Total operating profit decreased by £36 million, or 12%, to £268 million (2014: £304 million). This was mainly due the 2014 disposals in Italy and Spain. Within this, life operating profit in Italy, excluding Eurovita, increased to £139 million (2014: £135 million), up 15% on a constant currency basis, mostly due to improved margins on with-profits business, driven by management actions to reduce the cost of guarantees. In Spain (excluding CxG), life operating profit decreased to £92 million (2014: £101 million) but was 2% higher on a constant currency basis.
Operating profit before tax was 7% higher at £481 million (2015: £449 million) but decreased 5% on a constant currency basis. Within this, life operating profit increased by 9% to £429 million (2015: £395 million) but decreased by 4% on a constant currency basis, with growth in protection and with-profit offset by higher operating expenses due to investment in and reorganisation of the business. General insurance and health operating profit remained stable at £70 million (2015: £71 million), but was down 12% on a constant currency basis due to weather events in the first half of the year.
Operating profit decreased by 28% to £141 million (2014: £195 million). Within this, Life operating profit was lower, at £129 million (2014: £183 million) largely due to a £39 million one-off regulatory pension change which benefitted the prior year. General insurance operating profit was £10 million (2014: £9 million).
Operating profit before tax Long-term insurance and savings business Italy 170 139 148 Spain 107 92 126 Other 6 11 13 283 242 287 General insurance and health Italy & other 42 33 26 Other operations (7) (7) (9)
In Spain (excluding Aseval & CxG), life sales decreased by £432 million, or 41%, to £622 million (2014: £1,054 million) mainly reflecting reduced with-profit sales.
Other life sales, which relates to sales in our Turkey Life joint venture, decreased by £35 million, or 7%, to £460 million (2014: £495 million), but increased 7% on a constant currency basis driven by increased sales of pensions offset by the impact of a reduction in our share of the business following the partial IPO in 2014.
General insurance net written premiums increased by 23% to £2,453 million (2015: £1,992 million). Net written premiums increased by 14% on a constant currency basis, mainly due to the acquisition of RBC. Excluding RBC, net written premiums increased by 2% on a constant currency due to strong rate increases in personal property and SME business.
Operating profits were £201 million (2015: £223 million). Life operating profit decreased to £241 million (2015: £244 million), 5% on a constant currency basis due to the bancassurance discontinuance, continuing investment and the one-off benefit of an internal reinsurance transaction in 2015 partly offset by a recovery of indirect taxes paid in Singapore. Non-life operating losses were higher due to higher claims experience from the Singapore health business and higher losses from other operations.
Profit before tax attributable to shareholders’ profits was £23 million (2015: £70 million), due to the above, and negative investment variances of £10 million (2015: £11 million positive).
Year ended 31 December 2015 Long -term insurance and savings sales in Asia increased by 38% to £2,694 million (2014: £1,951 million) mainly reflecting higher protection sales in Singapore and China and £582 million sales contributed by Friends Provident International (‘FPI’), following the Friends Life acquisition in April 2015. General insurance and health net written premiums, excluding long-term health, were £56 million (2014: £65 million).
Profit before tax attributable to shareholders’ profits increased to £130 million (2015: £81 million profit). This included higher operating profits, partly offset by higher integration and restructuring costs of £19 million (2015: £11 million). Other operations operating profit of £19 million (2015: £nil) related to reinsurance recoveries, of which £16 million was from the Group’s internal reinsurer and therefore has a neutral effect at a Group level.
Year ended 31 December 2015 Total sales increased by 61% to £5,005 million (2014: £3,106 million). Long-term insurance and savings business increased to £1,647 million following the transfer of the UK retail fund management business from UK Life in May 2014. Investment sales increased to £3,358 million (2014: £2,235 million) reflecting higher sales of European funds.
Operating profit before tax General Insurance (14) 13 9 Corporate centre (184) (180) (132) Group debt costs and other interest (325) (361) (463) Other Group operations (65) (46) (56)
Group debt costs and other interest decreased to £325 million (2015: £361 million), mainly due to lower internal debt costs of £23 million (2015: £92 million) and a decrease in the net finance income on the main UK pension scheme to £86 million (2015: £94 million). The impact of internal debt costs is neutral at an overall Group level.
Losses from other operations were £65 million (2015: £46 million) due mainly to increased investment in the development of the UK digital business.
Year ended 31 December 2015 The weakening of the Canadian dollar has affected all metrics from a Group perspective.
Operating profit was £214 million (2014: £191 million), a 12% increase compared to the prior year. On a constant currency basis, profit increased by 21%. The increase in profits included higher underwriting profits of £120 million (2014: £83 million), and benefitted from more benign weather conditions compared to prior year and higher positive prior year reserve releases in personal lines. Longer term investment return reduced 13% to £98 million (2014: £112 million), down 6% on a constant currency basis, primarily as a result of lower reinvestment yields.
Asia The table below presents the sales, net written premiums, operating profit and profit before tax attributable to shareholders’ profits under IFRS for the three years ended 31 December 2016, 2015 and 2014.
Sales Long-term insurance, savings and health business Singapore 940 1,498 1,336 Other Asia – excluding Malaysia 1,269 1,196 518 Malaysia — — 97
Operating profit before tax Long-term insurance and savings business Singapore 112 94 82 Other Asia 129 150 5
General insurance and health Singapore (12) (6) (3) Other Asia (1) — 1 Other operations (27) (15) (7) Total operating profit before tax 201 223 78
(including UK retail collectives) 2,845 1,647 881 Investment sales (excluding UK retail
Profit/(loss) before tax attributable to shareholders’ profits 130 81 83 1 The UK Retail fund management business was transferred from UK Life to Aviva Investors on 9 May 2014 and hence is included in Aviva Investors from 9 May 2014 onwards.
Fund management operating profit increased to £139 million (2015: £105 million), driven by revenue growth from increased assets under management and a revision in pricing to manage funds on behalf of other Aviva entities.
Assets under management increased by £54.6 billion to £344.5 billion (2015: £289.9 billion). This was driven by positive net fund flows, the transfer of a further £14 billion of Friends Life assets and favourable market and foreign exchange rate movements.
Year ended 31 December 2016 Net written premiums from our reinsurance business were £23 million (2015: £13 million).
Operating loss from general insurance was £14 million (2015: £13 million profit).
Loss before tax attributable to shareholders’ profits was £510 million (2014: £626 million loss). The lower loss in 2015 was mainly due to lower operating losses and higher positive short-term investment variances, partially offset by higher integration and restructuring costs.
Income Gross written premiums 25,442 21,925 21,670 22,035 22,744 Premiums ceded to reinsurers (2,364) (2,890) (1,614) (1,546) (1,571)
Premiums written net of reinsurance 23,078 19,035 20,056 20,489 21,173 Net change in provision for unearned premiums (210) (111) 1 134 (16)
Net earned premiums 22,868 18,924 20,057 20,623 21,157 Fee and commission income 1,962 1,797 1,230 1,279 1,273 Net investment income 30,257 2,825 21,889 12,509 21,135 Share of profit/(loss) after tax of joint ventures and associates 216 180 147 120 (255) Profit/(loss) on the disposal and re-measurement of subsidiaries and associates (11) 2 174 115 (164)
Profit before tax attributable to shareholders’ profits 1,193 1,413 2,306 1,281 175 Tax attributable to shareholders’ profits (334) (316) (606) (403) (261)
Profit/(loss) after tax from continuing operations 859 1,097 1,700 878 (86) Profit/(loss) after tax from discontinued operations — — 58 1,273 (2,848)
Number of shares in issue at 31 December 4,062 4,048 2,950 2,947 2,946 Weighted average number of shares in issue for the year 4,051 3,741 2,943 2,940 2,910 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 (2014: £25 million) and an increase in opening retained earnings for 2015 of £20 million (2014: £nil) with an increase in equity at 31 December 2015 of £38 million (£20 million). See note 1 to the Consolidated Financial Statements for further details.
Profit before tax 1,833 1,195 2,688 1,472 396 Tax attributable to policyholders’ returns (640) 218 (382) (191) (221)
Continuing operations – Basic (pence per share) 15.3p 23.1p 48.4 22.0p (11.2)p Continuing operations – Diluted (pence per share) 15.1p 22.8p 47.7 21.8p (11.2)p
CGU plc was formed in 1998 from the merger of Commercial Union plc and General Accident plc. General Accident plc was incorporated in 1865. Commercial Union was incorporated in 1861 and in 1905 acquired Hand in Hand, which was incorporated in 1696.
Norwich Union plc was founded as a mutual society in 1797, and had expanded as a global business by the 20th century. In 1997 it demutualised and became an English public limited company.
• Not everywhere Focusing on markets and segments where we can win.
Our long-term insurance businesses offer a broad range of life insurance and savings products. Our products are split into the following categories: • Annuities – a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or indexlinked.
General insurance and health insurance accounted for 20% of our total worldwide sales for the year ended 31 December 2016. In the year ended 31 December 2016, we reported 1 See ‘financial and operating performance’ for further details. 2 Association of British Insurers (ABI) Stats published Q3 2016.
Market position We are a leading general insurer in the United Kingdom and Canada with 10.9%3 and 10.6%4 market share respectively. We also have general insurance operations in France, Italy, Ireland, and Poland. We sell health products in the UK, France, Singapore and Indonesia. In the year ended 31 December 2016, 42% of our total general insurance and health new business was written in the UK.
Distribution Customers can buy our products through a range of distribution channels, including: • Direct – In many of our markets, customers can buy our products over the telephone or via the internet. This method of distribution is most commonly available for simple products which do not require advice.
UK & Ireland Life Business overview and strategy The UK business is a leading long-term insurance provider with an overall market share of 14.5%2, based on annual premium equivalent (APE) data as at 30 September 2016. The Irish business is the fourth largest life and pensions provider in Ireland, with an overall market share of 8.4%6.
Market and competition The fundamental growth drivers of UK insurance remain attractive and have not changed post Brexit. The UK has a large, ageing and affluent population and is the third largest insurance market globally7. Over the last few years, Auto-Enrolment, pension freedoms, exit fee caps and the Department of Work and Pensions (DWP) charge cap have transformed the way that long-term savings products are bought and sold in the UK. The capping of early exit pension charges at 1% will come into effect from 31 March 2017. New schemes entered into after 31 March 2017 cannot impose any kind of early exit charges. The vast majority of our products do not have early termination charges, but where an early termination charge does apply, the cap will be in place by the implementation date. We believe the cap on new entrants will have no impact on Aviva.
The Department of Work and Pensions (DWP) charge cap of 75 basis points came into force in April 2015, and the removal of active member discounts (AMDs) commenced in April 2016.
Our history The Group was formed by the merger of CGU plc and Norwich Union plc on 30 May 2000. CGU plc was renamed CGNU plc on completion of the merger, and subsequently renamed Aviva plc on 1 July 2002. CGU plc and Norwich Union plc were both major UK-based insurers operating in the long-term insurance business and general insurance markets. Both companies had long corporate histories.
On 10 April 2015, the Group completed the acquisition of Friends Life Group Limited through an all share exchange.
• Equity Release – a range of products that allows you to access the equity tied up in your home.
• Investment sales –retail sales of mutual fund type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).
• Corporate and specialty risks – products for large clients or where the risk is specialised.
Market position Aviva Investors was ranked 45th globally by assets under management5. Total worldwide funds managed by Aviva Investors, at 31 December 2016, was £345 billion. The substantial majority of this relates to Aviva’s insurance and savings operations.
• Intermediaries – We offer a range of long-term insurance, savings, retirement, general insurance and health insurance products which can be bought through an intermediary, such as an independent financial adviser or an insurance broker.
Subject to regulatory requirements, intermediaries receive a commission on sales of Aviva’s products.
• Corporate partnerships, bancassurance and joint ventures – Aviva is a corporate partner for many organisations, including banks and other financial institutions, who wish to offer their customers insurance products. We have various distribution agreements with bancassurance partners and joint ventures across the markets in which we operate. In return for offering our products to their customers, the bank or joint venture partners receive a commission as a percentage of sales and in some cases achieve extra commission if agreed target levels of sales are met. Certain agreements have a profit sharing element based on a predetermined percentage. In some cases, if the agreed targets are not met, certain terms of the contract can be renegotiated. Under the joint venture agreements, the cost of running the venture are often split between the partners.
In the UK we offer a market leading range of propositions to individual and corporate customers, including long term savings, Equity Release and Annuities, Protection and Health, and we have one of the largest back books in the UK Life and Pensions market. We have competitive advantages through the strength of our balance sheet and diversification we achieve, economies of scale in our cost base, our brand and the 16 million UK & Ireland Aviva customer base. Our aim is to generate cash and deliver profitable growth, while continuing to drive the composite model and our digital strategy. On 10 April 2015, the Group completed the acquisition of Friends Life Group. In 2016, we delivered the integration benefits of Friends Life UK a year ahead of schedule.
Our Irish long-term business is solely focused on distribution through intermediaries.
We remain committed to building on our existing relationships and distribution partnerships as well as growing our workplace and direct channels.
We focus on personal and commercial insurance. In the UK we hold the top position in the motor and property markets7. We believe our key strengths include underwriting and pricing sophistication, claims and cost management and excellent customer service. Our aim is to deliver cash and profitable growth by focusing on the fundamentals of the insurance business to maximise underwriting returns and we have a portfolio strategy to deliver greater stability of earnings.
During 2016, the UK personal motor market saw prices initially continue to rise strongly, although later in the year there were signs that the increases had begun reducing in size. The market conditions continue to be challenging in other UK classes of business as insurers seek to diversify and gain share in segments with better margin, putting pressure on rates and extent of cover.
Distribution We have a multi-distribution strategy. Our personal products are sold digitally through the internet and MyAviva, directly to customers over the phone, via brokers and through Partnership arrangements. Our QuoteMeHappy and General Accident insurance products are also available through price comparison websites. For commercial insurance, we focus on broker distribution and believe that independent brokers remain the best source of advice for business customers. Many of our brokers and customers prefer to deal online now and in line with our Digital First strategy, we’ve been developing our digital channels to deal with that demand with around 24% of our UK gross written premiums now coming through that route. We are expanding our digital capability through allowing customers to view their policies, purchase simple products, and receive risk prevention support, as well as purchase new products using the MyAviva app.
Market and competition France is the second largest insurance market in Europe12. The life insurance market is driven by individual savings and dominated by bancassurance, which accounted for 64% of the life insurance premiums collected in 201513. We believe that the long-term insurance and savings market in France has long-term growth potential due to an ageing population and the growing need for private pensions and protection. We also believe that in a low interest and Solvency II regulatory environment, product diversification and multi-funds policies are the best drivers of performance over a longer period.
to grow our portfolio while maintaining the portfolio quality and combined operating ratio.
Banca and Unicredit to maintain the level of value of new business and extend our product range (protection, accident and health) with Banca Popolare. Aviva signed a five year agreement with Banca Populare di Bari in April 2016.
We believe our Irish business is now market leader in the annuity space and continues to grow market share. We consider our main competitors to be Bank of Ireland Life, Irish Life, Zurich Life and Friends First.
In the UK, we have exclusive distribution deals for the sale of protection products with several long term partnerships including Santander, Barclays, Connells, Countrywide, and LSL estate agents.
UK & Ireland General Insurance Business overview and strategy We are a leading general insurer in both the UK and Ireland with market shares of 10.9%3 and 12.3%8 respectively. We employ around 6,700 people and operate from a number of locations throughout the UK and Ireland, including Norwich, Perth, Glasgow, London and Dublin.
Market and competition The UK is the second largest non-life insurance market in the world9. In 2015, the top five companies had a 37% share of the UK general insurance market3.
The UK and Ireland general insurance markets are cyclical in nature and remain very competitive, particularly in personal lines, where the market is highly commoditised.
In the UK our main competitors are Direct Line Group, RSA, AXA, Zurich, Allianz, Ageas, LV= and NFU Mutual. In Ireland, our competitors include RSA, AXA, Zurich, FBD, Allianz, Liberty and AIG.
Products We provide a wide range of general insurance products both in the UK and Ireland. In the UK we have a business mix of approximately 61% personal lines and 39% commercial lines.
In the general insurance market our product range includes household, motor, health and legal protection products and also a range of insurance products for small to medium sized entities, farms, craftsmen and tradesmen, and specific products for building firms and motor fleets.
Distribution The direct sales force and bancassurance are the main distribution channels for most of the Polish business and are made up of almost 2,200 tied insurance agents. Our biggest relationship is with Bank Zachodni WBK (a subsidiary of Santander Group) that sells both life and general insurance products through the bank’s network of 666 branches15. We are also exploring the IFA market through Expander Advisors, the second largest network in Poland which we acquired in 201516. We also co-operate with independent insurance agencies and brokers. Our mutual funds are also sold in brokerage houses and our individual products are supported by call centre and website sales.
Italy, Spain and Other Italy Business overview and strategy Aviva is Italy’s 10th largest life insurer, with a market share of 2.75%17 based on 2015 premiums and the 12th largest General Insurance company with a market share of 1.34%17. We have approximately 2.2 million customers across both the life and general insurance businesses. During 2016 we continued to develop our business, the focus of which is to: • Renew and refocus our distribution agreements with UBI
Our strategy is to maintain the franchise value in Spain and to develop our retail operations with new distribution agreements. The ongoing focus is on less capital intensive products.
Products The general insurance products that we provide through our Canadian companies are: • Mass personal lines, including personal motor and home insurance; • Niche personal insurance products including holiday trailers, boats as well as antique, classic and custom cars; • Small and medium-size enterprise commercial insurance, including motor, property, and liability; and • Large commercial insurance, including motor, property, liability, boiler and machinery, and surety.
In Hong Kong, our wholly owned subsidiary, Aviva Hong Kong, operates primarily through IFA distribution networks. On 20 January 2017, we agreed to develop a joint venture with Hillhouse Capital and Tencent Holdings Limited, which will focus on digital insurance. Aviva and Hillhouse will each hold 40% and Tencent will hold 20% shareholdings in Aviva Hong Kong.
Market and competition The Italian life and general insurance markets are highly concentrated with the top three providers holding c.50%17 and c.52%17 market share respectively. The life insurance industry in Italy is reporting decreased volumes, with new business down by c. 11.7%18 in September 2016 compared to the same period in 2015. The general insurance segment decreased by 1.5%19 in the first half 2016 compared to the previous year, this is mainly due to a continuous decline of motor business (4.3%19) driven by lower average prices.
Distribution Our products are distributed through bancassurance partnerships with Unicredit Group (life), Banca Popolare Group (life and general insurance), UBI Banca (life) and Banco Popolare di Bari (life and general insurance). These partnerships give us access to about 3,500 branches. In addition, we also have approximately 1,500 active financial advisors (life), and a retail network of c.700 insurance (multi-mandate) agencies and brokers (general insurance and life) as at 30 June 2016.
Spain Business overview and strategy We are Spain’s 10th largest long-term insurer by gross written premiums20 with a market share of 3% as at 30 September 201620. We sell protection, long-term savings and pensions, health and accident insurance through a bancassurance network based on four joint ventures with three banks. We also sell through Aviva Vida y Pensiones, the wholly-owned Aviva branded long-term insurance company and through our Spanish mutual insurance company Pelayo.
The top positions in the long-term life insurance market are dominated by bank-owned or bank-insurer joint ventures, with the overall bancassurance channel accounting for more than 66% of gross written premiums at the end of 2015 in the Spanish life insurance market19.
Aviva’s business in Turkey sells life and savings products including unit-linked pensions through its life joint venture, AvivaSA, which is listed as ‘AVISA’ on Borsa Istanbul.
AvivaSA has an exclusive bancassurance agreement with Akbank until 2029. Akbank sells AvivaSA’s life and pensions products on an exclusive basis through its leading banking network in Turkey.
Market and competition Canada is the 8th largest non-life insurance market22 in the world and is established and stable. The Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand.
The rest of the industry includes several national carriers as well as smaller, provincially based or niche companies.
While direct and affinity channels are gradually increasing in market share, the traditional broker channel accounts for a high proportion of distribution (particularly in commercial lines). In addition to the growth of direct and affinity channels, insurance carriers are increasingly supporting and controlling distribution through investment in brokers.
In Taiwan and Vietnam, through our joint ventures with First Financial Holdings Co., Ltd and Vietnam Joint Stock Commercial Bank for Industry and Trade, respectively, we aim to grow our bancassurance businesses and continue the diversification of our distribution networks.
Products Our Asian businesses offer a wide range of protection, savings, and pension products, including universal life, participating and non-participating endowments, unit-linked single, regular premium life insurance, a range of accident and health insurance products, single premium investment products, and individual assurance policies.
Aviva Investors Business overview and strategy Aviva Investors offers a range of asset management services, operating in the UK, Europe, North America and Asia and had £345 billion in assets under management at the end of 2016 (2015: £290 billion).
Products Our products cover a broad range of asset classes. In Europe, we have a range of open-ended collective investment schemes which are domiciled in France, Luxembourg and Poland. These funds have different share classes depending on the size and type of investor. Our traditional distribution model for these funds focuses on wholesale distributors, asset allocators and small to mid-size institutional investors. In the UK, we largely sell segregated mandates and specialist funds to pension schemes, local authorities and insurance companies. We also supply products to the retail and wholesale markets, principally through UK domiciled bond, real estate, equity, multi-asset and multi-strategy OEIC funds. The Aviva Investors Multi-Strategy (‘AIMS’) range of funds seek to provide outcome-focused strategies for an uncertain environment. In addition, we have a range of pooled pension funds which are aimed at the smaller pension fund market. We also have a range of specialist property funds and money market funds.
Distribution Aviva Investors has a Global Client Solutions team based in 14 locations. We manage relationships with a diverse range of clients including corporate and public sector pension funds, sovereign wealth funds, financial institutions, charities, insurance companies, wealth managers and national and local government bodies. Our distribution model for our open-ended collective investment schemes focuses on wholesale distributors, asset allocators and small to mid-size institutional investors. In the UK, our retail products are promoted to investors via independent financial advisors, fund platforms, fund supermarkets and discretionary asset managers. In the United States, we have a strategic partnership with Virtus Investment Partners which provides Aviva Investors’ strategies to US customers in US open-ended mutual funds. Our property funds are targeted at specialist real estate buyers and large institutions (mostly pension funds and local authorities), and our money market funds are sold by a specialist sales team and target corporate treasury functions.
Property partnerships As part of their investment strategy, the UK and certain European policyholder funds have invested in a number of property limited partnerships (‘PLPs’), either directly or via property unit trusts (‘PLPs’), through a mix of capital and loans. The nature of our involvement in property partnerships is set out in the second and third paragraphs of the Investment vehicles section of ‘IFRS Financial Statements – Accounting policies – (D) Consolidation principles’. Property partnerships are accounted for as subsidiaries, joint ventures or financial investments depending on our participation and the terms of each partnership agreement. For each property partnership accounted for as a subsidiary, joint venture or financial investment, we are exposed to falls in the value of the underlying properties which are reflected as unrealised gains/losses on investment properties, our share of joint venture results and unrealised gains/losses on financial investments, respectively. However, the majority of these are in policyholder funds (rather than shareholder funds) so such losses are offset by changes in the amounts due to policyholders or unitholders, or UDS.
Our largest clients are the long-term insurance, savings, and general insurance businesses of Aviva, to whom we provide bespoke asset management services across a broad spectrum of asset classes.
Long-term insurance and savings business As stated above, we aim to optimise investment returns while ensuring that sufficient assets are held to meet future liabilities and regulatory requirements. As different types of life insurance business vary in their cash flows and in the expectations placed upon them by policyholders, we need to hold different types of investments to meet these different cash flows and expectations.
With unit-linked business, the primary objective is to maximise investment returns, subject to following an investment policy consistent with the representations that we have made to our unit-linked product policyholders.
Investment property 6,625 3,664 527 10,816 (48) 10,768 Loans 1,027 2,470 21,362 24,859 (75) 24,784 Financial investments
Corporate Public utilities — 207 3,065 2,109 30 309 5,720 Convertibles and bonds with warrants — — — — — — — Other corporate bonds 2,175 3,440 8,639 5,554 311 2,294 22,413
For the table above we have expressed our rating using a rating scale whereby investment grade debt securities are classified within the range of AAA (extremely strong) to BBB (good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as less than BBB. This rating scale is analogous with that used by major rating agencies.
Rating with insurance guarantee Rating without insurance guarantee Rating with insurance guarantee Rating without insurance guarantee
Wrapped credit AAA — 0.0% — 0.0% — 0.0% — 0.0% AA 23 3.0% 26 3.3% 24 3.1% 24 3.1% A 559 72.0% 451 58.1% 543 69.8% 516 66.3% BBB 82 10.5% 176 22.7% 98 12.6% 120 15.4% Less than BBB 65 8.4% 65 8.4% 68 8.7% 68 8.7% Non-rated 47 6.1% 58 7.5% 45 5.8% 50 6.5% Not available without insurance guarantee — 0.0% — 0.0% — 0.0% — 0.0%
Debt securities 27,048 102,511 53,715 183,274 (7,738) 175,536 Equity securities 52,571 15,771 670 69,012 (664) 68,348 Other investments 45,630 9,119 3,506 58,255 (2,304) 55,951
As the table indicates, approximately 23.0% of total investments can be directly attributed to shareholders. The apportionment of our shareholder assets is predominantly weighted towards debt securities and loans. In comparison, policyholder assets contain a greater proportion of equities and other investments (e.g. unit trusts), and participating funds contain a greater proportion of debt and equity securities, reflecting the underlying investment mandates.
Government UK Government — 11,369 61 — — 80 11,510 Non-UK Government 4,644 4,154 1,289 1,270 3 13 11,373
Debt securities are graded according to external credit ratings issued at the balance sheet date. The credit rating used for each individual security is the median rating of the available ratings from the major credit rating agencies. If a credit rating is available from only one of these rating agencies then this rating is used. If an individual security has not been given a credit rating by any of the major rating agencies, the security is classified as ‘non-rated’.
Greece — — — — — — Ireland 0.7 0.6 0.1 0.1 0.8 0.7 Portugal 0.1 0.1 — — 0.1 0.1 Italy 5.4 4.4 0.4 0.3 5.8 4.7 Spain 1.0 0.8 0.4 0.4 1.4 1.2
Equity securities The table below analyses our investments in equity securities by sector.
Total liabilities per statement of financial position 420,868 1. Amounts shown in respect of long-term insurance contracts represent estimated undiscounted cash flows for the Group’s life assurance contracts. In determining the projected payments, account has been taken of the contract features, in particular that the amount and timing of the contractual payments reflect either surrender, death or contract maturity. In addition, the undiscounted amounts shown include the expected payments based on assumed future investment returns on assets backing insurance and investment contract liabilities. The projected cash flows exclude the unallocated divisible surplus of with-profits funds (see below).
Regulatory Authority. Although accounted for as a liability, as permitted by IFRS 4, there is currently no expected payment date for the unallocated divisible surplus. 8. Provisions include pension obligations, which have been excluded from the contractual obligations table above, due to the uncertainty of the amount and timing of future cash flows. The Group operates both funded defined benefit and funded defined contribution pension schemes, full details of which are provided in ‘IFRS Financial Statements – Note 48 – Pension obligations’. We have a contractual obligation to fund these schemes. However, the amount and timing of the Group’s cash contributions to these schemes is uncertain and will be affected by factors such as future investment returns and demographic changes. Our cash funding of defined contribution schemes is based on percentages of salary. Our cash contribution to defined benefit schemes is agreed in advance with scheme trustees. The Company and trustees have agreed to a long-term funding plan where contributions, together with anticipated growth on scheme investments are expected to eliminate the funding deficits over time. Contributions to these and the other schemes are regularly reviewed in light of changes in expectations of investment returns and other assumptions. The discounted scheme liabilities have an average duration of 21 years in the main UK scheme, 20 years in the RAC scheme, 19 years in the Irish scheme, 12 years in the Canadian scheme and 21 years in the Friends Provident Pension Scheme (FPPS).
Greece — — — — — — Ireland 0.7 0.6 0.1 0.1 0.8 0.7 Portugal 0.1 0.1 — — 0.1 0.1 Italy 7.5 6.1 0.5 0.5 8.0 6.6 Spain 1.4 1.1 0.7 0.6 2.1 1.7
3. Amounts shown in respect of general insurance contracts are based on undiscounted estimates of future claim payments, including for those classes of business for which discounted provisions are held, see ‘Financial statements IFRS – Note 40 – Insurance liabilities’. The timing of cash flows reflects a best estimate of when claims will be settled.
Principal risks and uncertainties In accordance with the requirements of the FCA Handbook (DTR 4.1.8) we provide a description of the principal risks and uncertainties facing the Group here and in note 56 to the IFRS Financial statements. More detail on the risks and uncertainties facing the Group can be found in the shareholder information section ‘Risks relating to our business’.
Despite recent increases in interest rates by the US Federal Reserve the current low interest rate environment compared to historical norms is likely to persist in the intermediate future at least.
Low interest rate environment The Group continues to be impacted by the low interest rate environment in a number of markets around the world. This has resulted in reduced interest spread on participating contracts (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under those contracts), and 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. As a result we continue to rebalance the Group’s revenues towards product lines, such as protection, that are not significantly sensitive to interest rate or market movements. Further information on the Group’s exposure to low interest rates is included in the sensitivity analysis in Note 56 of the IFRS Financial Statements.
The Group manages capital in conjunction with solvency capital requirements, and seeks to; on a consistent basis: • Match the profile of our assets and liabilities, taking into account the risks inherent in each business; • Maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength. Refer to Note 56 for more information about the Group’s risk management approach; • Retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines; • Allocate capital rigorously to support value adding growth and repatriate excess capital where appropriate; and
In 2016, the Group maintained a strong capital position through a combination of increased profits, new business and management actions contributing to a higher operating capital generation offset by adverse market movements and dividend distributions.
Our sustainability and financial strength are underpinned by an effective risk management process which helps us identify major risks to which we may be exposed, establish appropriate controls and take mitigating actions for the benefit of our customers and investors. The Group’s risk strategy is to invest its available capital to optimise the balance between return and risk while maintaining an appropriate level of economic (i.e. riskbased ) capital and regulatory capital in accordance with our risk appetite. Consequently, our risk management objectives are to: • Embed rigorous risk management throughout the business, based on setting clear risk appetites and staying within these; • Allocate capital where it will make the highest returns on a risk-adjusted basis; and • Meet the expectations of our customers, investors and regulators that we will maintain sufficient capital surpluses to meet our liabilities even if a number of extreme risks materialise.
In Poland the Government began consultation in 2016 on potentially significant pension reforms, while in the UK a 1% charge cap has been introduced on personal and stakeholder pensions. Further changes to public policy on pensions savings is likely in the UK and Poland. In most of our markets conduct regulation and enforcement has received increased focus from national supervisors, as well as international supervisory bodies such as EIOPA and IAIS. This is expected to continue into the future.
On 1 January 2016, the Solvency II capital regime became effective. During 2016, the Group applied for regulatory approval to extend use of its internal model to the non-profit business of Friends Life. Formal approval was provided in February 2017, with a beneficial impact on the Group and its UK Life business’ capital requirement at 31 December 2016. Over the next year or two the Group plans to apply to further extend use of its internal model, subject to supervisory approval.
Risk profile The types of risk to which the Group is exposed have not changed significantly over the year and remain credit, market, insurance, asset management, liquidity, operational and reputational risks as described in note 56 of the IFRS financial statements.
The increase in the capital employed is primarily driven by the increase in the equity shareholders’ funds and new issuances of subordinated debt and senior debt. In May 2016 the Group issued C$450 million of subordinated debt to part fund the acquisition of RBC General Insurance Company. In September 2016 the Group issued £400 million of subordinated debt which was used in part to finance the redemption of $400 million of subordinated debt redeemed at its first call date in December 2016. The Group maintained strong liquidity throughout the year, which was enhanced by the issuance of €350 million and €500 million of senior debt in 2016.
Regulatory capital – overview Solvency II, the new European-wide prudential regulatory framework, came into force on 1 January 2016. The Solvency II regime puts in place a consistent solvency framework for insurers across Europe. The Aviva Group is regulated on a Solvency II basis and the Group Solvency II position reflects a consolidation of all legal entities on a Solvency II basis. The Solvency II regime is underpinned by market-consistent principles. For assets this typically means the market value is used, whereas liabilities are valued on a best estimate basis using market-implied assumptions. In addition, a risk margin is required to be held, designed to represent the additional amount an insurer would be expected to pay to transfer its obligations to another insurer. The combination of the valuation of liabilities and the risk margin is known as ‘technical provisions’. Subject to regulatory approval, firms may utilise a transitional measure which spreads the increase in technical provisions that resulted from the move to the Solvency II regime, over a period of 16 years. Available capital resources is referred to as ‘own funds’ under Solvency II. This includes the excess of assets over technical provisions in the Solvency II balance sheet, subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds approved by the regulator. The Solvency II regime requires firms to hold own funds in excess of the solvency capital requirement (SCR). The SCR is calculated using a risk-based capital model, calibrated to reflect the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial shocks. The Aviva Group had used a risk-based capital model to assess economic capital requirements for a number of years which helped to prepare for the Solvency II regime. Aviva’s Group Solvency II internal model was approved in December 2015 by the Prudential Regulation Authority (PRA) for use in calculating the Group SCR. An extension of the scope of the internal model to include the non-profit funds of Friends Life Limited and Friends Life and Pensions Limited, was effective 31 December 2016. While the majority of Aviva’s Group SCR is calculated using the Group’s internal model, the SCR for some business units is valued using the standard formula, and hence the Aviva Group SCR is calculated using a partial internal model.
The Group’s overall financial strength is reflected in our credit ratings. The Group’s rating from Standard and Poor’s is A+ (strong) with a Stable outlook; A1 (good) with a Stable outlook from Moody’s; AA- (very strong) with a Stable outlook from Fitch Ratings; and A (excellent) with a Stable outlook from A.M. Best.
2 The estimated Solvency II position includes an estimated adverse impact of a notional reset of the transitional measure on technical provisions (‘TMTP’) to reflect interest rates at 31 December 2016. Removing this notional reset of TMTP would increase the estimated Solvency II surplus by £0.4 billion. Amortisation of TMTP since 1 January 2016 is also reflected.
The estimated Solvency II surplus at 31 December 2016 is £11.5 billion, with a shareholder cover ratio of 191%. This is an increase of £1.8 billion compared to the 31 December 2015 surplus. The beneficial impacts of operating capital generation, foreign exchange variances and hybrid debt issuance have been partially offset by the impact of the Aviva plc dividend, acquisitions and the adverse non-operating capital generation, driven by adverse market movements, notably falls in interest rates over the year. The operating capital generation includes the beneficial impact of increasing the scope of the Group’s internal model to include the non-profits funds of Friends Life Limited and Friends Life and Pensions Limited, effective 31 December 2016. The non-operating capital generation includes a notional reset of the transitional measure on technical provisions (‘TMTP’) to reflect interest rates at 31 December 2016.
Key indicators Indicator 2014 2015 2016 2016 target Change Met target 2017 target
1 Our 2010 baseline is 146,248 tCO2e. We have two long term CO2e reduction targets in place, 50% by 2020 and 70% by 2030 from the baseline. 2 There were no structural changes in the organisation which had a material impact on operational CO2e emissions this year. 3 We have restated 2015 figures after an overstatement was found in the data reported by one of our markets. This was due to an overstatement within the estimated water calculation identified through our market audit. Before restatement the figure for 2015 was 483,635m3. 4 We have restated 2015 figures after an overstatement was found in the data reported by one of our markets. This was due to an overstatement within the estimated waste calculation identified through our market audit. Before restatement the figure for 2015 was 9,564 tonnes.
Responsible investment £ invested in low-carbon infrastructure1 New KPI New KPI £450m Invest an average of £500m annually N/A N/A Invest £2.5bn by 2020 tCO2e savings from annual investment in low-carbon infrastructure2
% of employees who rate us favourably on engagement index2 70% 70% 74% Improve from previous year 4pp Y Maintain performance
Corporate Responsibility during the term of their contract with Aviva1 83% 99% 84% Increase scope/ % from previous year
Increase scope/ % from previous year 1 Target marked as partially met because we increased the scope of our managed supply population in 2016 to include suppliers to our Ireland business, Heritage Friends Life and Sesame Bankhall Group. In 2017, we will be providing further guidance to our Supplier Managers to help improve engagement on CR matters with our Managed Suppliers.
Indicator 2014 2015 2016 2016 target Change Met target 2017 target
Number of employee hours spent volunteering2 40,200 40,800 41,700 Increase volunteering hours
Number of local community projects supported through our corporate responsibility programmes3
New KPI 700 1,600 Support 1,000 projects annually 1 We report following the LBG methodology. 2 The increase in the number of employees engaged is due to increased participation and improvements in reporting. Our strategy includes a target of 200,000 volunteering hours to be achieved by 2020. This includes hours volunteered from January 2015 onwards. All numbers have been rounded down to the nearest hundred. 3 Our strategy includes targets of 2.5 million people benefitted, and 5,000 local community projects supported, to be achieved by 2020. We count beneficiaries and projects supported from January 2015 onwards. This includes our carbon offsetting programme. The increase in these KPIs is due to our growing Aviva Community Fund activity, our new partnership with the British Red Cross, and reporting improvements. All numbers have been rounded down to the nearest hundred.
Independent Limited Assurance Report to the Directors of Aviva plc The Board of Directors of Aviva plc (‘Aviva’) engaged us to provide limited assurance on the information described below and set out in Aviva’s Annual Report and Accounts for the year ended 31 December 2016.
Our conclusion Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe that the Selected Information for the year ended 31 December 2016 has not been prepared, in all material respects, in accordance with the Reporting Criteria.
This conclusion is to be read in the context of what we say in the remainder of our report.
Trust % of employees who confirm that they have read, understood, and accepted the Business Ethics Code annually; and all employees in Aviva France who are obliged to comply with the Business Ethics Code as a term of their employment1
CO2e emissions (tonnes) – absolute 83,924 88,698 79,410 Reduce by 5% (10)% Y Reduce by 5% CO2e emissions (tonnes) – relative2 N/A 88,698 79,410 Reduce by 5% (10)% Y Reduce by 5% Water consumption (m³) – absolute3 468,097 449,913 373,402 Reduce by 4% (17)% Y Reduce by 4% Waste generated (tonnes) – absolute4 9,255 5,821 4,994 Reduce by 4% (14)% Y Reduce by 4%
Total beneficiaries of corporate responsibility programmes3 511,600 587,200 939,000 Increase number of beneficiaries
Work done We are required to plan and perform our work in order to consider the risk of material misstatement of the Selected Information. In doing so, we: • made enquiries of Aviva’s management, including the Corporate Responsibility (CR) team and those with responsibility for CR
Aviva’s responsibilities The Directors of Aviva are responsible for: • designing, implementing and maintaining internal controls over information relevant to the preparation of the Selected
Governing climate-related risks At the Aviva plc Board level, the following two Committees oversee our management of climate related risks. • Board Risk Committee – this Committee met six times in 2016 and reviews, manages and monitors all aspects of risk management in the Group, including climate risk. Climate change is highlighted as an emerging risk in the 2016 Annual Report & Accounts, as it has been in previous years. It is therefore assessed for its proximity and significance to Aviva via our embedded market and group emerging risk processes. Emerging risks are regularly reviewed and their potential impact is evaluated to understand if they are significant at an Aviva level over longer time periods than the current business plan. This is to ensure all risks to both the medium and long term future of Aviva receive appropriate attention.
In July 2015, we published Aviva’s Strategic Response to Climate Change setting out our approach to acting on climate-related investment risk over the next five years (2015-2020)2. This encompasses how we allocate our capital and how we use our influence to support the transition to a lower carbon – ‘2°C aligned’ – economy. We provided an update to this Response in 20163.
We remain deeply committed to ensuring environmental, social and governance issues are included in our investment analysis and decision making and continue to drive better integration of carbon and climate risk factors into investment decisions. The dynamic and interconnected nature of climate risk, in addition to current limitations in some necessary data sets, means understanding and managing climate related risks remains an important focus for our business.
Physical Risk • Insurance risks – We recognise that the increased severity and frequency of weather-related losses is a driver of results volatility and may impact our ability to write profitable new business over the longer term. This has driven a focus on explicitly considering the impact of climate/weather in financial planning and pricing. Our exposure is limited by our general insurance business being predominantly in Northern Europe and Canada. Large catastrophic losses are explicitly considered in economic capital modelling to make sure the Group and its subsidiaries are resilient to such scenarios. We consider our top three insurance climate-related risks to be:
Information that is free from material misstatement, whether due to fraud or error; • establishing objective Reporting Criteria for preparing the Selected Information; • measuring and reporting the Selected Information based on the Reporting Criteria; and • the content of the Annual Report and Accounts 2016.
Our responsibilities We are responsible for: • planning and performing the engagement to obtain limited assurance about whether the Selected Information is free from material misstatement, whether due to fraud or error; • forming an independent conclusion, based on the procedures we have performed and the evidence we have obtained; and • reporting our conclusion to the Directors of Aviva.
In this section Company address 316 Share capital 316 Related party disclosures 318 Dividend data 319 Guarantees, securitised assets and off-balance sheet arrangements
Liquidity and capital resources 321 Regulation 326 Risks relating to our business 332
– Adverse impact to validity of actuarial pricing assumptions and projections – Potential need to restrict coverage levels to make assets insurable – Managing volatility of financial results emanating from increased severity and frequency of weather related losses.
• Reinsurance – We purchase reinsurance to protect against the severity and frequency of large catastrophe losses (CAT) events, and review the adequacy of the cover and programme structure annually at renewal.
• Investment risks – When acquiring property, Aviva Investors’ strategy is to commission an Environmental Assessment, as well as a standard Building Defects Report. The former covers important potential risks, such as flood exposure and historic and potential pollution. Within our real estate portfolio, we use the Global Real Estate Sustainability Benchmark (GRESB) to understand the climate resilience and broader sustainability of individual properties and funds. Our real estate and infrastructure investments are located predominantly in Europe.
Transition Risk With the Paris agreement to pursue efforts to limit the temperature increases to well below 2oC, there will be an increasing number of climate–related policies and regulations to assist this transition; these will impact sectors in different ways. We consider active stewardship to be a fundamental responsibility for us as investors. This includes considered voting and engagement on climate risk, disclosure and performance. We have focused on in-depth engagement with companies strategically exposed to climate related risks due to their significant carbon impact and exposure to transition risks (and opportunities). We undertake this engagement individually and collaboratively, actively supporting shareholder resolutions, and co-filing similar resolutions as appropriate.
We continue to be committed to increasing our investment in low carbon infrastructure and to considering how best we support the financing of the transition to a lower carbon economy.
Metrics and Targets used to assess and manage relevant climate-related risks and opportunities Investment We have enhanced our ESG heat map to include proxy climate risk metrics. This heat map is available to our analysts and fund managers via Bloomberg and updated on a monthly basis. This includes a composite carbon exposure metric based on the carbonintensity of business activities, the extent of operations in jurisdictions with stringent carbon emissions regulations and the quality of a company’s carbon management.
In 2016, we met with a further 127 companies to discuss sustainability governance, sustainability disclosure and climate change, and environment.
Over the same period, we supported 86.8% of climate change-related shareholder resolutions. In 2015, we actively supported the ‘Strategic Resilience for 2035 and beyond’ shareholder resolutions, lead by the Aiming4A Coalition, proposed at the BP, Shell, and Statoil AGMs. We attended both the BP and Shell AGMs in support of the resolution and to question the Board. In 2016, we co-filed similar resolutions at the AGMs of Anglo American, Glencore and Rio Tinto.
In September 2015, we signed the Montreal Investment carbon foot-printing pledge. At the time, we were one of the largest asset managers to support this initiative. In November 2015, we published the carbon footprint of our four largest equity portfolios collectively totalling £13 billion. This represented one third of our equity assets and 5% of our total assets under management.
IN THIS SECTION 316 Company address 316 Share capital 318 Related party disclosures 319 Dividend data 320 Guarantees, securitised assets and off-balance sheet arrangements 321 Liquidity and capital resources 326 Regulation 332 Risks relating to our business
The Companies Act 2006 abolished the requirement for a company to have an authorised share capital and the Company’s current articles of association reflect this. Directors are still limited as to the number of shares they can allot, as the allotment authority continues to be required under the Act, save in respect of employee share schemes. Details of existing authorities to allot shares are set out in notes 30 and 33. Ordinary shares in issue in the Company rank pari passu. All the ordinary shares in issue carry the same right to receive all dividends and other distributions declared, made or paid by the Company.
The Company is presently authorised to repurchase up to 404 million ordinary shares and any shares that are repurchased may be held as Treasury shares or cancelled. Details of the Company’s dividends are set out in the section ‘Dividend data’. The Company’s preference shares rank, as to the payment of dividends and capital, as set out in note 33 of the IFRS Financial statements.
At 31 December 2013 2,946,939,622 Shares issued under the Group’s Employee and Executive Share Option Schemes1 3,547,718
At 31 December 2014 2,950,487,340 Shares issued under the Group’s Employee and Executive Share Option Schemes1 11,651,227 Shares issued in relation to the acquisition of Friends Life 1,086,326,606
Issued share capital The Company had an aggregate issued and outstanding ordinary share capital of £1,015 million as of 31 December 2016. The following table sets out information about the issued and outstanding classes of equity as of 31 December 2016.
There were no changes to the voting rights of any class of shares during 2014, 2015 and 2016, other than issuances in connection with our various employee option schemes and in relation to the acquisition of Friends Life. The Company did not issue shares for consideration other than cash during 2014, 2015 and 2016, with the exception of the acquisition of Friends Life in 2015. In addition, at the Company’s general meetings in 2014, 2015 and 2016, shareholders authorised the limited dis-application of section 561 of the Companies Act 2006 to permit the Company to issue new equity securities for cash without applying shareholders’ statutory pre-emptive rights.
Related party disclosures Related party transactions For more information relating to related party transactions, including more information about the transactions described below, please see ‘IFRS Financial Statements – note 59 – Related party transactions’.
Key management compensation The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: Salary and other short-term benefits 14.6 13.3 8.9 Other long term benefits 5.3 5.2 4.1 Post-employment benefits 1.5 1.7 1.0 Equity compensation plans 9.3 10.6 1.9 Termination benefits — 2.0 —
In addition to the amounts disclosed for associates and joint ventures above, at 31 December 2016 amounts payable at yearend were £nil (2015: £nil), and expenses incurred during the period were £3 million (2015: £7 million).
Loans to joint ventures We make loans to our property management joint ventures to fund property developments which we undertake with our joint venture partners. Movements in these loans may be found in ‘IFRS Financial Statements – note 18 – Interests in, and loans to, joint ventures’. Total loans to joint ventures at 31 December 2016 were £nil, with the loans being repaid during 2016. Total loans to joint ventures at the end of each of the last three financial years are shown in the table below: Loans to joint ventures — 94 73
We have loans receivable, secured by mortgages, which have then been securitised through non-recourse borrowings by special purpose entities in our UK Life business, as set out in Note 24 to the IFRS Financial Statements. These special purpose entities have been consolidated and included in the statement of financial position, as we retain the residual interest in them.
Management of capital resources We seek to maintain an efficient capital structure using a combination of equity shareholders’ funds, preference capital, subordinated debt and senior borrowings. This structure is consistent with our risk profile and the regulatory and market requirements of our business.
• manage exposures to movements in exchange rates by aligning the deployment of capital by currency with our capital requirements by currency.
In May 2016 Aviva plc issued C$450 million of subordinated debt at 4.50% which matures in May 2021. In September 2016 Aviva plc issued £400 million of subordinated debt at 4.375%, with a final maturity in September 2049 and first call in September 2029, and €350 million of senior debt at 0.100% which matures in December 2018. In October 2016 Aviva plc issued a further €500 million of senior debt at 0.625% with a maturity in October 2023. On 1 December 2016 Aviva plc redeemed, at first call, the 8.25% $400 million subordinated debt originally issued in 2011.
It is standard business practice for our Group companies to give guarantees, indemnities and warranties in connection with disposals of subsidiaries, joint ventures and associates to third parties. As of 31 December 2016, we believe no material unprovisioned loss will arise in respect of these guarantees, indemnities and warranties. Principal warranties include the accuracy and completeness of the statement of financial position at an agreed specified date, details of outstanding litigation, regulatory matters, material contractual commitments, the position on tax filings and other customary matters together with any specific items identified during due diligence. In addition, specific clauses cover such items as regulatory approvals and licences, the basis of calculation regarding actuarial insurance liabilities, reinsurance contracts and the status of employee pension plans. Their exact terms are tailored to each disposal and are set out in the respective sale and purchase agreement. Similarly, the open warranty periods, within which the purchaser could claim, and limits on the maximum amount potentially recoverable will vary for each item covered in each disposal.
We have received notice of a number of claims on recent disposals, and where appropriate, hold provisions in respect of such claims. There are also open claim periods on other recent disposals in respect of which we have neither received, nor have any reason to believe we will receive, any claims. Accordingly, as of 31 December 2016, we believe that appropriate provisions have been made regarding known and expected material warranty and indemnity claims relating to recent disposal activity.
At 31 December 2016, total consolidated cash and cash equivalents net of bank overdrafts amounted to £38,405 million, an increase of £5,235 million from £33,170 million in 2015.
At 31 December 2016, our total external borrowings, including subordinated debt and securitised mortgage loans, amounted to £10.3 billion (2015: £8.8 billion). Of the total borrowings, £8.6 billion (2015: £6.9 billion) are considered to be core borrowings and are included within the Group’s capital employed. The balance of £1.7 billion (2015: £1.9 billion) represents operational debt issued by operating subsidiaries. We also have substantial committed credit facilities available for our use. At 31 December 2016, we had no undrawn committed credit facilities expiring within one year (2015: £0.6 billion) and £1.7 billion in credit facilities expiring after more than one year (2015: £1.1 billion).
The table below presents our debt position for the periods indicated: Core structural borrowings Subordinated debt 7,222 6,469 Senior notes 722 — Commercial paper 642 485
Following the renewal of terms undertaken in 2015 our committed central borrowing facilities have no financial covenants.
The table below shows liquid resources provided to Group Centre during the year: Amounts received in respect of 2016 activity £m
Application of funds We use funds to pay dividends to our shareholders, to service our debt and to pay our central Group cash flows.
Year ended 31 December 2016 Net cash from operating activities Total net cash from operating activities decreased by £8 million to a £4,747 million inflow in 2016 (2015: £4,755 million inflow). The net operating cash inflow reflects a number of factors, including the level of premium income, payments of claims, creditors and surrenders and purchases and sales of operating assets including financial investments. It also includes changes in the size and value of consolidated cash investment funds and changes in the Group’s participation in these funds.
Year ended 31 December 2015 Net cash from operating activities Total net cash from operating activities (continuing operations) increased by £5,299 million to a £4,755 million inflow in 2015 (2014: £544 million outflow). The increase mainly reflected net cash inflows arising from purchases and sales of operating assets including financial investments.
Operating borrowings Operational borrowings at amortised cost 608 550 Operational borrowings at fair value 1,110 1,308 10,295 8,770 Less: Amounts classified as held for sale — —
UK & Ireland life1 1,096 UK & Ireland general insurance & health1 91 France 185 Poland 138 Italy 76 Spain 47 Other Europe 3 Canada 130 Asia, Aviva Investors & Other2 39 Total 1,805 1 Cash remittances include amounts of £100 million received from UK & Ireland Life and £83 million from UK & Ireland General Insurance in February 2017 in respect of 2016 activity. 2016 cash remittances also include £159 million received from France in January 2017 in respect of 2016 activity.
Excess centre cash flow represents cash remitted by business units to the Group centre less central operating expenses and debt financing costs. It is an important measure of the cash that is available to pay dividends, reduce debt, pay exceptional charges or invest back into our business units. It does not include non-operating cash movements such as disposal proceeds or capital injections.
In 2016, our total interest costs on central borrowings were £388 million. This compared with £350 million of interest paid on central borrowings in 2015. Total corporate centre expenses in 2016 were £184 million compared with £180 million in 2015. An additional application of our funds is the acquisition of businesses. In 2016, cash paid in the acquisition of subsidiaries, joint ventures and associates net of cash received amounted to £432 million, compared with cash received of £7,783 million in 2015.
Net cash outflow on financing activities Net cash used in financing activities decreased by £977 million to an outflow of £388 million (2015: £1,365 million outflow). The decrease is mainly due to the net drawdown of borrowings partially offset by an increase of the dividend payment.
Own Funds1,2 24.1 21.8 Solvency Capital Requirement before diversification1 (18.0) (16.3) Diversification benefit 5.4 4.2 Diversified Solvency Capital Requirement1 (12.6) (12.1)
Group Solvency II Surplus at 1 January 2016 9.7 Operating Capital Generation 3.5 Non-operating Capital Generation (1.4) Dividends (1.0) Foreign exchange variances 0.6 Hybrid debt issuance 0.4 Acquired/divested business (0.3)
2 The estimated Solvency II position includes an estimated adverse impact of a notional reset of the transitional measure on technical provisions (‘TMTP’) from interest rate movements in the second half of 2016. Removing this notional reset of TMTP would increase the estimated Solvency II surplus by £0.4 billion. Amortisation of TMTP since 1 January 2016 is also reflected.
Regulation Compliance In both our insurance and fund management businesses, matters may arise as a result of industry-wide issues, inspection visits or other regulatory activity, requiring discussion and resolution with industry regulators. The Group needs to ensure that procedures are in place to address any regulatory concerns, and that such procedures are properly planned, managed and resourced. Corrective action is undertaken, when necessary, with progress reported to relevant regulatory bodies in a timely manner.
The European Union In addition to its UK businesses, Aviva is active in other EU member states through wholly owned subsidiary and joint venture companies. These companies are subject to the laws and regulations of the EU member state in which they are based, but are also affected by higher level EU legislation. In future years the regulatory landscape in the UK will depend on the nature of the ongoing relationship between the UK and its EU partners (following the UK referendum on EU membership). This will be determined in the forthcoming negotiations. Up until the UK leaves the European Union EU law continues to have force in the UK.
Key directives of particular relevance to the financial services industry, and so to Aviva’s businesses in the EU include: European System for Financial Supervision The European System for Financial Supervision comprises European Supervisory Authorities, including the European Insurance and Occupational Pensions Authority (EIOPA). Its aims include achieving consistent regulation and supervision within the European Union. In this respect it is able to issue supervisory guidelines on a comply or explain basis to National Competent Authorities and where European Directives provide Delegated Acts, it may propose Regulatory Technical Standards to the Commission.
Markets in Financial Instruments Directive (MIFID) MIFID became law in the UK in November 2007 and superseded the earlier Investment Services Directive. It sets the conditions for initial authorisation and the ongoing regulatory requirements that investment firms must meet, and expands the range of investment services that investment firms can provide across the EU on the basis of their authorisation in the country where they are established. It also introduces greater harmonisation governing the organisation and conduct of business of investment firms.
Future EU developments There are a number of European dossiers that are expected to continue to progress during 2017, including Packaged Retail and Insurance-based Investment Products (PRIIPs) that will introduce common product disclosure standards, the Insurance Distribution Directive (IDD) that will introduce new standards for insurance distribution and MIFID 2 that introduces new conduct and market transparency requirements.
United Kingdom The regulatory structure On 1 April 2013 the Financial Services Authority was replaced by the Prudential Regulation Authority (the ‘PRA’) and the Financial Conduct Authority (the ‘FCA’).
Within their respective jurisdictions, the PRA and FCA have authority to make rules and issue guidance, taking into account relevant EU directives, impacting individuals and firms authorised to conduct regulated activities (‘Authorised Persons’ and ‘Authorised Firms’).
Overview of regulation as it affects our business Our principal insurance and fund management operations are in the UK, Europe, Canada and Asia. We are therefore subject to financial services regulation and local regulatory supervision in all these areas, as individually covered below.
As the Group’s parent company is based in the UK, both EU legislation and UK regulatory rules can impact Aviva’s business practices worldwide. Regulators supervising the Group coordinate on a cross-border basis through a ‘college’.
Insurance Mediation Directive This requires EU member states to establish a framework to: • ensure that insurance and reinsurance intermediaries have been registered on the basis of a minimum set of professional and financial requirements; • ensure that registered intermediaries will be able to operate in other member states by availing themselves of the freedom to provide services or by establishing a branch; and
The PRA is currently a subsidiary of the Bank of England and is responsible for the micro-prudential regulation of banks, building societies, credit unions, insurers and major investment firms. The PRA has two statutory objectives: • to promote the safety and soundness of regulated firms; and • in the case of insurers, to contribute to securing an appropriate degree of protection for policyholders.
UK Regulation of the Aviva Group A number of the Groups’ UK subsidiaries are ‘dual regulated’ (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation)) while others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation).
The COBS and ICOBS Rules imposed on an Authorised Firm will vary according to the scope of its business and range of the Authorised Firm’s clients. Generally speaking, however, the obligations imposed on an Authorised Firm by the COBS and ICOBS Rules will include the need to classify its clients according to their level of sophistication, provide them with information about the Authorised Firm, meet certain standards of product disclosures (including fee and remuneration arrangements), ensure that promotional material which it produces is clear, fair and not misleading, assess suitability when advising on certain products, control the range and scope of advice given, manage conflicts of interest, report appropriately to its clients and provide certain protections in relation to client assets.
Capital and solvency rules for insurers Qualitative and quantitative requirements for calculating technical provisions and capital requirements are set out in the pillar 1 framework of Solvency II. Technical provisions include the best estimate of liabilities and a risk margin. A Solvency Capital Requirement (SCR) is required to reflect risk based capital required to meet obligations over 12 months with a 99.5% probability. This can be calculated either using a prescribed standard formula or an internal model that has been approved by the regulator. Aviva has received approval from the PRA to use an internal model for its largest businesses in the UK, France and Canada, but uses the standard formula for its smaller businesses. Solvency II also requires the calculation of a Minimum Capital Requirement (MCR) which along with the SCR constitutes a ladder of supervisory intervention.
Day-to-day supervision Both the PRA and FCA take a risk-based approach to supervision, with the PRA focusing on those issues and authorised firms posing the greatest risk to the stability of the UK financial system and policyholders, and the FCA conducting in-depth structured supervision work with those firms with the potential to cause the greatest risk to its objectives. Given our size and our share of the UK retail market, a major issue within our business which causes concern for the regulators may have a significant impact on these objectives.
UK winding up rules The general insolvency laws and regulations applicable to UK companies are modified in certain respects in relation to UK insurance companies where direct insurance claims will have priority over the claims of other unsecured creditors (with the exception of preferred creditors), including reinsurance creditors, on a winding up by the court or a creditors’ voluntary winding up of the insurance company. Furthermore, instead of making a winding-up order when an insurance company has been proved unable to pay its debts, a UK court may reduce the amount of one or more of the insurance company’s contracts on terms and subject to conditions (if any) which the court considers fit. Where an insurance company is in financial difficulties but not in liquidation, the FSCS may take measures to secure the transfer of all or part of the business to another insurance company. FSMA provides further protection to policyholders of insurance companies effecting or carrying out contracts of long-term insurance. Unless the court orders otherwise, a liquidator and/or administrator must carry on the insurer’s business so far as it consists of carrying out the insurer’s contracts of long-term insurance with a view to it being transferred as a going concern to a person who may lawfully carry out those contracts. In carrying on the business, the liquidator/administrator may agree to the variation of any contracts of insurance in existence when
Insurance business in Canada is regulated federally by the Office of the Superintendent of Financial Institutions (OSFI) for prudential supervision (i.e. capital adequacy, solvency, etc). OSFI derives its powers from the federal Insurance Companies Act (Canada) which governs the structure and operation of federally incorporated insurance companies.
Intervention and enforcement The PRA and FCA have extensive powers to investigate and intervene in the affairs of Authorised Firms. In relation to dual regulated firms, under the terms of a Memorandum of Understanding entered into in April 2013, the PRA and FCA will consult each other before taking enforcement action. The PRA has the right to veto certain FCA regulatory actions in relation to dual regulated firms, but the FCA is not required to comply if in its opinion it would be incompatible with any EU or other international obligation of the UK.
Shareholder information continued the winding-up order is made, but must not effect any new contracts of insurance.
Ongoing difficult conditions in the global financial markets and the economy generally may adversely affect our business and results of operations, and these conditions may continue. Our results of operations are materially affected by uncertainty in the worldwide financial markets and macro-economic conditions generally. A wide variety of factors, including concerns over slowing growth, high sovereign debt within, and to a lesser degree outside, the eurozone, the stability and solvency of financial institutions, longer-term low interest rates in developed markets, inflationary threats as well as geopolitical issues in, and emanating from, the Middle East (in particular Syria), Russia, Ukraine and North Africa, have contributed to increased volatility in the financial markets in recent years and have diminished growth expectations for the global economy. Global fixed income markets continue to experience periods of both volatility and limited market liquidity, which have affected a broad range of asset classes and sectors.
Factors relating to general economic conditions (such as consumer spending, business investment, government spending, and high sovereign debt levels, exchange rates and commodity prices), uncertainty over the United Kingdom’s future relationship with the European Union (‘EU’), the outcome of national elections in several European Union member states, the volatility and strength of both debt and equity markets, and inflation, all affect the profitability of our business. In a sustained economic phase of low growth and high public debt, characterised by higher unemployment, lower household income, lower corporate earnings, lower business investment and lower consumer spending, the demand for financial and insurance products could be adversely affected. In addition, we may experience an elevated incidence of claims or surrenders of policies or claims of misselling. Any potential material adverse effect on us will also be dependent upon customer behaviour and confidence.
Following the UK’s referendum vote to withdraw from the EU, uncertainty surrounding the UK’s future relationship with the EU may have a negative effect on global economic conditions, financial markets and our business. On 23 June 2016, the UK voted in a national referendum to withdraw from the EU. The UK government has indicated that it intends during March 2017 to formally serve notice to the European Council of its desire to withdraw, a process that could involve lengthy negotiation to draft and approve a withdrawal agreement in accordance with Article 50 of the Treaty on European Union.
As a global business, we are exposed to various local political, regulatory and economic conditions, business risks and challenges which may affect the demand for our products and services, the value of our investment portfolios and the credit quality of local counterparties. We offer our products and services in Europe (including the United Kingdom (‘UK’)), North America and the Asia Pacific region through wholly owned and majority owned subsidiaries, joint ventures, companies in which we hold non-controlling equity stakes, agents and independent contractors. Our international operations expose us to local political, regulatory, business and financial risks and challenges which may affect the demand for our products and services, the value of our investment portfolio, the required levels of capital and surplus, and the credit quality of local counterparties. These risks
There are concerns over the solvency of some European banks, particularly in Italy, and their resilience to any deterioration in macroeconomic conditions. Possible measures which could be taken by governments to restore the solvency of their banks may breach EU rules or significantly increase sovereign indebtedness, and act as a trigger for a re-emergence of the sovereign debt and banking crisis in Europe, all of which could have a material adverse effect on our financial condition and results of operations.
The issues arising out of a re-emergence of the sovereign debt crisis in Europe may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies, and likewise affect UK and U.S. based financial institutions, the stability of the global financial markets and any economic recovery.
In addition, with respect to secured transactions, our credit risk may be increased when the collateral held by us cannot be realised or is liquidated at prices insufficient to recover the full amount of the loan or other value due. We also have exposure to financial institutions in the form of unsecured debt instruments and derivative transactions. Such losses or impairments to the carrying value of these assets could materially and adversely affect our financial condition and results of operations.
The interdependence of global financial institutions means that the failure of a sufficiently large and influential financial institution could materially disrupt global securities markets or clearance and settlement systems in the markets. This could cause severe market decline or volatility. Such a failure could also lead to a chain of defaults by counterparties that could materially adversely affect the Group. This risk, known as “systemic risk”, could adversely impact our future product sales as a result of reduced confidence in the financial services industry. It could also adversely impact our results because of market declines and write downs of assets.
The UK referendum on EU membership has also increased the risk of a number of other political events occurring both in the UK and the EU, including similar referendums in other EU member states and a new Scottish referendum on independence. The possible occurrence of such events and the uncertain outcome of the arrangements which will be put in place for the UK to exit the EU could result in heightened market volatility and a significant risk of macroeconomic deterioration. The Bank of England has also responded by loosening its monetary policy causing a reduction in the long term interest rates on UK gilts with the possibility that such rates could stay at record low levels for a prolonged period. The European Central Bank may also follow suit causing a reduction in the interest rates on European government securities. While we actively manage our risk exposure, sustained low yields alongside macroeconomic uncertainty and heightened volatility could impact our business.
Credit risks relating to Aviva’s business Market developments and government actions regarding the sovereign debt crisis in Europe, particularly in Greece, and concerns over the solvency of European banks, particularly in Italy, could have a material adverse effect on our results of operations, financial condition and liquidity. Continued uncertainty over the outcome of EU and the international financial support programme for Greece, and the possibility that other EU member states may experience similar financial pressures, could disrupt global markets. In particular, any re-emergence Greece’s sovereign debt crisis could disrupt equity and fixed income markets, and result in volatile bond yields on the sovereign debt of EU members.
If an EU member state were to default on its obligations or to seek to leave the eurozone, or if the eurozone were broken up entirely, the impact on the financial and currency markets would be significant and could impact materially all financial institutions, including the Group.
Credit spread volatility may adversely affect the net unrealised value of our investment portfolio and our results of operations. Our exposure to credit spreads primarily relates to market price variability associated with changes in credit spreads in our investment portfolio. These are largely held to maturity, so although our financial statements reflect the market value of assets, our priority remains the management of assets and liabilities over the longer term. Credit spread moves may be caused by changes in the perception of the creditworthiness of a company, or from market factors such as the market’s risk appetite and liquidity. A widening of credit spreads will generally reduce the value of fixed income securities we hold. Conversely, credit spread tightening will generally increase the value of fixed income securities we hold. It can be difficult to value certain of our securities if trading becomes less liquid. Accordingly, valuations of investments may include assumptions or estimates that may have significant period to period changes that could have a material adverse effect on our consolidated results of operations or financial condition. Downturns in the net unrealised value of our investment portfolio may also have a material adverse effect on our regulatory capital surplus.
Losses due to defaults by counterparties, or changing market perceptions as to the risk of default, including potential sovereign debt defaults or restructurings, could adversely affect the value of our investments and reduce our profitability and shareholders’ equity. We choose to take and manage credit risk through investment assets partly to increase returns to policyholders whose policies the assets back, and partly to optimise the return for shareholders.
We use reinsurance and hedging programmes to hedge various risks, including certain guaranteed minimum benefits contained in many of our long-term insurance and fund management products. These programmes cannot eliminate all of the risks and no assurance can be given as to the extent to which such programmes will be effective in reducing such risks. We enter into a variety of derivative instruments, including options, forwards, interest rate and currency swaps, with a number of counterparties. Our obligations under our fund management and life products are not changed by our hedging activities and we are liable for our obligations even if our derivative counterparties do not pay us. Defaults by such counterparties could have a material adverse effect on our financial condition and results of operations.
As interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured or have been prepaid or sold at lower yields, reducing our investment return. Moreover, borrowers may prepay or redeem the fixed-income securities, commercial mortgages and mortgage-backed securities in our investment portfolio with greater frequency in order to borrow at lower market rates, which increases this risk. Lowering interest crediting or policyholder bonus rates can help offset decreases in investment margins on some products. However, our ability to lower these rates could be limited by competition or by contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our spread could decrease or potentially become negative. Our expectation for future spreads is an important component in the amortisation of policy acquisition costs and significantly lower spreads may cause us to accelerate amortisation, thereby reducing net income in the affected reporting period. In addition, during periods of declining interest rates, the guarantees within existing life insurance and annuity products may be more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year to year, during a period when our new investments carry lower returns. Accordingly, during periods of declining interest rates, profitability may suffer as the result of a decrease in the spread between interest rates credited to policyholders and returns on our investment portfolio.
Downturns and volatility in equity markets can have a material adverse effect on the revenues and returns from our unit-linked, participating and fund management business. The unit-linked and fund management business depends on fees related primarily to the value of assets under management and would therefore be reduced by declines in equity and property markets. Profit could also be reduced as a result of current investors withdrawing funds or reducing their rates of on-going investment with our fund management companies, or switching to lower risk funds generating lower income, or as a result of our fund management companies failing to attract funds from new investors. Similarly, bonuses credited to participating policyholders will reduce following declines in equity and property markets and this will generally also lead to reductions in transfers to shareholders.
Shareholder information continued may fall in value causing the investment in securities to fall in value. The markets for these property investments and instruments can become illiquid, and issues relating to counterparty credit ratings and other factors may increase pricing and valuation uncertainties. We are also indirectly exposed to property risk through our UK commercial finance lending. The fall in prices of any such investments due to such risks could adversely affect our results of operations, shareholders’ equity and financial condition.
Downturns in equity markets may also have a material adverse effect on our regulatory capital surplus as measured under the EU Solvency II Insurance Directive.
For property investment, we are subject to counterparty, valuation and liquidity risks. These investments may be adversely affected by weakness in property markets and increased mortgage delinquencies. We are also subject to property risk indirectly in our investments in residential mortgage-backed securities and commercial mortgage-backed securities and covered bonds. There is the risk that the underlying collateral
Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates could result in an increase in the valuation of the future policy benefits or policyholder account balance liabilities associated with such products, resulting in a reduction to net income. We use reinsurance and derivative instruments to mitigate some of the liability exposure and the volatility of net income associated with these liabilities, and while we believe that these and other actions mitigate the risks related to these benefit, we remain liable for the guaranteed benefit in the event that reinsurers or derivative counterparties are unable or unwilling to pay.
Asset management risks relating to Aviva’s business Our fund management business may be affected by the poor investment performance of the funds we manage Poor investment returns in our investment management business, due either to general market conditions or underperformance (relative to competitors or to benchmarks) by funds or accounts that we manage, may adversely affect our ability to retain existing assets and to attract new clients or additional assets from existing clients. The ability of our investment team to deliver strong investment performance depends in large part on our ability to identify appropriate investment opportunities in which to invest client assets. If the investment team for any of our strategies is unable to identify sufficient appropriate investment opportunities for existing and new client assets on a timely basis, the investment performance of the strategy could be adversely affected. The risk that sufficient appropriate investment opportunities may be unavailable is influenced by a number of factors, including general market conditions. This could adversely affect the management and incentive fees that we earn on assets under management and our results of operations.
Liquidity risks relating to Aviva’s business Adverse capital and credit market conditions may adversely affect our financial flexibility in addressing liquidity needs, as well as access to and the cost of capital which could adversely affect our results of operations or financial condition. At Group level, we need some of our invested assets to be liquid to pay our operating expenses, taxes, interest on our debt, dividends on our capital stock and to repay maturing debt. At an operational level we also need liquidity and sufficient cash flow sources to meet insurance claims. Without sufficient
We may refinance existing financing arrangements and may, in exceptional circumstances, need to seek additional financing to supplement liquidity available from internal resources. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry and the market’s perception of our financial condition. Disruptions and uncertainty or volatility in the capital and credit markets, as has been experienced in the past, in particular throughout the eurozone, may exert downward pressure on availability of liquidity and credit capacity for certain issuers and, if access to liquidity is constrained for a prolonged period of time, may limit our access to capital required to operate and grow our business at a sustainable cost. Adverse market conditions may limit our ability to replace, in a timely manner, maturing debt, satisfy statutory capital requirements and generate fee income and market related revenue to meet liquidity needs.
Shareholder information continued liquidity, we could be forced to curtail our operations and our business would suffer. The principal sources of our liquidity are insurance premiums, annuity considerations, deposit funds and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short and long-term instruments, including repurchase agreements, commercial paper, medium and long-term debt, junior subordinated debt, securities, capital securities and stockholders’ equity.
The use of inaccurate assumptions in pricing and reserving for insurance business may have an adverse effect on our business profitability. Our life insurance companies are required to make a number of assumptions in relation to the business written, including the mortality and morbidity rates of our customers (the proportion of customers dying or falling sick or recovering from illness), the development of interest rates, persistency rates (the proportion of customers retaining existing policies and continuing to pay premiums up to their maturity dates), the exercise by customers of options included within their policies and future levels of expenses. By their nature, these assumptions may prove to be incorrect.
When establishing their liabilities, our life insurance companies allow for changes in the assumptions made, monitor their experience against the actuarial assumptions used and assess the information gathered to refine their long-term assumptions, together with taking actual claims experience into account. However, it is not possible to determine precisely the total amounts that will ultimately be paid under the policies written by the business as amounts may vary from estimates. Changes in assumptions may also lead to changes in the level of capital required to be maintained, meaning that we may need to increase the amount of our reserves. This could have a material adverse impact on our value, the results of our operations and financial condition.
If the assumptions underlying the reserving basis were to prove incorrect, we might have to increase the amount of the general insurance provisions, which would adversely impact our financial condition or results of operations.
In the UK, 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. On 27 February 2017, the Lord Chancellor announced that the discount rate will be reduced from 2.5% to minus 0.75% with effect from 20 March 2017. The impact of the change in the discount rate on IFRS shareholders’ equity at 31 December 2016 is £380 million.
The Lord Chancellor has also announced that the framework for setting this discount rate is also under review and a public consultation will be launched before the end of April 2017.
If our business does not perform well or if actual experience versus management estimates used in valuing and amortising Deferred Acquisition Costs (‘DAC’) and Acquired value of inforce business (‘AVIF’) varies significantly, we may be required to accelerate the amortisation and/or impair the DAC and AVIF which could adversely affect the results of operations or financial condition. We incur significant costs in connection with acquiring new and renewal business. Those costs that vary with and are driven by the production of new and renewal business are deferred and referred to as DAC. The recovery of DAC is dependent upon the future expected profitability of the related business. The amount of future profit or margin is dependent principally on expected investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency, general insurance underwriting profit and expenses to administer the business. Of these factors, investment margins and general insurance underwriting profit are most likely to impact the rate of amortisation of such costs. The aforementioned factors enter into management’s estimates of gross profit or margins, which generally are used to amortise such costs. If the estimates of gross profit or margins were overstated, then the amortisation of such costs would be accelerated in the period the actual amount is known and would result in a charge to income. Significant or sustained equity market declines could result in an acceleration of amortisation of the DAC related to unit-linked business, resulting in a charge to income. Such adjustments could have a material adverse effect on the results of operations or financial condition.
There are inherent funding risks associated with our participation in defined benefit staff pension schemes. We operate both defined benefit and defined contribution staff pension schemes. In the UK, we operate three main pension schemes: the Aviva Staff Pension Scheme (‘ASPS’), the Friends Provident Pension Scheme (‘FPPS’) and the RAC (2003) Pension Scheme. The defined benefit section of the ASPS was closed to new members in 2002 other than on an exceptional basis, and closed to future accruals for all existing members from 1 April 2011. The FPPS has been closed to new members since July 2007 and closed to active membership on 31 December 2012. The defined benefit section of the RAC (2003) Pension Scheme was also closed to new members and closed to future accrual in April 2011.
There are still inherent funding risks associated with the defined benefit schemes. Events could result in a material reduction in the funding position of such schemes and may result in a materially increased deficit between the pension scheme’s assets and liabilities. The factors that affect the scheme’s position include: poor performance of pension fund investments; greater life expectancy than assumed; adverse changes in interest rates or inflation or discount rates; and other events occurring that increase the costs of past service benefits over the amounts predicted in the actuarial assumptions. In the short term, the funding position is inherently volatile due to movements in the market value of assets. Where a funding deficit or surplus arises, the position will be discussed with the scheme trustees to agree appropriate actions. This may include a plan to fund the deficit over a period of years. Any surplus or deficit in the defined benefit pension scheme will affect shareholders’ equity, although the IFRS position may diverge from the scheme funding position.
In addition, we outsource certain customer service, technology and legacy policy administration functions to third parties and may do so increasingly in the future. If we do not effectively develop, implement and maintain our outsourcing strategy, third-party providers do not perform as anticipated or we experience technological or other problems with a transition to or between such providers, we may not realise the full extent of productivity improvements or administration and cost efficiencies and, as a result, may experience operational difficulties, increased costs and a loss of business. In particular, failings by our outsource partners to perform outsourced functions, or to perform them to the required standards, may adversely affect our reputation and lead to the loss of customers and operating profit or to regulatory fines.
We value our fair value securities using designated methodologies, estimations and assumptions. These securities, which are reported at fair value on the consolidated statement of financial position, represent the majority of our total cash and invested assets. We have categorised the measurement basis for assets carried at fair value into a ‘fair value hierarchy’ in accordance with the valuation inputs and consistent with IFRS 13: Fair Value Measurement. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1); the middle priority to fair values other than quoted prices based on observable market information (Level 2); and the lowest priority to unobservable inputs that reflect the assumptions that we consider market participants would normally use (Level 3). The majority of our financial assets are valued based on quoted market information (Level 1) or observable market data (Level 2). At 31 December
Brand and reputation risks relating to Aviva’s business We are rated by several rating agencies, and a decline in any of these ratings could affect our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products and services and cause our sales and earnings to decrease. A rating downgrade, or the perceived potential for such a downgrade, of Aviva plc or any of our rated insurance subsidiaries may, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies. The outcome of such activities may be cash payments requiring the sale of invested assets, including illiquid assets, at a price that may result in realised investment losses. These cash payments to policyholders would result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals may also cause us to accelerate amortisation of policy acquisition costs, which would reduce net income. A rating downgrade may also impact sales volumes, particularly in Canada, where there is more focus by brokers on ratings when evaluating similar products. The ratings provided by AM Best and Standard & Poor’s (‘S&P’) are considered to be the most important for distribution in Canada, and a downgrade could lead to a significant loss of sales and could lead to the termination of some distribution agreements. A significant rating downgrade may also increase our cost of borrowing or limit our access to some forms of financing.
(such as Friends Provident, General Accident and Quotemehappy), including Community trade marks having effect in the entire EU. We rely on a combination of contractual rights, copyright and trademark laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete.
Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial services industry challenging, among other things, product designs and business processes. If a third party were to successfully assert an intellectual property infringement claim against us, or if we were otherwise precluded from offering certain features or designs, or utilising certain processes, it could have a material effect on our business, results of operations and financial condition.
We also face competitors who specialise in many of the niche markets in which we operate. We believe that competition will intensify across all regions in response to consumer demand, technological advances, the impact of consolidation, regulatory actions and other factors.
Systems errors or regulatory changes may affect the calculation of unit prices or deduction of charges for unitlinked products which may require us to compensate customers retrospectively. A significant proportion of our product sales are unit-linked contracts, where product benefit are linked to the prices of underlying unit funds. While comprehensive controls are in place, there is a risk of error in the calculation of the prices of these funds due to human error in data entry, IT-related issues or other causes. Additionally, it is possible that policy charges which are deducted from these contracts are taken incorrectly, or the methodology is subsequently challenged by policyholders or regulators and changed retrospectively. Any of these can give rise to compensation payments to customers. Controls are in place to mitigate these risks, but errors could give rise to future liabilities. Payments due to errors or compensation may negatively impact our results of operations or financial condition.
The implementation of our strategy may not proceed as expected. Our strategy, which may be revised from time to time, may involve carrying on business in new markets, developing capabilities to carry out new business activities, expanding or reducing the scope of certain types of business activity or products and reorganising the Group in a manner which is appropriate for such business development changes, taking into
Insurance regulation in the UK and our European subsidiaries is largely based on the requirements of EU directives. Inconsistent application of directives by regulators in different EU member states may place us at a competitive disadvantage to other European financial services groups. In addition, changes in the local regulatory regimes of designated territories could affect the calculation of our solvency position. While the UK negotiates its new relationship with the EU, there will remain uncertainty as to the extent current and future requirements of EU directives and regulations will apply to the UK operations of the Group. The Group will have limited ability to influence future developments in those EU directives and regulations, that might still apply to its UK operations, both during and after the completion of the UK’s negotiations with the EU.
The failure of any of our subsidiaries to meet minimum capital and surplus requirements could subject us to further examination or corrective action imposed by insurance regulators, including limitations on our ability to write additional business, increased supervision by regulators or the implementation of resolution plans. Any corrective action imposed could have a material adverse effect on our business, results of operations and financial condition. A decline in minimum capital and surplus amounts may also limit the ability of an insurance subsidiary to make dividend payments or distributions and could be a factor in causing rating agencies to downgrade our financial strength ratings, which could have a material adverse effect on our business, results of operations and financial condition.
The Solvency II Directive, which governs insurance industry regulation and prudential capital requirements in the European Union, including associated Implementing Technical Standards and guidelines, became effective on 1 January 2016. There remains uncertainty as to how the Directive and associated standards and guidelines will be interpreted and implemented by national supervisory authorities (‘NSAs’) in individual member states, which may adversely impact the amount of capital required to support the business. There is a risk that inconsistent interpretation and application of the Directive and associated standards and guidelines by NSAs could put us at competitive disadvantage in some markets by adversely impacting the Group and subsidiary capital requirements compared to domestic competitors, for example application of rules pertaining to the dynamic volatility adjustment.
The PRA has approved use of the Group’s partial internal model to calculate the regulatory capital requirement under Solvency II for much of the Group’s businesses. Over the next year or two the Group plans to apply to extend use of the Internal model to other businesses within the Group, with a beneficial impact on the Group’s capital requirement. There is a risk that the PRA and the NSAs responsible for these businesses do not approve extension to the use of the Internal model or apply conditions that result in the anticipated capital benefits failing to materialise.
In July 2013 the Group was designated by the Financial Stability Board (‘FSB’) as a global systemically important insurer (‘G-SII’). The initial list of nine insurance groups that have been designated as G-SIIs also includes a number of our competitors. The list will be updated annually and the Group’s inclusion on the list was reconfirmed in November 2016. For so long as it is designated as a G-SII, the Group is within the scope of policy requirements issued by the International Association of Insurance Supervision (‘IAIS’), including: enhanced supervision requiring the maintenance of a “Systemic Risk Management Plan”; a liquidity risk management plan; a recovery plan; a resolution plan; and higher loss absorbency capital requirements, which will apply from January 2019, subject to implementation by NSAs, for those insurers still designated as G-SIIs in November 2017. While details of the higher loss absorbency capital requirements developed by the IAIS have been published it’s likely that the requirements will be amended before 2019 leading to uncertainty over their impact. There is a risk that, if we continue to be designated as a G-SII, this could lead to a significant increase in capital required to support our business which may give rise to a need for us to delay deleveraging plans or to issue additional debt. Similarly we could be required to reduce or discontinue activities which contribute to systemic riskiness, restructure to facilitate resolvability and/or remove or reduce (or accelerate the planned reduction of) intercompany debts or guarantees within the Group. Such requirements could have negative consequences for our business and results of operations and, in particular, could impact on the ability of subsidiaries to remit dividends to Aviva and consequently on the Aviva’s ability to remit dividends to shareholders.
We may face increased compliance costs due to the need to set up additional compliance controls or the direct cost of such compliance because of changes to financial services legislation or regulation.
We may face increased compliance costs in jurisdictions in which we operate as a result of the adoption of the OECD’s Common Reporting Standard and legislation passed in the United States and globally The U.S. Foreign Account Tax Compliance Act (‘FATCA’) requires 30% withholding on payments of U.S. source dividends, interest, and other fixed payments (including as of 1 January 2017 premiums for ‘foreign-to-foreign’ insurance of US risk and, no earlier than 1 January 2019, payments of gross proceeds) made to a non-United States financial institution (‘FFI’) unless the FFI has entered into an agreement with the Internal Revenue Service to report account information for any of the FFI’s US accountholders. An intergovernmental agreement between the U.S. and certain other jurisdictions will allow FFIs in those jurisdictions to report U.S. accountholder information only to local revenue authorities, rather than to the IRS.
Shareholder information continued of 2016 information. Despite commitments, certain participating jurisdictions have yet to implement domestic legislation and there is a lack of concrete domestic implementation guidance in many jurisdictions. As there remains uncertainty over the precise scope of these measures, the Group is at risk of late changes to interpretation of implementation requirements and consequently an increase in its compliance costs.
Risks related to ownership of the ADSs and ordinary shares The trading price of our ADRs and dividends paid on our ADSs may be materially adversely affected by fluctuations in the exchange rate for converting sterling into US dollars. An ADS (as evidenced by an American Depository Receipt (ADR)) is a negotiable US security representing two ordinary shares in the Company. An ADR is denominated in US dollars and represents ownership of any number of ADSs. ADRs generally could be listed on a national securities exchange or may trade in the over-the-counter market. From October 2009 to 22 December 2016, the Company’s ADSs were listed on the NYSE. The ADSs are currently traded only in the U.S. over-the-counter market under the symbol “AVVIY”. Any dividends are paid to investors in US dollars. ADRs are specifically designed to facilitate the purchase, holding and sale of non-US securities by US investors. The term ADR is often used to mean both the certificates and the securities themselves.
Fluctuations in the exchange rate for converting pound sterling into US dollars may affect the value of our ADRs. Specifically, as the relative value of the pound sterling against the US dollar declines, each of the following values will also decline: • the US dollar equivalent of the pound sterling trading price of our ordinary shares on the London Stock Exchange which may consequently cause the trading price of our ADRs in the US to also decline; • the US dollar equivalent of the proceeds that a holder of • our ADSs would receive upon the sale in the UK of any our ordinary shares withdrawn from the depositary; and • the US dollar equivalent of cash dividends paid in pound sterling on our ordinary shares represented by our ADSs.
Holders of our ADSs will have limited recourse if we or the depositary fail to meet our respective obligations under the Deposit Agreement. The Deposit Agreement expressly limit our obligations and liability and those of the depositary. Neither we nor the depositary will be liable if either of us: • are prevented from or delayed in performing any obligation by circumstances beyond our/their control; • exercise or fail to exercise discretion under the Deposit
Additionally, it is possible that a regulator in one of our major markets may conduct a review of products previously sold, either as part of an industry-wide review or specific to it. The result of this review may be to compensate customers for losses they have incurred as a result of the products they were sold.
In 2005 the European Court of Justice (‘ECJ’) judgement in the case of Staatssecretaris van Financien v. Arthur Andersen, Case C-472/03, held that the UK and some other EU member states were granting a VAT exemption for a wider range of insurance related services than the Sixth VAT Directive (77/288/EEC) allowed. The European Commission then initiated a project to update the insurance VAT exemption in light of current market conditions, which project was discontinued in late 2015. On 23 December 2015 the EU Advocate General’s opinion in the case of Minister Finansów v. Aspiro SA, Case C40 /15, confirmed the ECJ’s 2005 judgement. Following this judgement the UK government was expected to enact legislation that would result in services outsourced to parties who have no contractual relationship with the insured not benefiting from the VAT exemption for insurance services. However, following the result of the UK referendum on EU membership the UK government has stated it does not propose to make any imminent change to UK VAT law. Ultimately whether any restrictions on VAT exemption are applied depends on the outcome of negotiations on the UK’s future relationship with the EU. Any restrictions may increase the irrecoverable VAT incurred by the Group negatively impacting our results of operations or financial condition.
Shareholder information continued payable, in whole or in part, in securities, the Deposit Agreement provides that the depositary (after consultation with us) shall have discretion as to the procedure to be followed in making such rights or other securities available to ADR holders, including disposing of such rights or other securities and distributing the net proceeds in US dollars to ADR holders. Given the significant number of our ADR holders in the US, we generally would be required to register with the SEC any public offering of rights, warrants or other securities made to our ADR holders unless an exemption from the registration requirements of the US securities laws is available. Registering such an offering with the SEC can be a lengthy process which may be inconsistent with the timetable for a global capital raising operation. Consequently, we have in the past elected and may in the future elect not to make such an offer in the US, including to our ADR holders in the US, and rather only conduct such an offering in an ‘offshore’ transaction in accordance with ‘Regulation S’ under the US Securities Act of 1933, as amended (the ‘Securities Act’). Therefore, there can be no assurance that our ADR holders will be able to participate in such an offering in the same manner as our ordinary shareholders.
• conjecture about our business in the press, media or investment communities.
• strategic actions by competitors, including acquisitions and/or restructurings; • changes in market conditions and regulatory changes in any number of countries, whether or not the Company derives significant revenue therefrom; and
As a ‘foreign private issuer’ the Company is not subject to US proxy rules and is subject to Exchange Act reporting obligations that, to some extent, are less detailed and less frequent than those of a US issuer. In addition, once the deregistration of the ADSs and the underlying ordinary shares under Section 12(g) of the Exchange Act has taken effect, the Company’s duty to file reports under Section 13(a) or Section 15(d) of the Exchange Act will be permanently terminated. This may afford less protection and less detailed and less frequent information to investors in the Company’s securities than those afforded to shareholders of US public companies. Until the termination of the Section 12(g) registration is effective, 90 days after the Form 15F was filed (or such shorter period as the SEC may determine), certain other obligations will continue to apply. However, as a ‘foreign private issuer’ the Company is already exempt from those rules under the US Securities Exchange Act of 1934, as amended (the ‘Exchange Act’), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, the Company’s officers, directors and principal shareholders are already exempt from the reporting and ‘short-swing’ profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of the Company’s ordinary shares and ADRs. Moreover, the Company, as a ‘foreign private issuer’, is not required to file periodic reports and financial statements with the SEC as frequently or as promptly as US companies whose securities are registered under the Exchange Act, nor is it required to comply with Regulation FD, which restricts the selective disclosure of material information. Although the Company must comply with UK Listing Rules on insider reporting of share ownership and on protection of inside information, there may be less publicly available information concerning the Company than there is for US public companies.
The over-the-counter market where the Company’s ADSs are to be traded following the NYSE delisting and SEC deregistration of the ADSs and the underlying ordinary shares is an electronic quotation system operated by OTC Markets Group that displays quotes from broker-dealers for many over-thecounter securities. The over-the-counter market is not a stock exchange. To be quoted in the over-the-counter market, companies do not need to file periodic reports or audited financial statements with the SEC. Rule 12g3-2(b) under the Exchange Act permits non-U.S. companies with securities listed primarily on a qualified non-US exchange to make publicly available to US investors in English the same information that is made publicly available in their home countries as an alternative to SEC reporting. The Company will rely on the exemption provided by Rule 12g3-2(b) in connection with its ADSs. Although the Company must comply with the conditions of Rule 12g3-2(b), on an on-going basis, to promptly publish its non-US disclosure documents in English on the Company’s website, there may be less publicly available information concerning the Company than there is for US public companies.
Whole life A protection policy that remains in force for the insured’s whole life with a lump sum paid out on death. Traditional whole life contracts have fixed premium payments that typically cannot be missed without lapsing the policy. Flexible whole life contracts allow the policyholder to vary the premium and/or amount of life cover, within certain limits.
Alternative performance measures Alternative performance measures (‘APMs’) are non-GAAP measures used by the Aviva Group within its financial publications to supplement disclosures prepared in accordance with other regulations such as International Financial Reporting Standards (IFRS) and Solvency II. We believe that these measures provide useful information to enhance the understanding of financial performance. The APMs should be viewed as complementary to, rather than a substitute for, the figures determined according to other regulatory measures.
The Group’s most recent financial publications are available online at which includes the Aviva plc 2016 Preliminary Results Announcement. For further details on useful links for shareholders, please refer to the ‘Shareholder services’ section.
Deferred acquisition costs (DAC) The costs directly attributable to the acquisition of new business for insurance and investment contracts may be deferred to the extent that they are expected to be recoverable out of future margins in revenue on these contracts.
Excess centre cash flow‡ A measure of excess cash flow, calculated by deducting central operating expenses and debt financing costs from cash remittances by business units. It is a measure of the cash available to pay dividends, reduce debt, pay exceptional charges or invest back into our business. The cash remittances from business units eliminate on consolidation and hence the excess centre cash flow is not directly reconcilable to the Group’s IFRS consolidated statement of cash flows.
Financial Conduct Authority (FCA) The FCA is an independent public body and is independent of the Bank of England. It is responsible for the conduct business regulation of financial services firms (including those firms subject to prudential regulation by the PRA) and the prudential regulation of firms not regulated by the PRA. The FCA has three statutory objectives: securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK financial system and promoting effective competition in the interests of consumers.
Equity Release Equity release mortgages allow a homeowner to receive a lump sum in return for a mortgage secured on their house. No interest is payable on the loan; instead, interest is rolled-up on the loan and the loan and accrued interest are repayable at redemption (upon death or moving into long-term care).
Mortgage life insurance A protection contract designed to pay off the outstanding amount of a mortgage or loan in the event of the death of the insured.
Pension A means of providing income in retirement for an individual and possibly his/her dependants.
Stakeholder pensions Low cost and flexible pension plans available in the UK, governed by specific regulations.
The Group’s APMs have been referenced within the strategic report using the following symbol ‘‡’.
Available for sale (AFS) Securities that have been acquired neither for short-term sale nor to be held to maturity and are not classified as other than trading. These are shown at fair value on the statement of financial position and changes in value are taken straight to equity instead of the income statement.
Cash remittances‡ Amounts paid by our operating businesses to the Group, comprising dividends and interest on internal loans. These amounts eliminate on consolidation and are hence not directly reconcilable to the Group’s IFRS consolidated statement of cash flows.
CFO Forum The CFO Forum (www.cfoforum.nl) is a group formed by the chief financial officers of major European listed and non-listed insurance companies. Its aim is to discuss issues relating to proposed new accounting regulations for their businesses and how they can create greater transparency for investors.
Combined operating ratio (COR)‡ A financial measurement of general insurance underwriting profitability calculated as incurred claims expressed as a percentage of net earned premiums, plus written commissions and written expenses expressed as a percentage of net written premiums. A COR below 100% indicates profitable underwriting.
The components used to calculate COR for the Group are detailed in note 7.ii – General insurance and health, within the Aviva plc 2016 Preliminary Results Announcement.
Contract boundaries A contract boundary is the first point in time in the lifetime of an insurance policy at which the insurer has the ability to review the premiums charged at the individual policy level, without any contractual constraints. For policies in which such a point does not exist, the contract boundary is the same as the full term of the contract. Under Solvency II, if a contract boundary on an insurance contract is less than the full term of the contract the expected future premiums and obligations that relate to cover which may be provided after that date are not recognised in the measurement of the insurance liabilities.
Covered business The contracts to which the MCEV basis has been applied.
Fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price).
Financial Reporting Council Guidance on Internal Control The Guidance on Risk Management, Internal Control and Related Financial and Business Reporting sets out best practice on risk management and internal controls for UK listed companies, and provides additional guidance on applying certain sections of the UK Corporate Governance Code.
International financial reporting standards (IFRS) These are international accounting regulations that all publicly listed companies in the European Union are required to use.
Life business Businesses selling life and pensions contracts that are classified as covered business within MCEV VNB.
Liquidity premium An addition to the risk-free rate used when projecting investment returns and discounting cash flows on certain types of contracts where the liabilities are illiquid and have cash flows that are predictable.
Longevity risk Risk associated with increasing life expectancy trends among policyholders and pensioners.
Mortality Rate of death, varying by such parameters as age, gender and health, used in pricing and calculating liabilities for policyholders of life and annuity products, which contain mortality risks.
Ogden discount rate The Ogden discount rate is used by courts in the UK to calculate awards for cases involving bodily injury. The UK Government announced a reduction to the Ogden discount rate in February 2017 which will see the cost of bodily injury compensation claims increase significantly as a result.
Operating expense ratio‡ The Group operating expense ratio expresses operating expenses as a percentage of operating income. Operating income is calculated as operating profit before Group debt costs and operating expenses.
A reconciliation of Group operating profit to profit for the year is presented in the primary financial statements and is also defined in the accounting policies (refer to section B).
Persistency The rate at which policies are retained over time and therefore continue to contribute premium income and assets under management.
MCEV value of new business (VNB)‡ VNB is the present value of future profits from new business written at the point of sale and any changes to existing contracts which were not anticipated at the outset of the contract that generate additional shareholder risk and associated premium income, of the nature of a new policy. An example of a change to existing contracts that is considered to be generating value of new business is an internal transfer of annuities from with-profits funds to a non-profit fund. It is calculated on a market consistent basis using economic assumptions set at the start of each quarter or more frequently and best estimate operating assumptions. It is stated after the effect of any frictional costs and the cost of non-hedgeable risks.
Minimum capital requirement (MCR) The Minimum Capital Requirement is the minimum amount of capital that an insurer needs to hold to cover its risks under the Solvency II regulatory framework. If an insurer’s capital falls below the MCR then authorisation will be withdrawn by the regulator unless a firm is able to meet the MCR within a short period of time.
Morbidity Rate of disease or how likely someone will fall ill, varying by such parameters as age, gender and health, used in pricing and calculating liabilities for policyholders of life and annuity products.
Net asset value (NAV) per share‡ Net asset value (NAV) per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the Consolidated statement of financial position), divided by the actual number of shares in issue as at the balance sheet date.
Operating capital generation (OCG)‡ OCG is the Solvency II surplus movement in the period due to operating items including the impact of new business, expected investment returns on existing business, operating variances, operating assumption changes and management actions. It excludes economic variances, economic assumption changes and integration and restructuring costs.
Operating expenses‡ The day-to-day expenses involved in running the business including staff costs. For the avoidance of doubt, operating expenses excludes commission, non-operating integration and restructuring costs, and amortisation and impairment of AVIF and intangible assets. The components of operating expenses are detailed in note 3 – Expenses, within the Aviva plc 2016 Preliminary Results Announcement.
Paid out in benefits and claims Paid out in benefits and claims comprise claims and expenses per the IFRS financial statements (net of reinsurance) and amounts paid relating to investment contracts which are not included within the income statement. This measure is not directly reconcilable to the IFRS financial statements.
Prudential Regulatory Authority (PRA) The PRA is a part of the Bank of England and is responsible for the prudential regulation of deposit taking institutions, insurers and major investment firms. The PRA has three statutory objectives: to promote the safety and soundness of these firms, specifically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders and secondary objective to facilitate effective competition.
Underwriting result The profit or loss from general insurance and health activities, excluding investment performance. It is calculated as net earned premiums less net insurance claims, commission and expenses. The underwriting result is calculated in note 7ii – General insurance and health, within the Aviva plc 2016 Preliminary Results Announcement.
 No more fees for the replacement of lost cheques – one in five dividend cheques issued in 2015 remains uncashed
If you are currently receiving your dividend by cheque, take action now and choose from the dividend payment options detailed below. If you already receive your dividend directly to your bank account, your current payment instruction will apply.
25 April 2017 Last date to complete a mandate instruction for the dividend payable in May 2017 17 May 2017 Last dividend payment that can be made by cheque
First dividend where direct credit is the only method of payment for cash dividends – a reminder will be sent to shareholders who have not received their dividend
MyAviva also includes a link to the Investor Centre, where you can log in and manage your shareholding as outlined above.
www.aviva.com/agm: To find the latest information on our Annual General Meeting.
www.aviva.com/shareprice: To find out the latest Aviva plc Ordinary share price.
Solvency Capital Requirement (SCR) The Solvency Capital Requirement is the amount of capital the regulator requires an insurer to hold to meet the requirements under the Solvency II regulatory framework. Holding capital in excess of the SCR demonstrates an insurer has adequate financial resources in place to meet all its liabilities as and when they fall due and that there is sufficient capital to absorb significant losses. Firms may use their own internal model, the European Insurance and Occupational Pensions Authority (EIOPA) prescribed standard formula or a partial internal model to determine SCR.
DIVIDEND PAYMENT OPTIONS Shareholders will be able to receive their dividends in the following ways:  Directly into your nominated UK bank account  Directly into your nominated eurozone bank account  The Global Payment Service provided by our Registrar,
You can find further details regarding these payment options at www.aviva.com/dividends and register your choice by contacting Computershare using the contact details on the next page, online at www.aviva.com/online or by returning a dividend mandate form. You must register for one of these payment options to receive dividend payments from November 2017.
www.aviva.com/dividends www.aviva.com/online www.aviva.co.uk/myaviva www.aviva.com/online www.aviva.co.uk/myaviva www.aviva.com/shareholders www.aviva.com/dividends www.aviva.com/agm www.investorcentre.co.uk/eproxy www.aviva.com/reports www.aviva.com/shareprice www.londonstockexchange.com www.aviva.com/online
1–1,000 539,400 91.50 134,735,003 3.32 1,001–5,000 44,611 7.57 83,697,278 2.06 5,001–10,000 3,000 0.51 20,785,611 0.51 10,001–250,000 1,861 0.32 78,749,554 1.94 250,001–500,000 154 0.03 54,803,042 1.35 500,001 and above 461 0.08 3,648,142,024 89.82 American Depositary Receipts (ADRs)+ 1 0.00 40,626,694 1.00
In Writing: Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ
AMERICAN DEPOSITARY RECEIPTS (ADRS) – CONTACT: For any queries regarding Aviva ADRs, please contact Citibank Shareholder Services (Citibank): By Telephone: 1 877 248 4237 (1 877-CITI-ADR), or +1 781 575 4555 if calling from outside of the US – Lines are open 8.30am to 6pm, Monday to Friday US Eastern Standard Time
The full financial calendar is available at www.aviva.com/financial-calendar * Please note that the ADR local payment date will be approximately five business days after the proposed dividend date for ordinary shares. The ex-dividend date for ADR holders will be 5 April 2017.
ORDINARY AND PREFERENCE SHARES – CONTACT: For any queries regarding your shareholding, please contact Computershare: By Telephone: 0371 495 0105 – Lines are open 8.30am to 5.30pm (UK time), Monday to Friday (excluding public holidays). Please call +44 117 378 8361 if calling from outside of the UK
Details of each resolution to be considered at the meeting and voting instructions are provided in the Notice of AGM, which is available on the Company’s website at www.aviva.com/agm. The voting results of the 2017 AGM will be accessible on the Company’s website at www.aviva.com/agm shortly after the meeting.