A – Changes in accounting policies The Company has made a change in accounting policy whereby investments in subsidiaries and joint ventures held as available for sale investments under IAS 39 have been reclassified to being held at cost under IAS 27. As per Group accounting policy D, investments in subsidiaries, associates and joint ventures are recognised at cost less impairment. Investments are reviewed annually to test whether any indicators of impairment exist. Where there is objective evidence that such an asset is impaired, the investment is impaired to its recoverable value and any unrealised loss is recorded in the income statement. The revised policy provides more relevant and reliable information as reserves are better aligned with distributable profits and cost is a factual measure which is complete, neutral and requires less judgement.
The impact of the changes on the affected line items in the financial statements is set out below.
Other comprehensive income 705 (707) (2) Effect analysed as: Fair value gains on investments in subsidiaries and joint ventures 707 (707) — Remeasurements of pension schemes (2) — (2)
Dividends received from subsidiaries P(iii) 2,780 1,740 Interest receivable from group company loans held at amortised cost P(i) 92 116 Other income 2 —
C – Operating expenses (i) Operating expenses Operating expenses comprise: £m
E – Tax (i) Tax credited to the income statement The total tax credit comprises: £m
Current tax For this year (94) (253) Prior year adjustments (2) (3)
Unrecognised tax losses and temporary differences of previous years were used to reduce the deferred tax expense by £nil (2017: £nil).
(ii) Tax credited to other comprehensive income There was no tax credited or charged to other comprehensive income in either 2018 or 2017.
(iii) Tax credited to equity Tax credited directly to equity in the year, in respect of coupon payments on the direct capital instrument and fixed rate tier 1 notes, amounted to £8 million (2017: £16 million).
(ii) Joint venture At 31 December 2018, the Company’s investment in the joint venture, Aviva-COFCO Life Insurance Co. Limited has a cost of £123 million (2017: £123 million).
Loans due from subsidiaries held at amortised cost P(i) 5,401 5,410 Amount due from subsidiaries held at amortised cost P(iii) 414 298
H – Tax assets and liabilities (i) Current tax Current tax assets recoverable in more than one year are £89 million (2017: £255 million).
(ii) Deferred tax (a) The balance at 31 December comprises: £m
Balance at 31 December 2017 (restated)2 6,438 111 3,555 Arising in the year: Profit for the year — — 2,197 Remeasurements — — 2 Forfeited dividend income4 — — 4 Dividends and appropriations — — (1,189) Reserves credit for equity compensation plans — 64 — Issue of share capital under equity compensation scheme — (55) 49 Shares purchased in buy-back — — (600) Aggregate tax effect — — 8 Balance at 31 December 2018 6,438 120 4,026 1 See notes 33(d) and 38 for further details of balances included in Equity compensation reserve. 2 The Company has made a change in accounting policy whereby investments in subsidiaries and joint ventures held as available for sale investments under IAS 39 have been reclassified to being held at cost under IAS 27. As a result, comparatives have been restated. See note A for further details. 3 On 28 September 2017, notification was given that the Group would redeem the 8.25% US $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into Sterling at that date. The resulting foreign exchange loss of £92 million has been charged to retained earnings. 4 The Company has commenced a shareholder forfeiture programme, where the shares of shareholders who Aviva has lost contact with over the last 12 years will be forfeited and sold on. Any associated unclaimed dividends will be reclaimed by the Company. After covering administration costs, the majority of the money will be put into a charitable foundation.
Total IAS 19 obligations to staff pension schemes 45 48 Other provisions — 5 Total provisions 45 53
At 1 January 5 — Additional provisions 10 5 Unused amounts reversed (2) — Charge to income statement 8 5 Utilised during the year (13) —
Subordinated debt 5,586 6,009 Senior notes 1,113 751 Commercial paper 251 668
Total contractual undiscounted cash flows 6,997 7,400 14,397 7,479 8,106 15,585
Expected to be recovered in less than one year 4,206 7,192 Expected to be recovered in more than one year 12,815 9,900 17,021 17,092
N – Contingent liabilities Details of the Company’s contingent liabilities are given in the Group consolidated financial statements, note 55.
O – Risk management Risk management in the context of the Group is considered in the Group consolidated financial statements, note 59. The business of the Company is managing its investments in subsidiaries and joint venture operations. Its risks are considered to be the same as those in the operations themselves, and full details of the major risks and the Group’s approach to managing these are given in the Group consolidated financial statements, note 59. Such investments are held by the Company at cost in accordance with accounting policy D.
Financial liabilities owed by the Company as at the balance sheet date are largely in respect of borrowings (details of which are provided in note K and the Group consolidated financial statements, note 52) and loans owed to subsidiaries. Loans owed to subsidiaries were within agreed credit terms as at the balance sheet date.
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 60(a).
Maturity analysis of external borrowings and amounts due to and by subsidiaries are provided in notes G and K respectively.
Within 1 year — 1,730 1 – 5 years 3,485 754 Over 5 years 1,916 2,926
On 1 January 2013, Aviva International Holdings Limited, an indirect subsidiary, transferred the following loan liabilities with the Company to Aviva Group Holdings Limited, its direct subsidiary: • An unsecured loan of €250 million, entered into on 7 May 2003 accruing interest at fixed rate of 5.5% with settlement to be paid at maturity in May 2033. As at the statement of financial position date, the total amount drawn down on the facility was £224 million (2017: £222 million).
On 23 December 2014, the Company provided an unsecured revolving credit facility of £2,000 million to Aviva Group Holdings Limited, its subsidiary, with an initial maturity date of 3 September 2018 which was subsequently extended to 31 December 2023. The facility accrues interest at 75 basis points above 6 month LIBOR. As at the statement of financial position date, the total amount drawn down on the facility was £1,752 million (2017: £1,286 million).
On 30 September 2016, the Company provided the following loans to Aviva Group Holdings Limited, its subsidiary: • An unsecured loan of €850 million with a maturity date of 30 September 2021. The loan accrues interest at 115 basis points above 12 month EURIBOR with settlement to be paid at maturity. As at the statement of financial position date, the total amount drawn was £700 million (2017: £754 million).
• An unsecured loan of €650 million with a maturity date of 5 July 2023. The loan accrues interest at a fixed rate of 1.54% with settlement to be paid at maturity. As at the statement of financial position date, the total amount drawn down on the facility was £584 million (2017: £577 million).
P – Related party transactions continued (i) Loans owed by subsidiaries continued On 21 November 2016, the Company provided an unsecured loan of €500 million to Aviva Group Holdings Limited, its subsidiary, with a maturity date of 27 October 2023. The loan accrues interest at a fixed rate of 1.75% with settlement to be paid at maturity. As at the statement of financial position date, the total amount drawn was £449 million (2017: £444 million).
The interest paid on these loans is £194 million (2017: £175 million). See note D.
On 14 December 2017, the Company renewed its facility with GA plc, its subsidiary, of £9,990 million and the Board approved the extension of the maturity of the loan by five years from 31 December 2017 to 31 December 2022. The other terms of the loan will remain unchanged, including the rate of interest payable by the Company to GA plc (65 basis points above 3 month LIBOR and in the event that the LIBOR rate is less than zero, the rate shall be deemed to be zero). As at 31 December 2018, the loan balance outstanding was £9,770 million (2017: £9,900 million). This loan is secured against the ordinary share capital of Aviva Group Holdings Limited. The loan agreement also includes a penalty interest charge of 1% above the interest rate if any amounts payable under the loan agreement remain outstanding.
Subsidiaries 2,780 414 1,740 298 1 Following a review of the Company’s related party classifications, comparative amounts in respect of services provided to related parties have been amended from those previously reported. The balances exclude loans owed by subsidiaries.
In this section Page Alternative performance measures 254 Shareholder services 259
In order to fully explain the performance of our business, we discuss and analyse our results in terms of financial measures which include a number of alternative performance measures (APMs). APMs are non-GAAP measures which are used to supplement the disclosures prepared in accordance with other regulations such as International Financial Reporting Standards (IFRS) and Solvency II. We believe these measures provide useful information to enhance the understanding of our financial performance. However, APMs should be viewed as complementary to, rather than as a substitute for, the figures determined according to other regulations.
The APMs utilised by Aviva may not be the same as those used by other insurers and may change over time. These metrics are reviewed annually and updated as appropriate to ensure they remain an effective measurement that underpins the objectives for the Group.
There are no new APMs or changes to existing APMs in 2018.
A reconciliation of AUM to amounts appearing in the Group’s statement of financial position is shown below.
AUM managed on behalf of Group companies Assets included in statement of financial position1 Financial investments 305 319 Investment properties 11 11 Loans 29 28 Cash and cash equivalents 47 44 Other 1 1
4 UK Platform relates to the assets under management in the UK long-term savings business.
Cash remittances‡ # Cash paid by our operating businesses to the Group, comprised of dividends and interest on internal loans. Dividend payments by operating businesses may be subject to insurance regulations that restrict the amount that can be paid. The business monitors total cash remittances at a Group level and in each of its markets.
The COR does not include the impact of any changes in the discount rate used for estimating lump sum payments in settlement of bodily injury claims.
Incurred claims – GI & Health (as per note 5)1 (6,400) (6,533) Adjusted for the following: Incurred claims – Health 633 677 Impact of change in the discount rate used in settlement of bodily injury claims (190) —
Total incurred claims (included in COR) (5,957) (5,856) Total commissions and expenses (included in COR)2 (2,765) (2,813)
# symbol denotes key performance indicators used as a base to determine or modify remuneration. ‡ denotes APMs which are key performance indicators. There have been no changes to the APMs used by the Group during period under review. .
The normalised accident year combined operating ratio is derived from the COR (as defined in this section) with adjustments made to exclude the impact of prior year reserve development and weather claims variations versus expectations, gross of the impact of profit sharing arrangements. These adjustments are made so that the underlying performance of the Group can be assessed excluding factors that might distort the trend in the claims ratio on a year on year basis.
Impairment, amortisation and profit or loss on disposal Group adjusted operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to merger and acquisition activity which we view as strategic in nature, hence they are excluded from the Group adjusted operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group chief operating decision maker.
Other items These items are, in the Directors’ view, required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. Other items at 2018 comprise: • A movement in the discount rate used for estimating lump sum payments in settlement of bodily injury claims which resulted in a gain of £190 million (see note 43(b)). Consistent with the presentation of the change in the Ogden discount rate in 2016, this is reported outside of Group adjusted operating profit
• A charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirement to equalise members’ benefits for the effects of Guaranteed Minimum Pension (see note 51(b)). This is reported outside of Group adjusted operating profit as the additional liability arose as a consequence of a High Court judgement in October 2018 in the case involving Lloyds Banking Group; and does not reflect the financial performance of the Group for the year
Group adjusted operating profit and profit before tax together to understand the performance of the business in the period.
The table below presents a reconciliation between our consolidated operating profit and profit before tax attributable to shareholders’ profits.
Group adjusted operating profit before tax after integration and restructuring costs 3,116 2,927
Net asset value (NAV) per share NAV per share is calculated as the equity attributable to shareholders of Aviva plc, less preference share capital (both within the consolidated statement of financial position), divided by the actual number of shares in issue as at the balance sheet date.
NAV per share is used to monitor the value generated by the Company in terms of the equity shareholders’ face value per share investment and enables comparability.
Net fund flows Net fund flows is one of the measures of growth used by management and is a component of the movement in the life and platform business managed assets (excluding UK with-profits) during the period. It is the difference between the inflows (being IFRS net written premiums plus deposits received under investment contracts) and outflows (being IFRS net paid claims plus redemptions and surrenders under investment contracts). It excludes market and other movements.
Operating expenses exclude impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangible assets; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items relate to merger and acquisition activity which we view as strategic in nature, hence they are excluded from the operating expenses APM as this is principally used to manage the performance of our operating segments.
Analysed as: Long-term insurance and savings net written premiums 16,365 15,342 General insurance and health net written premiums 9,968 10,035 26,333 25,377 1 Discounted value of regular premiums expected to be received over the term of the new contract, adjusted for expected levels of persistency. 2 Total long-term new business sales include our share of sales from joint ventures and associates. Under
premiums. 4 Under IFRS, only the margin earned from non-participating investment contracts is recognised in the IFRS
income statement. 5 Investment sales included in total sales represent the cash inflows received from customers investing in mutual fund type products such as unit trusts and OEICs. 6 The non-GAAP measure of sales focuses on new business written in the period under review while the IFRS
Return on Equity (RoE)# The RoE1 calculation is based on Group adjusted operating profit, after tax attributable to ordinary shareholders expressed as a percentage of weighted average ordinary shareholders’ equity (excluding non-controlling interests, preference share capital and direct capital instrument and tier 1 notes). 1 In 2016 and 2017 adjustments were made to the Group calculation of RoE for the purposes of calculating
Total Group equity on an IFRS basis 18.5 19.1 Elimination of goodwill and other intangible assets1 (7.8) (9.8) Liability valuation differences (net of transitional deductions)2 19.2 22.0 Inclusion of risk margin (net of transitional deductions) (3.3) (3.2) Net deferred tax3 (1.1) (1.3) Revaluation of subordinated liabilities (0.6) (0.7) Other accounting differences4 (0.3) (0.1)
Difference between Solvency II net assets and own funds5 (1.0) (1.3)
Estimated Solvency II own funds6 23.6 24.7 1 Includes £1.8 billion (2017: £1.9 billion) of goodwill and £6.0 billion (2017 £7.9 billion) of other intangible assets comprising acquired value of in-force business of £2.9 billion (2017: £3.3 billion), deferred acquisition costs (net of deferred income) of £2.8 billion (2017: £2.9 billion) and other intangibles of £0.3 billion (2017: £1.7 billion).
5 Regulatory adjustments to bridge from Solvency II net assets to own funds include recognition of subordinated debt capital and non-controlling interests.
• A notional reset of the transitional measure on technical provisions (TMTP), calculated using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The TMTP is amortised on a straight-line basis over 16 years from 1 January 2016 in line with the Solvency II rules.
A summary of the Group’s Solvency II position is shown in the table below.
Value of new business on an adjusted Solvency II basis (VNB)‡ VNB measures the additional value to shareholders created through the writing of new life business in the period. It reflects Solvency II assumptions and allowance for risk and is defined as the increase in Solvency II own funds resulting from business written in the period, including the impact of interactions between in-force and new business, adjusted to: i) remove the impact of the contract boundary restrictions under
Solvency II; ii) allow for businesses which are not within the scope of the
Solvency II own funds (e.g. UK and Asia Healthcare, retail fund management and UK equity release); and iii) include the impacts of tax and ‘look through profits’ in service companies (where not included in Solvency II) and deduct the impacts of non-controlling interests.
These adjustments are considered to reflect a more realistic basis than the prudential Solvency II rules. The VNB is derived from the present value of projected pre-tax distributable profits generated by new business plus a risk margin.
Operating assumptions The operating assumptions used are derived from an analysis of recent operating experience to give a best estimate of future experience. When these assumptions are updated, the year-to-date VNB will capture the impact of the assumption change on all business sold that year.
Economic assumptions VNB is calculated using economic assumptions as at the point of sale, taken as those appropriate to the start of each quarter. For contracts that are repriced more frequently, weekly or monthly economic assumptions have been used. Dealing with each of the principal economic assumptions in turn: • The risk-free interest rate curves used to calculate VNB reflect the basic risk-free interest rate curves (including the credit risk adjustment) published by EIOPA on their website.
Matching adjustment (MA) A MA is applied to certain obligations based on the expected allocation of assets backing new business at each year-end date. This allocation may be different to the MA applied at the portfolio level. Aviva applies a MA to certain obligations in UK Life, using methodology which is set out in the Solvency and Financial Condition Report.
New business margin New business margin is calculated as value of new business on an adjusted Solvency II basis (VNB) divided by the present value of new business premiums (PVNBP), and expressed as a percentage.
Operating capital generation (OCG)# OCG is the Solvency II surplus movement in the period due to operating items. The calculation of OCG is consistent with previous years.
Solvency II surplus impact of new business (0.2) (0.1) Life earnings from existing business 1.6 1.6
Total Solvency II OCG 3.2 2.6 1 Other includes the impact of ‘look through profits’ in service companies (where not included in Solvency II)
and the reduction in value when moving to a net of non-controlling interests basis. 2 Other OCG includes the impact of capital actions and non-economic assumption changes.
Other key dates: Annual General Meeting 11 am on 23 May 2019 2018 interim results announcement 8 August 2019 * Please note that the ADR local payment date will be approximately four business days after the proposed dividend date for ordinary shares. ** These dates are provisional and subject to change
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• The Dividend Reinvestment Plan enables eligible shareholders to reinvest their cash dividend in additional Aviva ordinary shares
Details of each resolution to be considered at the meeting and voting instructions are provided in the Notice of AGM, which is available on the Company’s website at www.aviva.com/agm. The voting results of the 2019 AGM will be accessible on the Company’s website at www.aviva.com/agm shortly after the meeting.
Aviva plc strategic report The strategic report sets out a review of Aviva’s business, addressing key issues such as its business model, strategy and principal risks and uncertainties facing the business. The strategic report forms part of the annual report and accounts. However, shareholders can also elect to receive Aviva’s standalone strategic report as an alternative to the full annual report and accounts by contacting Computershare using the contact details below.
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Group Company Secretary Shareholders may contact the Group Company Secretary: • By email: Aviva.shareholders@aviva.com • In writing: Kirstine Cooper, Group Company Secretary, St Helen’s, 1 Undershaft, London, EC3P 3DQ • By telephone: +44 (0)20 7283 2000 www.aviva.com/agm www.aviva.com/agm www.aviva.com/online www.aviva.com/shareholders www.aviva.com/online www.aviva.com/dividends mailto:AvivaSHARES@computershare.co.uk mailto:Citibank@shareholders-online.com mailto:Aviva.shareholders@aviva.com