Accounting policies continued hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary. Accounting for the PUTs and PLPs as subsidiaries, joint ventures, associates or other financial investments depends on whether the Group is deemed to have control or joint control over the PUTs and PLPs’ shareholdings in the GPs and the terms of each partnership agreement are considered along with other factors that determine control, as outlined above. Where the Group exerts control over a PUT or a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by an agreement such that there is joint control between the parties, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be lower or higher than 50%, such PUTs and PLPs have been classified as joint ventures. Where the Group has significant influence over the PUT or PLP, as defined in the following section, the PUT or PLP is classified as an associate. Where the Group holds non-controlling interests in PLPs, with no significant influence or control over their associated GPs, the relevant investments are carried at fair value through profit or loss within financial investments.
Associates and joint ventures Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control. Generally, it is presumed that the Group has significant influence if it has between 20% and 50% of voting rights. Joint ventures are joint arrangements whereby the Group and other parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. In a number of these, the Group’s share of the underlying assets and liabilities may be greater or less than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly controlled entities are referred to as joint ventures in these financial statements. Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures. Losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred between entities. Other than investments in investment vehicles which are carried at fair value through profit or loss, investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in accounting policy O, the cost includes goodwill identified on acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of postacquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence or joint control over the investment. If the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the undertaking, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the entity.
(E) Foreign currency translation Income statements and cash flows of foreign entities are translated into the Group’s presentation currency at average exchange rates for the year while their statements of financial position are translated at the year-end exchange rates. Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures, and of borrowings and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income and taken to the currency translation reserve within equity. On disposal of a foreign entity, such exchange differences are transferred out of this reserve and are recognised in the income statement as part of the gain or loss on sale. The cumulative translation differences were deemed to be zero at the transition date to IFRS. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions. Gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Translation differences on debt securities and other monetary financial assets measured at fair value and designated as held at fair value through profit or loss (FVTPL) (see accounting policy T) are included in foreign exchange gains and losses in the income statement. For monetary financial assets designated as Available for Sale (AFS), translation differences are calculated as if they were carried at amortised cost and so are recognised in the income statement, whilst foreign exchange differences arising from fair value gains and losses are recognised in other comprehensive income and included in the investment valuation reserve within equity. Translation differences on non-monetary items, such as equities which are designated as FVTPL, are reported as part of the fair value gain or loss, whereas such differences on AFS equities are included in the investment valuation reserve.
(F) Fair value measurement Fair value is 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, regardless of whether that price is directly observable or estimated using another valuation technique. This presumes that the transaction takes place in the principal (or most advantageous) market under current market conditions. Fair value is a market-based measure and in the absence of observable market prices in an active market, it is measured using the assumptions that market participants would use when pricing the asset or liability. The fair value of a non-financial asset is determined based on its highest and best use from a market participant’s perspective. When using this approach, the Group takes into account the asset’s use that is physically possible, legally permissible and financially feasible. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. In certain circumstances, the fair value at initial recognition may differ from the transaction price. If the fair value is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging), or is based on a valuation technique whose variables include only data from observable markets, then the difference between the fair value at initial recognition and the transaction price is recognised as a gain or loss in the income statement. When unobservable market data has a significant 120 | Aviva plc Annual report and accounts 2014
(G) Product classification Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts. Some insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts. As noted in accounting policy A above, insurance contracts and participating investment contracts in general continue to be measured and accounted for under existing accounting practices at the later of the date of transition to IFRS or the date of the acquisition of the entity, in accordance with IFRS 4. Accounting for insurance contracts in UK companies is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers, the most recent version of which was issued in December 2005 and amended in December 2006. In certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed, and adjustments to the measurement basis have occurred, the financial statements of that year will have disclosed the impacts accordingly. One such example is our adoption of Financial Reporting Standard 27 Life Assurance (FRS 27) which was issued by the UK’s Accounting Standards Board (ASB) in December 2004. Aviva, along with other major insurance companies and the ABI, signed a Memorandum of Understanding with the ASB, under which we voluntarily agreed to adopt in full the standard from 2005 in the Group’s IFRS financial statements. FRS 27 adds to the requirements of IFRS but does not vary them in any way. The additional requirements of FRS 27 are detailed in accounting policy L below and in note 57.
(K) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on fair value through profit or loss investments (as defined in accounting policy T). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis, and is recognised on a straight line basis unless there is compelling evidence that benefits do not accrue evenly over the period of the lease. A gain or loss on a financial investment is only realised on disposal or transfer, and is the difference between the proceeds received, net of transaction costs, and its original cost or amortised cost, as appropriate. Unrealised gains and losses, arising on investments which have not been derecognised as a result of disposal or transfer, represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase
Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices, with the exception of liabilities remeasured to reflect current market interest rates to be consistent with the value of the backing assets, and those relating to UK with-profit and non-profit contracts. For liabilities relating to UK with-profit contracts, the Group has adopted FRS 27 Life Assurance, as described in policy G above, in addition to the requirements of IFRS. The long-term business provisions are calculated separately for each life operation, based either on local regulatory requirements or existing local GAAP (at the later of the date of transition to IFRS or the date of the acquisition of the entity); and actuarial principles consistent with those applied in each local market. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 41(b). For liabilities of the UK with-profit funds, FRS 27 requires liabilities to be calculated as the realistic basis liabilities as set out by the UK’s Prudential Regulation Authority (PRA), adjusted to remove the shareholders’ share of future bonuses. For UK non-profit insurance contracts, the Group applies regulatory requirements, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. On 1 April 2013 the rules made by the FSA were designated by the PRA.
Contract liabilities Deposits collected under non-participating investment contracts are not accounted for through the income statement, except for the investment income attributable to those contracts, but are accounted for directly through the statement of financial position as an adjustment to the investment contract liability. The majority of the Group’s contracts classified as nonparticipating investment contracts are unit-linked contracts and are measured at fair value. Certain liabilities for non-linked nonparticipating contracts are measured at amortised cost. The fair value liability is determined in accordance with IAS 39, using a valuation technique to provide a reliable estimate of the amount for which the liability could be transferred in an orderly transaction between market participants at the measurement date, subject to a minimum equal to the surrender value. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required based on a discounted cash flow analysis. For non-linked contracts, the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price for risk. Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of payments such as transaction costs and front-end fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate.
Acquired value of in-force business (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary, is recognised as an asset. If the AVIF results from the acquisition of an investment in a joint venture or an associate, it is held within the carrying amount of that investment. In all cases, the AVIF is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. The value of the acquired in-force long-term business is reviewed annually for any impairment in value and any reductions are charged as expenses in the income statement.
(S) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: • The rights to receive cash flows from the asset have expired. • The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a currently enforceable legal right to set off the recognised amounts and there is the ability and intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
(T) Financial investments The Group classifies its investments as either financial assets at fair value through profit or loss (FVTPL) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. The FVTPL category has two subcategories – those that meet the definition as being held for trading and those the Group chooses to designate as FVTPL (referred to in this accounting policy as ‘other than trading’) upon initial recognition. In general, the other than trading category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group acquires with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see accounting policy U below). The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS, are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS are recognised in other comprehensive income and 124 | Aviva plc Annual report and accounts 2014
recorded in a separate investment valuation reserve within equity. When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement with a corresponding movement through other comprehensive income.
(V) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. Certain loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost. However, for the majority of mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of these mortgages are estimated using discounted cash flow models, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement. At each reporting date, we review loans carried at amortised cost for objective evidence that they are impaired and uncollectable, either at the level of an individual security or collectively within a group of loans with similar credit risk characteristics. To the extent that a loan is uncollectable, it is written down as impaired to its recoverable amount, measured as the present value of expected future cash flows discounted at the original effective interest rate of the loan, taking into account the fair value of the underlying collateral through an impairment provision account. Subsequent recoveries in excess of the loan’s written-down carrying value are credited to the income statement.
(W) Collateral The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, certain derivative contracts and loans, in order to reduce the credit risk of these transactions. Collateral is also pledged as security for bank letters of credit. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the statement of financial position with a corresponding liability for the repayment in financial liabilities (note 60). However, where the Group has a currently enforceable legal right of set-off and the ability and intent to net settle, the collateral liability and associated derivative balances are shown net, in line with market practice. Non-cash collateral received is not recognised in the statement of financial position unless the Group either (a) sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability; or (b) the counterparty to the arrangement defaults, at which point the collateral is seized and recognised as an asset. Collateral pledged in the form of cash, which is legally segregated from the Group, is derecognised from the statement of financial position with a corresponding receivable recognised for its return. Non-cash collateral pledged is not derecognised from the statement of financial position unless the Group defaults on its obligations under the relevant agreement, and 126 | Aviva plc Annual report and accounts 2014
(AB) Employee benefits Annual leave Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the statement of financial position date.
Accounting policies continued reductions in contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group. Remeasurements of defined benefit plans comprise actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions, the return on plan assets (excluding net interest) and the effect of the asset ceiling (if any). The Group recognises remeasurements immediately in other comprehensive income and does not reclassify them to the income statement in subsequent periods. Service costs comprising current service costs, past service costs, gains and losses on curtailments and net interest expense/(income) are charged or credited to the income statement. Past service costs are recognised at the earlier of the date the plan amendment or curtailment occurs or when related restructuring costs are recognised. The Group determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability/(asset). Net interest expense is charged to finance costs, whereas, net interest income is credited to investment income. For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. The Group’s contributions are charged to the income statement in the year to which they relate and are included in staff costs.
Premiums written net of reinsurance 20,056 20,489 1,489 Net change in provision for unearned premiums 1 134 —
Expenses 7 Claims and benefits paid, net of recoveries from reinsurers (19,474) (22,093) (2,037) Change in insurance liabilities, net of reinsurance 41a(ii) (5,570) 2,493 (312) Change in investment contract provisions (6,518) (7,050) (31) Change in unallocated divisible surplus 46 (3,364) 280 — Fee and commission expense (3,389) (3,975) (438)
Less: tax attributable to policyholders' returns 14d 382 191 — Tax attributable to shareholders' profits (601) (403) (265)
Attributable to: Equity shareholders of Aviva plc 1,569 2,008 Non-controlling interests 39 169 143
Earnings per share AG & 15 Basic (pence per share) 50.4p 65.3p Diluted (pence per share) 49.6p 64.5p
Consolidated statement of comprehensive income For the year ended 31 December 2014 £m
Profit for the year from continuing operations 1,680 878 Profit for the year from discontinued operations1 58 1,273
Other comprehensive income from continuing operations: Items that may be reclassified subsequently to income statement
Share of other comprehensive income of joint ventures and associates 22 (37) Foreign exchange rate movements (396) (35) Aggregate tax effect – shareholder tax on items that may be reclassified into profit or loss (9) (14)
Owner-occupied properties -fair value gains/(losses) 7 (2) Remeasurements of pension schemes 49b(i) 1,662 (674) Aggregate tax effect – shareholder tax on items that will not be reclassified into profit or loss (347) 125
Other comprehensive income, net of tax from continuing operations 994 (617) Other comprehensive income, net of tax from discontinued operations1
Attributable to: Equity shareholders of Aviva plc 2,642 1,038 Non-controlling interests 90 177 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note 4 for further details.
Reconciliation of Group operating profit to profit for the year For the year ended 31 December 2014 £m
Operating profit before tax attributable to shareholders' profits Life business 1,979 1,901 272 General insurance and health 808 797 —
Operating profit before tax attributable to shareholders' profits 2,173 2,049 290
Profit after tax 1,680 878 1,273 Profit from discontinued operations1 58 1,273
Reconciliation of Group operating profit to profit for the year continued Operating profit can be further analysed into the following segments (details of segments can be found in note 5): Year ended 31 December 2014
Total – continuing operations 2,049 Total – discontinued operations1 290 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note 4 for further details.
Shares distributed by employee trusts — — — — 23 — (18) 5 — — 5 Reserves credit for equity compensation plans — — — — — 39 — 39 — — 39 Shares issued under equity compensation
Aggregate tax effect – shareholder tax — — — — — — 19 19 — — 19 Redemption of direct capital instrument2 — — — — — — (57) (57) (490) — (547)
1 Refer to note 37 for further details of balances included in Other reserves.
Profit for the year — — — — — — 2,008 2,008 — 143 2,151
Total comprehensive income for the year — — — — — (421) 1,459 1,038 — 177 1,215 Dividends and appropriations — — — — — — (538) (538) — — (538) Capital contributions from non-controlling
Non-controlling interests share of dividends declared in the year — — — — — — — — — (134) (134) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — (803) 1 (802) — — (802) Changes in non-controlling interests in
Shares acquired by employee trusts — — — — (32) — — (32) — — (32) Shares distributed by employee trusts — — — — 33 — (28) 5 — — 5 Reserves credit for equity compensation plans — — — — — 37 — 37 — — 37 Shares issued under equity compensation
Aggregate tax effect – shareholder tax — — — — — 30 22 52 — — 52 1 Refer to note 37 for further details of balances included in Other reserves.
Consolidated statement of financial position As at 31 December 2014 £m
Acquired value of in-force business and intangible assets O & 18 1,028 1,068 1,084 Interests in, and loans to, joint ventures D & 19 1,140 1,200 1,390 Interests in, and loans to, associates D & 20 404 267 265
Deferred tax assets AC 76 244 188 Current tax assets 27 76 67
Deferred acquisition costs and other assets X & 29 5,091 3,051 3,778 Prepayments and accrued income 2,466 2,635 2,776 Cash and cash equivalents Y & 56d 23,105 26,131 24,213 Assets of operations classified as held for sale AH & 4c 9 3,113 42,603
Equity attributable to shareholders of Aviva plc 10,218 8,164 8,404 Direct capital instruments and fixed rate tier 1 notes 35 892 1,382 1,382
Liabilities Gross insurance liabilities L & 41 113,445 110,555 113,091 Gross liabilities for investment contracts M & 42 117,245 116,058 110,494
Deferred tax liabilities AC 1,091 563 547 Current tax liabilities 169 116 112
Liabilities of operations classified as held for sale AH & 4c 2 3,023 41,411
Cash (used in)/generated from continuing operations 56a (87) 2,562 Tax paid (457) (463)
Net cash (used in)/from investing activities – continuing operations (228) 334 Net cash (used in)/from investing activities – discontinued operations1
Effect analysed as: Effect analysed as: Payables and other financial liabilities 9,398 2,653 12,051 9,194 2,751 11,945
Notes to the consolidated financial statements continued 4 – Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the year end.
(b) Disposal and re-measurements of subsidiaries, joint ventures and associates The profit on the disposal and re-measurement of subsidiaries, joint ventures and associates comprises: £m
Spain – long-term business (see (vi) below) 132 197 Italy – long-term business (see (iii) below) (6) (178) Korea (see (ii) below) 2 (20) Turkey – general insurance (see (vii) below) (16) (9) Aviva Investors (see (iv) below) 35 — Turkey – long-term business (see (v) below) 15 — Indonesia (see (i) below) (3) — Ireland – long-term business — 87 Malaysia — 39 Russia — 1 Czech Republic, Hungary and Romania — 1 Poland — (4) Other small operations 15 1
Profit on disposal and remeasurement from continuing operations 174 115 Profit on disposal and remeasurement from discontinued operations (see (viii) below) 58 808
(ii) Korea In 2013, management determined that the value of our long-term business joint venture in South Korea, Woori Aviva Life Insurance Co. Ltd, would be principally recovered through sale and it was classified as held for sale and re-measured at fair value, based on expected sales proceeds less costs to sell of £19 million. On 27 June 2014 the Group completed its disposal of the 47% interest for consideration of £17 million, after transaction costs. Net assets disposed of were £19 million resulting in a loss of £2 million (2013: £20 million loss on re-measurement). Recycling of currency translation and investment valuation reserves of £4 million on completion resulted in an overall net gain in 2014 of £2 million.
Assets Financial Investments 2,857 Other assets 4 Cash and cash equivalents 175
Profit on disposal 4 1 A loan between Aviva and Eurovita had been provided against in 2013 as its repayment was uncertain as of 31 December 2013. However, this provision was reversed in 2014 as the loan was repaid in full upon the closing of the sale.
(v) Turkey – long-term business – initial public offering On 13 November 2014 Aviva and its joint venture partner Sabanci Holdings completed an initial public offering of a minority share of their Turkish life and pensions joint venture AvivaSA Emeklilik ve Hayat A.S (“Aviva SA”), reducing the Group’s holding in Aviva SA from 49.8% to 41.3%. Sabanci and the Group continue to share contractual joint control of Aviva SA and it continues to be equity accounted for as a joint venture. The Group received cash proceeds of £40 million, net of transaction costs, from the share sale resulting in a gain of £23 million. Recycling of currency translation reserves of £8 million on completion resulted in an overall net gain of £15 million.
Notes to the consolidated financial statements continued 4 – Subsidiaries continued (vi) Spain – long-term business On 19 September 2014 Aviva announced the sale of its 50% holding in CXG Aviva Corporacion Caixa Galicia de Seguros y Reaseguros, S.A. (“CxG”) a Spanish life assurance company to NCG Corporacion Industrial S.L. (“NCG Banco”) following a decision by the Spanish Arbitration Tribunal which concluded legal proceedings between Aviva and NCG Banco. On 11 December 2014 the Group transferred its entire holding in CxG for cash consideration of £221 million resulting in a net profit on disposal of £132 million, calculated as follows: £m
Cash consideration received 221 Less: transaction costs attributable to Aviva (1)
(vii) Turkey general insurance In the second half of 2013 management committed to sell the Turkey general insurance subsidiary Aviva Sigorta S.A. (“Turkey GI”). At 31 December 2013 the business was remeasured to fair value based on an expected sales price less costs to sell of £2 million resulting in a loss on remeasurement of £9 million in FY13 following its classification as held for sale. In 2014 the underlying carrying value decreased from £11 million to £(2) million. On 18 December 2014 Aviva completed the sale of Turkey GI resulting in a loss on sale of £17 million after transaction costs and post completion adjustments. The net loss recognised within “Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates” in 2014 is calculated as follows: £m
4 – Subsidiaries continued (c) Assets and liabilities of operations classified as held for sale During 2014 it was determined that the value of the Group’s Taiwan joint venture, First-Aviva Life Insurance Co. Ltd. (“Taiwan”), would no longer be recovered principally through a sale. As a result, the business was reclassified out of “Assets of operations classified as held for sale” and into “Interests in, and loans to, joint ventures”. As the recoverable amount at the date it ceased to be held for sale was lower than its carrying value when it was classified as held for sale, no remeasurement gain or loss was recorded following this reclassification. The assets and liabilities of operations classified as held for sale as at 31 December 2014 are as follows: £m 2013 £m
Assets and liabilities held for sale at 31 December 2014 relate to small reinsurance operations in the Group.
(d) Subsequent events On 25 February 2015, Crédit du Nord, the Group's partner in Antarius S.A. (“Antarius”), exercised its call option to purchase Aviva France’s 50% share of Antarius. In accordance with the shareholders agreement, the exercise of the call option starts a period of approximately two years to complete the disposal. In accordance with IFRS 5, the subsidiary will be classified as Held for Sale from the date when the transaction is expected to complete within 12 months.
Notes to the consolidated financial statements continued 5 – Segmental information The Group’s results can be segmented, either by activity or by geography. Our primary reporting format is on market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and consolidated statement of financial position. The Group has determined its operating segments along market reporting lines. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group CEO for the operating segment for which they are responsible.
United Kingdom & Ireland The United Kingdom and Ireland comprises two operating segments – Life and General Insurance. The principal activities of our UK and Ireland Life operations are life insurance, long-term health (in the UK) and accident insurance, savings, pensions and annuity business. UK and Ireland General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers’ liability and professional indemnity liability) and medical expenses. UK & Ireland General Insurance includes the results of our Ireland Health business.
Asia Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia and Taiwan. This segment also includes the results of Malaysia and Korea until the date of their disposals (in April 2013 and June 2014 respectively). Asia also includes general insurance and health operations in Singapore and health operations in Indonesia.
Aviva Investors Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France, North America, Asia Pacific and other international businesses, managing policyholders’ and shareholders’ invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. This segment also includes the results of River Road Asset Management LLC until the date of its disposal in June 2014.
Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in ‘Other Group activities’, along with central core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our reinsurance operations are also included in this segment.
Inter-segment revenue — — — — — — — 158 — 158 Share of profit/(loss) of joint ventures and associates 139 — 7 4 9 — (12) — — 147 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — — 125 14 (1) 35 1 174
Profit/(loss) before tax from continuing operations 1,337 406 462 196 489 253 63 83 (626) 2,663 Tax attributable to policyholders' returns (357) — — — — — (25) — — (382)
Adjusted for non-operating items from continuing operations: Reclassification of corporate costs and unallocated interest — 11 16 — 1 — — — (28) — Investment return variances and economic assumption changes on long-term business 13 — 9 (4) (101) — 11 — — (72) Short-term fluctuation in return on investments backing non-
Impairment of goodwill, joint ventures and associates and other amounts expensed — — — — — — 24 — — 24 Amortisation and impairment of intangibles 31 1 — — 17 10 3 11 17 90 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — — (125) (14) 1 (35) (1) (174)
Premiums written net of reinsurance 4,228 4,200 5,565 475 3,193 2,250 532 — 46 20,489 1,489 21,978 Net change in provision for unearned
Profit/(loss) before tax attributable to shareholders' profits 717 387 457 178 509 104 98 (89) (1,080) 1,281 1,538 2,819
Short-term fluctuation in return on investments on non-long-term business — 74 15 — 12 122 — — 113 336 — 336
Impairment of goodwill, joint ventures and associates and other amounts expensed — — — — 48 — 29 — — 77 — 77
Assets of operations classified as held for sale — — — — — — — — 9 9
Insurance liabilities Long-term business and outstanding claims provisions 71,619 5,515 16,179 2,444 8,414 2,317 2,598 — 36 109,122
Notes to the consolidated financial statements continued 5 – Segmental information continued (a) (iv) Segmental statement of financial position as at 31 December 2013 – (Restated)1
Assets of operations classified as held for sale — — — — 3,042 — 62 — 9 3,113
Net asset value attributable to unitholders 287 — 3,032 — 324 — — — 6,719 10,362
Total equity and liabilities 281,627 1 The statement of financial position has been restated following the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details. There is no impact on the result or the total equity for any period presented as a result of this statement.
Other Other includes service companies, head office expenses such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments.
Discontinued operations In the products and services analysis, the results of US Life (including the related internal asset management business) for comparative periods are presented as discontinued operations up to the date of disposal in October 2013.
Gross written premiums1 12,727 8,943 — — 21,670 Premiums ceded to reinsurers (971) (643) — — (1,614)
Operating profit/(loss) before tax attributable to shareholders' profits from continuing operations 1,979 808 86 (700) 2,173 Operating profit/(loss) before tax attributable to shareholders' profits 1,979 808 86 (700) 2,173 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £164 million, of which £81 million relates to property and liability insurance and £83 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,146 million relating to health business. The remaining business relates to property and liability insurance.
Profit/(loss) before tax from continuing operations 2,072 483 31 (1,114) 1,472 Tax attributable to policyholder returns (191) — — — (191)
Profit/(loss) before tax attributable to shareholders' profits from continuing operations 1,881 483 31 (1,114) 1,281 Adjusted for: Non-operating items from continuing operations 20 314 62 372 768
Operating profit/(loss) before tax attributable to shareholders' profits 2,173 797 124 (755) 2,339 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £246 million, of which £142 million relates to property and liability insurance and £104 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,196 million relating to health business. The remaining business relates to property and liability insurance. 3 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4.
Gross insurance liabilities 99,453 13,992 — — 113,445 Gross liabilities for investment contracts 117,245 — — — 117,245 Unallocated divisible surplus 9,467 — — — 9,467 Net asset value attributable to unitholders 3,264 — — 6,218 9,482
Other liabilities, including inter-segment liabilities 12,689 (952) 354 4,333 16,424 Liabilities of operations classified as held for sale — 2 — — 2
Total equity and liabilities 281,627 1 The statement of financial position has been restated following the adoption of amendments to IAS 32 “Financial Instruments: Presentation’ – see note 1 for details. There is no impact on the result or the total equity for any period presented as a result of this statement.
Notes to the consolidated financial statements continued 6 – Details of income This note gives further detail on the items appearing in the income section of the consolidated income statement.
Less: premiums ceded to reinsurers (note 5a and 5b) (1,614) (1,546) Gross change in provision for unearned premiums (note 41e) (8) 136 Reinsurers’ share of change in provision for unearned premiums (note 44ciii) 9 (2) Net change in provision for unearned premiums 1 134
Dividend income 1,444 1,527 Other income from investments designated as trading Realised gains/(losses)on disposals 208 (202) Unrealised gains and losses (policy K)
Gains/(Losses) arising in the year 795 (67) (Gains)/Losses recognised in prior periods and now realised (208) 202
Realised gains on disposals 2,829 3,250 Unrealised gains and losses (see policy K)
Expenses relating to these properties (42) (42) Realised (losses)/gains on disposal 49 (2) Fair value gains on investment properties (note 22) 678 184
Income from continuing operations 43,497 34,646 Income from discontinued operations 58 4,665
7 – Details of expenses This note gives further detail on the items appearing in the expenses section of the consolidated income statement.
Claims and benefits paid, net of recoveries from reinsurers 19,474 22,093
Staff costs (note 11b) 848 841 Central costs and sharesave schemes 132 150
Expenses from continuing operations 40,834 33,174 Expenses from discontinued operations — 3,127
Integration and restructuring costs Integration and restructuring costs from continuing operations were £140 million (2013: £363 million) and mainly include £94 million of expenses associated with the Solvency II programme (2013: £79 million). Compared to the prior year, integration and restructuring costs have reduced by £223 million principally driven by a significant reduction in transformation spend.
Interest on collateral received 18 20 Net finance charge on pension schemes 13 20 Unwind of discount on GI reserves 6 5 Other similar charges 58 77
Total finance costs 540 625 9 – Long-term business economic volatility The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business, as described below.
Investment variances and economic assumptions – continuing operations 72 (49) Investment variances and economic assumptions – discontinued operations — 452 Investment variances and economic assumptions 72 403
For continuing operations, investment variances were £72 million positive (2013: £49 million negative) mainly driven by lower risk free rates and narrowing credit spreads on government and corporate bonds in Italy and Spain. Adverse variances in the UK were due to the adverse impact of falling reinvestment yields net of improved underlying property values on commercial mortgages partly offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities that they back. In 2013, for continuing operations, positive variances from narrowing spreads in Italy and Spain were offset by an increase in allowance for credit defaults in the UK. Discontinued operations represent the US business disposed of in 2013, which benefitted from favourable equity market performance on embedded derivatives in 2013.
9 – Long-term business economic volatility continued The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
10 – Longer-term investment return and economic assumption changes for non-long-term business For non-long-term business, the total investment income, including realised and unrealised gains, is split between a calculated longer-term return, which is included in operating profit, and short-term fluctuations from this, which are disclosed outside operating profit but are included in profit before tax. This note gives details of the longer-term return calculation and the relevant assumptions, as well as the economic assumption changes on our general insurance and health business.
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-long-term business result and reported outside operating profit were as follows: Non-long-term business 2014 £m
Analysis of investment income: Net investment income 754 266 Foreign exchange gains/losses and other charges (8) (35)
Analysed between: Longer-term investment return, reported within operating profit 485 567 Short-term fluctuation in investment return, reported outside operating profit
1 For 2014 represents short-term fluctuations on assets backing non-long-term business in Group centre investments, including the centre hedging programme. For 2013 represents short-term fluctuations on assets backing non-longterm business in the France holding company and Group centre investments, including the centre hedging programme.
Notes to the consolidated financial statements continued 10 – Longer-term investment return and economic assumption changes for non-long-term business continued Market value movements which give rise to variances between actual and longer-term investment returns are disclosed separately in short term fluctuations outside operating profit. The favourable movement in short term fluctuations during 2014 compared with 2013 is mainly due to a decrease in risk free rates increasing fixed income security market values, and other market movements impacting Group centre investments and the centre hedging programme.
(d) The total assets supporting the general insurance and health business, which contribute towards the longer-term return, are: £m £m
To calculate the longer-term investment return for its non-long-term business in 2013 and 2014, the Group has applied the same economic assumptions for equities and properties as are used under MCEV principles.
Actual return attributable to shareholders 2,760 2,902 Longer-term return credited to operating results (3,293) (3,578)
Equities 1% higher/lower Group operating profit before tax 3 8 Properties 1% higher/lower Group operating profit before tax 1 1
(a) Employee numbers The number of persons employed by the Group, including directors under a service contract, was: At 31 December Average for the year1
Total staff costs 1,534 1,780 1 In 2013, the credit for the defined benefit schemes arose from a £145 million gain from plan amendments to the Irish scheme.
Notes to the consolidated financial statements continued 13 – Auditors’ remuneration This note shows the total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to our principal auditors, PricewaterhouseCoopers LLP.
Total fees payable to PwC LLP and its associates for services to Group companies 26.2 24.2
The tables above reflect the disclosure requirements of SI2011/2198 – The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011. In addition to the fees shown above, during 2014 the Group paid PwC £0.2 million (2013: £0.2 million) in relation to the audit of Group occupational pension schemes. Fees payable for the audit of the Group’s subsidiaries include fees for the statutory audit of the subsidiaries, both inside and outside the UK, and for the work performed by the principal auditors in respect of the subsidiaries for the purpose of the consolidated financial statements of the Group. Total audit fees (excluding additional fees relating to the prior year audits of group subsidiaries), audit-related assurance fees and fees for the audit of the Group’s MCEV reporting were £15.8 million (2013: £15.8 million). This includes favourable foreign exchange movements of £0.3 million, giving an underlying increase of £0.3 million. Audit related assurance comprises services in relation to statutory and regulatory filings. These include audit services for the audit of regulatory returns in the UK and review of interim financial information under the Listing Rules of the UK Listing Authority. Fees for other assurance services comprise non-statutory assurance work which is customarily performed by the external auditor, including the audit of the Group’s MCEV reporting. Although embedded value is a primary management reporting basis and our disclosures require a full audit, the relevant fees are not classified as being for statutory audit. Other assurance services in 2014 includes fees relating to the audit of the Group’s MCEV reporting of £1.2 million, £1.4 million for examination of the Group Individual Capital Assessment and Economic Capital and £6.4 million associated with assurance services to prepare the businesses for Solvency II implementation. Solvency II implementation is a major project requiring substantial model validation assurance that the Company believes is most appropriately performed by the principal auditors. In view of the significance and scale of this work, the Audit Committee specifically assessed the suitability of PwC to provide this service. The 2014 fees for other non-audit services of £1.5 million includes £0.5 million relating to a controls review at Aviva Investors and £1.0 million for a number of other, individually smaller services. Details of the Group’s process for safeguarding and supporting the independence and objectivity of the external auditors are given in the Audit Committee report.
14 – Tax This note analyses the tax charge for the year and explains the factors that affect it.
(a) Tax charged to the income statement (i) The total tax charge comprises: £m £m
Current tax For the year 680 517 Prior year adjustments 12 13
14 – Tax continued (ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £382 million (2013: £191 million).
(v) Deferred tax charged to the income statement represents movements on the following items: £m 2013 £m
In respect of pensions and other post-retirement obligations 424 (110) In respect of unrealised gains on investments 21 8
Tax charged/(credited) to other comprehensive income arising from continuing operations 356 (111) Tax credited to other comprehensive income arising from discontinued operations — (169)
(ii) The tax charge attributable to policyholders’ returns included above is £nil (2013: £nil).
Tax calculated at standard UK corporation tax rate of 21.5% (2013: 23.25%) 503 82 585 656 44 700 Reconciling items
Different local basis of tax on overseas profits 138 (2) 136 184 — 184 Change in future local statutory tax rates (17) — (17) (9) — (9) Movement in deferred tax not recognised 3 — 3 (21) — (21) Tax effect of (profit)/loss from joint ventures and associates (4) — (4) (10) — (10)
The tax charge attributable to policyholder returns is removed from the Group’s total profit before tax in arriving at the Group’s profit before tax attributable to shareholders’ profits. As the net of tax profits attributable to with-profit and unit-linked policyholders is zero, the Group’s pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge attributable to policyholders included in the total tax charge. The difference between the policyholder tax charge and the impact of this item in the tax reconciliation can be explained as follows: £m
Tax attributable to policyholder returns 382 191 UK corporation tax at a rate of 21.5% (2013: 23.25%) in respect of the policyholder tax deduction (82) (44) Different local basis of tax of overseas profits 2 —
Different basis of tax – policyholders per tax reconciliation 302 147
(a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: Continuing operations
Profit/(loss) attributable to ordinary shareholders from continuing operations 1,383 42 1,425 1,254 (606) 648
Profit attributable to ordinary shareholders from discontinued operations — 58 58 207 1,066 1,273
Amortisation and impairment of intangibles (90) (61) (2.1) (91) (65) (2.2) Profit on disposal and remeasurement of subsidiaries, joint ventures and
Integration and restructuring costs and exceptional items (140) (130) (4.4) (363) (315) (10.7)
Profit attributable to ordinary shareholders from continuing operations 2,281 1,425 48.4 1,281 648 22.0 Profit attributable to ordinary shareholders from discontinued operations 58 58 2.0 1,538 1,273 43.3
Diluted earnings per share from continuing operations 1,425 2,987 47.7 648 2,979 21.8
(ii) Diluted earnings per share on operating profit attributable to ordinary shareholders is calculated as follows: Total £m
Diluted operating profit per share from discontinued operations — 2,987 — 207 2,979 6.9
Goodwill from acquisitions and additions arose on the acquisition of a small insurance broker in Canada. There were no goodwill impairment charges on subsidiaries recognised in the income statement. The total charge for impairment of goodwill, joint ventures, and associates for the year was £24 million, comprising an impairment charge recognised in respect of goodwill within interests in associates (refer to note 20). Goodwill disposed of during the year primarily relates to CxG, a Spanish long-term business, and River Road, a US equity manager. See note 4 for further details. Movements in contingent consideration in 2014 relate to contingent consideration received in respect of acquisitions of subsidiaries made prior to 1 January 2010.
Carrying amount of intangibles with indefinite useful lives (detailed in note 18) Total £m 2013 £m £m £m
Long-term business Value in use is calculated as an actuarially determined appraisal value, based on the embedded value of the business calculated in accordance with market consistent embedded value (‘MCEV’) principles, together with the present value of expected profits from future new business. If the embedded value of the business tested is sufficient to demonstrate goodwill recoverability on its own, then it is not necessary to estimate the present value of expected profits from future new business. If required, the present value of expected profits arising from future new business written over a given period is calculated on an MCEV basis, using profit projections based on the most recent three year business plans approved by management. These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, mortality, morbidity and persistency.
Notes to the consolidated financial statements continued 17 – Goodwill continued Future new business profits for the remainder of the given period beyond the initial three years are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to management estimates, past experience and relevant available market statistics. Expected profits from future new business are discounted using a risk adjusted discount rate. The discount rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
Italy long-term business MCEV MCEV 2.0 2.0 8.4 10.5 Spain long-term business MCEV MCEV 1.5 1.5 10.0 10.0
General insurance, health, fund management and other businesses Value in use is calculated as the discounted value of expected future profits of each business. The calculation uses cash flow projections based on business plans approved by management covering a three year period. These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, premium rate and fee income changes, claims inflation and commission rates. Cash flows beyond that three year period are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to past experience and relevant available market statistics. Future profits are discounted using a risk adjusted discount rate.
France – indefinite life intangible asset The recoverable amount of the indefinite life intangible asset has been assessed based on the fair value less costs to sell of the cash generating unit to which it relates. The fair value less costs to sell was determined based on the quoted market value of Aviva’s share of the subsidiary to which it relates.
Results of impairment testing The recoverable amount exceeds the carrying value of the cash generating units including goodwill.
AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total AVIF of £92 million (£59 million on insurance contracts, £33 million on investment contracts), £74 million (2013: £93 million) is expected to be recovered more than one year after the statement of financial position date.
Notes to the consolidated financial statements continued 19 – Interests in, and loans to, joint ventures In several businesses, Group companies and other parties jointly control certain entities. This note analyses these interests and describes the principal joint ventures in which we are involved.
Share of (loss)/profit after tax (6) 135 — 129 (5) 145 — 140 Reclassification from subsidiary 43 21 — 64 — — — —
1 Comprises amortisation of AVIF on insurance contracts of £3 million (2013: £3 million) and other intangibles of £3 million (2013: £2 million).
The property management undertakings perform property ownership and management activities, and are incorporated and operate in the UK. All such investments are held by subsidiary entities. The loans are not secured and no guarantees were received in respect thereof. They are interest-bearing and are repayable on termination of the relevant partnership. The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted with the exception of Aviva SA Emklilik ve Hayat A.S. which has issued a minority portion of shares publically (refer to note 4(b)(v)). All investments in such undertakings are held by subsidiaries, except for the shares in the Chinese joint venture, Aviva-COFCO Life Insurance Co. Limited, which are held by Aviva plc. The Group’s share of net assets of that company is £208 million (2013: £177 million) and has a fair value of £208 million (2013: £177 million). The investment in general insurance and health undertakings relates to the health insurance operations in our Indonesian joint venture. (iii) No joint ventures are considered to be material from a Group perspective (2013: none). The Group’s principal joint ventures are as follows: Name Nature of activities Principal place of business
(iv) The joint ventures have no significant contingent liabilities to which the Group is exposed. The Group has commitments to provide funding to property management joint ventures of £70 million (2013: £140 million). In certain jurisdictions the ability of joint ventures to transfer funds in the form of cash dividends or to repay loans and advances made by the Group is subject to local corporate or insurance laws and regulations and solvency requirements.
Carrying amount and details of associates (i) The movements in the carrying amount comprised: Goodwill and intangibles £m
Impairment testing Management has determined that the goodwill in Aviva Life Insurance Company India Limited is fully impaired. An impairment of £24 million (2013: £29 million) has been recognised in respect of this associate, reducing its goodwill to £nil. The recoverable amount of property management undertakings is the fair value less costs to sell of the associate, measured in accordance with the Group’s accounting policy for Investment Property (see accounting policy Q).
(ii) No associates are considered to be material from a Group perspective (2013: none). All investments in principal associates are held by subsidiaries. The Group’s principal associates are as follows: Name Nature of activities Principal place of business
21 – Property and equipment This note analyses our property and equipment, which are primarily properties occupied by Group companies.
Transfers (to)/from investment property (note 22) (25) 1 — — — (24) Fair value losses 3 (2) — — — 1 Foreign exchange rate movements — 6 — (2) (1) 3
Transfers (to)/from investment property (note 22) — — — — — — Fair value gains/(losses) 5 4 — — — 9 Foreign exchange rate movements — (15) — (3) (9) (27)
Depreciation and impairment At 1 January 2013 — (92) (2) (559) (195) (848) Charge for the year — — — (22) (12) (34)
Impairment charge — (26) — — — (26) Foreign exchange rate movements — — — 5 5 10 1 Disposals include property and equipment sold as part of the disposal of the US Life business in 2013.
Transfers from property and equipment (note 21) — — — 24 — 24 1 Disposals in 2014 relate primarily to the deconsolidation of certain property limited partnerships (PLPs). Disposals in 2013 include property sold as part of the disposal of the US Life business.
(a) Basis for determining fair value hierarchy All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the ‘fair value hierarchy’ described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets and liabilities that the entity can access at the measurement date.
(b) Changes to valuation techniques There were no changes in the valuation techniques during the year compared to those described in the 2013 annual consolidated financial statements, other than those noted below.
Financial liabilities Non-participating investment contracts (note 42(a)) 50,013 50,013 48,140 48,140 Net asset value attributable to unitholders 9,482 9,482 10,362 10,362 1 Restated following the adoption of amendments to IAS 32 ‘Financial instruments: Presentation’ – see note 1 for details. 2 Within the fair value total, the estimated fair value has been provided for the portion of loans and borrowings that are carried at amortised cost as disclosed in note 23 (d).
Fair value of the following assets and liabilities approximate to their carrying amounts: • Receivables • Cash and cash equivalents • Payables and other financial liabilities • The equivalent assets to those above, which are classified as held for sale
(d) Fair value hierarchy analysis An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below. Financial instruments relating to operations classified as held for sale have been excluded from the individual asset and liability line items and have been disclosed separately.
Recurring fair value measurements Investment Property (note 22) — — 8,925 8,925 — 8,925
Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers in line with the Group’s policy. Further details on the valuation of these properties can be found in note 21.
Investments classified as Level 2 Please see note 23(a) for a description of typical Level 2 inputs. Fixed income assets, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced from brokers. Other Level 2 investments, including Unit Trusts, are valued using net assets values which are deemed to be observable market inputs.
Total net (losses)/gains recognised in other comprehensive income — — — — — — — — —
Total net (losses)/gains recognised in other comprehensive income — — — — 1 19 — — —
Transfers out of Level 3 — — (2,089) — (119) — 184 — — Reclassification to held for sale — — — (3) (159) 162 — — —
23 – Fair value methodology continued Total net gains recognised in the income statement in the year ended 31 December 2014 in respect of Level 3 assets measured at fair value amounted to £1,837 million (restated 2013: £234 million), with net losses in respect of liabilities of £227 million (restated 2013: gains £22 million). Included in this balance are net gains of £1,733 million (restated 2013: £199 million) attributable to those assets and net losses of £227 million (restated 2013: gains £22 million) attributable to those liabilities still held at the end of the year. The principal assets classified as Level 3, and the valuation techniques applied to them, are: • Commercial mortgage loans held by our UK Life business amounting to £10.4 billion (2013: £9.9 billion), valued using a Portfolio
Credit Risk Model (PCRM). This model calculates a Credit Risk Adjusted Value (CRAV) for each mortgage. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve, and global assumption for the liquidity premium. The mortgage loans have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The illiquidity premium used in the discount rate ranges between 140 bps to 180 bps.
• Equity release and securitised mortgage loans held by our UK life business amounting to £5.9 billion (2013: £4.7 billion) comprise: – £3.6 billion (2013: £2.6 billion) of equity release mortgages held by our UK Life annuity business valued using an internal model which has been refined during 2014 (see note 41(b)(iii) for further details). Inputs to the model include property growth rates, mortality and morbidity assumptions, cost of capital and liquidity premium. These mortgage loans continue to be classified as Level 3 as these inputs are not deemed to be market observable. The assumed property growth ranges between 1.4% to 1.7% per annum.
• Investment property amounting to £8.9 billion (2013: £9.5 billion). In the UK, investment property is valued at least annually by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period. Outside the UK, valuations are produced by local qualified staff of the Group or external qualified professional appraisers in the countries concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar property. These inputs are deemed unobservable.
• Private equity investment funds amounting to £1.0 billion (2013: £1.1 billion), together with external hedge funds held principally by businesses in the UK and France amounting to £1.4 billion (2013: £1.1 billion), and property funds amounting to £0.3 billion (2013: £0.5 billion) are valued based on external reports received from the fund manager. Where these valuations are at a date other than balance sheet date, as in the case of some private equity funds, we make adjustments for items such as subsequent draw-downs and distributions and the fund manager’s carried interest.
Notes to the consolidated financial statements continued 23 – Fair value methodology continued Where possible, the Group tests the sensitivity of the fair values of Level 3 investments to changes in unobservable inputs to reasonable alternatives. Valuations for Level 3 investments are sourced from independent third parties when available and, where appropriate, validated against internally-modelled valuations, third-party models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations, the Group undertakes, where feasible, sensitivity analysis on the following basis: • For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity of the internally modelled valuation to changes in unobservable inputs to a reasonable alternative is determined. • For third-party valuations either not validated or validated against a third-party model or broker quote, the third-party valuation in its entirety is considered an unobservable input. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the third-party valuation. For example, for a fixed income security the implied yield would be the rate of return which discounts the security’s contractual cash flows to equal the third-party valuation.
On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £39.3 billion of the Group’s Level 3 assets. For these Level 3 assets, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by + £1.5 billion / - £1.6 billion. Of the £1.2 billion Level 3 assets for which sensitivity analysis is not provided, it is estimated that a 10% change in valuation downwards of these assets would result in a change in fair value of approximately £120 million.
Where possible, the Group tests the sensitivity of the fair values of Level 3 liabilities to changes in unobservable inputs to reasonable alternatives. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the third-party valuation. On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £0.5 billion of the Group’s Level 3 liabilities. For these Level 3 liabilities, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by approximately ± £30 million. Of the £1.1 billion Level 3 investments for which sensitivity analysis is not provided it is estimated that a 10% change in valuation downwards of these liabilities would result in a change in fair value of approximately £110 million.
Asset and liabilities not carried at fair value Loans — 984 3,256 4,240
24 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
UK securitised mortgage loans (see note 25) 2,406 — 2,406 2,169 — 2,169
Less: Amounts classified as sale — — — — — —
Of the above loans, £23,771 million (2013: £21,850 million) are due to be recovered in more than one year after the statement of financial position date.
Loans at amortised cost The fair value of these loans at 31 December 2014 was £4,240 million (2013: 5,334 million).
Loans to brokers and other intermediaries 123 — 123 78 — 78
Decrease / (increase) during the year 9 (30) Write back following sale or reimbursement 81 3 Write back following recovery in value — 4
Securitised mortgage loans At fair value (note 24) 2,406 (1,539) 2,169 (1,493) Other securitisation assets/(liabilities) 319 (1,186) 301 (977)
Total loan notes issued, as above 1,539 1,493 Less: Loan notes held by Group companies (167) (180)
Loan notes held by third parties {note 50(c)(i)} 1,372 1,313 26 – Interests in structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. The Group has interests in both consolidated and unconsolidated structured entities as described below.
The Group’s maximum exposure to loss related to the interests presented above is the carrying amount of the Group’s investments. The majority of debt securities above are investment grade securities held by the UK business. In some cases, the Group may be required to absorb losses from an unconsolidated structured entity before other parties when and if Aviva’s interest is more subordinated with respect to other owners of the same security. At 31 December 2014 the Group has granted loans to PLPs classified as joint ventures and associates totaling £73 million (2013: £29 million). This amount has been provided for the purpose of short term liquidity funding. For commitments to property management joint ventures, please refer to Note 19. In relation to risk management, disclosures on debt securities and investment vehicles are given in note 58(b)(iii). The Group has not provided any other financial or other support in addition to that described above as at the reporting date, and there are no intentions to provide support in relation to any other unconsolidated structured entities in the foreseeable future. In relation to other guarantees and commitments that the Group provides in the course of its business, please refer to Note 53 (f) ‘Contingent liabilities and other risk factors’. Aviva’s interest in unconsolidated structured debt securities at 31 December 2014 is £2.5 billion (2013: £2.1 billion) and the total issuance balance relating to these securities totals £51.2 billion (2013: £44.7 billion). Aviva’s interest in unconsolidated structured entities that it also manages at 31 December 2014 is £2.1 billion (2013: £2.2 billion) and the total funds under management relating to these investments at 31 December 2014 is £16.1 billion (2013: £12.2 billion).
Notes to the consolidated financial statements continued 26 – Interests in structured entities continued
Total 13,082 104 26,031 103 1 Investment funds relate to the Group’s Spanish and Polish pension funds. 31 December 2013 AUM includes funds managed by the Group’s US external mutual fund management business which was sold in 2014. 2 2013 figures have been restated to include certain externally owned funds which had been excluded from this disclosure in the prior year. The net impact on assets under management has been an increase of £805 million.
Fixed maturity securities Debt securities UK government — 20,590 — 20,590 — 17,297 — 17,297
Convertibles and bonds with warrants attached — 170 — 170 — 310 79 389
Less assets classified as held for sale Fixed maturity securities — — — — — (2,413) (7) (2,420) Equity securities — — — — — (54) — (54) Other investments — — — — — (201) — (201)
Of the above total, £120,743 million (2013 restated: £115,278 million) is due to be recovered in more than one year after the statement of financial position date. Other debt securities of £8,177 million (2013: £7,070 million) include residential and commercial mortgage-backed securities, as well as other structured credit securities.
27 – Financial investments continued (b) Cost, unrealised gains and fair value The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments: 2014 Restated1
Unit trusts and specialised investment vehicles 27,304 2,152 184 29,640 26,880 1,881 (155) 28,606
Other investments – short-term 1 — — 1 1 — — 1
These are further analysed as follows: At fair value through profit or loss 176,843 27,098 (2,339) 201,602 179,802 19,539 (3,833) 195,508 1 The statement of financial position has been restated following the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details. There is no impact on the result or the total equity for any period presented as a result of this restatement
(c) Impairment of financial investments The movements in impairment provisions on available-for-sale financial investments for the years ended 31 December 2014 and 2013 were as follows: Fixed maturity securities £m
Charge for the year taken to the income statement — — (2) (2) (12) — (1) (13) Write back following sale or reimbursement — 5 — 5 101 — — 101
Notes to the consolidated financial statements continued 27 – Financial investments continued (d) Financial investment arrangements (i) Stock lending arrangements The Group has entered into stock lending arrangements in the UK and overseas in accordance with established market conventions. The majority of the Group’s stock lending transactions occur in the UK, where investments are lent to EEA-regulated, locally domiciled counterparties and governed by agreements written under English law. The Group receives collateral in order to reduce the credit risk of these arrangements, either in the form of securities or cash. See Note 60 for further discussion regarding collateral positions held by the Group.
(ii) Other arrangements In carrying on its bulk purchase annuity business, the Group’s UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits. At 31 December 2014 £1,447 million (2013: £1,201 million) of financial investments were restricted in this way. Certain financial investments are also required to be deposited under local laws in various overseas countries as security for the holders of policies issued in those countries. Other investments are pledged as security collateral for bank letters of credit.
(e) Non UK Government Debt Securities (gross of non-controlling interests) The following is a summary of non UK government debt by issuer as at 31 December 2014 analysed by policyholder, participating and shareholder funds.
Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £3.7 billion. The majority of our holding (78%) is in senior debt. The primary exposures are to UK (27%), Spanish (19%) and US (19%) banks. Net of non-controlling interests, our direct shareholder asset exposure to worldwide bank equity securities is £75 million. Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £13.3 billion. The majority of the exposure (78%) is in senior debt. Participating funds are the most exposed to French (29%), UK (13%) and Dutch (12%) banks.
Notes to the consolidated financial statements continued 28 – Receivables This note analyses our total receivables.
Deferred acquisition costs in respect of: Insurance contracts – Long-term business 529 485 Insurance contracts – General insurance and health business 852 868 Participating investment contracts – Long-term business 22 27 Non-participating investment contracts – Long-term business 968 1,013 Retail fund management business 7 10
Impact of assumption changes (73) — — (73) (213) — — (213) Effect of portfolio transfers, acquisitions and disposals1 — (4) — (4) (2,418) — — (2,418)
Less: Amounts classified as held for sale — — — — — (6) — (6)
(c) Other assets Other assets include £1 million (2013: £1 million) that is expected to be recovered more than one year after the statement of financial position date.
Debt securities 13,628 12,835 Equity securities 26,324 25,836 Reinsurance assets 2,536 2,043 Cash and cash equivalents 3,514 4,725
(a) Description of the plans The Group maintains a number of active share option and award plans and schemes (the Group’s share plans). These are as follows: (i) Savings-related options These are options granted under the tax-advantaged save as you earn (SAYE) share option scheme in the UK and Irish revenueapproved SAYE share option scheme in Ireland. Options are normally exercisable during the six-month period following either the 3rd, 5th or 7th anniversary of the start of the relevant savings contract. Options granted from 2012 are normally exercisable following the 3rd or 5th anniversary.
(b) Outstanding options and awards (i) Share options At 31 December 2014, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva savings related share option scheme
Normally exercisable 182 | Aviva plc Annual report and accounts 2014
(i) Share options The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2014 2013
34 – Preference share capital This note gives details of Aviva plc’s preference share capital. The preference share capital of the Company at 31 December was: £m
Issued May 2012 8.25% US $650 million fixed rate tier 1 notes 392 392
The euro and sterling direct capital instruments (the DCIs) were issued on 25 November 2004 and qualify as Innovative Tier 1 capital, as defined by the PRA in GENPRU Annex 1 ‘Capital Resources’. On 28 November 2014 the Company exercised its option to redeem the euro DCI on its first redemption date. The remaining sterling DCI has no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the principal amount on 27 July 2020, at which date the interest rate changes to a variable rate, or on any respective coupon payment date thereafter. The sterling DCI variable rate will be the six month sterling deposit rate plus margin. The fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012 and also qualify as Innovative Tier 1 capital. The FxdRNs are perpetual but are subject to a mandatory exchange into non-cumulative preference shares in the Company after 99 years. The Company may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on any respective coupon payment date thereafter. On the occurrence of a Capital Disqualification Event as defined in the terms and conditions of the issue for both the DCI and FxdRNs, the Company may at its sole option substitute at any time not less than all of the DCI or FxdRNs for, or vary the terms of the DCI so that they become, Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities. In addition, on the occurrence of a Substitution Event as defined in the terms and conditions of the issue for the DCI, the Company may at its sole option substitute not less than all of the DCI for fully paid non-cumulative preference shares in the Company. These preference shares can only be redeemed on 27 July 2020, or on any dividend payment date thereafter. For the FxdRNs, having given the required notice, the Company has the right to substitute not less than all of the notes for fully paid noncumulative preference shares at any time. These preference shares can only be redeemed on 3 November 2017, or on any dividend payment date thereafter. The Company has the right to choose whether or not to pay any dividend on the new shares, and any such dividend payment will be non-cumulative.
37 – Other reserves This note gives details of the various reserves forming part of the Group’s consolidated equity and shows the movements during the year net of non-controlling interests: Currency translation reserve (see accounting policy E) £m
Equity shares in subsidiaries 472 641 Share of earnings 202 321 Share of other reserves 242 259
Balance at 1 January 1,471 1,574 Profit for the year attributable to non-controlling interests 169 143 Foreign exchange rate movements (79) 34 Total comprehensive income attributable to non-controlling interests 90 177 Capital contributions from non-controlling interests — 1 Non-controlling interests share of dividends declared in the year (189) (134) Changes in non-controlling interest in subsidiaries (206) (147)
The Group has no subsidiaries whose non-controlling interest (NCI) is material on the basis of their share of profit or loss in 2014.
Provision for claims incurred but not reported — 2,578 2,578 — 2,568 2,568
Provision for unearned premiums — 4,107 4,107 — 4,226 4,226 Provision arising from liability adequacy tests — 10 10 — 10 10
General insurance and health liabilities Change in insurance liabilities (note 41c(iv) and 44 c(ii)) (76) 49 (27) Less: Unwind of discount on GI reserves and other (9) 3 (6)
Long term business liabilities Change in long term business provisions (note
Less: Unwind of discount on GI reserves and other (15) 10 (5) — — — (15) 10 (5)
(b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: • In the UK mainly in: – New With-Profits sub-fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below).
– The RIEESA of UKLAP, which is a non-profit fund where shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the ‘lock-in’ criteria set by the Reattribution Scheme have been met. The RIEESA has been used to write non-profit business and also to provide capital support to NWPSF.
• In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.
(ii) Group practice The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006. Material judgment is required in calculating the provisions and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates. Where discount rate assumptions are based on current market yields on fixed interest securities, allowance is made for default risk implicit in the yields on the underlying assets. Bonuses paid during the year are reflected in claims paid, whereas those allocated as part of the bonus declaration are included in the movements in the long-term business provision. For UK with-profit life funds falling within the scope of the PRA realistic capital regime, and hence FRS 27, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. For our UK with-profit funds, no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated divisible surplus.
(a) UK With-profit business The valuation of with-profit business uses the methodology developed for the Realistic Balance Sheet, adjusted to remove the shareholders’ share of future bonuses. The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract. For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses. The items included in the cost of future policy-related liabilities include: • Maturity Guarantees; • Guarantees on surrender, including no-MVR (Market Value Reduction) Guarantees and Guarantees linked to inflation • Guaranteed Annuity Options; • GMP (Guaranteed Minimum Pension) underpin on Section 32 transfers; and • Expected payments under Mortgage Endowment Promise.
The cost of future policy-related liabilities is determined using a market-consistent approach and, in the main, this is based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are based on experience, adjusted to take into account future trends. The principal assumptions underlying the cost of future policy-related liabilities are as follows: Future investment return A ‘risk-free’ rate equal to the spot yield on UK swaps is used for the valuation of With-Profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2014 of 1.88% (2013: 3.11%) for a policy with ten years outstanding.
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued For the main pensions annuity business in Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 101.5% of PCMA00 (2013: 102.0% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 96.5% of PCFA00 (2013: 97.5% of PCFA00) with base year 2000. Improvements are materially unchanged from prior year and are based on CMI_2013 with a long-term improvement rate of 1.75% for males and 1.5% for females, both with an addition of 0.5% to all future annual improvement. Year-specific adjustments are made to allow for selection effects due to the development of the Enhanced Annuity market.
(iv) Movements The following movements have occurred in the gross long-term business provisions during the year: £m
Carrying amount at 1 January 94,972 131,190 Provisions in respect of new business 4,796 5,671 Expected change in existing business provisions (5,806) (8,015) Variance between actual and expected experience 1,383 2,871 Impact of operating assumption changes (1,118) 428 Impact of economic assumption changes 6,819 (2,812) Other movements (227) (235) Change in liability recognised as an expense 5,847 (2,092) Effect of portfolio transfers, acquisitions and disposals2 (805) (34,441) Foreign exchange rate movements (1,904) 509 Other movements — (194)
Carrying amount at 31 December 98,110 94,972 1 The 2013 comparatives include US Life in each line of the analysis up to the “effect of portfolio transfers, acquisitions and disposals” item. 2 The movement during 2014 includes £103 million related to the disposal of Eurovita, £696 million related to the disposal of CxG and £6 million related to the restructuring of our operations in Indonesia.
(c) General insurance and health liabilities (i) Provisions for outstanding claims Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments. Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE.
Reinsured London Market business 2.1% 2.5% 10 years 12 years Latent claims 0.16% to 2.75% 0.36% to 3.76% 6 to 15 years 6 to 15 years Structured settlements 2.0% 2.8% 35 years 35 years
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued The following explicit assumptions are made which could materially impact the level of booked net reserves: UK mesothelioma claims The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group’s latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees. The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate £245 million (2013: £235 million) greater than the best estimate, or £75 million (2013: £70 million) lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.
Incurred claims losses and expenses 5,832 6,020 Less: Payments made on claims incurred in the current year (3,253) (3,352) Payments made on claims incurred in prior years (2,933) (3,001) Recoveries on claim payments 269 285
Changes in claims reserve recognised as an expense (76) (33) Effect of portfolio transfers, acquisitions and disposals (121) (44) Foreign exchange rate movements (222) (178) Other movements (3) (1)
Two years later (5,449) (5,971) (7,191) (7,828) (6,102) (5,875) (5,150) (4,812) Three years later (5,784) (6,272) (7,513) (8,304) (6,393) (6,163) (5,457) Four years later (6,001) (6,531) (7,836) (8,607) (6,672) (6,405) Five years later (6,156) (6,736) (8,050) (8,781) (6,836) Six years later (6,311) (6,936) (8,144) (8,906) Seven years later (6,467) (7,015) (8,224) Eight years later (6,496) (7,062) Nine years later (6,537)
Net cumulative claim payments At end of accident year (3,281) (3,612) (4,317) (4,808) (3,650) (3,386) (3,300) (2,925) (2,905) (2,972) One year later (4,925) (5,442) (6,542) (7,165) (5,286) (5,242) (4,578) (4,166) (4,240) Two years later (5,344) (5,881) (7,052) (7,638) (5,885) (5,637) (4,963) (4,575) Three years later (5,671) (6,181) (7,356) (8,094) (6,177) (5,905) (5,263) Four years later (5,892) (6,434) (7,664) (8,356) (6,410) (6,137) Five years later (6,039) (6,625) (7,852) (8,515) (6,568) Six years later (6,188) (6,724) (7,942) (8,626) Seven years later (6,245) (6,789) (8,004) Eight years later (6,294) (6,831) Nine years later (6,318)
Estimate of net ultimate claims At end of accident year 6,982 7,430 8,363 9,262 7,115 6,650 6,202 5,941 5,838 5,613 One year later 6,818 7,197 8,302 9,104 7,067 6,751 6,103 5,765 5,745 Two years later 6,688 7,104 8,244 9,028 7,036 6,685 6,095 5,728 Three years later 6,544 6,996 8,249 9,007 6,978 6,644 6,077 Four years later 6,476 6,980 8,210 8,962 6,940 6,634 Five years later 6,448 6,992 8,221 8,949 6,977 Six years later 6,397 6,939 8,149 8,926 Seven years later 6,372 6,938 8,143 Eight years later 6,385 6,947 Nine years later 6,384
Estimate of net ultimate claims 6,384 6,947 8,143 8,926 6,977 6,634 6,077 5,728 5,745 5,613
Carrying amount at 1 January 4,226 4,441 Premiums written during the year 8,943 9,361 Less: Premiums earned during the year (8,935) (9,497)
Change in UPR recognised as income 8 (136) Gross portfolio transfers and disposals (31) — Foreign exchange rate movements (96) (79)
Carrying amount at 31 December 4,107 4,226 196 | Aviva plc Annual report and accounts 2014
Notes to the consolidated financial statements continued 42 – Liability for investment contracts continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £0.7 billion is driven by favourable property returns on liabilities in the UK. Additionally, minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors. The impact of assumption changes in the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 45, together with the impact of movements in related non-financial assets.
Carrying amount at 31 December 50,013 48,140 1 The 2013 comparatives include US business in each line of the analysis up to the effect of portfolio transfers, acquisitions and disposals item. 2 The movements during 2014 relate primarily to the disposal of Eurovita. 2013 related to the disposals of US Life and Ark Life.
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience of £1.6 billion is primarily driven by the impact of favourable movements in property returns on liabilities for unit linked contracts in UK and Ireland. In addition there are variances in Italy due to lower lapses than expected. The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of nonparticipating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note 45, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.
43 – Financial guarantees and options This note details the financial guarantees and options that the Group has given for some of our insurance and investment products. As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products. Further information on assumptions is given in notes 41 and 42.
43 – Financial guarantees and options continued (iii) Guaranteed annuity options The Group’s UK with-profit funds have written individual and group pension contracts which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities. Realistic liabilities for GAOs in the UK with-profit funds were £1,198 million at 31 December 2014 (2013: £921 million). With the exception of the New With-Profits Sub Fund (NWPSF), movements in the realistic liabilities in the with-profit funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in the NWPSF were £197 million at 31 December 2014 (2013: £149 million).
(v) Guaranteed minimum maturity payments on mortgage endowments In addition, the with-profit fund companies have made promises to certain policyholders in relation to their with-profit mortgage endowments. Top-up payments will be made on these policies at maturity to meet the mortgage value up to a maximum of the 31 December 1999 illustrated shortfall. For UKLAP WP policyholders, these payments are subject to certain conditions.
(i) Guaranteed annuity options Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £33 million at 31 December 2014 (2013: £31 million).
(i) France Guaranteed surrender value and guaranteed minimum bonuses Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, ‘Provision pour Aléas Financiers’ (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at full year 2014. The most significant of these contracts is the AFER Eurofund which has total liabilities of £32 billion at 31 December 2014 (2013: £34 billion). The guaranteed minimum bonus is agreed between Aviva France and the AFER association at the end of each year, in respect of the following year. The bonus was 3.20% for 2014 (2013: 3.36%) compared with an accounting income from the fund of 3.69% (2013: 3.85%). Non-AFER contracts with guaranteed surrender values had liabilities of £16 billion at 31 December 2014 (2013: £15 billion) and all guaranteed annual bonus rates are between 0% and 4.5%. For non-AFER business the accounting income return exceeded guaranteed bonus rates in 2014.
44 – Reinsurance assets This note details the reinsurance recoverables on our insurance and investment contract liabilities.
Long-term business Insurance contracts 4,032 3,734 Participating investment contracts 3 2 Non-participating investment contracts1 2,533 2,048
General insurance and health Outstanding claims provisions 724 849 Provisions for claims incurred but not reported 373 315
1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss.
Change in asset 862 643 Effect of portfolio transfers, acquisitions and disposals1 (13) (873) Foreign exchange rate movements (65) 42
Carrying amount at 31 December 6,568 5,784 1 The movement during 2014 includes £12 million related to the disposal of Eurovita and £1 million related to the disposal of CxG. Prior year movements primarily relates to the disposal of US Life in 2013.
Incurred in current year (131) (169) Incurred in prior years (173) (140)
Reinsurance recoveries received in the year (304) (309) Unwind of discounting 3 10
Notes to the consolidated financial statements continued 45 – Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2013 to 2014, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.
The impact of interest rates on long-term business relates primarily to UK annuities, where a reduction in the valuation interest rates has increased liabilities. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. There has been a release of expense reserves for the UK annuity business as a result of continuing restructuring and process improvements, reducing the current and long term cost base and a release of mortality reserves following the annual review of experience, most of which relates to annuitant mortality. Tax and other assumptions includes the effect of changes in the equity release default assumptions used to derive the valuation interest rate for UK annuities resulting in a £163 million reduction in annuity liabilities (changes in other default risk assumptions are included within “interest rate” changes). This is partially offset by a write down of DAC in the UK in part to include the impact of the DWP announcement of a 0.75% charge cap and ban on active member discounts. The adverse change in discount rate assumptions on general insurance and health business of £145 million (2013: £33 million favourable) arises mainly as a result of a decrease in the swap rates used to discount latent claims reserves and periodic payment orders.
46 – Unallocated divisible surplus An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore the expected duration for settlement of the UDS is not defined. This note shows the movements in the UDS during the year.
Carrying amount at 1 January 6,709 6,986 Change in participating contract assets 3,087 (262) Change in participating contract liabilities 299 (22) Other movements (22) 4 Change in liability recognised as an expense 3,364 (280) Effect of portfolio transfers, acquisitions and disposals (131) (115) Foreign exchange rate movements (444) 118 Other movements (31) —
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £15 million and £13 million (2013: £42 million and £1 million), respectively.
Long-term business technical provisions and other insurance items 2,263 1,276 Deferred acquisition costs (251) (220) Unrealised gains on investments (2,885) (1,856) Pensions and other post-retirement obligations (499) (78) Unused losses and tax credits 227 296 Subsidiaries, associates and joint ventures (12) (8) Intangibles and additional value of in-force long-term business (170) (190) Provisions and other temporary differences 312 468
Net liability at 31 December (1,015) (312) 1 Disposals in 2013 mainly relate to the disposal of US Life of £720 million.
48 – Provisions This note details the non-insurance provisions that the Group holds, and shows the movements in these during the year.
Total IAS 19 obligations to staff pension schemes 434 410 Restructuring provisions 97 140 Other provisions 348 437
Change in the discounted amount arising from passage of time — 2 2 — 1 1 49 – Pension obligations (a) Introduction The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland, and Canada with the main UK scheme being the largest. The assets and liabilities of these defined benefit schemes as at 31 December 2014 are shown below.
Total fair value of scheme assets (see b(ii) below) 14,733 483 258 15,474 11,734 431 233 12,398 Present value of defined benefit obligation (12,079) (748) (343) (13,170) (11,185) (640) (334) (12,159)
Net surpluses/(deficits) in the schemes 2,654 (265) (85) 2,304 549 (209) (101) 239
Surpluses included in other assets (note 29) 2,695 — — 2,695 606 — — 606 Deficits included in provisions (note 48) (41) (265) (85) (391) (57) (209) (101) (367)
(ii) Other schemes Future accruals for the Irish and Canadian defined benefit schemes ceased with effect from 30 April 2013 and 31 December 2011 respectively. The Irish scheme is regulated by the Pensions Authority in Ireland. The main Canadian plan is Registered Pension Plan in Canada and as such is registered with the Canada Revenue Agency and Financial Services Commission of Ontario and is required to comply with the Income Tax of Canada and the various provincial Pension Acts within Canada.
(b) IAS 19 disclosures Disclosures under IAS 19 for the material defined benefit schemes in the UK, Ireland and Canada, are given below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
Return on scheme assets excluding amounts in interest income 2,593 — 2,593 Losses from change in financial assumptions — (1,063) (1,063) Gains from change in demographic assumptions — 150 150 Experience losses — (18) (18)
Net surplus in the schemes at 31 December 15,474 (13,170) 2,304 1 Administrative expenses are expensed as incurred. 2 Net interest income of £33 million has been credited to investment income and net interest expense of £13 million has been charged to finance costs (see Note 8). 3 Total recognised in income from discontinued operations is £nil and total remeasurements recognised in other comprehensive income from discontinued operations is £nil.
Total pension cost charged to net operating expenses — 125 125 Net interest credited/(charged) to investment income/(finance costs)3 543 (506) 37
Net surplus in the schemes at 31 December 12,398 (12,159) 239 1 Includes £145 million gain relating to plan amendments in Ireland. 2 Administrative expenses are expensed as incurred. 3 Net interest income of £57 million has been credited to investment income and net interest expense of £20 million has been charged to finance costs (see Note 8). 4 Total recognised in income from discontinued operations is £nil and total remeasurements recognised in other comprehensive income from discontinued operations is £nil.
(ii) Scheme assets Scheme assets are stated at their fair values at 31 December 2014. Total scheme assets are comprised by scheme as follows: UK £m
Total fair value of assets 14,733 483 258 15,474 11,734 431 233 12,398
Total fair value of assets 8,761 6,713 15,474 5,719 6,679 12,398 1 A total of £1,697 million, which was previously disclosed in 2013 as £277 million of fixed interest bonds, £645 million of equities, and £775 million of property has been reclassified to pooled investment vehicles. 2 Cash and other assets comprise cash at bank, insurance policies, receivables and payables.
Plan assets include investments in Group-managed funds in the consolidated statement of financial position of £905 million (2013: £868 million) and transferrable insurance policies with other Group companies of £189 million (2013: £177 million) in ASPS. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate line in the table above, otherwise they appear in ‘Cash and other’.
Basis of discount rate AA-rated corporate bonds AA-rated corporate bonds AA-rated corporate bonds 1 For UK schemes, assumption provided for RPI/CPI. 2 In the UK, the only remaining linkage between pension benefits and general salary increases is in respect of a small amount of Guaranteed Minimum Pension benefits, in line with National Average Earnings.
Mortality assumptions Mortality assumptions are significant in measuring the Group’s obligations under its defined benefit schemes, particularly given the maturity of these obligations in the material schemes. The assumptions used are summarised in the table below and have been selected to reflect the characteristics and experience of the membership of these schemes. The mortality tables, average life expectancy and pension duration used at 31 December 2014 for scheme members are as follows: Life expectancy/(pension duration) at NRA of a male Life expectancy/(pension duration) at NRA of a female
UK – ASPS Club Vita pooled experience, including an allowance for future improvements 60 89.5 91.4 90.6 92.4
Canada Canadian Pensioners’ Mortality 2014 Private Table 65 86.5 87.6 89.0 90.0
The assumptions above are based on commonly used mortality tables. The tables make allowance for observed variations in such factors as age, gender, pension amount, salary and postcode-based lifestyle group, and have been adjusted to reflect recent research into mortality experience. However, the extent of future improvements in longevity is subject to considerable uncertainty and judgment is required in setting this assumption. In the UK schemes, which are the most material to the Group, the allowance for future mortality improvement is per the actuarial professions CMI 2013 model, with assumed long term rates of improvement of 1.75% p.a. for males, and 1.50% p.a. for females.
49 – Pension obligations continued Sensitivity analysis Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivities analyses below have been determined based on reasonably possible changes of the respective assumptions, holding all other assumptions constant. The following table summarises how the defined benefit obligation would have increased/ (decreased) as a result of the change in the respective assumptions: Impact on present value of defined benefit obligation
Impact on present value of defined benefit obligation at 31 December 2014 (2,170) 2,911 2,747 (2,081) 367 Impact on present value of defined benefit obligation at 31 December 2013 (1,968) 2,616 2,388 (1,824) 324 1 The effect of assuming all members in the schemes were one year younger.
Maturity profile of the defined benefit obligation The discounted scheme liabilities have an average duration of 20 years in ASPS, 19 years in the RAC scheme, 20 years in the Irish scheme and 12 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below: (iv) Risk management and asset allocation strategy As noted above, the long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, the schemes’ assets are invested in a portfolio, consisting primarily (approximately 75%) of debt securities as detailed in section (b)(ii). The investment strategy will continue to evolve over time and is expected to match the liability profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched to interest rates on the funding basis.
(v) Funding Formal actuarial valuations normally take place every three years and where there is a deficit, the Company and the trustee would agree a deficit recovery plan. The assumptions adopted for triennial actuarial valuations are determined by the trustee and agreed with the Company and are normally more prudent than the assumptions adopted for IAS19 purposes, which are best estimate. For ASPS, following the latest formal actuarial valuation (with an effective date of 31 March 2012) deficit recovery plan was agreed, to make good the deficit over a period of time, consistent with the requirements of the UK pension regulations. As at 31 December 2014, the funding deficit was estimated at £30 million. The deficit funding payment for 2015 is estimated to be £180 million, however, contributions will depend on the funding position of the scheme and the outcome of the triennial actuarial valuation as at 31 March 2015. Total employer contributions for all schemes in 2015 are currently expected to be £298 million.
Core structural borrowings, at amortised cost 5,310 5,125 Operational borrowings, at amortised cost 696 1,410 Operational borrowings, at fair value 1,372 1,313
Subordinated debt 6.125% £700 million subordinated notes 2036 — 692 — 692 — 692 — 692
Notes to the consolidated financial statements continued 50 – Borrowings continued (ii) The contractual maturity dates of undiscounted cash flows for these borrowings are: Principal £m Interest £m Total £m Principal £m Interest £m Total £m
(d) Description and features (i) Subordinated debt A description of each of the subordinated notes is set out in the table below: Notional amount Issue date Redemption date Callable at par at option of the Company from In the event the Company does not call the notes, the coupon will reset at each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% €500 million 29 Sep 2003 Undated 29 Sep 2015 3 month Euribor + 2.35% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40% £600 million 20 May 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% €500 million 20 May 2008 22 May 2038 22 May 2018 3 month Euribor + 3.35% £200 million1 1 Apr 2009 1 Apr 2019 1 Apr 2014 3 month LIBOR + 8.10% €50 million1 30 Apr 2009 30 Apr 2019 30 Apr 2014 3 month Euribor + 8.25% £450 million 26 May 2011 3 June 2041 3 June 2021 6 Month LIBOR + 4.136% $400 million 22 November 2011 1 December 2041 1 December 2016 8.25%(fixed) €650 million 5 July 2013 5 July 2043 5 July 2023 5 year EUR mid-swaps + 5.13% €700 million 3 July 2014 3 July 2044 3 July 2024 5 year EUR mid-swaps + 3.48% 1 The £200 million and €50 million subordinated notes were redeemed at their first call dates on 1 April and 30 April 2014 respectively.
Subordinated notes issued by the Company rank below its senior obligations and ahead of its preference shares and ordinary share capital. The dated subordinated notes rank ahead of the undated subordinated notes. The fair value of notes at 31 December 2014 was £5,188 million (2013: £4,707 million), calculated with reference to quoted prices.
(ii) Debenture loans The 9.5% guaranteed bonds were issued by the Company at a discount of £1.1 million. This discount and the issue expenses are being amortised over the full term of the bonds. Although these bonds were issued in sterling, the loans have effectively been converted into euro liabilities through the use of financial instruments in a subsidiary. All these borrowings are at fixed rates and their fair value at 31 December 2014 was £223 million (2013: £236 million), calculated with reference to quoted prices.
Non-recourse Loans to property partnerships (see (a) below) 199 804 Loans to Irish investment funds (see (b) below) — 7 UK Life reassurance (see (c) below) 178 208 Other non-recourse loans (see (d) below) 219 288
(a) As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property funds and structures (the “Property Funds”), some of which have raised external debt, secured on the relevant Property Fund’s property portfolio. The lenders are only entitled to obtain payment of interest and principal to the extent there are sufficient resources in the relevant Property Fund and they have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £199 million (2013: £804 million) included in the table relate to those Property Funds which have been consolidated as subsidiaries. (b) External borrowings raised by one Irish policyholder investment fund, which has been fully consolidated in accordance with accounting policy D, were repaid in full in 2014.
New borrowings drawn down, excluding commercial paper, net of expenses 552 1 553 554 184 738 Repayment of borrowings, excluding commercial paper (241) (372) (613) (546) (347) (893) Movement in commercial paper1 1 — 1 (50) — (50)
Borrowings acquired/(loans repaid) for non-cash consideration2 — (321) (321) — (183) (183)
1 Gross issuances of commercial paper were £1,830 million in 2014 (2013: £1,583 million), offset by repayments of £1,829 million (2013: £1,633 million). 2 Includes borrowings disposed of / repaid as part of the disposal of US Life in 2013 of £179 million. 3 Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such holdings over the year are reflected in the tables above.
All movements in fair value in 2013 and 2014 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
Bank overdrafts amount to £95 million (2013: £77 million) in life business operations and £455 million (2013: £416 million) in general insurance business and other operations. All payables and other financial liabilities are carried at cost, which approximates to fair value, except for derivative liabilities, which are carried at their fair values.
Notes to the consolidated financial statements continued 52 – Other liabilities This note analyses our other liabilities at the end of the year.
Deferred income 159 177 Reinsurers’ share of deferred acquisition costs 12 11
(a) Uncertainty over claims provisions Note 41 gives details of the estimation techniques used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities.
(d) Regulatory compliance The Group’s insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the Group’s UK subsidiaries are “dual regulated” (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation) whilst others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group’s regulators outside the UK typically have similar powers, but in some cases they also operate a system of ‘prior product approval’. The Group’s regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required. The impact of any such finding (whether in the UK or overseas) could have a negative impact on the Group’s reported results or on its relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on the business of the Group, its results of operations and/or financial condition and divert management’s attention from the day-to-day management of the business.
(f) Other In the course of conducting insurance and investment business, various Group companies receive liability claims, and become involved in actual or threatened related litigation. In the opinion of the directors, adequate provisions have been established for such claims and no material loss will arise in this respect. In addition, in line with standard business practice, various Group companies have given guarantees, indemnities and warranties in connection with disposals in recent years of subsidiaries and associates to parties outside the Aviva Group. In the opinion of the directors, no material loss will arise in respect of these guarantees, indemnities and warranties. There are a number of charges registered over the assets of Group companies in favour of other Group companies or third parties. In addition, certain of the Company’s assets are charged in favour of certain of its subsidiaries as security for intra-Group loans. The Group’s insurance subsidiaries pay contributions to levy schemes in several countries in which we operate. Given the economic environment, there is a heightened risk that the levy contributions will need to be increased to protect policyholders if an insurance company falls into financial difficulties. The directors continue to monitor the situation but are not aware of any need to increase provisions at the statement of financial position date.
Later than 1 year and not later than 5 years 732 807 Later than 5 years 1,203 1,307
2 The definition of tangible capital employed has been adjusted in 2014 to deduct only goodwill to calculate “tangible capital”. Goodwill includes £1,302 million (2013: £1,480 million including £4 million within assets held for sale) of goodwill in subsidiaries and £25 million (2013: £30 million) of goodwill in joint ventures. AVIF and other intangibles are maintained within the capital base. As the end of 2014, AVIF and other intangibles comprise £1,028 million (2013: £1,068 million) of intangibles in subsidiaries and £62 million (2013: £30 million) of intangibles in joint ventures, net of deferred tax liabilities of £(180) million (2013: £(189) million) and the non-controlling interest share of intangibles of £(198) million (2013: £(215) million).
56 – Statement of cash flows This note gives further detail behind the figures in the statement of cash flows.
(a) The reconciliation of profit before tax to the net cash inflow from operating activities is: £m
Depreciation of property and equipment 19 31 Equity compensation plans, equity settled expense 39 37 Impairment and expensing of: Goodwill on subsidiaries — 48 Financial investments, loans and other assets (3) 32 Acquired value of in-force business and intangibles 10 14 Non-financial assets 26 —
Amortisation of: Premium or discount on debt securities 255 144 Premium or discount on borrowings (24) (16) Premium or discount on non participating investment contracts 5 8 Financial instruments 12 194 Acquired value of in-force business and intangibles 108 110
Change in unallocated divisible surplus 3,364 (280) Interest expense on borrowings 525 589 Net finance charge on pension schemes (20) (37) Foreign currency exchange gains (199) (187)
Notes to the consolidated financial statements continued 56 – Statement of cash flows continued (c) Cash flows in respect of the disposal of subsidiaries, joint ventures and associates comprised: Cash proceeds from disposal of subsidiaries, joint ventures and associates 349 817 Less: Net cash and cash equivalents divested with subsidiaries (239) (440)
1 Restated for the adoption of amendments to IAS 32 ‘Financial Instruments: Presentations’ – see note 1 for details. In addition, following a review of the classification of cash and cash equivalents, £8,211 million has been reclassified from cash at bank and in hand to cash equivalents. The net impact of this reclassification on cash and cash equivalents is £nil.
Cash and cash equivalents reconciles to the statement of financial position as follows: Restated1
1 Restated for the adoption of amendments to IAS 32 ‘Financial Instruments: Presentations’ – see note 1 for details 57 – Capital statement This statement sets out the financial strength of our Group entities and provides an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital statement also provides a reconciliation of shareholders’ funds to regulatory capital. The analysis below sets out the Group’s available capital resources, which includes available capital resources of subsidiaries classified as held for sale in the Group IFRS statement of financial position still included in the Group’s available capital resources at 31 December 2014.
Adjustments onto a regulatory basis: Shareholders' share of accrued bonus (37) 445 (181) 227 — 227 — 227 — 227 (89)
Other non-participating life insurance 372 3,588 509 4,469 37,476 41,945 4,711 46,656 — 46,656 42,447 Amounts classified as held for sale — — — — — — — — — — (106)
Amounts classified as held for sale — — — — — — — — — — (2,710)
1 Other sources of capital include Subordinated debt of £4,594 million issued by Aviva and £29 million of other qualifying capital issued by Italian and Spanish subsidiary and associate undertakings. 2 Unallocated divisible surplus for overseas life operations is included gross of minority interest and amounts disclosed include balances classified as held for sale. 3 Includes goodwill and other intangibles of £87 million in joint ventures and associates, and amounts disclosed include balances classified as held for sale. 4 Includes an adjustment for minorities (except for other sources of capital that are reflected net of minority interest). 5 Includes the Provident Mutual with-profit fund. 6 Other operations include general insurance and fund management business.
Expected change in available capital resources (4) (1) 70 65 306 371 653 1,024 Variance between actual and expected experience (6) 70 31 95 (71) 24 3,176 3,200 Effect of operating assumption changes (6) 5 48 47 156 203 59 262 Effect of economic assumption changes (8) (139) (26) (173) (45) (218) 51 (167) Effect of changes in management policy1 (87) 926 — 839 308 1,147 3 1,150 Transfers, acquisitions and disposals2 — — — — (491) (491) (61) (552) Foreign exchange movements — — — — — — (792) (792)
Further analysis of the movement in the liabilities of the long-term business can be found in notes 41 and 42. The analysis of movements in capital provides an explanation of the movement in available capital of the Group’s life business for the year. This analysis is intended to give an understanding of the underlying causes of changes in the available capital of the Group’s life business, and provides a distinction between some of the key factors affecting the available capital. The negative shareholders’ funds balance within the UK with-profit funds arises in NWPSF as a result of regulatory valuation and admissibility differences in the reattributed estate which is valued on a realistic regulatory basis compared to the disclosure on an IFRS basis. NWPSF is fully supported by the reattributed estate of £2,111 million (this is known as RIEESA) at 31 December 2014 (31 December 2013: £1,105 million) held within NPSF1 (a non-profit fund within UKLAP included within other UK life operations) in the form of a capital support arrangement. This support arrangement will provide capital to NWPSF to ensure that the value of assets of NWPSF are at least equal to the value of liabilities calculated on a realistic regulatory basis, therefore it forms part of the NWPSF available capital resources. The with-profit funds and the RIEESA use internal hedging to limit the impacts of equity market volatility. In aggregate, the Group has at its disposal total available capital of £22.2 billion (2013: £18.6 billion), representing the aggregation of the solvency capital of all of our businesses. This capital is available to meet risks and regulatory requirements set by reference to local guidance and EU directives. After effecting the year-end transfers to shareholders, the UK with-profit funds have available capital of £3.9 billion (2013: £3.2 billion) (including amounts held in RIEESA). Subject to certain conditions, the RIEESA capital can be used to write new non-profit business, but the primary purpose of this capital is to provide support for the UK with-profit business. The capital (including RIEESA) is comfortably in excess of the required capital margin, and therefore no further support is required by shareholders. For the remaining life and general insurance operations, the total available capital amounting to £18.3 billion (2013: £15.4 billion) is higher than the minimum requirements established by regulators and, in principle, the excess is available to shareholders. In practice, management will hold higher levels of capital within each business operation to provide appropriate cover for risk. The total available capital of £22.2 billion is arrived at on the basis of local regulatory guidance, which evaluates assets and liabilities prudently and includes the Group’s unallocated divisible surplus of overseas life operations. This is a limitation of the Group Capital Statement which, to be more meaningful, needs to evaluate available capital on an economic basis and compare it with the risk capital required for each individual operation, after allowing for the considerable diversification benefits that exist in our Group. Within the Aviva Group there exist intra-group arrangements to provide capital to particular business units. Included in these arrangements is a subordinated loan of £200 million from Aviva Life Holdings UK Limited to Aviva Annuity Limited to provide capital to support the writing of new business. The available capital of the Group’s with-profit funds is determined in accordance with the ‘Realistic balance sheet’ regime prescribed by the PRA’s regulations, under which liabilities to policyholders include both declared bonuses and the constructive obligation for future bonuses not yet declared. The available capital resources include an estimate of the value of their respective estates, included as part of the unallocated divisible surplus. The estate represents the surplus in the fund that is in excess of any constructive obligation to policyholders. It represents capital resources of the individual with-profit fund to which it relates and is available to meet regulatory and other solvency requirements of the fund and, in certain circumstances, additional liabilities may arise. The liabilities included in the balance sheet for the with-profit funds do not include the amount representing the shareholders’ portion of future bonuses. However, the shareholders’ portion is treated as a deduction from capital that is available to meet regulatory requirements and is therefore shown as a separate adjustment in the capital statement. In accordance with the PRA’s regulatory rules under its realistic capital regime, the Group is required to hold sufficient capital in its UK life with-profit funds to meet the PRA capital requirements, based on the risk capital margin (RCM). The determination of the RCM depends on various actuarial and other assumptions about potential changes in market prices, and the actions management would take in the event of particular adverse changes in market conditions.
2 Estimated realistic inherited estate at 31 December 2013 was £nil, £0.4 billion and £1.5 billion for NWPSF, OWPSF and WPSF respectively. 3 This represents the reattributed estate (RIEESA) of £2.1 billion at 31 December 2014 (31 December 2013: £1.1 billion).The increase arises mainly from the transfer of non-profit business from RIEESA to NWPSF and recognition of the value of this business in RIEESA. 4 The WPSF fund includes the Provident Mutual (PM) fund which has realistic assets and liabilities of £1.7 billion and therefore does not contribute to the realistic inherited estate.
Under the PRA regulatory regime, UK life with-profits business is required to hold capital equivalent to the greater of their regulatory requirement based on EU directives (regulatory peak) and the PRA realistic bases (realistic peak) described above. For UK non-participating business, the relevant capital requirement is the minimum solvency requirement determined in accordance with PRA regulations. The available capital reflects the excess of regulatory basis assets over liabilities before deduction of capital resources requirement. For UK general insurance businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the PRA requirements. For overseas businesses in the European Economic Area (EEA), Canada, Hong Kong and Singapore, the available capital and the minimum requirement are calculated under the locally applicable regulatory regimes. The businesses outside these territories are subject to the PRA rules for the purposes of calculation of available capital and capital resource requirement. For fund management and other businesses, the relevant capital requirement is the minimum solvency requirement determined in accordance with the local regulator’s requirements for the specific class of business. The available capital resources in each regulated entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group. The principal restrictions are: • (i) UK with-profits fund – (NWPSF, OWPSF and WPSF) – any available surplus held in each fund can be used to meet the requirements of the fund itself, be distributed to policyholders and shareholders or in the case of NWPSF and OWPSF, transferred via the capital support arrangement explained above (for OWPSF only to the extent support has been provided in the past). In most cases, with-profit policyholders are entitled to at least 90% of the distributed profits while the shareholders receive the balance. The latter distribution would be subject to a tax charge, which is met by the fund.
• (iv) General insurance operations – the capital requirements and corresponding regulatory capital held by overseas businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses are subject to local regulatory restrictions which may constrain management’s ability to utilise these in other parts of the Group. Any transfer of available capital may give rise to a tax charge, subject to availability of tax relief elsewhere in the Group.
A detailed breakdown of the Group’s current credit exposure by credit quality is shown below.
(iii) Other investments Other investments (including assets of operations classified as held for sale) include unit trusts and other investment vehicles; derivative financial instruments, representing positions to mitigate the impact of adverse market movements; and other assets includes deposits with credit institutions and minority holdings in property management undertakings. The credit quality of the underlying debt securities within investment vehicles is managed by the safeguards built into the investment mandates for these funds which determine the funds’ risk profiles. At the Group level, we also monitor the asset quality of unit trusts and other investment vehicles against Group set limits. A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall appetite for market risk.
These loans are fully collateralised by other securities; and • Mortgage loans collateralised by property assets.
We use loan to value; interest and debt service cover; and diversity and quality of the tenant base metrics to internally monitor our exposures to mortgage loans. We use credit quality, based on dynamic market measures, and collateralisation rules to manage our stock lending activities. Policy loans are loans and advances made to policyholders, and are collateralised by the underlying policies.
(vi) Reinsurance credit exposures The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group ALM and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate. The Group’s largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit linked contracts. At 31 December 2014, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £2,048 million.
Receivables and other financial assets 7,350 56 26 18 22 4 7,476 1 Restated for the adoption of amendments to IAS32 ‘Financial Instruments – Presentation’ – see note1 for details. In addition, restated to exclude reinsurance assets measured at fair value through profit or loss.
(ii) Property price risk The Group is subject to property price risk directly due to holdings of investment properties in a variety of locations worldwide and indirectly through investments in mortgages and mortgage backed securities. Investment in property is managed at business unit level, and is subject to local regulations on asset admissibility, liquidity requirements and the expectations of policyholders. As at 31 December 2014, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Sensitivity to changes in property prices is given in section ‘(j) risk and capital management’ below.
(iii) Interest rate risk Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group’s interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options are given in note 43. Exposure to interest rate risk is monitored through several measures that include duration, economic capital modelling, sensitivity testing and stress and scenario testing. The impact of exposure to sustained low interest rates is considered within our scenario testing. The Group typically manages interest rate risk by investing in fixed interest securities which closely match the interest rate sensitivity of the liabilities where this is available. In particular, a key objective is to match the duration of our annuity liabilities with assets of the same duration. These assets include corporate bonds, residential mortgages and commercial mortgages. Should they default before maturity, it is assumed that the Group can reinvest in assets of a similar risk and return profile, which is subject to market conditions. Interest rate risk is also managed in some business units using a variety of derivative instruments, including futures, options, swaps, caps and floors. Some of the Group’s products, principally participating contracts, expose us to the risk that changes in interest rates will impact on profits through a change in the interest spread (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). The primary markets where Aviva is exposed to this risk are the UK, France and Italy. The low interest rate environment in a number of markets around the world has resulted in our current reinvestment yields being lower than the overall current portfolio yield, primarily for our investments in fixed income securities and commercial mortgage loans. We anticipate that interest rates may remain below historical averages for an extended period of time and that financial markets may continue to have periods of high volatility. Investing activity will continue to decrease the portfolio yield as long as market yields remain below the current portfolio level. We expect the decline in portfolio yield will result in lower net investment income in future periods. Certain of the Group’s product lines, such as protection, are not significantly sensitive to interest rate or market movements. For unit-linked business, the shareholder margins emerging are typically a mixture of annual management fees and risk/expense charges. Risk and expense margins will be largely unaffected by low interest rates. Annual management fees may increase in the short term as the move towards low interest rates increases the value of unit funds. However, in the medium term, unit funds will grow at a lower rate which will reduce fund charges. For the UK annuities business interest rate exposure is mitigated by closely matching the duration of liabilities with assets of the same duration. The UK participating business includes contracts with features such as guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. These liabilities are managed through duration matching of assets and liabilities and the use of derivatives, including swaptions. As a result, the Group’s exposure to sustained low interest rates on this portfolio is not material. The Group’s key exposure to low interest rates arises through its other participating contracts, principally in Italy and France. Some of these contracts also include features such as guaranteed minimum bonuses, guaranteed investment returns and guaranteed surrender values. In a low interest rate environment there is a risk that the yield on assets might not be sufficient to cover these obligations. For certain of its participating contracts the Group is able to amend guaranteed crediting rates. Our ability to lower crediting rates may be limited by competition, bonus mechanisms and contractual arrangements. Details of material guarantees and options are given in Note 43. In addition, the following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2014 for our Italian and French participating contracts, where the Group’s key exposure to sustained low interest rates arises.
Total N/A N/A 112,066 1. “Other” includes UK participating business 224 | Aviva plc Annual report and accounts 2014
The nature of the business means that prices in certain circumstances can be increased to maintain overall profitability. This is subject to the competitive environment in each market. To the extent that there are further falls in interest rates the investment yield would be expected to decrease further in future periods. Sensitivity to changes in interest rates is given in section ‘(j) risk and capital management’ below. This analysis shows an initial benefit to profit before tax and shareholders’ equity from a 1% decrease in interest rates due to the increase in market value of the backing fixed income securities. However, in subsequent years the reduction in portfolio yield will result in lower net investment income. Further information on borrowings is included in note 50.
euro rate £m 10% decrease in sterling / euro rate £m 10% increase in sterling / CAD$ rate £m 10% decrease in sterling / CAD$ rate £m
euro rate £m in sterling/ euro rate £m 10% increase in sterling/ CAD$ rate £m in sterling/ CAD$ rate £m
Impact on profit before tax 31 December 2014 (44) (25) (15) 20 Impact on profit before tax 31 December 2013 (restated) 1 (3) (1) (8) 2 1 Restated to disclose the impact of a 10% change in the average exchange rate applied to translate foreign currency profits into sterling. In previous years, the sensitivity of profit before tax to changes in foreign exchange rates was calculated on the basis of a 10% change in the period-end exchange rate which was used to calculate the average exchange rate applied to translate foreign currency profits. We consider the change in basis of calculation better reflects the sensitivity of profit before tax to foreign currency risk.
Notes to the consolidated financial statements continued 58 – Risk management continued The balance sheet changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling, with above movements being taken through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit. Net asset and profit before tax figures are stated after taking account of the effect of currency hedging activities.
(d) Liquidity risk Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,550 million) from a range of leading international banks to further mitigate this risk.
(i) Analysis of maturity of insurance and investment contract liabilities For non-linked insurance business, the following table shows the gross liability at 31 December 2014 and 2013 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts. Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. We expect surrenders, transfers and maturities to occur over many years, and the tables reflect the expected cash flows for these contracts. However, contractually, the total liability for linked business and non-linked investment contracts would be shown in the ‘within 1 year’ column below, and previously the total liability for linked business was shown in the ‘within 1 year’ column. Changes in durations between 2013 and 2014 reflect evolution of the portfolio, and changes to the models for projecting cash-flows. This table includes assets held for sale.
Long-term business Insurance contracts – non-linked 85,723 7,980 25,318 32,534 19,891
Long-term business Insurance contracts – non-linked 81,458 7,900 25,223 29,620 18,715 226 | Aviva plc Annual report and accounts 2014
1 Restated for the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details
(e) Life insurance risk Life insurance risk in the Group arises through its exposure to mortality and morbidity risks and exposure to worse than anticipated operating experience on factors such as persistency levels, exercising of policy holder options and management and administration expenses. The Group chooses to take measured amounts of life insurance risk provided that the relevant business has the appropriate core skills to assess and price the risk and adequate returns are available. The underlying risk profile of our life insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2014, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. Our economic exposure to longevity risk was reduced as a result of the Aviva Staff Pension Scheme entering into a longevity swap covering £5 billion of pensioner in payment scheme liabilities on 5 March 2014, while any significant reduction in individual annuity new business volumes as a result of the UK budget changes to compulsory annuitisation will also reduce our longevity risks exposure over the longer term to the extent not offset by increased bulk purchase annuity volumes. Despite this longevity risk remains the Group’s most significant life insurance risk due to the Group’s existing annuity portfolio. Persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal economic capital model and subject to sensitivity and stress and scenario testing. The assumption and management of life insurance risks is governed by the group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life insurance risks are managed as follows: • Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitor that the aggregation of risk ceded is within credit risk appetite.
• Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends. Whilst individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity and continually monitors and evaluates emerging market solutions to mitigate this risk further.
The impact of these is reflected in the economic capital model and MCEV reporting and managed as part of the asset liability framework. Further disclosure on financial guarantees and options embedded in contracts and their inclusion in insurance and investment contract liabilities is provided in Note 43.
Aviva has a preference for general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. The majority of the general insurance business underwritten by the Group continues to be short tail in nature such as motor, household and commercial property insurances. The Group’s underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. General insurance risk is managed primarily at business unit level with oversight at the Group level. Claims reserving is undertaken by local actuaries in the various general insurance businesses and is also subject to periodic external reviews. Reserving processes are further detailed in note 41 ‘insurance liabilities’. The vast majority of the Group’s general insurance business is managed and priced in the same country as the domicile of the customer.
Management of general insurance risks Significant insurance risks will be reported under the risk management framework. Additionally, the economic capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements. Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits.
(g) Asset management risk Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. The risk profile is regularly monitored. Investment performance has remained strong over 2014 despite some positions being impacted by the volatility of global markets. A client relationship team is in place to manage client retention risk, while all new asset management products undergo a review and approval process at each stage of the product development process, including approvals from legal, compliance and risk functions. Investment performance against client objectives relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further independent oversight and challenge by a specialist risk team, reporting directly to the Aviva Investors’ CRO.
(i) Brand and reputation risk We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory investigations, media speculation and negative publicity, disclosure of confidential client information, inadequate services, whether or not founded, could impact our brands or reputation. Any of our brands or our reputation could also be affected if products or services recommended by us (or any of our intermediaries) do not perform as expected (whether or not the expectations are founded) or customers’ expectations for the product change. We seek to reduce this risk to as low a level as commercially sensible. The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation. If we do not manage the perception of our brands and reputation successfully, it could cause existing customers or agents to withdraw from our business and potential customers or agents to choose not to do business with us.
Annuitant mortality (long-term insurance only) The impact of a reduction in mortality rates for annuity contracts by 5%. Gross loss ratios (non-long-term insurance only) The impact of an increase in gross loss ratios for general insurance and health business by 5%.
58 – Risk management continued Sensitivities as at 31 December 2013 2013 Impact on profit before tax (£m)
Fund management and non-insurance business sensitivities as at 31 December 2014 2014 Impact on profit before tax (£m)
Notes to the consolidated financial statements continued 59 – Derivative financial instruments and hedging This note gives details of the various financial instruments we use to mitigate risk. The Group uses a variety of derivative financial instruments, including both exchange traded and over-the-counter instruments, in line with our overall risk management strategy. The objectives include managing exposure to price, foreign currency and / or interest rate risk on existing assets or liabilities, as well as planned or anticipated investment purchases. In the narrative and tables below, figures are given for both the notional amounts and fair values of these instruments. The notional amounts reflect the aggregate of individual derivative positions on a gross basis and so give an indication of the overall scale of the derivative transaction. They do not reflect current market values of the open positions. The fair values represent the gross carrying values at the year end for each class of derivative contract held (or issued) by the Group. The fair values do not provide an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA (International Swaps and Derivatives Association, Inc.) master agreements or their equivalent. Such agreements are designed to provide a legally enforceable set-off in the event of default, which reduces credit exposure. In addition, the Group has collateral agreements in place between the individual Group entities and relevant counterparties, refer to note 60 for further information on collateral and net credit risk of derivative instruments.
(a) Instruments qualifying for hedge accounting The Group has formally assessed and documented the effectiveness of its instruments qualifying for hedge accounting in accordance with IAS 39, Financial Instruments: Recognition and Measurement. To reduce its exposure to foreign currency risk, the Group has designated a portion of its euro denominated debt as a hedge of the net investment in its European subsidiaries. The carrying value of the debt at 31 December 2014 was £1,292 million (2013: £1,428 million) and its fair value at that date was £1,359 million (2013: £1,516 million). The foreign exchange gain of £94 million (2013: loss of £40 million) on translation of the debt to sterling at the statement of financial position date has been recognised in the hedging instruments reserve in shareholders’ equity. This hedge was fully effective throughout the current and prior years. There were no cash flow or fair value hedges designated in the year.
(i) The Group’s non-hedge derivative activity at 31 December 2014 and 2013 was as follows: Contract/ notional amount £m
Interest rate and currency swaps 2,237 141 (153) 1,411 217 (130)
Exchange traded 1 Restated for the adoption of amendments to IAS32 – Financial Instruments:Presentation’ – See note 1 for details
Swap option (“swaption”) contracts are included within interest rate options above as management’s intention in entering into and subsequent managing of the interest rate related swaption contracts most closely resembles option-type contracts. Fair value assets are recognised as ‘Derivative financial instruments’ in note 27(a), while fair value liabilities are recognised as ‘Derivative liabilities’ in note 51. The Group’s derivative risk management policies are outlined in note 58.
Restated1 1 Restated for the adoption of amendments to IAS32 – Financial Instruments:Presentation’ – See note 1 for details
(c) Collateral Certain derivative contracts, primarily interest rate and currency swaps, involve the receipt or pledging of cash and non-cash collateral. The amounts of cash collateral receivable or repayable are included in notes 28 and 51 respectively. Collateral received and pledged by the Group is detailed in note 60.
Financial Liabilities Derivative Financial Liabilities (3,725) 1,065 (2,660) 2,108 338 146 (68) Other Financial Liabilities (1,859) — (1,859) — — 1,859 —
Financial Assets Derivative Financial Assets 3,032 (1,556) 1,476 (945) (270) (182) 79 Loans to banks and repurchase arrangements 4,844 — 4,844 — — (4,844) —
Financial Liabilities Derivative Financial Liabilities (3,190) 1,556 (1,634) 1,198 79 211 (146) Other Financial Liabilities (1,119) — (1,119) — — 1,119 —
(b) Collateral In the tables above, the amounts of assets or liabilities presented in the consolidated statement of financial position are offset first by financial instruments that have the right of offset under master netting or similar arrangements with any remaining amount reduced by the amount of cash and securities collateral. The actual amount of collateral may be greater than amounts presented in the tables above in the case of over collateralisation. The total amount of collateral received which the Group is permitted to sell or repledge in the absence of default was £20,566 million (2013: £16,914 million), all of which other than £2,896 million (2013: £203 million) is related to securities lending arrangements. £4,036 million (2013: £5,310 million) of collateral has been received related to balances recognised within ‘Loans to Banks’ (refer to note 24). The value of collateral that was actually sold or repledged in the absence of default was £nil (2013: £nil). The level of collateral held is monitored regularly, with further collateral obtained where this is considered necessary to manage the Group’s risk exposure.
Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 19(a)(iii). Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earn interest on loans advanced to these entities, movements in which may be found in note 19(a)(i). Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance. Our UK fund management companies manage most of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Groupmanaged funds and insurance policies with other Group companies, as explained in note 49(b)(ii). The related parties’ receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties provided on behalf of related parties are given in note 53(f).
Notes to the consolidated financial statements continued 62 – Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2014. Aviva plc is the holding company of the Group.
United Kingdom Aviva Annuity UK Limited Aviva Central Services UK Limited Aviva Consumer Products UK Limited Aviva Employment Services Limited Aviva Equity Release UK Limited Aviva Health UK Limited Aviva Insurance Limited Aviva Insurance Services UK Limited Aviva International Insurance Limited Aviva Investors Global Services Limited Aviva Investors Pensions Limited Aviva Investors UK Fund Services Limited Aviva Investors UK Funds Limited Aviva Life & Pensions UK Limited Aviva Life Services UK Limited Aviva UKGI Investments Limited Gresham Insurance Company Limited The Ocean Marine Insurance Company Limited
62 – Organisational structure continued Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Avipop Assicurazioni S.p.A (50%) Avipop Vita S.p.A (50%) Aviva S.p.A (51%) Aviva Assicurazioni Vita S.p.A (80%) Aviva Italia S.p.A Aviva Vita S.p.A (80%)
Profit for the year before tax 496 486 Tax credit C 67 116
Statement of changes in equity For the year ended 31 December 2014
Employee trust shares distributed in the year — — — — — — (18) (18) — (18) Reserves credit for equity
Employee trust shares distributed in the year — — — — — — (33) (33) — (33) Reserves credit for equity
Statement of financial position At 31 December 2014 £m 2013 £m
Investments in subsidiaries A 33,930 33,095 Investment in joint venture 208 177 Loans owed by subsidiaries I 1,330 1,040 Deferred tax assets C 201 205 Current tax assets C 65 93
Loans owed by subsidiaries I 388 42 Other amounts owed by subsidiaries I 274 624 Other assets D 18 347 Cash and cash equivalents 33 223
Company number: 2468686 240 | Aviva plc Annual report and accounts 2014
Statement of cash flows For the year ended 31 December 2014
Cash flows from investing activities Sale/(purchase) of financial investments 290 (294) Interest received 7 —
Cash and cash equivalents at 31 December 33 223 1 Ordinary dividends paid amounted to £449 million. £2 million of unclaimed and waived dividends has been set off against this above. See note 16 within the Group consolidated financial statements for further detail.
A – Investments in subsidiaries (i) Movements in the Company’s investments in its subsidiaries are as follows: £m £m
B – Operating expenses (i) Operating expenses Operating expenses comprise: £m 2013 £m
(iii) Equity compensation plans All transactions in the Group’s equity compensation plans involve options and awards for ordinary shares of the Company. Full disclosure of these plans is given in the Group consolidated financial statements, note 32. The cost of such options and awards is borne by all participating businesses and, where relevant, the Company bears an appropriate charge. As the majority of the charge to the Company relates to directors’ options and awards, for which full disclosure is made in the Directors’ Remuneration Report, no further disclosure is given here.
C – Tax (i) Tax credited to the income statement The total tax charge comprises: £m 2013 £m
Deferred tax Origination and reversal of temporary differences 4 (49) Changes in tax rates or tax laws — 24
(ii) Tax charged/(credited) to other comprehensive income No tax was charged or credited to other comprehensive income in 2014 or 2013.
Tax calculated at standard UK corporation tax rate of 21.5% (2013: 23.25%) 107 113 Adjustment to tax charge in respect of prior years (5) (7) Non-assessable dividend income (252) (337) Disallowable expenses 9 13 Non-taxable loss on settlement of intra-group loan — 17 Movement in deferred tax not recognised (2) — Different local basis of tax on overseas profits 2 — Change in future local statutory tax rates — 32 Losses surrendered intra-group for nil value 74 53
(v) Deferred tax A deferred tax asset of £201 million (2013: £205 million), principally arising in respect of deferred interest has been recognised at 31 December 2014 at 20%. The Company has unrecognised temporary differences of £45 million (2013: £54 million) to carry forward indefinitely against future taxable income.
(vi) Current tax assets Current tax assets recoverable in more than one year are £65 million (2013: £93 million).
Tax of £19 million (2013: £22 million) is deductible in respect of coupon payments of £88 million (2013: £92 million) on the direct capital instruments and fixed rate tier 1 notes.
G – Contingent liabilities Details of the Company’s contingent liabilities are given in the Group consolidated financial statements, note 53.
Interest rate risk Loans to and from subsidiaries are at either fixed or floating rates of interest, with the latter being exposed to fluctuations in these rates. The choice of rates is designed to match the characteristics of financial investments (which are also exposed to interest rate fluctuations) held in both the Company and the relevant subsidiary, to mitigate as far as possible each company’s net exposure. All the Company’s long term external borrowings are at fixed rates of interest and are therefore not exposed to changes in these rates. However, for short term commercial paper, the Company is affected by changes in these rates to the extent the redemption of these borrowings is funded by the issuance of new commercial paper or other borrowings. Further details of the Company’s borrowings are provided in note F and the Group consolidated financial statements, note 50. The effect of a 100 basis point increase/decrease in interest rates on floating rate loans due to and from subsidiaries and on refinancing short term commercial paper as it matures would be a decrease / increase in profit before tax of £100 million (2013: decrease / increase of £109 million). The net asset value of the Company’s financial resources is not materially affected by fluctuations in interest rates.
Currency risk The Company’s direct subsidiaries are exposed to foreign currency risk arising from fluctuations in exchange rates during the course of providing insurance and asset management services around the world. The exposure of the subsidiaries to currency risk is considered from a Group perspective in the Group consolidated financial statements, note 58. The Company faces exposure to foreign currency risk through some of its borrowings which are denominated in Euros. However, most of these borrowings have been on-lent to a subsidiary which holds investments in Euros, generating the net investment hedge described in the Group consolidated financial statements, note 59(a).
Liquidity risk Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The Company’s main sources of liquidity are liquid assets held within the Company and its subsidiary Aviva Group Holdings Limited (AGH), and dividends received from the Group’s insurance and asset management businesses. Sources of liquidity in normal markets also includes a variety of short and long-term instruments including commercial papers and medium and long-term debt. In addition to the existing liquid resources and expected inflows, the Company maintains significant undrawn committed borrowing facilities (£1,550 million) from a range of leading international banks to further mitigate this risk. Maturity analysis of external borrowings and amounts due to and by subsidiaries are provided in notes F and I respectively.
Other related party balances comprise dividends and interest receivable and payable, as well as intercompany balances for fees and other transactions in the normal course of business. During the year the facility with General Accident plc was renewed, giving a total loan principal of £10,210 million with a maturity date of December 2017.
The Company incurred expenses in the year of £179,000 (2013: £130,000) representing audit fees paid by the Company on behalf of subsidiaries. The Company did not recharge subsidiaries for these expenses. The related parties’ receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms.
Financial and operating performance Our main activities are the provision of products and services in relation to long-term insurance and savings, fund management and general and health insurance.
Factors affecting results of operations Our financial results are affected, to some degree, by a number of external factors, including demographic trends, general economic and market conditions, government policy and legislation and exchange rate fluctuations. See 'Other information – Risk and capital management' for more information on these and other risk factors. In addition, our financial results are affected by corporate actions taken by the Group, including acquisitions, disposals and other actions aimed at achieving our stated strategy. We believe that all of these factors will continue to affect our results in the future.
During the year, sterling strengthened against the euro, Canadian dollar and Polish zloty which has impacted the overall results and performance. See IFRS financial statements – note 2 – Exchange rates. In addition, the Group undertook the following actions which impacted the overall results and performance: • The Group completed the sale of a number of operations during the year, including operations in Italy (Eurovita Assicurazioni S.p.A), Spain (CXG Aviva Corporacion Caixa Galicia de Sueguros Reaseguros, S.A.), Turkey (Aviva Sigorta A.S.), South Korea (Woori Aviva Life Insurance Co. Ltd), and the US (River Road Asset Management, LLC). See 'IFRS Financial statements - note 4 – Subsidiaries' for further details.
• The Group continued to undertake restructuring and transformation activity to align our business operations with our strategy. Integration and restructuring costs of £140 million (2013: £366 million) mainly include £94 million of Solvency II implementation costs (2013: £79 million). Compared to the prior year, integration and restructuring costs have reduced by £226 million principally driven by a significant reduction in transformation spend.
• In addition, there was a favourable movement of £1,662 million (2013: £674 million adverse) relating to the Group's staff pension schemes which has been recognised in other comprehensive income. This was principally due to the main UK staff pension scheme largely as a result of positive asset performance driven by a fall in interest rates, partly offset by an increase in the defined benefit obligation. See 'IFRS Financial statements – note 49 – Pension obligations' for further details.
Demographic trends Our results are affected by the demographic make-up of the countries in which we operate. The types of products that we sell reflect the needs of our customers. For example, in countries with a high proportion of older people, a larger proportion of our sales will reflect their needs for pre-and post-retirement planning. Our sales levels will also be impacted by our ability to help provide useful information to such policyholders on retirement planning and to offer products that are competitive and respond to such policyholders' needs.
The benign financial market conditions experienced in 2013 continued during 2014, albeit with increased volatility in the second half of the year.
The world economy is expected to grow c.3.5%1 in 2015 and 3.7%1 in 2016, slightly higher than the previous two years (growth was 3.3%1 in both 2013 and 2014). Emerging markets are expected to sustain high growth, although lower than precrisis highs. The US is projected to continue leading the developed market recovery, with Canada and the UK also achieving reasonable growth, while eurozone growth is expected to be low, with downside risks.
With-profits business With-profits products are mainly written in our UK & Ireland operating segment, with small funds in France and Singapore. These funds enable policyholders to participate in a large pool of diverse investments, therefore reducing their exposure to individual securities or asset classes. The investment pool is managed by us with returns to with-profits policyholders paid through bonuses which are added to the value of their policy. In order to provide an element of stability in the returns to policyholders, bonuses are designed to reduce policyholders' exposure to the volatility of investment returns over time and to provide an equitable share of surplus earned, depending on the investment and operating performance of the fund. Shareholders also have a participating interest in the with-profits funds and any declared bonuses. Generally, policyholder and shareholder participation in with-profits funds in the UK is split 90:10. Shareholders' profits arising on with-profits business under IFRS depend on the total bonuses declared to policyholders on an annual basis. The level of bonuses declared to policyholders is influenced by the actual returns on investments and our expectation of future rates of return. Whilst bonuses can never be negative, a predicted sustained fall in equity markets could lead to a reduction in regular and final bonus rates, thereby reducing both policyholder returns and shareholders' profit under IFRS. In 2014 and 2013 we made increases in the majority of final bonus rates.
1 International Monetary Fund world economic outlook 248 | Aviva plc Annual report and accounts 2014
General insurance and health underwriting cycle Our general insurance and health business is comprised of our property and casualty insurance and health insurance operations. In 2014, general insurance and health sales accounted for 41% of Group net written premiums (NWP) from continuing operations. Demand for general insurance is usually price-sensitive because of the limited degree of product differentiation inherent in the industry. As a result, the price of insuring property and casualty risks is subject to a cycle (called an underwriting cycle). In periods when the price of risk is high, the high profitability of selling insurance attracts new entrants and hence new capital into the market. Increased competition, however, drives prices down. Eventually the business becomes uneconomic and some industry players, suffering from losses, exit the market whilst others fail, resulting in lower capital invested within the market. Decreased competition leads to increasing prices, thereby repeating the cycle. Our various general insurance markets are not always at the same stage of the underwriting cycle. In the UK, the personal motor market has seen further rate reductions in 2014 reflecting intense competition and regulatory change. This follows a period of rate increases in previous periods in response to rising claims costs and frequencies. Challenging rating conditions also apply to other UK classes of business. We expect the underwriting cycle to continue in the future but to be less pronounced than in the past because of structural changes to the industry over the past decade. Capital markets are imposing financial discipline by being increasingly more demanding about performance from insurance companies before extending new capital. Such discipline, together with the increased concentration of competitors within the market, and the adoption of more advanced pricing methods, is expected to make the underwriting cycle less pronounced in the future.
Government policy and legislation Changes in government policy and legislation applicable to our business in many of the markets in which we operate, particularly in the UK, may affect the results of our operations. These include changes to the tax treatment of financial products and services, government pension arrangements and policies, the regulation of selling practices and the regulation of solvency standards. Such changes may affect our existing and future business by, for example, causing customers to cancel existing policies, requiring us to change our range of products and services, forcing us to redesign our technology, requiring us to retrain our staff or increase our tax liability. As a global business, we are exposed to various local political, regulatory and economic conditions, and business risks and challenges which may affect the demand for our products and services, the value of our investments portfolio and the credit quality of local counterparties. Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. For details please refer to the section 'Shareholder information - Regulation'.
Exchange rate fluctuations We publish our consolidated financial statements in pounds sterling. Due to our substantial non-UK operations, a significant portion of our operating earnings and net assets are denominated in currencies other than sterling, most notably the euro, Canadian dollar and the Polish zloty. As a consequence, our results are exposed to translation risk arising from fluctuations in the values of these currencies against sterling. We generally do not hedge foreign currency revenues, as we retain local currency in each business to support business growth, to meet local and regulatory market requirements and to maintain sufficient assets in local currency to match local currency liabilities. Movements in exchange rates may affect the value of consolidated shareholders' equity, which is expressed in sterling. Exchange differences taken to other comprehensive income arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity. During 2014, sterling strengthened against a number of currencies including the Euro and the Canadian dollar. This resulted in a foreign currency loss in other comprehensive income from continuing operations of £396 million (2013: £35 million loss). The impact of these fluctuations is limited to a significant degree, however, by the fact that revenues, expenses, assets and liabilities within our non-UK operations are generally denominated in local currencies.
Acquisitions and disposals Over the last three years we have completed and announced a number of transactions, some of which have had a material impact on our results. These transactions reflect our strategic objectives of narrowing our focus to businesses where we can produce attractive returns and exit businesses which we do not consider central to our future growth.
Activity in 2014 In May 2014, the Group restructured its existing business in Indonesia and reduced its ownership interest from 60% to 50% to form a 50-50 joint venture (Astra Aviva Life) between Aviva and PT Astra International Tbk. On 27 June 2014, the Group completed the disposal of its 47% holding in Woori Aviva Life Insurance Co. Ltd in South Korea for consideration of £17 million. On 30 June 2014, Finoa Srl, an Italian holding company in which the Group owns a 50% share, disposed of its entire interest in Eurovita Assicurazioni S.p.A for gross cash consideration of £36 million. Also on 30 June 2014, the Group completed the sale of US equity manager River Road Asset Management, LLC (“River Road”) to Affiliated Managers Group, Inc. for consideration of £75 million. In October 2013, the Group completed the sale of its US Life subsidiary. In 2014, the Group paid a settlement of £20 million related to the purchase price adjustment. The settlement and the aggregate development of other provisions related to the discontinued operations in 2014 resulted in a net £58 million gain which has been presented as profit on disposal of discontinued operations.
O ther inform ation Aviva plc Annual report and accounts 2014 | 249
Basis of earnings by line of business Our earnings originate from four main lines of business: our long-term insurance and savings business, which includes a range of life insurance and savings products; general insurance, which focuses on personal and commercial lines; health insurance and fund management, which manages funds on behalf of our long-term insurance and general insurance businesses, external institutions, pension funds and retail clients. These lines of business are present in our various operating segments to a greater or lesser extent. In the UK, we have major long-term insurance and savings businesses and general insurance and health businesses; in Europe we have long-term insurance and savings businesses in all countries in which we operate, large general insurance businesses in France, Ireland and Italy, and smaller general insurance operations in several other countries and health businesses in France and Ireland; in Canada we have a leading general insurance operation; in Asia we predominantly have long-term insurance and savings businesses. Our fund management businesses operate across Europe, Asia, North America and the UK.
Other participating business Outside of the UK, most of our long-term operations write participating business. This is predominantly savings or pensions business, where the policyholders receive guaranteed minimum investment returns, and additional earnings are shared between policyholders and shareholders in accordance with local regulatory and policy conditions. This may also be referred to as 'with-profits' business.
Long-term insurance and savings new business sales Sales of the long-term insurance and savings business consist of: • Insurance and participating investment business
– For new business reporting in the UK, companies continue to report non-participating investment business within their 'covered business' sales, in line with the historic treatment under UK GAAP.
Sales is a non-GAAP financial measure and financial performance indicator that we report to our key decision makers in the businesses in order to help assess the value of new business from our customers and compare performance across the markets in which we operate. For long-term insurance and savings new business, we define sales as the sum of the present value of new business premiums (PVNBP) of life, pension and savings products and investment sales. PVNBP is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the terms of newly incepted contracts and is calculated as at the date of sale. We adjust annual premiums to reflect the expected stream of business coming from this new business over future years. In the view of management, this performance measure better recognises the relative economic value of regular premium contracts compared with single premium contracts. PVNBP is a European insurance industry standard measure of new business. For our long-term insurance and savings business, we believe that sales is an important measure of underlying performance and a better measure for new business than IFRS net written premiums. We consider that the use of sales over IFRS net written premiums provides a: • Consistent treatment of long-term insurance and investment contracts: IFRS net written premiums do not include deposits received on non-participating investment contracts. Long-term insurance contracts and participating investment contracts both contain a deposit component, which are included in IFRS net written premiums, in addition to an insurance risk component. Therefore, to assess the revenue generated on a consistent basis between types of contracts, we evaluate the present value of new business sales of long-term insurance and investment products on the basis of total premiums and deposits collected, including sales of mutual fund type products such as unit trusts and open ended investment companies (OEICs).
General insurance and health sales General insurance and health (excluding long-term health business) sales are defined as IFRS net written premiums, which are premiums written during the year net of amounts reinsured with third parties. For sales reporting, we use the GAAP measure for this business. The table below presents our consolidated sales for the three years ended 31 December 2014, 2013 and 2012 for our continuing operations, as well as the reconciliation of sales to net written premiums in IFRS.
Less: Effect of capitalisation factor on regular premium long-term business (7,314) (6,807) (6,738) Share of long-term new business sales from JVs and
General insurance and health net written premiums 8,300 8,720 8,894 1 Comparative has been restated to reflect changes in MCEV liquidity premium and an extension of the MCEV covered business.
(investment sales) Investment sales included in the total sales number represent the cash inflows received from customers to invest in mutual fund type products such as unit trusts and OEICs. We earn fees on the investment and management of these funds which are recorded separately in the IFRS income statement as 'fees and commissions received' and are not included in statutory premiums.
Consolidated results of operations The table below presents our consolidated sales from continuing operations for the three years ended 31 December 2014, 2013 and 2012.
Other group activities 7 33 67 1 Comparative has been restated to reflect changes in MCEV liquidity premium and an extension of the MCEV covered business.
United Kingdom & Ireland Life 1,052 1,124 903 United Kingdom & Ireland GI 492 465 480
Share of Delta Lloyd's adjusted operating profit (before tax) as an associate — — 112
Adjusted operating profit before tax after integration and restructuring costs 2,033 1,686 1,577
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 72 (49) (620) Short-term fluctuation in return on investments on non long-term business 261 (336) 7 Economic assumption changes on general insurance and health business (145) 33 (21) Impairment of goodwill, associates and joint ventures and other amounts expensed (24) (77) (60) Amortisation and impairment of intangibles (90) (91) (128) Profit/(loss) on the disposal and remeasurement of subsidiaries and associates 174 115 (164)
Non-operating items before tax (excluding Delta Lloyd as an associate) 248 (405) (986)
Profit before tax attributable to shareholders' profits – continuing operations 2,281 1,281 175
Adjusted operating profit before tax (from continuing operations) Year ended 31 December 2014 Adjusted operating profit before tax increased by 6% to £2,173 million (2013: £2,049 million) for the reasons set out in the market performance section below.
Year ended 31 December 2013 Adjusted operating profit before tax increased by 1% to £2,049 million (2012: £2,038 million) for the reasons set out in the market performance section below.
Net earned premiums 20,057 20,623 21,157 Fee and commission income 1,230 1,279 1,273 Net investment income 21,889 12,509 21,135 Share of profit/(loss) of joint ventures and associates 147 120 (255) Profit/(loss) on the disposal and re-measurement of subsidiaries, joint ventures and associates 174 115 (164)
Expenses Claims and benefits paid, net of recoveries from reinsurers (19,474) (22,093) (23,601) Change in insurance liabilities, net of reinsurance (5,570) 2,493 (430) Change in investment contract provisions (6,518) (7,050) (4,450) Change in unallocated divisible surplus (3,364) 280 (6,316) Fee and commission expense (3,389) (3,975) (4,457)
Income (from continuing operations) Year ended 31 December 2014 Net written premiums for continuing operations decreased by £433 million, or 2%, to £20,056 million (2013: £20,489 million). Long-term insurance and savings remained broadly flat at £11,756 million (2013: £11,769 million) with lower sales in the UK and Spain (mainly due to the disposal of Aseval in 2013) offset by higher sales in France, Poland, Italy and Asia. General insurance and health premiums decreased by £420 million, or 5%, to £8,300 million (2013: £8,720 million), mainly reflecting lower sales in the UK and Ireland. Further details on significant movements are outlined in the market performance sections below.