Centres (York) Unit Trust Jersey Ordinary Shares 97 Designer Retail Outlet Centres Unit Trust Jersey Unit Trust 97 Deutsche Asset Management North Americal Equity Index Fund2 United Kingdom OEIC 83 Devon Nominees (No. 1) Limited United Kingdom Ordinary Shares 50 Devon Nominees (No. 2) Limited United Kingdom Ordinary Shares 50 Devon Nominees (No. 3) Limited United Kingdom Ordinary Shares 50 Dextra Court Properties Limited United Kingdom Ordinary Shares 100 Diapason 1 France Mutual Fund 89 Diversifie 0-70 M France Mutual Fund 87 DollarDEX Investments Pte Ltd Singapore Ordinary Shares 100 DROC Livingston CP Limited United Kingdom Ordinary Shares 50 Dynamic Master Fund Luxembourg SICAV 100 E Aberdeen Mix.Emer.A Fcp4dec France Mutual Fund 90 E Act.Eur.0-100 Carmign.A Fcp France Mutual Fund 54 E Actions Environnement France Mutual Fund 66 E Actions Eurozone Aviva A Fcp France Mutual Fund 82 E Ccr Act Pme Eur A C. France Mutual Fund 59 E Echiquier Act.France A Fcp France Mutual Fund 45 E Multitalents A Fcp France Mutual Fund 40 E Schroders Acts Monde He A France Mutual Fund 59 EBISU Investments Limited United Kingdom Ordinary Shares 100 EES Operations 1 Limited United Kingdom Ordinary Shares 100 Elite Insurance Company Canada 1 Cdn Common Shares 100 Emergence M France Mutual Fund 100 Emerging Europe Equity Fund Luxembourg SICAV 33 Encore + Bedburg S.à r.l. Luxembourg Ordinary Shares 100 Encore + Bergkirchen S.à.r.l. Luxembourg €25 Shares 100 Encore + Fund FCP Luxembourg FCP 10 Encore + Logistics Spain B.V. Netherlands Ordinary Shares 100 Encore + Netherlands BV Netherlands Ordinary Shares 100 Encore + Rheinfelden S.à r.l. Luxembourg Ordinary Shares 100 Encore + Spain I BV Netherlands Ordinary Shares 100 Encore Plus Logistica S.L. Spain Ordinary Shares 100 Encore Plus Lombardia Sàrl Luxembourg Ordinary Shares 100 Encore Plus Lux Co Diamants II S.à r.l. Luxembourg Ordinary Shares 100 Encore Plus Lux Co Franklin II S.à r.l. Luxembourg Ordinary Shares 100 Encore Plus Lux Co Ile de la Jatte II S.à.r.l. Luxembourg Ordinary Shares 100 Encore Plus Lux Co Metzanine II S.à r.l. Luxembourg Ordinary Shares 100 Encore Plus Properties I S.à r.l. Luxembourg €100 Shares 100 Encore Plus Properties II S.à r.l. Luxembourg Ordinary of 100 Eur Shares 100 Encore Plus Properties III Sarl Luxembourg Ordinary Shares 100 Encore Plus Real Estate Bad Cannstatt S.à r.l. Luxembourg Ordinary Shares 100 Encore Plus Vaguada SL Spain Ordinary Shares 100 Encore+ Futura Sp. Z o.o. Poland Ordinary Shares 100 Enhanced Loan Investment Strategy Luxembourg Ordinary Shares 100 Enhanced Loan Investment Strategy Direct Holdings S.a.r.l Luxembourg Ordinary Shares 100 Eólica Almatret S.L. Spain Ordinary Shares 45 Eolica Almatret S.L.U Spain Ordinary Shares 50 Epargne Actuelle France Ordinary Shares 100 EPI NU société à responsabilité limitée Luxembourg Ordinary Shares 100 Etoile 6 Mois France Mutual Fund 47 Etoile Actions France France Mutual Fund 28 Etoile Actions Opportunites France Mutual Fund 22 Etoile Actions Rendement France Mutual Fund 40 Etoile Actions Styles France Mutual Fund 34 Etoile Actions Us France Mutual Fund 43 Etoile Banque Europe France Mutual Fund 34 Etoile Cliquet 90 France Mutual Fund 70 Etoile Convertibles France Mutual Fund 31 Etoile Garanti Avril 2018 France Mutual Fund 51 Etoile Garanti Fev.2020 Fcp France Mutual Fund 87 Etoile Garanti Jul.2018 Fcp France Mutual Fund 57 Etoile Industrie Europe France Mutual Fund 25 Etoile Matieres Premieres France Mutual Fund 54 Etoile Multi Gestion Actifs France Mutual Fund 53 Etoile Multi Gestion Actifs Pl France Mutual Fund 61 Etoile Multi Gestion Croissanc France Mutual Fund 52 Etoile Multi Gestion Europe France Mutual Fund 43 Etoile Multi Gestion France France Mutual Fund 56 Etoile Multi Gestion Usa France Mutual Fund 37 Etoile Obli Taux Plus France Mutual Fund 29 Etoile Patrimoine 20 (C) France Mutual Fund 26 Etoile Patrimoine 50 (C) France Mutual Fund 63 Etoile Patrimoine 70 (C) France Mutual Fund 39 Etoile Pme France Mutual Fund 24 Etoile Sante Europe France Mutual Fund 41 Etoile Tresorerie-Access France Mutual Fund 34 Etoile Usa 500 France Mutual Fund 52 Etoile Valeurs Moyennes France Mutual Fund 42 Euro Liquidity Fund Ireland ICVC 86 Europe Israel Croissance (SICAV) France Ordinary Shares 85 Euro-Valeur Maitre France Mutual Fund 65 Exeter Estates Limited Bahamas Ordinary Shares 100 Exeter Properties Inc. United States Common Stock WPV Shares 95 Expander Advisors Sp. z o.o. Poland Ordinary Shares 90 F&C Commercial Property Trust Limited Guernsey Discretionary Shares 26 F&C Diversified Growth Fund A Gbp Inc Hedged Luxembourg SICAV 25 F&C Diversified Growth X European Income Luxembourg SICAV 38 F&C European Capital Partners Limited Partnership United Kingdom Limited Partner 30 F&C European Growth & Income A Gbp Inc2 Luxembourg SICAV 52 F&C Institutional Investment Funds ICVC - Institutional Global Equity Fund United Kingdom OEIC 32 262 | Aviva plc Annual report and accounts 2015
Friends WUKH Limited United Kingdom Ordinary A Shares 100 Fuku II Investment Holdings PTE. LTD Singapore Ordinary Shares 100 Fuku Investment Holdings Pte Ltd Singapore Ordinary Shares 100 Fukut Investment Holdings PTE. Ltd. Singapore Ordinary Shares 80 GA Life Property Ireland Limited Ireland Ordinary Shares 100 Gateway Specialist Advice Services Limited United Kingdom Ordinary Shares 100 Gaura Investments Sp.z.o.o. Poland Ordinary of 500 Zlo Shares 100 General Accident Executor and Trustee Company Limited United Kingdom Ordinary Shares 100 General Accident plc United Kingdom Ordinary Shares 100 German Retail I GmbH Germany Ordinary Shares 94 German Retail II GmbH Germany Ordinary Shares 94 German Retail III GmbH Germany Ordinary Shares 100 German Retail Investment Properties Sarl Luxembourg Ordinary Shares 100 German Retail Investment Property Fund FCP-SIF Luxembourg Ordinary Shares 100 German Retail IV GmbH Germany Ordinary Shares 100 German Retail IX GmbH Germany Ordinary Shares 100 German Retail V GmbH Germany Ordinary Shares 100 German Retail VII GmbH Germany Ordinary Shares 100 German Retail VIII GmbH Germany Ordinary Shares 100 Gestion Flexible 0-100 M France Mutual Fund 93 Gestion Flexible 0 70 M France Mutual Fund 93 Gestion Flexible 0-30 M France Mutual Fund 80 Glasgow Airport Business Park Management Company Limited United Kingdom Guarantee transferred pursuant to the Part VII
Locamat SAS France Ordinary € 15.25 Shares 100 Lodz BC Sp. z o.o Poland Ordinary Shares 100 LogAxes Austria II S.à r.l. Luxembourg Ordinary Shares 100 LogAxes Austria III S.à r.l. Luxembourg Ordinary Shares 100 Logaxes Fund, FCP-SIF Luxembourg FCP 85 LogAxes Investment Properties S.à.r.l Luxembourg Ordinary Shares 100 Logipierre 1 France Ordinary Shares 44 Logiprime Europe France Ordinary Shares 100 Lombard (London) 1 Limited United Kingdom Ordinary Shares 100 Lombard (London) 2 Limited United Kingdom Ordinary Shares 100 London and Edinburgh Insurance Company Limited United Kingdom Ordinary Shares 100 London and Manchester (Commercial Mortgages) Limited United Kingdom Ordinary Shares 100 London and Manchester (Mortgages) (No.7) Limited United Kingdom Ordinary Shares 100 London and Manchester Group Limited United Kingdom Ordinary Shares 100 London Capital Holdings Limited United Kingdom Ordinary Shares 100 London Midland Associated Properties Limited United Kingdom Ordinary Shares 100 LUC Holdings Limited United Kingdom Ordinary Shares 20 Maling Street Management Company Limited United Kingdom Ordinary Shares 25 Martelli Inv Sp zoo Poland Ordinary of Pln 500 Shares 100 Matchtrack Limited United Kingdom Ordinary Shares 90 Matthew Parker Street (Nominee No 1) Limited United Kingdom Ordinary Shares 100 Matthew Parker Street (Nominee No 2) Limited United Kingdom Ordinary Shares 100 Medium Scale Wind No.1 Limited United Kingdom Ordinary Shares 100 Metropath Limited United Kingdom Ordinary Shares 100 Mill NU Developments (Conference Centre) Limited United Kingdom Ordinary Shares 60 Mill NU Properties Limited United Kingdom Ordinary A Shares 60 Mortimer Street Associated Co 1 Limited3 United Kingdom Ordinary Shares 50 Mortimer Street Associated Co 2 Limited3 United Kingdom Ordinary Shares 50 Mortimer Street Nominee 1 Limited3 United Kingdom Ordinary Shares 50 Mortimer Street Nominee 2 Limited3 United Kingdom Ordinary Shares 50 Mortimer Street Nominee 3 Limited3 United Kingdom Ordinary Shares 50 Multitalents M France Mutual Fund 100 Myria Asset Management France Ordinary Shares 74 Myria Conc.Act.Europ France Mutual Fund 22 National Home Warranty Group Inc. Canada Common Shares 100 Navigator Investment Services Limited Singapore Ordinary Shares 100 NBP Developments Limited United Kingdom Ordinary Shares 100 NDF Administration Limited United Kingdom Ordinary Shares 29 Netnerve Limited United Kingdom Ordinary Shares 100 New Broad Street House Unit Trust3 Jersey Unit Trust 50 New Broad Street House LP3 United Kingdom Limited Partnership 50 New Broad Street House Nominee 1 Limited3 United Kingdom Ordinary Shares 50 New Broad Street House Nominee 2 Limited3 United Kingdom Ordinary Shares 50 New Energy Residential Solar Limited United Kingdom Ordinary Shares 100 New Oxford Street (General Partner) Limited United Kingdom Ordinary Shares 100 New Oxford Street (Nominee) Limited United Kingdom Ordinary Shares 90 Newco France Ordinary Shares 100 Newgate Street Properties Limited United Kingdom Ordinary Shares 100 North British Properties (Scotland) Limited United Kingdom Ordinary Shares 100 North British Properties Limited United Kingdom Ordinary Shares 100 Norton Energy SLS Limited United Kingdom Ordinary Shares 100 Norwepp (General Partner) Limited United Kingdom Ordinary B Shares 33 Norwich Union (Mall GP) Limited United Kingdom Ordinary Shares 100 Norwich Union (Shareholder GP) Limited United Kingdom Ordinary Shares 100 Norwich Union Life Insurance Company Limited United Kingdom Ordinary Shares 100 NU 3PS Limited United Kingdom Ordinary Shares 100 NU College for Canterbury Limited United Kingdom Ordinary Shares 100 NU Developments (Brighton) Limited United Kingdom Ordinary Shares 100
The Financial Adviser School Limited United Kingdom Ordinary Shares 100 The Galleries Bristol Nominee No 2 Limited United Kingdom Ordinary Shares 100 The Gallery Gloucester Green Nominee One Limited United Kingdom Ordinary Shares 100 The Gallery Gloucester Green Nominee Three Limited United Kingdom Ordinary Shares 100 The Gallery Gloucester Green Nominee Two Limited United Kingdom Ordinary Shares 100 The Gobafoss Partnership United Kingdom Limited Partnership 100 The Growth Fund Limited United Kingdom Ordinary Shares 100 The I.F.A. Training School Limited United Kingdom Ordinary Shares 82 The Lancashire and Yorkshire Reversionary Interest Company Limited United Kingdom Ordinary Shares 100 The Land and House Property Corporation Limited United Kingdom 3.15% Cumulative Preference Shares Ordinary
Uff Selection Premium I France Mutual Fund 100 Ufifrance Gestion France Ordinary Shares 76 Ufifrance Immobilier France Ordinary Shares 20 Ufifrance Patrimoine France Ordinary Shares 76 UKLAP Australian Logistics Trust2 Australia Ordinary Shares 100 UKP Holdings Inc. United States Common Stock Shares 100 Undershaft (No.2) B.V. Netherlands Ordinary Shares 100 Undershaft (No.4) Limited United Kingdom Ordinary Shares 100 Undershaft (NUCM) Limited United Kingdom Ordinary Shares 100 Undershaft (NULLA) Limited United Kingdom Ordinary Shares 100 Undershaft Limited United Kingdom Ordinary Shares 100 Unicorp Vida, Compania de Seguros y Reaseguros Sociedad Anonima Spain Ordinary Shares 50 Union Financière de France Banque France Ordinary Shares 74 Unitair Limited Partnership United Kingdom Limited Partnership 50 Unitair General Partner Limited United Kingdom Ordinary Shares 50 United Kingdom Temperance and General Provident Institution United Kingdom Ordinary Shares 100 Uždaroji akcinė gyvybės draudimo ir pensijų bendrovė ‘Aviva Lietuva’ (Joint Stock Limited Life Insurance and Pension Company Aviva Lietuva)
Income Dividends received from subsidiaries I 1,250 1,172 Interest receivable from group companies I 57 60
Expenses Net investment expense (3) (2) Operating expenses B (224) (162) Interest payable to group companies I (174) (258) Interest payable on borrowings (344) (314)
Statement of comprehensive income For the year ended 31 December 2015
Direct capital instrument and tier 1 notes Total equity Note £m £m £m £m £m £m £m £m £m £m
Balance at 1 January 737 200 1,172 735 9,768 65 3,137 15,814 892 16,706 Profit for the year — — — — — — 677 677 — 677 Other comprehensive income — — — — 1,095 — — 1,095 — 1,095 Total comprehensive income for the year — — — — 1,095 — 677 1,772 — 1,772 Dividends and appropriations 15 — — — — — — (724) (724) — (724) Reserves credit for equity compensation plans — — — — — 40 — 40 — 40 Shares issued under equity compensation plans 3 — 13 — — (35) 19 — — — Novation of subsidiary company’s tier 1 notes D — — — — — — — — 224 224 Issue of share capital – acquisition of Friends Life 272 — — 5,703 — — — 5,975 — 5,975 Redemption of direct capital instrument — — — — — — — — — — Aggregate tax effect — — — — — — 15 15 — 15
Direct capital instrument tier and 1 notes Total equity Note £m £m £m £m £m £m £m £m £m £m
Equity Ordinary share capital 30 1,012 737 Preference share capital 33 200 200 Called up capital 1,212 937 Share premium 30b 1,185 1,172 Merger reserve E 6,438 735 Investment valuation reserve E 10,863 9,768 Equity compensation reserve E 70 65 Retained earnings E 3,124 3,137 Direct capital instrument and tier 1 notes 34 1,116 892
Statement of cash flows For the year ended 31 December 2015
(ii) At 31 December 2015, the Company has two wholly owned subsidiaries, both incorporated in the UK. These are General Accident plc and Aviva Group Holdings Limited. Aviva Group Holdings Limited is an intermediate holding company, whilst General Accident plc has preference shares listed on the London Stock Exchange. The principal subsidiaries of the Aviva Group at 31 December 2015 are set out in note 61 to the Group consolidated financial statements.
B – Operating expenses (i) Operating expenses Operating expenses comprise: Staff costs and other employee related expenditure (see below) 82 65 Other operating costs 201 150 Net foreign exchange gains (59) (53)
C – Tax (i) Tax credited to the income statement The total tax charge comprises: Current tax For this year (129) (64) Prior year adjustments 1 (7)
Deferred tax Origination and reversal of temporary differences 1 4 Changes in tax rates or tax laws 20 — Write back of deferred tax assets (8) —
(ii) Tax charged/(credited) to other comprehensive income No tax was charged or credited to other comprehensive income in 2015 or 2014.
Tax calculated at standard UK corporation tax rate of 20.25% (2014: 21.5%) 114 107 Adjustment to tax charge in respect of prior years 1 (5) Non-assessable dividend income (253) (252) Disallowable expenses 10 9 Movement in deferred tax not recognised (8) (2) Different local basis of tax on overseas profits 1 2 Change in future local statutory tax rates 20 — Losses surrendered intra-group for nil value — 74
UK legislation was substantively enacted in July 2013 to reduce the UK corporation tax rate from 21% to 20% from 1 April 2015, resulting in an effective rate for the year ended 31 December 2015 of 20.25%. The 20.25% corporation tax rate has been used in the calculation of the UK’s current tax liability for the year ended 31 December 2015.
(v) Deferred tax A deferred tax asset of £188 million (2014: £201 million), principally arising in respect of deferred interest has been recognised at 31 December 2015 at 18%. The Company has unrecognised temporary differences of £nil million (2014: £45 million) to carry forward indefinitely against future taxable income.
(vi) Current tax assets Current tax assets recoverable in more than one year are £130 million (2014: £65 million).
D – Direct capital instrument and tier 1 notes Details of the direct capital instrument and tier 1 notes are given in the Group consolidated financial statements, note 34. The 6.875% £210 million STICS are reflected in the Company financial statements at a value of £224 million following the transfer at fair value from Friends Life Holdings plc on 1 October 2015.
Tax of £15 million (2014: £19 million) is deductible in respect of coupon payments of £72 million (2014: £88 million) on the direct capital instrument and tier 1 notes.
Within 1 year 485 303 788 516 304 820 1 – 5 years — 1,212 1,212 200 1,149 1,349 5 – 10 years — 1,514 1,514 — 1,340 1,340 10 – 15 years 800 1,514 2,314 1,188 1,322 2,510 Over 15 years 4,448 3,496 7,944 3,442 2,924 6,366
Where subordinated debt is undated, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £79 million (2014: £72 million).