Cash and cash equivalents at 31 December1 23,248 205 — 23,453 1. Cash and cash equivalents include bank overdrafts amounting £566 million and cash that has been classified as Held For Sale of £917 million.
2 – Exchange rates The Group’s principal overseas operations during the year were located within the Eurozone, Canada, Poland and the United States. The results and cash flows of these operations have been translated into sterling at the average rates for the year and the assets and liabilities have been translated at the year end rates as follows: Eurozone Average rate (€1 equals) £0.85 £0.81 Period end rate (€1 equals) £0.83 £0.81 Canada Average rate ($CAD1 equals) £0.62 £0.63 Period end rate ($CAD1 equals) £0.57 £0.62 Poland Average rate (PLN1 equals) £0.20 £0.19 Period end rate (PLN1 equals) £0.20 £0.20 United States Average rate ($US1 equals) £0.64 £0.63 Period end rate ($US1 equals) £0.60 £0.62
(b) Change to operating segments Following announcements in the first quarter of 2013 relating to modifications to the Group’s management structure, the Group’s operating segments were changed to align them with the revised organisational reporting structure. The Group has determined its operating segments along market reporting lines, reflecting the management structure whereby a member of the Executive Management team is accountable to the group chief executive for the operating segment for which he is responsible. Further details of the reportable segments are given in note 5.
(a) Acquisitions There have been no material acquisitions during the year.
(b) Disposal and remeasurement of subsidiaries, joint ventures and associates The profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises: Ireland – long-term business (see (i) below) 87 — Spain – long-term business (see (ii) below) 197 — Malaysia (see (iii) below) 39 — Russia (see (iv) below) 1 — Czech Republic, Hungary and Romania (see (v) below) 1 7 Italy – long-term business (see (c) below) (178) — Korea (see (c) below) (20) — Turkey – general insurance (see (c) below) (9) — United Kingdom – RAC Limited — (21) Delta Lloyd Associate — (129) Poland (see (vi) below) (4) — Sri Lanka — 12 Other small operations 1 (33)
(i) Irish long-term business On 17 January 2012 the Group’s Irish long-term business subsidiary Ark Life Assurance Company Limited (Ark Life) was classified as held for sale as a result of Allied Irish Bank (“AIB”) exercising an option to purchase this entity. In addition AIB exercised its option to put its non-controlling interest in Aviva Life Holdings Ireland Limited (ALHI), another Irish Group subsidiary, to the Group. As a result this non-controlling interest was reclassified from equity to liabilities. At 31 December 2012 the net assets of Ark Life and the liability to purchase the ALHI non-controlling interest were recorded in the Group financial statements at management’s best estimates of settlement value. On 8 March 2013 the disposal of Ark Life and the acquisition of the non-controlling interest in ALHI were completed, for cash consideration of £117 million, consistent with the estimated expected net settlement reflected at 31 December 2012, together with settlement of the non-controlling interest purchase liability of £166 million. This transaction resulted in a profit on disposal of £87 million, calculated as follows:
Liabilities Insurance liabilities 1,338 Liability for investment contracts 1,955 Other liabilities 166
Assets Goodwill 189 Intangible assets 11 Financial Investments 2,378 Reinsurance assets 6 Receivables and other financial assets 12 Prepayments and accrued income 35 Other assets 10 Cash and cash equivalents 75
Profit on disposal 197 1 Cash consideration of £502 million above includes a loss of £16 million related to hedging the currency exposure on expected proceeds of the sale.
(v) Romania Pensions On 7 May 2013 the Group sold its Romania Pensions business to MetLife, Inc. for consideration of £5 million. Net assets disposed of were £4 million, comprising gross assets of £11 million and gross liabilities of £7 million resulting in a profit on disposal of £1 million.
(vi) Poland In 2013 the Group sold 16% of the total shares in its Polish life and general insurance joint ventures BZ-WBK Aviva Towarzystwo Ubezpiecze Ogólnych SA and BZ-WBK Aviva Towarzystwo Ubezpiecze na ycie SA, to its joint partner BZ-WBK. Aviva’s remaining interest in both entities is a 34% share. Due to the change in control, the Group’s investments were reclassified from joint ventures to associates and the transfer of shares resulted in a £4 million loss.
Notes to the consolidated financial statements continued 4 – Subsidiaries continued (vii) Discontinued operations – US long term business The profit/loss on disposal and remeasurement on discontinued operations is as follows: £m
Liabilities Insurance liabilities 31,219 Liability for investment contracts 1,826 Provisions 172 Reinsurance deposits and collateral payable 654 Current and deferred tax liabilities 704 External borrowings 179 Intra-group liabilities 553 Other liabilities 308
Profit on disposal 808 1 Cash consideration received of £1,434 million above includes a recognised loss of £4 million related to hedging the currency exposure on the expected proceeds of the sale. As noted above, the process to agree completion adjustments is on-going. Until the outcome of this process is known there remains uncertainty on the final determination of the consideration.
Liabilities Insurance liabilities (238) (31,153) (3,294) (34,447) Liability for investment contracts (2,710) (2,197) (1,857) (4,054) Unallocated divisible surplus 4 — (55) (55) Provisions (3) (184) (3) (187) Deferred tax liabilities (1) (672) (8) (680) Current tax liabilities — — — — External borrowings (29) (145) — (145) Other liabilities (46) (1,497) (346) (1,843)
(i) Eurovita In the first half of 2013, the Italian long-term business Eurovita Assicurazioni S.p.A (“Eurovita”) was classified as held for sale, as a result of management determining that the value of this business will principally be recovered through sale. Finoa Srl (“Finoa”), an Italian holding company in which Aviva owns a 50% share, owns a 77.55% share of Eurovita. During November 2013, the sale of Finoa’s stake in Eurovita was announced subject to regulatory approval. Following classification as held for sale, Eurovita was re-measured at fair value based on the expected sales price less costs to sell of £39 million. As a result, a remeasurement loss of £178 million has been recognised within “Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates” in the income statement. Aviva’s share of this loss is £74 million, and its share of the investment is £10 million. Eurovita’s results continue to be consolidated. On completion of the disposal the currency translation reserves relating to Eurovita, currently recognised in equity, will be recycled to the income statement.
Management determined that the value of our long-term business joint venture in South Korea, in which the group has a 47% share, will be principally recovered through sale. The sale is expected to complete in 2014 with an expected sales price of £41 million. As a result, the business has been classified as held for sale and remeasured at fair value of £19 million based on Aviva’s share of the expected sales price less costs to sell. As a result, a re-measurement loss of £20 million was recognised at 31 December 2013.
Refer to note 19 for details on the joint venture in Taiwan.
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, whilst 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.
Italy, Spain and Other These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8. This segment includes our operations in Italy and Spain (including Aseval up until the date of its disposal in April 2013). The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range of long-term insurance and savings products, and the general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. As set out in note 4c, the operations of Eurovita have been classified as held for sale during 2013. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. Our Other European operations include our life operations in Turkey and our Turkish general insurance business (which is held for sale as at 31 December 2013). This segment also includes the results of our Russian, Czech, Hungarian and Romanian businesses until the date of their disposals.
Asia Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong and Vietnam as well as our life operations in Taiwan, Indonesia and South Korea which are held for sale as at the balance sheet date. This segment also includes the results of Sri Lanka and Malaysia until the date of their disposals (in December 2012 and April 2013, respectively). Asia also includes general insurance operations in Singapore and health operations in Indonesia (which is held for sale at 31 December 2013).
Gross written premiums 4,971 4,664 5,634 484 3,277 2,318 678 — 9 22,035 1,589 23,624 Premiums ceded to reinsurers (743) (455) (63) (6) (79) (60) (146) — 6 (1,546) (100) (1,646) Internal reinsurance revenue — (9) (6) (3) (5) (8) — — 31 — — —
Net change in provision for unearned premiums (9) 185 (25) (2) 31 (54) 8 — — 134 — 134
Net earned premiums 4,219 4,385 5,540 473 3,224 2,196 540 — 46 20,623 1,489 22,112 Fee and commission income 424 198 134 60 115 40 14 294 — 1,279 28 1,307 income/(expense) 6,898 293 3,388 180 1,628 17 40 92 (27) 12,509 2,340 14,849 Inter-segment revenue — — — — — — — 143 — 143 49 192 Share of profit of joint ventures and associates 88 — 8 3 6 — 15 — — 120 — 120 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 87 — — (4) 13 — 19 — — 115 808 923
Fee and commission expense (598) (1,479) (554) (60) (286) (620) (61) (23) (294) (3,975) (438) (4,413) Other expenses (370) (301) (280) (51) (214) (136) (73) (446) (349) (2,220) (293) (2,513) Inter-segment expenses (129) (4) — (7) — (3) — — — (143) (49) (192) Finance costs (224) (6) (4) — (4) (6) — (5) (360) (609) (16) (625)
Profit/(loss) before tax 907 387 457 178 509 104 99 (89) (1,080) 1,472 1,538 3,010 Tax attributable to
(Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates (87) — — 4 (13) — (19) — — (115) (808) (923)
Premiums written net of reinsurance 5,623 4,490 4,702 433 3,036 2,176 636 — 77 21,173 3,589 24,762 Net change in provision for
Net earned premiums 5,608 4,553 4,674 430 3,039 2,145 631 — 77 21,157 3,589 24,746 Fee and commission income 448 180 121 57 131 42 10 279 5 1,273 23 1,296 6,056 4,733 4,795 487 3,170 2,187 641 279 82 22,430 3,612 26,042 Net investment income/(expense) 8,561 514 8,047 401 3,136 140 283 (8) 61 21,135 2,241 23,376 Inter-segment revenue — — — — — — — 134 — 134 75 209 Share of (loss)/profit of joint ventures and associates (15) — 8 2 2 — (3) 7 (256) (255) — (255) (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates (2) (21) — — 7 — 12 — (160) (164) (2,359) (2,523)
Claims and benefits paid, net of recoveries from reinsurers (9,224) (2,915) (5,272) (341) (3,934) (1,268) (589) — (58) (23,601) (2,721) (26,322)
Change in insurance liabilities, net of reinsurance 404 (30) (880) (241) 359 (40) (17) — 15 (430) (1,566) (1,996)
Change in investment contract provisions (3,151) — (983) 19 (296) — — (39) — (4,450) (77) (4,527)
Change in unallocated divisible surplus (347) — (4,359) (30) (1,491) — (89) — — (6,316) — (6,316)
Fee and commission expense (854) (1,544) (604) (60) (362) (611) (86) (24) (312) (4,457) (498) (4,955) Other expenses (749) (465) (268) (56) (316) (151) (67) (342) (429) (2,843) (1,307) (4,150) Inter-segment expenses (122) (3) — (5) — (4) — — — (134) (75) (209) Finance costs (252) (21) (2) — (2) (8) — (5) (363) (653) (21) (674)
Profit/(loss) before tax 305 248 482 176 273 245 85 2 (1,420) 396 (2,696) (2,300) Tax attributable to
Goodwill — 1,039 — 9 303 49 49 27 — 1,476 Acquired value of in-force business and intangible assets 148 2 122 8 637 58 2 48 43 1,068 Interests in, and loans to, joint ventures and associates 1,001 — 153 9 94 — 210 — — 1,467 Property and equipment 22 20 229 2 5 12 4 1 18 313 Investment property 6,364 7 1,545 — 2 — — 982 551 9,451 Loans 22,629 270 852 — 23 76 29 — — 23,879 Financial investments 89,680 4,638 65,601 3,045 20,469 3,435 2,681 687 2,725 192,961 Deferred acquisition costs 1,316 456 229 23 100 268 4 — 1 2,397 Other assets 19,084 4,150 9,919 220 1,967 1,081 343 532 5,455 42,751 Assets of operations classified as held for sale — — — — 3,042 — 62 — 9 3,113
Insurance liabilities Long-term business and outstanding claims provisions 71,282 5,846 14,194 2,517 9,733 2,494 2,285 — — 51 108,402 Unearned premiums 238 2,274 369 41 335 1,127 55 — — 2 4,441 Other insurance liabilities — 86 61 — 1 98 — — — 2 248 Liability for investment contracts 49,719 — 46,952 47 11,893 — — 1,883 — — 110,494 Unallocated divisible surplus 2,055 — 4,591 86 38 — 161 — — — 6,931 Net asset value attributable to unitholders 320 — 3,351 — 278 — — — — 6,034 9,983 External borrowings 2,934 — — — 101 — — — — 5,144 8,179 Other liabilities, including inter-segment liabilities 7,439 (4,696) 2,563 99 936 467 236 255 — 5,719 13,018 Liabilities of operations classified as held for sale 3,257 — — — 2,304 — — 13 35,835 2 41,411
Discontinued operations and Delta Lloyd In the products and services analysis, the results of US Life (including the related internal asset management business) for all periods are presented as discontinued operations up to the date of disposal in October 2013. The Group’s share of the results of its interest in Delta Lloyd are shown as an associate until 5 July 2012 and, from 6 July 2012 until disposed in January 2013, as a financial investment, and are shown only within other activities within continuing operations.
Notes to the consolidated financial statements continued 5 – Segmental information continued (b) (i) Segmental income statement – products and services for the year ended 31 December 2013
Premiums written net of reinsurance 11,769 8,720 — — 20,489 Net change in provision for unearned premiums — 134 — — 134
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.
Claims and benefits paid, net of recoveries from reinsurers (17,839) (5,762) — — (23,601) Change in insurance liabilities, net of reinsurance (359) (71) — — (430) Change in investment contract provisions (4,450) — — — (4,450) Change in unallocated divisible surplus (6,316) — — — (6,316) Fee and commission expense (1,522) (2,523) (32) (380) (4,457) Other expenses (1,251) (715) (368) (509) (2,843) Inter-segment expenses (116) (11) — — (127) Finance costs (198) (28) (56) (371) (653)
Profit/(loss) before tax attributable to shareholders’ profits 864 636 11 (1,336) 175 Adjusted for: Non-operating items from continuing operations (excluding Delta Lloyd as an associate) 967 258 40 182 1,447 Share of Delta Lloyd's non-operating items (before tax), as an associate — — — 523 523 Share of Delta Lloyd's tax expense, as an associate — — — (107) (107)
Operating profit/(loss) before tax attributable to shareholders’ profits from discontinued operations4 200 — 55 (16) 239
Operating profit/(loss) before tax attributable to shareholders’ profits 2,031 894 106 (754) 2,277 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £370 million, of which £130 million relates to property and liability insurance and £240 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,164 million relating to health business. The remaining business relates to property and liability insurance. 3 Restated for the adoption of revised IAS19 and IFRS10. See note 1 for further details. 4 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.
(b) (iv) Segmental statement of financial position as at 31 December 2012 – (Restated)1
Goodwill 361 1,060 27 72 1,520 Acquired value of in-force business and intangible assets 799 146 56 83 1,084 Interests in, and loans to, joint ventures and associates 1,646 5 4 — 1,655 Property and equipment 253 94 5 39 391 Investment property 9,080 139 — 720 9,939 Loans 24,085 433 — 19 24,537 Financial investments 175,889 9,266 39 3,549 188,743 Deferred acquisition costs 1,550 939 14 — 2,503 Other assets 29,185 7,237 453 4,617 41,492 Assets of operations classified as held for sale 42,564 11 28 — 42,603
Gross insurance liabilities 98,086 15,005 — — 113,091 Gross liabilities for investment contracts 110,494 — — — 110,494 Unallocated divisible surplus 6,931 — — — 6,931 Net asset value attributable to unitholders 3,949 — — 6,034 9,983 External borrowings 3,019 — — 5,160 8,179 Other liabilities, including inter-segment liabilities 8,734 (2,661) 334 6,611 13,018 Liabilities of operations classified as held for sale 41,237 2 13 159 41,411
Net investment income Interest and similar income From financial instruments designated as trading and other than trading 5,488 5,735 From AFS investments and financial instruments at amortised cost 75 83 5,563 5,818 Dividend income 1,527 1,652 Other income from investments designated as trading Realised losses on disposals (202) (667) Unrealised gains and losses (policy K) Losses arising in the year (67) (686) Losses recognised in prior periods and now realised 202 667 135 (19) (67) (686) Other income from investments designated as other than trading Realised gains on disposals 3,250 1,844 Unrealised gains and losses (policy K) Gains arising in the year 4,639 14,244 Gains recognised in prior periods and now realised (3,250) (1,844) 1,389 12,400 4,639 14,244 Realised gains and losses on AFS investments Gains recognised in prior periods as unrealised in equity (1) (1)
Share of profit/(loss) after tax of joint ventures (note 19) 140 (15) Share of loss after tax of associates (note 20) (20) (240) Share of profits/(losses) after tax of joint ventures and associates 120 (255) Profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates (note 4b) 115 (164)
Income from continuing operations 34,646 43,146 Income from discontinued operations 4,665 3,494
Total income 39,311 46,640 1 Restated for the adoption of revised IAS19 and IFRS10. See note 1 for further details.
Claims and benefits paid Claims and benefits paid to policyholders on long-term business Insurance contracts 11,899 12,382 Participating investment contracts 5,089 6,500 Non-participating investment contracts 61 33 Claims and benefits paid to policyholders on general insurance and health business 6,082 6,050 23,131 24,965 Less: Claim recoveries from reinsurers Insurance contracts (975) (1,197) Participating investment contracts (63) (167)
Other expenses Other operating expenses Staff costs (note 11b) 841 1,122 Central costs and sharesave schemes 150 136 Depreciation 31 42 Impairment of goodwill on subsidiaries (note 17) 48 109 Amortisation of acquired value of in-force business on insurance contracts 37 43 Amortisation of intangible assets 81 96 Impairment of acquired value of in-force business — 73 Impairment of intangible assets 14 49 Integration and restructuring costs (see below) 363 461 Other expenses 701 662
Impairments Net impairment on loans 30 43 Net impairment on financial investments 2 — Net impairment on receivables and other financial assets — 3 32 46
Expenses from continuing operations 33,174 42,750 Expenses from discontinued operations 3,127 6,190
Total expenses 36,301 48,940 1 Restated for the adoption of revised IAS19 and IFRS10. See note 1 for further details.
Integration and restructuring costs Integration and restructuring costs from continuing operations were £363 million (2012: £461 million) and mainly include expenses associated with the Group’s transformation programme. Compared with the prior year, integration and restructuring costs reduced by 21% as the level of transformation activity in UK and Ireland general insurance in 2012 was not repeated and Solvency II implementation costs reduced to £79 million (2012: £117 million).
Notes to the consolidated financial statements continued 8 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 50) and similar charges.
Interest expense on core structural borrowings Subordinated debt 305 294 Long term senior debt 21 19 Commercial paper 2 4
Interest expense on operational borrowings Amounts owed to financial institutions 70 94 Securitised mortgage loan notes at fair value 89 90
Interest on collateral received 20 27 Net finance charge on pension schemes 20 19 Unwind of discount on GI reserves 5 21 Other similar charges 77 85
Total finance costs from continuing operations 609 653 Total finance costs from discontinued operations 16 21
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 (49) (620) Investment variances and economic assumptions – discontinued operations 452 342
For continuing operations, investment variances were £49 million negative (2012: £620 million negative). Negative variances in the UK resulting from increasing the allowance for credit defaults on commercial mortgages were partially offset by the positive effect of narrowing spreads on government and corporate bonds in Italy and Spain together with reduction in cost of guarantees in France. In 2012, for continuing operations, negative investment variances of £620 million mainly related to the UK. The total for the UK included increasing the allowance for credit risk defaults on UK commercial mortgages together with some adverse experience on the portfolio and the cost of de-risking activities. Positive variances in Spain and France were offset by a negative variance in Italy. The positive variance of £452 million (2012: £342 million) for discontinued operations relates to the US business disposed of in 2013, driven by the impact of favourable equity market performance on embedded derivatives.
(c) Methodology The expected investment returns and corresponding expected movements in long-term business liabilities are calculated separately for each principal long-term business unit. The expected return on investments for both policyholders’ and shareholders’ funds is based on opening economic assumptions applied to the expected funds under management over the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equities and properties. Expected funds under management are equal to the opening value of funds under management, adjusted for sales and purchases during the period arising from expected operating experience. The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating experience of the long-term business, or management decisions to change asset mix, the effect is included in the operating profit. The residual difference between actual and expected investment return is included in investment variances, outside operating profit but included in profit before tax.
Analysed between: Longer-term investment return, reported within operating profit 567 723 Short-term fluctuation in investment return, reported outside operating profit General insurance and health (243) 18 Other operations1 (93) (11) (336) 7 231 730 1 For 2013 represents short term fluctuations on assets backing non-life business in the France holding company and Group centre investments, including the centre hedging programme. For 2012 represents short term fluctuations on assets backing non-life business in the France holding company.
To calculate the longer-term investment return for its non-long-term business in 2012 and 2013, the Group has applied the same economic assumptions for equities and properties as are used under MCEV principles.
Notes to the consolidated financial statements continued 11 – Employee information This note shows where our staff are employed throughout the world, excluding staff employed by our joint ventures and associates, and analyses the total staff costs.
(a) Employee numbers The number of persons employed by the Group, including directors under a service contract, was: At 31 December Average for the year
Total staff costs 1,780 2,111 1 Credit for the defined benefit schemes arises from the £145 million gain from the plan amendments to the Irish scheme as described in note 49a. 2 Following a review of the staff costs disclosure we have identified additional costs within our expense base that should have been included in this analysis for 2012. We have also identified some costs that required reclassification within this note in respect of 2012. The net impact on total 2012 staff costs disclosed in this note has been an increase of £116 million.
Total staff costs 1,780 2,111 1 Following a review of the staff costs disclosure we have identified additional costs within our expense base that should have been included in this analysis for 2012. We have also identified some costs that required reclassification within this note in respect of 2012. The net impact on total 2012 staff costs disclosed in this note has been an increase of £116 million.
12 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration Report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2013 was £5.9 million (2012: £6.3 million). Employer contributions to pensions for executive directors for qualifying periods were £86,923 (2012: £179,200). The aggregate net value of share awards granted to the directors in the period was £4.5 million (2012: £8.9 million). The net value has been calculated by reference to the closing middle market price of an ordinary share at the date of grant. During the year, no share options were exercised by directors (2012: nil).
Fees payable to PwC LLP and its associates for the statutory audit of the Aviva Group and Company financial statements 2.4 2.2 Fees payable to PwC LLP and its associates for other services
Audit of Group subsidiaries 10.1 9.6 Additional fees related to the prior year audit of group subsidiaries 0.7 —
Total audit fees 13.2 11.8 Audit related assurance 2.2 2.3 Other assurance services 6.1 7.2 Total audit and assurance fees 21.5 21.3 Tax compliance services 0.1 0.4 Tax advisory services 0.1 0.1 Services relating to corporate finance transactions 0.1 0.3 Other non audit services not covered above 1.1 7.7
Fees payable to PwC LLP and its associates for services to Group companies classified as continuing operations 22.9 29.8
Discontinued operations Fees payable to PwC LLP and its associates for audit of Group subsidiaries 1.2 1.7 Fees payable to PwC LLP and its associates for other non-audit services to Group subsidiaries 0.1 0.3
Total fees payable to PwC LLP and its associates for services to Group companies 24.2 31.8
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 2013 the Group paid PwC £0.2 million (2012: £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. 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 2013 includes fees relating to the audit of the Group’s MCEV reporting of £1.1 million, £2.4 million for examination of the Group Individual Capital Assessment and Economic Capital, and £1.5 million associated with assurance services to prepare the businesses for Solvency II implementation. The 2013 fees for other non audit services for continuing operations of £1.1 million includes £0.2 million relating to a regulatory advice engagement and £0.9 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.
(a) Tax charged/(credited) to the income statement (i) The total tax charge comprises: £m
Notes to the consolidated financial statements continued 14 – Tax continued (iii) The tax charge/(credit) can be analysed as follows: £m
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £3 million and £57 million (2012: £7 million and £11 million), respectively.
(v) Deferred tax charged/(credited) to the income statement represents movements on the following items: £m £m
Deferred tax charged/(credited) to income statement from continuing operations 64 (2) Deferred tax charged to income statement from discontinued operations 187 143
Total deferred tax charged to income statement 251 141 1 Restated for the adoption of revised IAS19. See note 1 for further details.
(b) Tax (credited)/charged to other comprehensive income (i) The total tax credit comprises: £m
Tax calculated at standard UK corporation tax rate of 23.25% (2012: 24.5%) 656 44 700 (618) 54 (564) Reconciling items Different basis of tax – policyholders — 147 147 — 170 170 Adjustment to tax charge in respect of prior years (18) — (18) (20) — (20) Non-assessable income and items not taxed at the full statutory rate (54) — (54) (86) — (86) Non-taxable (profit)/loss on sale of subsidiaries and associates (154) — (154) 872 — 872 Disallowable expenses 98 — 98 418 — 418 Different local basis of tax on overseas profits 184 — 184 (142) (3) (145) Change in future local statutory tax rates (9) — (9) (13) — (13) Movement in deferred tax not recognised (21) — (21) (69) — (69) Tax effect of (profit)/loss from associates and joint ventures (10) — (10) 75 — 75 Other (4) — (4) (4) — (4)
The tax charge attributable to policyholders' returns is removed from the Group’s total profit/(loss) before tax in arriving at the Group’s profit/(loss) before tax attributable to shareholders' profits. As the net of tax profits attributable to with-profit and unitlinked 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 191 221 UK corporation tax at a rate of 23.25% (2012: 24.5%) in respect of the policyholder tax deduction (44) (54) Different local basis of tax of overseas profits — 3
The UK corporation tax rate reduced to 23% from 1 April 2013. Legislation was substantively enacted in July 2013 to reduce the main rate of UK corporation tax to 21% from 1 April 2014, with a further reduction to 20% from 1 April 2015. The 20% rate has been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2013.
Profit/(loss) before tax attributable to shareholders' profits 2,049 (768) 1,281 2,038 (1,970) 68 Share of Delta Lloyd's tax expense as an associate — — — (28) 135 107
Profit/(loss) for the year 1,515 (637) 878 1,511 (1,597) (86) Amount attributable to non-controlling interests (174) 31 (143) (184) 16 (168) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of direct capital instruments (DCI) and fixed rate tier 1 notes (net of tax) (70) — (70) (55) — (55)
Profit/(loss) attributable to ordinary shareholders from continuing operations 1,254 (606) 648 1,255 (1,581) (326)
Profit/(loss) attributable to ordinary shareholders from discontinued operations 207 1,066 1,273 161 (3,009) (2,848)
Profit/(loss) attributable to ordinary shareholders from discontinued operations 1,538 1,273 43.3 (2,696) (2,848) (97.9)
Profit/(loss) attributable to ordinary shareholders 2,819 1,921 65.3 (2,521) (3,174) (109.1) 1 DCI includes direct capital instruments and fixed rate tier 1 notes. 2 Restated for the adoption of revised IAS19. See note 1 for further details.
Notes to the consolidated financial statements continued 15 – Earnings per share continued (b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: Total £m
Profit/(loss) attributable to ordinary shareholders 1,273 2,940 43.3 (2,848) 2,910 (97.9) Dilutive effect of share awards and options — 39 (0.6) — 44 —
Diluted earnings/(loss) per share 1,921 2,979 64.5 (3,174) 2,954 (109.1) 1 Losses have an anti-dilutive effect. Therefore the basic and diluted earnings for 2012 have remained the same. 2 Restated for the adoption of revised IAS19. See note 1 for further details.
Diluted operating profit per share from continuing operations 1,254 2,979 42.1 1,255 2,954 42.5
16 – Dividends and appropriations This note analyses the total dividends and other appropriations we paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements. The impact of shares issued in lieu of dividends is shown separately in note 38.
Subsequent to 31 December 2013, the directors proposed a final dividend for 2013 of 9.4 pence per ordinary share (2012: 9.0 pence), amounting to £277 million (2012: £264 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 16 May 2014 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2014. Interest payments on the direct capital instruments issued in November 2004 and the fixed rate tier 1 notes issued in May 2012 are treated as an appropriation of retained profits and, accordingly, are accounted for when paid. Tax relief is obtained at a rate of 23.25% (2012: 24.5%).
Notes to the consolidated financial statements continued 17 – Goodwill This note analyses the changes to the carrying amount of goodwill during the year, and details the results of our impairment testing on both goodwill and intangible assets with indefinite lives.
United Kingdom – general insurance and health 924 924 — — 924 924 Ireland – general insurance and health 115 112 — — 115 112 France – long-term business — — 52 51 52 51 Poland – long-term business 9 9 — — 9 9 Italy Long-term business 15 35 — — 15 35 General insurance and health 30 37 — — 30 37 Spain – long-term business 259 450 — — 259 450 Other Europe — 3 — — — 3 Aviva Investors 27 27 — — 27 27 Canada 49 50 — — 49 50 Asia 52 56 — — 52 56
Notes to the consolidated financial statements continued 17 – Goodwill continued 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. 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. The recoverable amounts of businesses classified as held for sale was assessed based on the fair value less costs of disposal of the business, based on the expected net disposal proceeds of the businesses.
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.
United Kingdom general insurance and health 1.3 1.3 7.7 8.0 Ireland general insurance and health 1.3 2.0 8.4 10.6 Italy general insurance and health 2.0 2.0 – 3.0 8.7 – 10.2 9.0 – 11.4 Aviva Investors 3.0 3.0 17.0 17.0
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 goodwill associated with the Spanish long-term cash generating unit was reviewed in the first half of the year due to the continued volatility in the Spanish economy, in accordance with accounting policy O. As a result, management concluded that the goodwill was no longer fully recoverable. An impairment of £18 million was recognised in the first half of the year reducing the carrying value of this cash generating unit to its recoverable amount reflecting a reduction to management’s estimates due to prevailing economic circumstances. Subsequently, management reviewed the goodwill at 31 December 2013 and concluded that no further impairment was required as the recoverable amount exceeded the carrying amount. Similarly, as a result testing of the Italian long-term and general insurance cash generating unit, impairments of £21 million and £9 million respectively have been recognised. Other than the CGUs noted above, the recoverable amount exceeds the carrying value of the cash generating units including goodwill.
Gross amount At 1 January 2012 2,464 299 1,765 117 4,645 Additions — — 143 — 143 Acquisition of subsidiaries — — 2 — 2 Disposals (160) (5) (134) — (299) Movement in shadow adjustment 45 — — — 45 Transfers from property and equipment — — 3 — 3 Foreign exchange rate movements (88) (6) (42) (3) (139)
At 31 December 2012 (1,547) (165) (682) — (2,394) Amortisation for the year (133) (8) (73) — (214) Disposals3 1,308 102 314 — 1,724 Foreign exchange rate movements (11) (7) 8 — (10)
At 31 December 2012 (144) (39) (185) (63) (431) Impairment losses charged to expenses — — (24) — (24) Disposals3 61 15 151 — 227 Foreign exchange rate movements (2) — (3) (3) (8)
Carrying amount At 1 January 2012 815 144 1,010 52 2,021 At 31 December 2012 570 84 870 51 1,575
94 38 884 52 1,068 1 On insurance and participating investment contracts. 2 On non-participating investment contracts. 3 Disposals include the disposal of the US business in 2013.
At 1 January 132 1,341 43 1,516 147 1,465 100 1,712 Share of results before tax — 161 — 161 — 4 — 4 Share of tax — (16) — (16) — (4) — (4)
Share of results after tax — 145 — 145 — — — — Impairment of goodwill — — — — (9) — — (9) Amortisation of intangibles1 (5) — — (5) (6) — — (6)
60 1,116 24 1,200 78 1,269 43 1,390 1 Comprises amortisation of AVIF on insurance contracts of £3 million (2012: £3 million) and other intangibles of £2 million (2012: £3 million). 2 Comprises the impact of the adoption of IFRS 10 on prior year comparatives and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting Policy (D).
Additions relate to additional investments in property management undertakings. Disposals relate to property management undertakings and the sale of the Malaysian joint ventures. Further details of the Malaysian entities sold are provided in note 4. The reduction in Group interest in the year relates primarily to the reclassification of two Polish joint ventures to associates and the write-down of the South Korean joint venture, Woori Aviva Life Insurance Co. Ltd, to fair value less costs to sell following its classification as held for sale. See note 4 for further details. The Group’s Taiwan joint venture, First-Aviva Life Insurance Co. Ltd, was classified as held for sale in 2010 following the decision of management to seek to dispose of the business. Management have reviewed the held for sale classification and determined that classification remains appropriate. The disposal is expected to be completed within 12 months of the balance sheet date.
Notes to the consolidated financial statements continued 19 – Interests in, and loans to, joint ventures continued (iii) No joint ventures are considered to be material from a Group perspective (2012: none). The Group’s principal joint ventures are as follows: Name Nature of activities Principal place of business
The Southgate Limited Partnership Property management UK 50.00% 50.00% Queensgate Limited Partnership Property management UK 50.00% 50.00% Airport Property Partnership Property management UK 50.00% 50.00% 2-10 Mortimer Street Limited Partnership Property management UK 38.10% 27.30% The Mall Limited Partnership Property management UK 50.52% 50.52% Aviva-COFCO Life Insurance Co. Ltd Life insurance China 50.00% 50.00% First-Aviva Life Insurance Co. Ltd Life insurance Taiwan 49.00% 49.00% AvivaSA Emeklilik ve Hayat A.S Life insurance Turkey 49.83% 49.83% Woori Aviva Life Insurance Co. Ltd Life insurance Korea 47.31% 47.31%
(iv) The aggregate carrying amount of the Group’s interests in all individually immaterial joint ventures, and related financial information representing the Group’s share, is as follows: Restated1 £m
(v) 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 £140 million (2012: £41 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. We do not believe that these requirements constitute a material limitation on the ability of the joint ventures to transfer funds to the Group.
Share of results after tax — 9 — 9 — (298) — (298) Impairment (29) — — (29) (147) 205 — 58
Notes to the consolidated financial statements continued 20 – Interests in, and loans to, associates continued Impairment testing Management has determined that the goodwill in Aviva Life Insurance Company India Limited is fully impaired. An impairment of £29 million (2012: £147 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).
(iii) The aggregate carrying amount of the Group’s interests in all individually immaterial associates, and related financial information representing the Group’s share, is as follows: £m £m
Cost or valuation At 1 January 2012 175 215 7 630 247 1,274 Additions 16 171 — 27 20 234 Disposals — (13) (4) (46) (41) (104) Transfers to investment property (note 22) (111) (32) — — — (143) Fair value losses (6) (3) — — — (9) Transfer to intangible assets (note 18) — — — (3) — (3) Foreign exchange rate movements — (1) — — (7) (8)
At 31 December 2012 74 337 3 608 219 1,241 Additions — 12 — 9 9 30 Disposals1 (44) (96) — (19) (61) (220) Transfers (to)/from investment property (note 22) (25) 1 — — — (24) Fair value gains/(losses) 3 (2) — — — 1 Foreign exchange rate movements — 6 — (2) (1) 3
Depreciation and impairment At 1 January 2012 — — (5) (567) (192) (764) Charge for the year — — 1 (28) (19) (46) Disposals — — 2 38 20 60 Impairment charge (see below) — (91) — (5) (10) (106) Foreign exchange rate movements — (1) — 3 6 8
At 31 December 2012 — (92) (2) (559) (195) (848) Charge for the year — — — (22) (12) (34) Disposals1 — 91 — 12 59 162 Foreign exchange rate movements — — — — 2 2
8 257 1 27 20 313 1 Disposals include property and equipment sold as part of the disposal of the US Life business in 2013.
Notes to the consolidated financial statements continued 22 – Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation.
Carrying value At 1 January 8,552 1,405 9,957 9,848 1,790 11,638 Impact of the adoption of IFRS 101 — — — (543) (350) (893) Additions 332 10 342 536 194 730 Capitalised expenditure on existing properties 26 2 28 103 8 111 Fair value gains/(losses)1 111 73 184 (396) (79) (475) Disposals2 (888) (248) (1,136) (940) (207) (1,147) Transfers from property and equipment (note 21) 24 — 24 89 54 143 Foreign exchange rate movements 50 2 52 (145) (5) (150)
Less: Assets classified as held for sale — — — (18) — (18)
8,207 1,244 9,451 8,534 1,405 9,939 1 Comprises the impact of adoption of IFRS 10 and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting policy D see note 1 for further details. 2 Disposals include investment property sold as part of the disposal of the US Life business in 2013.
In circumstances where internal models are not used to validate broker prices, or the observability of inputs used by brokers is unavailable, the investment is classified as Level 3.
(c) Comparison of the carrying amount and fair values of financial instruments Set out below is a comparison of the carrying amounts and fair values of financial instruments, excluding assets classified as held for sale. These amounts may differ where the asset or liability is carried on a measurement basis other than fair value, e.g. amortised cost.
Financial liabilities Non-participating investment contracts (note 42(a)) 48,140 48,140 43,741 43,741 Net asset value attributable to unitholders 10,362 10,362 9,983 9,983 Borrowings (note 50) 8,222 7,819 8,324 8,179 Derivative liabilities (note 51) 1,188 1,188 1,643 1,643 1 Restated for the impact of the adoption of IFRS 10. Refer to note 1 for further details.
Financial liabilities of operations classified as held for sale — — — — 29 29
Total 58,290 2,168 545 61,003 6,535 67,538 1 In addition to the balances in this table, included within Reinsurance Assets in the Statement of Financial Position and note 44 are £2,048 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as level 1 assets.
Financial investments and loans measured at fair value (notes 24 & 27) Loans — 18,973 — 18,973 8,961 (3,397) 24,537 Fixed maturity securities 108,107 43,588 10,082 161,777 — (33,617) 128,160 Equity securities 33,610 230 473 34,313 — (1,248) 33,065 Other investments (including derivatives) 20,533 5,650 2,885 29,068 — (1,550) 27,518
Financial Liabilities Non-participating investment contracts (note 42 (a))3 45,032 825 442 46,299 1,400 (3,958) 43,741 Borrowings (note 50) — 1,332 — 1,332 6,992 (145) 8,179 Derivative liabilities (note 51) 122 1,570 59 1,751 — (108) 1,643
Assets and liabilities not carried at fair value Loans — 1,021 4,313 5,334 Borrowings 5,499 383 1,027 6,909
Level 1 to 2 For the year to 31 December 2013, transfers of financial assets from fair value hierarchy Level 1 to Level 2 amounted to £29.4 billion (2012: £1.3 billion). The transfers from Level 1 to Level 2 arose primarily in the UK and Ireland (£26.9 billion) as a result of the enhanced understanding of pricing vendor methodologies for the fair value hierarchy level classification of certain debt securities. Other transfers from level 1 to 2 arose mainly from changes in the level of market activity for specific assets in Asia (£1.2 billion) and Europe (£1.3 billion).
Notes to the consolidated financial statements continued 23 – Fair value methodology continued Transfer to/from Level 3 Transfers out of Level 3 mainly relate to improvements in the market liquidity of certain debt securities held by our business in France (£1.9 billion), which were transferred to Level 2, as observable prices became available. The transfers into Level 3 (shown below) primarily relate to UK mortgage loans (£14.6 billion) and investment property (£9.5 billion) as follows: £9.9 billion of UK commercial mortgage loans. Following a reassessment of inputs management has deemed the illiquidity premium used to value these mortgage loans to be a significant, unobservable input.
£2.1 billion of UK securitised mortgage loans and certain non-securitised equity release mortgage loans. Market transactions used in the valuation of these loans are infrequent and, as a result, prices are no longer classified as market observable. In the absence of any additional market transactions the mortgage loans have been reclassified from Level 2 to Level 3.
£9.5 billion investment property. Following the adoption of IFRS 13, investment property is now included within the fair value hierarchy. Due to the irregularity of similar transactions, management has concluded that significant inputs into the valuation methodology are non-market observable, and classified investment property within Level 3. We have also transferred £0.5 billion of property funds into Level 3 to reflect the valuation of underlying property assets.
Balance at 31 December 2013 9,451 15,362 8,879 441 2,890 148 — (63) (482) 1 Disposals include the disposal of the US business in 2013 (£609 million assets and £270 million liabilities).
Opening balance at 1 January 2012 7,940 483 2,945 11,368 (292) Total net gains recognised in the income statement 934 7 18 959 4 Total net gains recognised in other comprehensive income 113 — 17 130 — Purchases 1,826 27 646 2,499 (18) Issuances — — 1 1 (23) Disposals (767) (29) (755) (1,551) — Transfers into Level 3 443 2 56 501 (184) Transfers out of Level 3 (149) (3) (12) (164) — Impact of IFRS10 restatement — — 6 6 — Foreign exchange rate movements (258) (14) (37) (309) 12
Less: Amounts classified as held for sale (120) — (396) (516) —
Notes to the consolidated financial statements continued 23 – Fair value methodology continued Total net gains recognised in the income statement in the year ended 31 December 2013 in respect of Level 3 assets measured at fair value amounted to £108 million (2012: £959 million), with net losses in respect of liabilities of £13 million (2012: gains £4 million). Included in this balance are £73 million (2012: £1,030 million) of net gains attributable to those assets and £13 million (2012: £3 million) of losses attributable to those liabilities still held at the end of the year.
Equity release and UK securitised mortgage loans held by our UK Life business amounting to £4.7 billion, valued using Discounted Cash Flow models (DCF). Cash flows are adjusted for credit risk and discounted using a yield curve and global assumptions for the liquidity premium. The mortgage loans have been classified as Level 3 as assumptions used to derive the credit risk and property risk are not deemed to be market observable.
Level 3 liabilities include £0.5 billion (2012: £nil) of securitised mortgage loan notes which are valued using a similar technique to the related Level 3 securitised mortgage assets.
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, IRR 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.
Loans to banks include cash collateral received under stock lending arrangements (see note 27(d)). The obligation to repay this collateral is included in payables and other financial liabilities (note 51). Of the above loans, £21,850 million (2012: £19,179 million) are due to be recovered in more than one year after the statement of financial position date.
Loans at fair value Fair values have been calculated by discounting the future cash flows using appropriate current interest rates for each portfolio of mortgages. Further details of the fair value methodology are given in note 23. The change in fair value of these loans during the year, attributable to a change in credit risk, was £43 million loss (2012: £491 million loss). The cumulative change attributable to changes in credit risk to 31 December 2013 was £2,709 million loss (2012: £2,665 million loss). Non-securitised mortgage loans include £4.1 billion (2012: £4.1 billion) relating to UK primary healthcare and PFI businesses which are secured against General Practitioner premises, other primary health-related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not government-guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.
Policy loans 888 — 888 1,309 — 1,309 Loans to banks 4,087 — 4,087 4,250 — 4,250 Non-securitised mortgage loans 343 (151) 192 3,335 (124) 3,211 Loans to brokers and other intermediaries 78 — 78 89 — 89 Other Loans 157 — 157 106 (4) 102
(c) Collateral The Group holds collateral in respect of loans where it is considered appropriate in order to reduce the risk of non-recovery. This collateral generally takes the form of liens or charges over properties and, in the case of policy loans, the underlying policy for the majority of the loan balances above. In all other situations, the collateral must be in a readily realisable form, such as listed securities, and is held in segregated accounts. Transfer of title for the collateral received always occurs in such cases, although no market risk or benefit is taken. In the event of a default, the Group is able to sell or repledge the collateral. The amount of collateral received with respect to loans which the Group is permitted to sell or repledge in the absence of default was £5,513 million (2012: £4,560 million). No collateral was actually sold or repledged in the absence of default during the year (2012: £nil).
25 – Securitised mortgages and related assets The Group, in its UK Life business has loans receivable, secured by mortgages, which have then been securitised through nonrecourse borrowings. This note gives details of the relevant transactions.
Loan notes held by third parties are as follows: Total loan notes issued, as above 1,493 1,515 Less: Loan notes held by Group companies (180) (183)
Loan notes held by third parties (note 50 (c)(i)) 1,313 1,332
Notes to the consolidated financial statements continued 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.
Investment funds which include: hedge funds, liquidity funds, private equity funds, unit trusts, mutual funds and Private Finance Initiative (PFIs).
Specialised investment vehicles which comprise Open Ended Investment Companies (OEICs), Property Limited Partnerships (PLPs), Specialised Open Investment Funds (SOIFs), Sociétés d'Investissement à Capital Variable (SICAVs), Fonds Communs de Placement (FCPs) and Special Purpose Vehicles (SPVs).
Notes to the consolidated financial statements continued 26 – Interests in structured entities continued (b) Interests in unconsolidated structured entities As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2013, the Group’s total interest in unconsolidated structured entities was £26,474 million on the Group’s statement of financial position, which are classified as financial investments held at fair value through profit or loss. The Group does not sponsor any of the unconsolidated structured entities. As at 31 December 2013, a summary of the Group’s interest in unconsolidated structured entities is as follows: Interest in, and loans to, joint ventures £m
Debt securities1 — — 2,122 2,122 Analysed as: RMBS — — 152 152 CMBS — — 336 336 ABS — — 682 682 CDO (including CLO) — — 444 444 ABCP — — 34 34 Wrapped credit — — 474 474
Investment funds2 — — 13,283 13,283 Analysed as: Hedge funds — — 1,034 1,034 Liquidity funds — — 54 54 Private equity funds — — 981 981 Unit trusts — — 11,214 11,214
Total 917 84 25,473 26,474 1 Reported within ‘Other’ debt securities in Note 27a). 2 Reported within ‘Other investments’ in Note 27a).
The Group’s maximum exposure to loss 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. Based on the different structures of the securities, in some cases the Group may be required to absorb losses from an unconsolidated structured entity before other parties. Those cases occur when and if Aviva’s interest is more subordinated with respect to other owners of the same security. With regard to unconsolidated PLPs, the Group has provided a guarantee to a property management company to fund its future development. The amount provided is £66 million and the intention is for the Group to provide an additional £10 million. As at 31 December 2013, the Group has granted loans to PLPs classified as joint ventures and associates for a total of £29 million. This amount has been provided for the purpose of short term liquidly 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 usually provides in the course of its business, please refer to Note 53 (f) ‘Contingent liabilities and other risk factors’.
Notes to the consolidated financial statements continued 27 – Financial investments This note analyses our financial investments by type and shows their cost and fair value. These will change from one period to the next as a result of new business written, claims paid and market movements.
Fixed maturity securities Debt securities UK government — 17,297 — 17,297 — 18,300 — 18,300 UK local authorities — 133 — 133 — 18 — 18 Non-UK government (note 27e) — 43,113 781 43,894 — 44,202 2,258 46,460 Corporate bonds Public utilities — 7,988 25 8,013 — 6,266 2,881 9,147 Other corporate — 48,820 255 49,075 — 55,056 21,449 76,505 Convertibles and bonds with warrants attached — 310 79 389 — 465 6 471 Other — 7,070 — 7,070 — 5,525 3,301 8,826
Equity securities Ordinary shares Public utilities — 3,716 — 3,716 — 3,697 — 3,697 Banks, trusts and insurance companies — 7,968 39 8,007 — 7,574 62 7,636 Industrial miscellaneous and all other — 25,258 2 25,260 — 22,542 1 22,543
Notes to the consolidated financial statements continued 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: Cost/ amortised cost £m
Fixed maturity securities 120,316 8,164 (1,675) 126,805 148,540 15,316 (2,079) 161,777 Equity securities 31,164 7,775 (1,559) 37,380 31,833 4,753 (2,273) 34,313 Other investments Unit trusts and specialised investment vehicles 26,880 1,881 (155) 28,606 24,296 1,315 (28) 25,583 Derivative financial instruments 793 683 (418) 1,058 1,201 518 (129) 1,590 Deposits with credit institutions 601 — — 601 739 — — 739 Non-controlling interests in property management undertakings 774 130 (108) 796 741 123 (138) 726 Other long-term investments 405 12 (28) 389 434 20 (30) 424 Other investments – short-term 1 — — 1 6 — — 6
All unrealised gains and losses and impairments on financial investments classified as fair value through profit or loss have been recognised in the income statement. Gains and losses on financial investments from continuing operations classified as at fair value through profit or loss recognised in the income statement in the year were a net gain of £1,524 million (2012: £12,381 million net gain). Of this, £135 million net gain (2012: £19 million net loss) related to financial investments designated as trading and £1,389 million net gain (2012: £12,400 million net gain) related to investments designated as other than trading. Total impairments of financial investments classified as available for sale (AFS) in the income statement in the year were £13 million (2012: £14 million). The total accumulated impairment provision for financial investments classified as available-for-sale included in the table above within unrealised losses and impairments was £13 million (2012: £97 million). Movements in this AFS provision are shown in section (c) below.
(c) Impairment of financial investments The movements in impairment provisions on available-for-sale financial investments for the years ended 31 December 2012 and 2013 were as follows: Fixed maturity securities £m
(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 2013 analysed by policyholder, participating and shareholder funds.
Notes to the consolidated financial statements continued 27 – Financial investments continued (f) Exposure to worldwide banks – debt securities Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)
Austria — — — 0.2 — 0.2 France 0.2 — 0.2 3.8 0.9 4.7 Germany 0.1 — 0.1 0.6 0.5 1.1 Italy 0.1 0.1 0.2 0.7 0.1 0.8 Netherlands 0.2 0.2 0.4 1.8 0.2 2.0 Spain 1.1 0.1 1.2 1.2 0.1 1.3 United Kingdom 0.6 0.3 0.9 0.8 1.0 1.8 United States 0.5 0.2 0.7 1.0 0.1 1.1 Other 0.5 0.3 0.8 2.0 0.6 2.6
Total (excluding assets held for sale) 3.3 1.2 4.5 12.1 3.5 15.6
Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £4.5 billion. The majority of our holding (73%) is in senior debt. The primary exposures are to Spain (27%), UK (20%) and US (16%) banks. Gross of non-controlling interests, our direct shareholder asset exposure to worldwide bank equity securities is £0.4 billion. Our holdings include strategic holdings in Italian banks of £258 million. Gross of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £15.6 billion. The majority of the exposure (78%) is in senior debt. Participating funds are the most exposed to French (30%), Dutch (13%) and UK (12%) banks.
Expected to be recovered in less than one year 6,918 7,384 Expected to be recovered in more than one year 142 92 7,060 7,476 1 Restated for the adoption of IFRS10. See note 1 for further details.
Deferred acquisition costs (DAC) on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year. Of the above total, £1,285 million (2012: £1,351 million) is expected to be recovered more than one year after the statement of financial position date. For long-term business where amortisation of the DAC balance depends on projected profits, the amount expected to be recovered is estimated and actual experience will differ. Surpluses in the staff pension schemes are recoverable more than one year after the statement of financial position date.
Notes to the consolidated financial statements continued 29 – Deferred acquisition costs, other assets, prepayments and accrued income continued (b) Deferred acquisition costs – movements in the year The movements in deferred acquisition costs (DAC) during the year were: Long-term business £m
The balance of deferred acquisition costs for long-term business decreased by £1.6 billion in 2013, primarily reflecting the disposal of the US Life and Ark Life businesses. Where amortisation of the DAC balance depends on projected profits, changes to economic conditions may lead to a movement in the DAC balance and a corresponding impact on profit. It is estimated that the movement in the DAC balance would reduce profit by £2 million (2012: £30 million) if market yields on fixed income investments were to increase by 1% and increase profit by £8 million (2012: £50 million) if yields were to reduce by 1%. The shadow adjustments relate to deferred acquisition costs on business in the US backed by investments classified as available for sale (AFS). As explained in accounting policies T and L, movements in unrealised gains and losses on the AFS investments and movements in the shadow adjustments are recognised directly in other comprehensive income.
76,569 70,682 1 Restated for the adoption of IFRS10. See note 1 for further details.
32 – Group’s share plans This note describes the Group’s various equity compensation plans, and shows how the Group values the options and awards of shares in the Company.
(ii) Executive share options These are options granted on various dates until 2004 under the Aviva executive share option plan. Options granted between 2001 and 2004 were subject to the satisfaction of conditions relating to both the Company’s return on equity (ROE) and its relative total shareholder return (TSR). The performance was measured over a three-year performance period and the options are normally exercisable between the third and tenth anniversary of their grant.
(iv) Annual bonus plan awards These awards have been made under the Aviva annual bonus plan 2011 and are described in section (b) below and in the directors’ remuneration report.
(v) Recruitment and retention share award plan awards These are conditional awards granted under the Aviva recruitment and retention share award plan in relation to the recruitment or retention of senior managers excluding executive directors. The awards vest in tranches on various dates and vesting is conditional upon the participant being employed by the Group on the vesting date and not having served notice of resignation. If a participant’s employment is terminated due to resignation or dismissal, any tranche of the award which has vested within the 12 months prior to the termination date will be subject to clawback and any unvested tranches of the award will lapse in full. No new Aviva plc ordinary shares will be issued or transferred from treasury to satisfy vested awards under this plan.
(vi) Aviva Investors Long term incentive plan awards These awards have been made under the Aviva Investors Holdings Limited 2009 long term incentive plan, a long term profit sharing arrangement for key Aviva Investors employees. Awards will vest on the 3rd anniversary of the grant, subject to achieving performance conditions.
Notes to the consolidated financial statements continued 32 – Group’s share plans continued (b) Outstanding options and awards (i) Share options At 31 December 2013, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva savings related share option scheme
Aviva executive share option plan Option price p Number of shares Normally exercisable
Notes to the consolidated financial statements continued 32 – Group’s share plans continued (ii) Share awards At 31 December 2013, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva long-term incentive plan 2011 Number of shares Vesting period
Aviva Investors Holdings Limited 2009 long term incentive plan Number of shares Vesting period
The vesting of awards under the Aviva long term incentive plan 2011 is subject to the attainment of performance conditions as described in the directors’ remuneration report. Shares which do not vest will lapse. No performance conditions attach to the awards under the Aviva annual bonus plan 2011 or most of the awards under the recruitment and retention share awards plan. 7,215 of the shares awarded under the recruitment and retention share awards plan which vest in 2015 are subject to the attainment of the same performance conditions that apply to the 2013 grant under the Aviva long-term incentive plan 2011 as outlined in the director’s remuneration report. Shares which do not vest will lapse. The vesting of the awards under the Aviva Investors Holdings Limited long-term incentive plan are subject to Aviva Investors Holdings Limited achieving ROCE of 27% per annum over a three year performance period. Shares which do not vest will lapse.
(iii) Shares to satisfy awards and options Since July 2008, it has been the Company’s practice to satisfy all awards and options using shares purchased in the market and held by employee trusts except where local regulations make it necessary to issue new shares. Further details are given in note 33.
(c) Movements in the year A summary of the status of the option plans as at 31 December 2012 and 2013, and changes during the years ended on those dates, is shown below.
Outstanding at 1 January 25,212,210 298.40 30,073,984 321.55 Granted during the year 2,986,293 312.00 6,236,944 269.02 Exercised during the year (2,442,874) 304.57 (2,862,952) 315.24 Forfeited during the year (1,171,735) 274.84 (2,187,371) 337.96 Cancelled during the year (1,355,364) 274.74 (3,282,095) 300.34 Expired during the year (3,158,682) 403.02 (2,766,300) 432.85
(d) Expense charged to the income statement The total expense recognised for the year arising from equity compensation plans was as follows: Equity-settled expense 37 42 Cash-settled expense 2 5
Notes to the consolidated financial statements continued 32 – Group’s share plans continued (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 2013 2012
Cost debited to shareholders' funds At 1 January 10,053,515 32 13,284,476 43 Acquired in the year 7,863,726 32 10,269,904 33 Distributed in the year (9,355,859) (33) (13,500,865) (44)
The shares are owned by employee share trusts with an undertaking to satisfy awards of shares in the Company under the Company’s share plans and schemes. Details of the features of the plans can be found in the directors’ remuneration report and in note 32. These shares were purchased in the market and are carried at cost. At 31 December 2013, they had an aggregate nominal value of £2,140,346 (2012: £2,513,379) and a market value of £38,500,535 (2012: £37,499,611). The trustees have waived their rights to dividends on the shares held in the trusts.
Under its articles of association, the Company may issue and allot sterling new preference shares and euro new preference shares, which, if issued and allotted, would rank, as to payment of a dividend and capital, ahead of the Company’s ordinary share capital but behind the cumulative irredeemable preference shares currently in issue. The issued preference shares are non-voting except where their dividends are in arrears, on a winding up or where their rights are altered. On a winding up, they carry a preferential right of return of capital ahead of the ordinary shares. The Company does not have a contractual obligation to deliver cash or other financial assets to the preference shareholders and therefore the directors may make dividend payments at their discretion.
Notes to the consolidated financial statements continued 35 – Direct capital instruments and fixed rate tier 1 notes
Issued November 2004 5.9021% £500 million direct capital instrument 500 500 4.7291% €700 million direct capital instrument 490 490
In relation to the FxdRNs, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons on the FxdRNs only in the following circumstances: Redemption; or Substitution by preference shares.
No interest will accrue on any deferred coupon. Deferred coupons will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital. These instruments have been treated as equity. Please refer to accounting policy AE.
Notes to the consolidated financial statements continued 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
Total other comprehensive income for the year (349) (2) 229 74 — (48) Transfer to profit on disposal of subsidiaries, joint ventures and associates 91 — 96 — — 187 Reserves credit for equity compensation plans — — — — 42 42 Shares issued under equity compensation plans (note 38) — — — — (68) (68)
Balance at 31 December 2,348 1,389 1 Restated for the adoption of revised IAS19. See note 1 for further details.
The shares issued in lieu of dividends in 2012 were in respect of the transfer to retained earnings from the ordinary dividend account, arising from the treatment of these shares explained in note 31(b). The Group’s regulated subsidiaries are required to hold sufficient capital to meet acceptable solvency levels based on applicable local regulations. Their ability to transfer retained earnings to the UK parent companies is therefore restricted to the extent these earnings form part of local regulatory capital.
Eurovita Assicurazioni S.p.A (Eurovita) is classified as held for sale as at 31 December 2013. Details can be found in note 4(c) – Subsidiaries. There were no dividends paid to the non-controlling interest of Eurovita during the year (2012: £nil). Although the Group holds only 39% of the voting rights of Eurovita, it controls the entity. This is because Finoa S.r.l, a consolidated special purpose company of the Group which is controlled by Aviva Italia Holding S.p.A., owns 77.6% of Eurovita and has the ability to use its power over Eurovita to influence its returns.
40 – Contract liabilities and associated reinsurance The following notes explain how the Group calculates its liabilities to policyholders for insurance and investment products it has sold to them. Notes 41 and 42 cover these liabilities, and note 43 details the financial guarantees and options given for some of these products. Note 44 details the reinsurance recoverables on these liabilities while note 45 shows the effects of changes in the assumptions. The following is a summary of the contract provisions and related reinsurance assets as at 31 December.
Long-term business Insurance contracts (94,972) 3,734 (91,238) (131,190) 4,291 (126,899) Participating investment contracts (70,628) 2 (70,626) (66,849) 3 (66,846) Non-participating investment contracts (48,140) 2,048 (46,092) (47,699) 1,678 (46,021)
(213,740) 5,784 (207,956) (245,738) 5,972 (239,766) Outstanding claims provisions Long-term business (1,287) 53 (1,234) (1,342) 93 (1,249) General insurance and health (7,730) 849 (6,881) (7,711) 900 (6,811) (9,017) 902 (8,115) (9,053) 993 (8,060) Provisions for claims incurred but not reported (2,568) 315 (2,253) (2,843) 354 (2,489)
(225,325) 7,001 (218,324) (257,634) 7,319 (250,315) Provision for unearned premiums (4,226) 256 (3,970) (4,441) 248 (4,193) Provision arising from liability adequacy tests (10) — (10) (11) — (11)
Totals (229,561) 7,257 (222,304) (262,086) 7,567 (254,519) Less: Amounts classified as held for sale 2,948 (37) 2,911 38,501 (883) 37,618
Long-term business provisions Participating 45,098 — 45,098 49,473 — 49,473 Unit-linked non-participating 8,714 — 8,714 9,936 — 9,936 Other non-participating 41,160 — 41,160 71,781 — 71,781
(ii) Change in insurance liabilities recognised as an expense The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown on the income statement, to the change in insurance liabilities recognised as an expense in the relevant movement tables in note 41. To do this we need to separate out the change in provision for outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on GI reserves (which is included within finance costs within the income statement). For general insurance and health business, the change in the provision for unearned premiums is not included in the reconciliation below, as within the income statement, this is included within earned premiums.
(note 41b(iv)) (2,423) (164) (2,587) 331 (19) 312 (2,092) (183) (2,275) Change in provision for outstanding claims 75 (7) 68 (11) 11 — 64 4 68
and 44c(ii)) (33) 64 31 — — — (33) 64 31 Less: Unwind of discount on GI reserves and other (15) 10 (5) — — — (15) 10 (5)
Total change in insurance (note 7) (2,396) (97) (2,493) 320 (8) 312 (2,076) (105) (2,181)
(note 41b(iv)) 531 (252) 279 1,691 (125) 1,566 2,222 (377) 1,845 Change in provision for outstanding claims 52 28 80 7 (7) — 59 21 80
and 44c(ii)) 140 (46) 94 — — — 140 (46) 94 Less: Unwind of discount on GI reserves and other (35) 12 (23) — — — (35) 12 (23)
Total change in insurance liabilities (note 7) 688 (258) 430 1,698 (132) 1,566 2,386 (390) 1,996
In other operations in Europe and Asia, a range of long-term insurance and savings products are written.
(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 policyrelated 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 Guarantees and Guarantees linked to inflation; Guaranteed Annuity Options; GMP underpin on Section 32 transfers; and Expected payments under Mortgage Endowment Promise.
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued 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 2013 of 3.11% (2012: 1.92 %) for a policy with ten years outstanding.
Mortality Mortality assumptions for with-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality table used 2013 2012
Allowance for future mortality improvement is in line with the rates shown for non-profit business below.
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates 2013 2012
Assurances Life conventional non-profit 2.5% 1.8% Pensions conventional non-profit 3.2% 2.2% Annuities Conventional immediate and deferred annuities 3.2% to 4.7% 2.6% to 4.1% Non-unit reserves on Unit Linked business Life 2.8% 2.1% Pensions 3.5% 2.5% Income Protection Active lives 2.9% 2.2% Claims in payment – level 3.1% 3.1% Claims in payment – index linked (0.6)% (0.7)%
(b) France The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued (c) Other countries In all other countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
Carrying amount at 31 December 94,972 131,190 1 Other movements (outside change in liability recognised as an expense) of £(111) million in 2012 represents the reclassification of liabilities from insurance to non-participating investment in Eurovita. In 2012 these were included within “Other movements” within change in liability recognised as an expense. 2 Disposals in 2013 include £31,167 million related to the disposal of the US business, £1,900 million related to the disposal of Aseval, and £1,233 million related to the disposal of Ark Life. 3 Other movements (outside change in liability recognised as an expense) in 2013 of £(194) million represents the reclassification of liabilities from insurance to participating investment in Eurovita.
Motor 3,724 1,001 4,725 3,737 1,051 4,788 Property 1,493 180 1,673 1,408 212 1,620 Liability 2,035 1,208 3,243 2,003 1,394 3,397 Creditor 26 18 44 54 13 67 Other 452 161 613 509 173 682
Reinsured London Market business 2.5% 2.0% 12 years 11 years Latent claims 0.36% to 3.76% 0.33% to 3.35% 6 to 15 years 6 to 15 years Structured settlements 2.8% 2.6% 35 years 33 years
Interest rates used to discount latent claim liabilities The discount rates used in determining our latent claim liabilities are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of latent claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2013, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £90 million, excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note 58.
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued (iv) Movements The following changes have occurred in the general insurance and health claims provisions during the year: £m
Incurred claims losses and expenses 6,020 6,153 Less: Payments made on claims incurred in the current year (3,352) (3,243) Payments made on claims incurred in prior years (3,001) (3,104) Recoveries on claim payments 285 297
Claims payments made in the year, net of recoveries (6,068) (6,050) Unwind of discounting 15 35 Other movements in the claims provisions — 2
Changes in claims reserve recognised as an expense (33) 140 Effect of portfolio transfers, acquisitions and disposals (44) (171) Foreign exchange rate movements (178) (158) Other movements (1) (2)
(d) Loss development tables (i) Description of tables The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2004 to 2013. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2004, by the end of 2013 £5,843 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £6,891 million was re-estimated to be £5,919 million at 31 December 2013. The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity. The Group aims to maintain strong reserves in respect of its general insurance and health business in order to protect against adverse future claims experience and development. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. However, in order to maintain overall reserve adequacy, the Group establishes strong reserves in respect of the current accident year (2013) where the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims. Key elements of the movement in prior accident year general insurance and health net provisions during 2013 were: £32 million release from UK & Ireland, including Group reinsurance business, mainly due to favourable development in health, commercial motor and commercial liability in Ireland, slightly offset by a small strengthening in the UK.
Gross cumulative claim payments At end of accident year (2,971) (3,345) (3,653) (4,393) (4,915) (3,780) (3,502) (3,420) (3,055) (3,068) One year later (4,561) (5,011) (5,525) (6,676) (7,350) (5,464) (5,466) (4,765) (4,373) Two years later (4,981) (5,449) (5,971) (7,191) (7,828) (6,102) (5,875) (5,150) Three years later (5,263) (5,784) (6,272) (7,513) (8,304) (6,393) (6,163) Four years later (5,448) (6,001) (6,531) (7,836) (8,607) (6,672) Five years later (5,617) (6,156) (6,736) (8,050) (8,781) Six years later (5,725) (6,311) (6,936) (8,144) Seven years later (5,792) (6,467) (7,015) Eight years later (5,826) (6,496) Nine years later (5,843) Estimate of gross ultimate claims At end of accident year 6,891 7,106 7,533 8,530 9,508 7,364 6,911 6,428 6,201 6,122 One year later 6,557 6,938 7,318 8,468 9,322 7,297 7,006 6,330 6,028 Two years later 6,371 6,813 7,243 8,430 9,277 7,281 6,950 6,315 Three years later 6,178 6,679 7,130 8,438 9,272 7,215 6,914 Four years later 6,008 6,603 7,149 8,409 9,235 7,204 Five years later 6,003 6,605 7,167 8,446 9,252 Six years later 5,953 6,591 7,167 8,381 Seven years later 5,933 6,596 7,176 Eight years later 5,926 6,604 Nine years later 5,919 Estimate of gross ultimate claims 5,919 6,604 7,176 8,381 9,252 7,204 6,914 6,315 6,028 6,122 Cumulative payments (5,843) (6,496) (7,015) (8,144) (8,781) (6,672) (6,163) (5,150) (4,373) (3,068)
Present value 2,178 75 107 161 236 472 532 751 1,165 1,655 3,054 10,386 Cumulative effect of foreign exchange movements — 12 16 22 17 (30) (21) (42) (38) (33) — (97) Effect of acquisitions 2 1 2 4 — — — — — — — 9
Present value recognised in the statement of financial position 2,180 88 125 187 253 442 511 709 1,127 1,622 3,054 10,298
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued (iii) Net of reinsurance After the effect of reinsurance, the loss development table is: Accident year
Present value 1,326 59 104 152 210 435 531 739 1,132 1,599 2,933 9,220 Cumulative effect of foreign exchange movements — 10 13 21 17 (28) (20) (39) (37) (32) — (95) Effect of acquisitions 2 1 2 4 — — — — — — — 9
Change in UPR recognised as income (136) 21 Gross portfolio transfers and acquisitions — (6) Foreign exchange rate movements (79) (57)
Notes to the consolidated financial statements continued 42 – Liability for investment contracts This note analyses our investment contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.
(a) Carrying amount The liability for investment contracts (gross of reinsurance) at 31 December comprised: Long-term business 2013 £m
(b) Long-term business investment liabilities Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS. Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for long-term business liabilities as described in note 41. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating contracts to Phase II of its insurance contracts project. For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus. Guarantees on long-term investment products are discussed in note 43. Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost. Following the disposal of the US, there are no non-participating investment contracts, that are measured at amortised cost, at 31 December 2013. Of the non-participating investment contracts measured at fair value, £47,684 million in 2013 are unit-linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves, if required, on a fair value basis. These contracts are generally classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number units in issue, and any non-unit reserve is insignificant. For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 29 and the deferred income liability is shown in note 52.
Carrying amount at 1 January 47,699 45,659 Provisions in respect of new business 3,386 3,851 Expected change in existing business provisions (2,698) (2,531) Variance between actual and expected experience 3,122 982 Impact of operating assumption changes 4 14 Impact of economic assumption changes 1 4 Other movements 46 (18) Change in liability 3,861 2,302 Effect of portfolio transfers, acquisitions and disposals2 (3,785) 25 Foreign exchange rate movements 365 (404) Other movements — 117
Carrying amount at 31 December 48,140 47,699 1 “Other movements” (outside Change in liability) of £117 million in 2012 include £111 million in respect of the reclassification of liabilities from insurance to non-participating investment. In the 2012 statements this £111 million was included within “Other movements” (within change in liability).
2 Disposals include £1,826 million related to the disposal of the US business, and £1,955 million related to the disposal of Ark Life.
The variance between actual and expected experience of £3.1 billion was primarily driven by favourable movements in investment markets in 2013. The rise in investment markets increased the value of unit linked contracts, which comprise the vast majority of the non-participating investment contract liabilities. For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. Minor variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors. The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of nonparticipating investment contract liabilities. The impact 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.
(ii) No market valuation reduction (MVR) guarantees For unitised business, there are a number of circumstances where a ‘no MVR’ guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the accumulated value of units and the market value of the underlying assets.
(b) UK Life non-profit business The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, including changes introduced in 2006 under FSA Policy Statement 06/14, Prudential Changes for Insurers (which was designated by the PRA on 1 April 2013).
(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 the end of 2013. The most significant of these contracts is the AFER Eurofund which has total liabilities of £34 billion at 31 December 2013 (2012: £33 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 3.36% for 2013 (2012: 3.45%) compared with an accounting income from the fund of 3.85% (2012: 3.94%). Non-AFER contracts with guaranteed surrender values had liabilities of £15 billion at 31 December 2013 (2012: £14 billion) and all guaranteed annual bonus rates are between 0% and 4.5%.
Guaranteed death and maturity benefits In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated statement of financial position at the end of 2013 for this guarantee is £20 million (2012: £101 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2013, total sums at risk for these contracts were £101 million (2012: £223 million) out of total unit-linked funds of £15 billion (2012: £12 billion). The average age of policyholders was approximately 54. It is estimated that this liability would increase by £22 million (2012: £88 million) if yields were to decrease by 1% per annum and by £8 million (2012: £21 million) if equity markets were to decline by 10% from year end 2013 levels. These figures do not reflect our ability to review the tariff for this option.
Notes to the consolidated financial statements continued 43 – Financial guarantees and options continued ‘No MVR’ guarantees Certain unitised with-profit policies containing ‘no MVR’ guarantees, similar to those in the UK, have been sold in Ireland. These guarantees are currently ‘in-the-money’ by £0.2 million (2012: £0.4 million). This has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees. The value of these guarantees is usually sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies. There is no sensitivity to either interest rates or equity markets since there is no longer any exposure to equity in these funds and a matching strategy has been implemented for bonds.
(a) Carrying amounts The reinsurance assets at 31 December comprised: Long-term business Insurance contracts 3,734 4,291 Participating investment contracts 2 3 Non-participating investment contracts1 2,048 1,678
Change in asset 643 450 Effect of portfolio transfers, acquisitions and disposals1 (873) 197 Foreign exchange rate movements 42 (48)
Carrying amount at 31 December 5,784 5,972 1 Includes £631 million related to the disposal of the US business in 2013, £3 million related to the disposal of Aseval, and £230 million related to the disposal of Ark Life.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets. The changes to the reinsurance asset from assumption changes mainly relates to business in the UK and Ireland, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact 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 liabilities and other non-financial assets.
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 2012 to 2013, 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.
Assumptions Long-term insurance business Interest rates 1,389 (515) Expenses 3 11 Persistency rates (1) — Mortality for assurance contracts 8 — Mortality for annuity contracts 85 241 Tax and other assumptions 20 (207) Investment contracts Interest rates — (2) Expenses — (1) Persistency rates — — Tax and other assumptions — — General insurance and health business Change in loss ratio assumptions 3 — Change in discount rate assumptions 33 (21) Change in expense ratio and other assumptions — (21)
Notes to the consolidated financial statements continued 47 – Tax assets and liabilities This note analyses the tax assets and liabilities that appear in the statement of financial position and explains the movements in these balances in the year.
(b) Deferred tax (i) The balances at 31 December comprise: Deferred tax assets 252 220 Deferred tax liabilities (564) (1,227)
Amounts classified as held for sale include £8 million of deferred tax assets (2012: £32 million) and £1 million of deferred tax liabilities (2012: £680 million).
(ii) The net deferred tax liability arises on the following items: Long-term business technical provisions and other insurance items 1,276 2,067 Deferred acquisition costs (220) (681) Unrealised gains on investments (1,856) (2,869) Pensions and other post-retirement obligations (78) (135) Unused losses and tax credits 296 535 Subsidiaries, associates and joint ventures (8) (10) Intangibles and additional value of in-force long-term business (190) (363) Provisions and other temporary differences 468 449
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future profits will be available. Where this is the case, the directors have relied on business plans supporting future profits. The Group has unrecognised tax losses and other temporary differences of £777 million (2012: £1,005 million) to carry forward against future taxable income of the necessary category in the companies concerned. Of these, trading losses of £79 million will expire within the next 20 years. The remaining losses have no expiry date. In addition, the Group has unrecognised capital losses of £438 million (2012: £652 million). These have no expiry date. There are no temporary differences in respect of unremitted overseas retained earnings for which deferred tax liabilities have not been recognised at 31 December 2013 (2012: £nil).
Total IAS 19 obligations to main staff pension schemes (Note 49(a)) 367 651 Deficits in other staff pension schemes 43 88
Total IAS 19 obligations to staff pension schemes 410 739 Restructuring provisions 140 144 Other provisions 437 423
Other provisions comprise many small provisions throughout the Group for obligations such as costs of compensation, litigation and staff entitlements. Of the total, £532 million (2012: £901 million) is expected to be settled more than one year after the statement of financial position date.
At 1 January 144 423 567 106 398 504 Additional provisions 222 219 441 236 120 356 Unused amounts reversed — (22) (22) — (30) (30) Change in the discounted amount arising from passage of time — 1 1 — 5 5
49 – Pension obligations (a) Introduction The Group operates a large 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 2013 are shown below.
As noted in section (ii) below, the final salary section of the Irish scheme was closed to future accrual with effect from 30 April 2013. The final salary sections of the UK and Canadian schemes were closed to future accrual in 2011. Closure of the schemes has removed the volatility associated with additional future accrual for active members.
(i) UK schemes In the UK, the Group operates two main pension schemes, the Aviva Staff Pension Scheme (ASPS) and the smaller RAC (2003) Pension Scheme which was retained after the sale of RAC Limited in September 2011. As the defined benefit section of both UK schemes is now closed to both new members and future accrual, existing deferred members and new entrants participate in the defined contribution section of the ASPS. Both schemes operate within the UK pensions’ regulatory framework.
Net surplus in the schemes at 1 January 12,281 (11,675) 606 Current service costs — (4) (4) Past service costs – amendments1 — 142 142 Past service costs – curtailment gain — 5 5 Administrative expenses2 — (18) (18)
Remeasurements: Actual return on these assets 366 — 366 Less: Interest income on scheme assets (543) — (543)
Return on scheme assets excluding amounts in interest income (177) — (177) Losses from change in financial assumptions — (730) (730) Gains from change in demographic assumptions — 186 186 Experience gains — 47 47
Total remeasurements recognised in other comprehensive income from continuing operations (177) (497) (674)
Notes to the consolidated financial statements continued 49 – Pension obligations continued The present value of unfunded post-retirement benefit obligations included in the table above is £118 million at 31 December 2013 (2012: £127 million). The net surplus in the pension schemes in 2013 was adversely affected by a narrowing of the spread between UK corporate bond yields and gilt yields. This was partly offset by a variety of factors which increased the surplus, including deficit funding contributions, positive equity and property market performance, and reductions to future member benefits.
Net surplus in the schemes at 1 January 11,791 (10,527) 1,264 Current service costs — (6) (6) Past service costs – curtailment gain — 15 15 Administrative expenses2 — (13) (13)
Total remeasurements recognised in other comprehensive income from continuing operations 34 (1,014) (980)
Employer contributions 250 — 250 Employee contributions 2 (2) — Benefits paid (344) 344 — Administrative expenses paid from scheme assets2 (13) 13 — Foreign exchange rate movements (16) 24 8
Equities 900 99 81 1,080 909 87 92 1,088 Property 1,074 13 — 1,087 914 12 — 926 Cash 518 1 21 540 514 44 13 571 Derivatives 225 55 — 280 386 1 — 387 Other1 239 2 2 243 236 2 2 240
Bonds1 Fixed interest government 808 900 1,708 1,566 241 1,807 Fixed interest corporate 10 2,836 2,846 7 2,647 2,654 Index-linked 3,864 750 4,614 2,698 1,910 4,608
Notes to the consolidated financial statements continued 49 – Pension obligations continued Plan assets include investments in Group-managed funds in the consolidated statement of financial position of £868 million (2012: £616 million) and transferrable insurance policies with other Group companies of £177 million (2012: £179 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 ‘Other’.
(iii) Assumptions on scheme liabilities The valuations used for accounting under IAS 19 have been based on the most recent full actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2013.
Inflation rate1 3.4%/2.3% 3.0%/2.2% 2.0% 2.0% 2.5% 2.5% General salary increases2 5.2% 4.8% 3.5% 3.5% 3.0% 3.0% Pension increases1 3.4%/2.3% 3.0%/2.2% 0.5% 2.0% 1.25% 1.25% Deferred pension increases1 3.4%/2.3% 3.0%/2.2% 2.0% 2.0% — — Discount rate 4.4% 4.5% 3.6% 3.5% 4.75% 3.75% 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 Pensions benefits that increases, 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 2013 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 89.6 91.5 90.8 92.6 (29.6) (31.5) (30.8) (32.6) – RAC SAPS series 1, including allowances for future improvement 65 88.0 90.6 89.8 92.2 (23.0) (25.6) (24.8) (27.2)
Ireland 89% PNA00 with allowance for future improvements 61 87.6 90.8 90.5 93.6 (26.6) (29.8) (29.5) (32.6)
Canada Canadian Pensioner Mortality – RPP2014 65 87.5 89.0 89.5 90.5 (22.5) (24.0) (24.5) (25.5)
Notes to the consolidated financial statements continued 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 of £12,159 million (2012: £11,675 million) would have increased (decreased) as a result of the change in the respective assumptions: Impact on present value of defined benefit obligation
The sensitivity analyses presented above may not be representative as in practice it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, the present value of the defined benefit obligation has been calculated using the projected unit credit method, which is the same as that applied in calculating the defined benefit obligation liability recognised within the consolidated statement of financial position.
(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 those objectives, each scheme’s assets are invested in a portfolio consisting primarily (nearly 75%) of debt securities, as detailed in section (b)(ii). The investment strategy will continue to evolve over time and is expected to match to the liability profile increasingly closely.
Notes to the consolidated financial statements continued 49 – Pension obligations continued (c) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their attitude to risk and their retirement plans. Members of this section contribute at least 2% of their pensionable salaries and, depending on the percentage chosen, the Company contributes up to a maximum 14%, together with the cost of the death-in-service benefits. These contribution rates are unchanged for 2014. The amount recognised as an expense for defined contribution schemes is shown section (d) below.
Total defined benefit schemes (note 11(b)) (128) 19 UK defined contribution schemes 90 91 Overseas defined contribution schemes 17 11
Total (credit)/charge for pension schemes (12) 126 1 Includes £145 million gain relating to plan amendments to the Irish Scheme.
There were no significant contributions payable or prepaid in the consolidated statement of financial position as at either 31 December 2013 or 2012.
(b) Core structural borrowings (i) The carrying amounts of these borrowings are: Upper Tier 2 £m Lower Tier 2 £m Senior £m Total £m Upper Tier 2 £m Lower Tier 2 £m Senior £m Total £m
Subordinated debt 6.125% £700 million subordinated notes 2036 — 692 — 692 — 691 — 691 5.250% €650 million subordinated notes 2023 — — — — — 527 — 527 5.700% €500 million undated subordinated notes 415 — — 415 404 — — 404 6.125% £800 million undated subordinated notes 793 — — 793 792 — — 792 6.125% €650 million subordinated notes 2043 — 537 — 537 — — — — 6.875% £400 million subordinated notes 2058 — 395 — 395 — 395 — 395 6.875% £200 million subordinated notes 2058 — 199 — 199 — 199 — 199 6.875% €500 million subordinated notes 2018 — 415 — 415 — 404 — 404 10.6726% £200 million subordinated notes 2019 — 200 — 200 — 200 — 200 10.464% €50m subordinated notes 2019 — 42 — 42 — 40 — 40 8.25% $400 million subordinated notes 2041 — 236 — 236 — 239 — 239 6.625% £450 million subordinated notes 2041 — 446 — 446 — 446 — 446
(c) Operational borrowings (i) The carrying amounts of these borrowings are: Restated1
Total 2,723 3,185 1 Restated for the adoption of IFRS 10. See note 1 for further details.
All the above borrowings are stated at amortised cost, except for the loan notes issued in connection with the UK lifetime mortgage business of £1,313 million (2012: £1,332 million). These loan notes are carried at fair value, their values are modelled on risk-adjusted cash flows for defaults discounted at a risk-free rate plus a market-determined liquidity premium, and are therefore classified as either ‘Level 2’ or ‘Level 3’ in the fair value hierarchy, depending on whether observable market prices are available for the loan note. These have been designated at fair value through profit and loss in order to present the relevant mortgages, 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. The securitised mortgage loan notes are at various fixed, floating and index-linked rates. Further details about these notes are given in note 25.
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 these notes at 31 December 2013 was £4,707 million (2012: £4,435 million), calculated with reference to quoted prices. On 28 February 2014, the Company notified the respective holders of the £200 million subordinated notes due 2019 and the €50 million subordinated notes due 2019 that it would redeem each of the notes on their respective first call dates in April 2014.
(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 2013 was £236 million (2012: £246 million), calculated with reference to quoted prices.
(iii) Commercial paper The commercial paper consists of £556 million issued by the Company (2012: £603 million) and is considered core structural funding. All commercial paper is repayable within one year and is issued in a number of different currencies, primarily sterling, euros and US dollars. Its fair value is considered to be the same as its carrying value.
Notes to the consolidated financial statements continued 50 – Borrowings continued (e) Movements during the year Movements in borrowings during the year were: Core Structural £m Operational £m Total £m
New borrowings drawn down, including commercial paper, net of expenses 2,137 184 2,321 2,200 452 2,652 Repayment of borrowings, including commercial paper (2,179) (347) (2,526) (2,295) (347) (2,642)
Bank overdrafts amount to £77 million (2012: £194 million) in life business operations and £416 million (2012: £372 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.
Expected to be settled within one year 2,145 1,457 Expected to be settled in more than one year 327 385 2,472 1,842 1 Restated for the adoption of IFRS10. See note 1 for further details.
Notes to the consolidated financial statements continued 53 – Contingent liabilities and other risk factors continued (e) Structured settlements The Company has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Company is exposed to credit risk to the extent that any of the life insurers fail to fulfil their obligations. The Company’s maximum exposure to credit risk for these types of arrangements is approximately $1,119 million as at 31 December 2013 (2012: $1,145 million, 2011: $1,085 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the life insurance industry compensation plan. As at 31 December 2013, no information has come to the Company’s attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.
(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 or regulatory action. 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.
(b) Operating lease commitments (i) Future contractual aggregate minimum lease rentals receivable under non-cancellable operating leases are as follows: Within 1 year 252 269 Later than 1 year and not later than 5 years 807 832 Later than 5 years 1,307 1,570
(ii) Future contractual aggregate minimum lease payments under non-cancellable operating leases are as follows: Within 1 year 111 136 Later than 1 year and not later than 5 years 357 421 Later than 5 years 575 587
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases 45 53 55 – Group capital structure The Group maintains an efficient capital structure from a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings, consistent with our overall risk profile and the regulatory and market requirements of our business. This note shows where this capital is employed.
Financed by Equity attributable to ordinary shareholders 7,964 8,204 Non-controlling interests 1,471 1,574 Direct capital instruments & fixed rate tier 1 notes 1,382 1,382 Preference shares 200 200 Subordinated debt 4,370 4,337 External debt 755 802
Less: Goodwill & other intangibles (net of tax & non-controlling interests)2 (2,204) (2,523)
Tangible debt leverage 50% 50% 1 Corporate and other business includes centrally held tangible net assets, the main UK staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance Limited (AIL). Internal capital management mechanisms in place allocated a majority of the total capital of AIL to the UK general insurance operations with the remaining capital deemed to be supporting residual (non-operational) Pillar II ICA risks.
— Certain subsidiaries, subject to satisfying standalone capital and liquidity requirements, loan funds to corporate and holding entities. These loans satisfy arm’s-length criteria and all interest payments are made when due. 2 Goodwill and intangibles comprise £1,480 million (2012: £1,703 million) of goodwill in subsidiaries, £1,068 million (2012: £1,090 million) of intangibles in subsidiaries and £60 million (2012: £132 million) of goodwill and intangibles in joint ventures, net of deferred tax liabilities of £(189) million (2012: £(188) million) and the non-controlling interest share of intangibles of £(215) million (2012: £(214) million). 3 Total debt comprises direct capital instruments and fixed rate tier 1 notes, Aviva Plc preference share capital and core structural borrowings. In addition General Accident plc preference share capital of £250 million within noncontrolling interests has been included.
(3,160) (1,010) Fair value (gains)/losses on: (1,713) (11,900) Depreciation of property and equipment 31 42 Equity compensation plans, equity settled expense 37 42 Impairment and expensing of: Goodwill on subsidiaries 48 109 Financial investments, loans and other assets 32 46 Acquired value of in-force business and intangibles 14 122 Non-financial assets — —
Premium or discount on debt securities 144 105 Premium or discount on borrowings (16) (12) Premium or discount on non participating investment contracts 8 20 Financial instruments 194 64 Acquired value of in-force business and intangibles 110 121 440 298 Change in unallocated divisible surplus (280) 6,316 Interest expense on borrowings 589 634 Net finance charge on pension schemes (37) (68) Foreign currency exchange gains (187) (128)
Total cash generated from operating activities 4,491 2,927 1 Restated for the adoption of IFRS10. See note 1 for further details. 2 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.
Notes to the consolidated financial statements continued 56 – Statement of cash flows continued (b) Cash flows in respect of, and additions to, the acquisition of subsidiaries, joint ventures and associates comprised: Cash consideration for subsidiaries, joint ventures and associates acquired and additions 1 136 Less: Cash and cash equivalents acquired with subsidiaries (1) (7)
Cash flows on acquisitions and additions – continuing operations — 129 Cash flows on acquisitions and additions – discontinued operations — —
(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 817 442 Less: Net cash and cash equivalents divested with subsidiaries (440) (21)
Cash and cash equivalents (excluding bank overdrafts) 25,350 24,019 Less: Assets classified as held for sale (351) (917)
24,999 23,102 1 Restated for the adoption of IFRS10. See note 1 for further details.
Total shareholders' funds 3 (19) 35 19 5,198 5,217 5,876 11,093 (76) 11,017 11,360 Other sources of capital1 — — — — 200 200 43 243 4,170 4,413 4,380 Unallocated divisible surplus2 323 — 1,397 1,720 26 1,746 4,963 6,709 — 6,709 6,986 Adjustments onto a regulatory basis: Shareholders' share of accrued bonus (27) 128 (190) (89) — (89) — (89) — (89) (304) Goodwill and other intangibles3 — — — — (146) (146) (1,017) (1,163) (1,445) (2,608) (3,410) Regulatory valuation and admissibility
Analysis of liabilities: Participating insurance liabilities 1,746 12,723 9,803 24,272 100 24,372 20,726 45,098 — 45,098 49,473 Unit-linked liabilities — — — — 3,639 3,639 5,075 8,714 — 8,714 9,936 Other non-participating life insurance 352 2,618 476 3,446 33,410 36,856 5,591 42,447 — 42,447 73,123 Amounts classified as held for sale — — — — — — (106) (106) — (106) (34,446)
Analysis of movements in capital of long-term businesses For the year ended 31 December 2013
Available capital resources at 31 December 363 1,298 1,510 3,171 2,793 5,964 10,732 16,696
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 NWPSF arises 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 £1,105 million (this is known as RIEESA) at 31 December 2013 (31 December 2012: £748 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.
Aggregate 35.3 (33.4) 1.9 1.1 (0.6) 2.4 1.8 1 These realistic liabilities include the shareholders’ share of accrued bonuses of £0.1 billion (31 December 2012: £0.3 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of accrued bonuses are £33.4 billion
(31 December 2012: £36.0 billion).These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4 billion, £0.2 billion and £2.5 billion for NWPSF, OWPSF and WPSF respectively (31 December 2012: £1.8 billion, £0.3 billion and £3.5 billion for NWPSF, OWPSF and WPSF respectively).
(iii) Overseas life operations – the capital requirements and corresponding regulatory capital held by overseas businesses are calculated using the locally applicable regulatory regime. The available capital resources in all these businesses are subject to local regulatory restrictions which may constrain management’s ability to utilise these in other parts of the Group. In several business units, Group companies and other parties jointly control certain entities; these joint venture operations may constrain management’s ability to utilise the capital in other parts of the Group. Any transfer of available capital may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
(a) Risk management framework The risk management framework (RMF) in Aviva forms an integral part of the management and Board processes and decisionmaking framework across the Group. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report (IMMMR) risks, including the use of our risk models and stress and scenario testing. For the purposes of risk identification and measurement, and aligned to Aviva’s risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance, general insurance, asset management and operational risk. Risks falling within these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation. To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. On a semi-annual basis the business chief executive officers and chief risk officers sign-off compliance with these policies and standards, providing assurance to the relevant oversight committees that there is a consistent framework for managing our business and the associated risks. A regular top-down key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees. Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. Roles and responsibilities for risk management in Aviva are based around the ‘three lines of defence model’ where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the IMMMR process and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes. Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital, liquidity and franchise value at Group and in the business units. Economic capital risk appetites are also set for each risk type. The Group’s position against risk appetite is monitored and reported to the Board on a regular basis. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee (ALCO), which focuses on business and financial risks, and the Operational Risk and Reputation Committee (ORRC) which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.
Notes to the consolidated financial statements continued 58 – Risk management continued Further information on the types and management of specific risk types is given in sections (b) – (j) below. The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva’s framework.
As at 31 December 2013 AAA AA A BBB Speculative grade Not rated
The Group's maximum exposure to credit risk of financial assets, without taking collateral into account, is represented by the carrying value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance assets, derivative assets, loans and receivables. The carrying values of these assets are disclosed in the relevant notes: financial investments (note 27), reinsurance assets (note 44), loans (note 24) and receivables (note 28). The collateral in place for these credit exposures is disclosed in note 60; Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Additional information in respect to collateral is provided in notes 24(c) and notes 27(d)(i).
(ii) Financial exposures to peripheral European countries and worldwide banks Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2013 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Ireland, Portugal, Italy and Spain, which has been offset by an increase in market values. Information on our exposures to peripheral European sovereigns and banks is provided in notes 27(e) and 27(f). We continue to monitor closely the situation in the eurozone and have had additional restrictions on further investment in place since late 2009 as well as taking actions to reduce exposure to higher risk assets. However, in the light of the improving economic situation in Ireland, we plan to allow a modest increase in our exposure to Irish sovereign debt during 2014.
Notes to the consolidated financial statements continued 58 – Risk management continued (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.
(vii) Securities finance The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by over-collateralisation and minimum counterparty credit quality requirements which are designed to minimise residual risk. The Group operates strict standards around counterparty quality, collateral management, margin calls and controls.
(ix) Unit-linked business In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the shareholders’ exposure to credit risk is limited to the extent of the income arising from asset management charges based on the value of assets in the fund.
Notes to the consolidated financial statements continued 58 – Risk management continued (x) Impairment of financial assets In assessing whether financial assets carried at amortised costs or classified as available for sale are impaired, due consideration is given to the factors outlined in accounting policies (T) and (V). The following table provides information regarding the carrying value of financial assets subject to impairment testing that have been impaired and the ageing of those assets that are past due but not impaired. The table excludes assets carried at fair value through profit or loss or ‘held for sale’.
Debt securities 517 — — — — — 517 Reinsurance assets 6,684 — — — — — 6,684 Other investments 9 — — — — 8 17 Loans 5,469 — — — — 151 5,620 Receivables and other financial assets 7,384 43 12 13 24 — 7,476 1 Restated for the impact of IFRS 10 (see note 1 for further details) and to exclude financial assets carried at fair value through profit or loss.
Excluded from the tables above are financial assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £125.7 billion of debt securities (2012: £131.9 billion), £31.4 billion of other investments (2012: £28.6 billion ) and £18.5 billion of loans (2012: £18.9 billion). Of these financial assets none are past due other than £513 million (2012: £531 million) of loans that are deemed not to have met their contractual commitments, and are therefore considered to be nonperforming. The fair value of these loans reflects the underlying property exposure. Where assets have been classed as ‘past due and impaired’, an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.
(c) Market risk Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, foreign currency exchange rates, equity and property prices. Market risk arises in business units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. We actively seek some market risks as part of our investment and product strategy. However, we have limited appetite for interest rate risk as we do not believe it is adequately rewarded. The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group Risk is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements. In addition, where the Group’s long-term savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders’ risk and reward objectives. The Group writes unit-linked business in a number of its operations. The shareholders’ exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund. The most material types of market risk that the Group is exposed to are described 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. Although we think it is reasonably likely that interest rates will rise, we still anticipate that interest rates may remain below historical averages for some time. 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, which includes amounts held for sale, the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2013 for our Italian and French participating contracts, where the Group’s key exposure to sustained low interest rates arises.
Average assets £m 1 Before realised and unrealised gains and losses and investment expenses
(iv) Inflation risk Inflation risk arises primarily from the Group’s exposure to general insurance claims inflation, to inflation linked benefits within the defined benefit staff pension schemes and within the UK annuity portfolio and to expense inflation. Increases in long-term inflation expectations are closely linked to long-term interest rates and so are frequently considered with interest rate risk. Exposure to inflation risk is monitored through economic capital modelling, sensitivity testing and stress and scenario testing. The Group typically manages inflation risk through its investment strategy and, in particular, by investing in inflation linked securities and through a variety of derivative instruments, including inflation linked swaps.
Net assets at 31 December 2013 (260) 360 (81) 99 Net assets at 31 December 2012 (386) 411 (112) 106
A 10% change in sterling to euro/Canada$ (CAD) foreign exchange rates relative to the year-end rate would have had the following impact on profit before tax, excluding ‘discontinued operations’.
Long-term business Insurance contracts – non-linked 81,458 7,900 25,223 29,620 18,715 Investment contracts – non-linked 60,111 2,098 10,422 17,594 29,997 Linked business 73,458 6,244 16,403 23,483 27,328 General insurance and health 14,534 6,350 5,591 2,197 396 Total contract liabilities 229,561 22,592 57,639 72,894 76,436
Long-term business Insurance contracts – non-linked 117,602 8,303 31,894 44,455 32,950 Investment contracts – non-linked 59,788 2,491 12,390 16,679 28,228 Linked business 69,690 5,667 18,203 21,590 24,230 General insurance and health 15,006 6,166 5,763 2,456 621
Debt securities 124,385 15,146 35,624 73,613 2 Equity securities 37,326 — — — 37,326 Other investments 31,250 28,067 701 587 1,895 Loans 23,879 2,029 3,909 17,920 21 Cash and cash equivalent 24,999 24,999 — — —
(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 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 2013, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. 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.
Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarked against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management.
Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, and guaranteed minimum rate of annuity payment.
Reinsurance strategy Significant reinsurance purchases are reviewed annually at both business unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by analysis of economic capital, earnings and capital volatility, cash flow and liquidity and the Group’s franchise value. Detailed actuarial analysis is used to calculate the Group’s extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using external probabilistic catastrophe models widely used by the rest of the (re)insurance industry. The Group cedes much of its worldwide catastrophe risk to third-party reinsurers but retains a pooled element for its own account gaining diversification benefit. The total Group potential loss from its most concentrated catastrophe exposure zone (Northern Europe) is approximately £180 million, for a one in ten year annual loss scenario, compared to approximately £280 million when measured on a one in a hundred year annual loss scenario.
Notes to the consolidated financial statements continued 58 – Risk management continued (h) Operational risk Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment. We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible. Our business units are primarily responsible for identifying and managing operational risks within their businesses, within the group-wide operational risk framework including the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning.
(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. Our regulators regularly consider 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.
(j) Risk and capital management (i) Sensitivity test analysis The Group uses a number of sensitivity tests to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic and operating experience are regularly produced on the Group’s key financial performance metrics to inform the Group’s decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of its business units, and the Group as a whole, are exposed. For long-term business in particular, sensitivities of market consistent performance indicators to changes in both economic and non-economic experience are continually used to manage the business and to inform the decision making process.
Credit spreads The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets. The test allows for any consequential impact on liability valuations
Notes to the consolidated financial statements continued 58 – Risk management continued Long-term business Sensitivities as at 31 December 2013 2013 Impact on profit before tax (£m)
Changes in sensitivities between 2013 and 2012 reflect movements in market interest rates, portfolio growth, changes to asset mix and the relative durations of assets and liabilities and asset liability management actions. The sensitivities to economic movements relate mainly to business in the UK. In general, a fall in market interest rates has a beneficial impact on non-participating business, due to the increase in market value of fixed interest securities and the relative durations of assets and liabilities; similarly a rise in interest rates has a negative impact. The mortality sensitivities also relate primarily to the UK.
Fund management and non-insurance business sensitivities as at 31 December 2013 2013 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 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.
(i) Cash flow hedges At the end of 2012 the Group entered into two cash flow hedges, using foreign exchange forward and option contracts, to hedge the currency exposure on expected proceeds in 2013 of businesses which were held for sale as of 31 December 2012 and sold in 2013. The fair value of the cash flow hedges as of 31 December 2012 was a £5 million derivative asset and no amounts in respect of the cash flow hedges were recognised in the income statement. All cash flows being hedged have ceased as of the disposal dates of the Aseval (Spanish long-term business) and the US Life businesses in 2013 and therefore no derivative asset or liability exists as of 31 December 2013. Following the disposal of these entities in 2013, £(4) million (2012: £nil) has been recycled to the income statement.
(iii) Net investment hedges To reduce its exposure to foreign currency risk, the Group has entered into the following net investment hedges: The Group has designated a portion of its euro denominated debt as a hedge of the net investment in its European subsidiaries. Prior to the sale of the US business the Group also held a portion of its US dollar denominated debt as a hedge of the net investment in the US Subsidiaries. The carrying value of the debt at 31 December 2013 was £1,428 million (2012: £1,741 million) and its fair value at that date was £1,516 million (2012: £1,785 million). The foreign exchange loss of £40 million (2012: gain of £74 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.
Notes to the consolidated financial statements continued 59 – Derivative financial instruments and hedging continued (i) The Group’s non-hedge derivative activity at 31 December 2013 and 2012 was as follows: Contract/ notional amount £m
Net amounts of financial assets presented in the statement of financial position £m
Gross amounts of recognised financial assets set off in the statement of financial position £m
Financial liabilities Derivatives 3,734 (2,546) 1,188 (36) (152) 1,000 Securities Lending 91 (91) — — — —
Notes to the consolidated financial statements continued 60 – Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements continued
Financial assets Derivatives 2,470 (880) 1,590 (13) (67) 1,510 Cash held as collateral on reverse repurchase and similar arrangements 4,250 — 4,250 — (4,250) — Securities Lending 661 (116) 545 — (543) 2 Other investments 8 — 8 — — 8
Related amounts not set off in the statement of financial position
Derivative assets are recognised as ‘Derivative financial instruments’ in note 27(a), while fair value liabilities are recognised as ‘Derivative liabilities’ in note 51. Collateral held by UK Life in relation to securities lending totals £4,844 million (2012: £4,250 million) and is recognised within ‘Loans to Banks’ in note 24(a). The 2013 total is split in this table between cash collateral of £4,543 million and £301 million of other collateral included in the other investments line. The entire 2012 balance of £4,250 was in cash collateral. The asset amounts within securities lending relate to securities lending arrangements in Canada, and are included within their recognised financial investments. The remaining £231 million in the other investment line above relate to hedge funds held by unit trusts.
Notes to the consolidated financial statements continued 61 – Related party transactions This note gives details of the transactions between Group companies and related parties which comprise our joint ventures, associates and staff pension schemes. The Group undertakes transactions with related parties in the normal course of business. Loans to related parties are made on normal arm’s-length commercial terms.
France Aviva France SA and its principal subsidiaries: Antarius S.A. (50.0%) Aviva Assurances S.A. (99.9%) Aviva Investors France S.A. (99.9%) Aviva Vie SA (99.9%) Aviva Epargne Retraite (99.9%) Union Financière de France Banque (Banking) (75.9%)
Notes to the consolidated financial statements continued 62 – Organisational structure continued Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Avipop Assicurazioni S.p.A (50.0%) Avipop Vita S.p.A (50.0%) Aviva S.p.A (51.0%) Aviva Assicurazioni Vita S.p.A (50.0%) Aviva Italia S.p.A Aviva Previdenza S.p.A (55.0%) Aviva Vita S.p.A (25.5%) Eurovita Assicurazioni S.p.A (38.8%)
Statement of cash flows For the year ended 31 December 2013
Cash flows from investing activities Purchase of Financial investments (294) —
Fair value as at 1 January 31,023 28,889 Movement in fair value 2,072 2,134
Staff costs and other employee-related expenditure (see below) 194 208 Other operating costs 156 96 Net foreign exchange (gains)/losses (24) 29
(ii) Tax charged to other comprehensive income No tax was charged or credited to other comprehensive income in 2013 or 2012.
(v) Deferred tax A deferred tax asset of £205 million, arising in respect of deferred interest, has been recognised in the Company at 31 December 2013 at 20% (2012: £180 million).The Company has unrecognised temporary differences of £54 million (2012: £50 million) to carry forward indefinitely against future taxable income.
D – Other assets Included in other assets are financial investments of £297 million (2012: £nil) made up of UK Government Bonds which are due to expire during 2014. These financial investments are valued as Level 1 in the fair value hierarchy described in note 23 to the Group consolidated financial statements and are classified as other than trading as described in note 27.
Subordinated debt 4,370 4,337 9.5% guaranteed bonds 2016 199 199 Commercial paper 556 603
Where subordinated debt is undated, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £73 million (2012: £72 million). The fair value of the subordinated debt at 31 December 2013 was £4,707 million (2012: £4,435 million), calculated with reference to quoted prices. The fair value of the 9.5% guaranteed bonds 2016 at 31 December 2013 was £236 million (2012: £246 million), calculated with reference to quoted prices. The fair value of the commercial paper is considered to be the same as its carrying value. On 28 February 2014, the Company notified the respective holders of the £200 million subordinated notes due 2019 and the €50 million subordinated notes due 2019 that it would redeem each of the notes on their respective first call dates in April 2014. Further details of these borrowings and undrawn committed facilities can be found in the Group consolidated financial statements, note 50, with details of the fair value hierarchy in relation to these borrowings in note 23.
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 (£1.5 billion) 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 inter-company balances for fees and other transactions in the normal course of business. Loans owed to Aviva Group Holdings Limited were settled during the year, resulting in a realised fair value loss of £78 million. The loan principal payable within 1 year of £9,975 million relates to a facility provided by General Accident plc, with settlement to be received in cash at maturity in December 2014. It is the intention of both parties that this facility will be renewed in full upon maturity.
K – Statement of cash flows Following a review of the classification of the cash flows, additional disclosures in respect of treasury shares purchased for employee trusts, interest paid on direct capital instruments, fixed rate tier 1 notes and exchange gains on cash and cash equivalents and shares issued under equity compensation plans have been provided and comparative amounts have been amended from amounts previously reported. There has been no impact on the total cash and cash equivalents balance.
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, the Group undertook the following actions which impacted the overall results and performance: During the year, the Group modified its management structure, and the Group’s operating segments were changed to align them with this revised structure. Further details of the reportable segments are given in ‘IFRS Financial statements – note 5 – Segmental information’.
The Group also completed the sale of a number of operations during the year, including operations in Russia, Malaysia and Spain (Aseval). See ‘IFRS Financial statements – note 4 – Subsidiaries’ for further details.
In addition, there was an adverse movement of £674 million 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 where the surplus has decreased over the year largely as a result of narrowing spreads between corporate bonds and gilts. See ‘IFRS Financial statements – note 49 – Pension obligations’ for further details.
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 2013 and 2012 we made increases in the majority of final bonus rates.
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.
Fund management Fund management operating earnings consist of fees earned for managing policyholder funds and external retail and institutional funds on behalf of clients, net of operating expenses. Arrangements for the management of proprietary funds are conducted on an arm’s length basis between our fund management and insurance businesses. Such arrangements exist mainly in the UK, France, Ireland and Canada. Proprietary insurance funds in most other countries are externally managed.
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. Longterm insurance contracts and participating investment contracts both contain a deposit component, which are included in IFRS net written premiums, in addition to an
Financial and operating performance continued 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 longterm 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).
In comparison with IFRS net written premiums, sales do not include premiums received from contracts in-force at the beginning of the year, even though these are a source of IFRS revenue, as these have already been recognised as sales in the year of inception of the contract. In addition, unlike IFRS net written premiums, sales do not reflect the effect on premiums of any increase or decrease in persistency of regular premium contracts compared with what was assumed at the inception of the contract. PVNBP is not a substitute for net written premiums as determined in accordance with IFRS. Our definition of sales may differ from similar measures used by other companies, and may change over time.
General insurance and health sales General insurance and health 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 general insurance and health business. The table below presents our consolidated sales for the three years ended 31 December 2013, 2012 and 2011 for our continuing operations, as well as the reconciliation of sales to net written premiums in IFRS.
Total sales 34,143 34,126 36,623 Less: Effect of capitalisation factor on regular premium long-term business (6,310) (5,935) (6,079) Share of long-term new business sales from JVs and associates (660) (592) (604) Annualisation impact of regular premium long-term business (203) (239) (533) Deposits taken on non-participating investment contracts and equity release contracts (4,389) (4,607) (4,573)
Add: IFRS gross written premiums from existing long-term business 3,688 3,936 4,305
Less: long-term insurance and savings business premiums ceded to reinsurers (905) (930) (959)
PVNBP is derived from the single and regular premiums of the products sold during the financial period and is expressed at the point of sale. The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The discounted value of regular premiums is calculated using the market consistent embedded value methodology proposed by the CFO Forum Principles.
Under IFRS, non-participating investment contracts are recognised in the Statement of Financial Position by recording the cash received as a deposit and an associated liability and are not recorded as premiums received in the Income Statement. Only the margin earned is recognised in the Income Statement.
(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.
IFRS gross written premiums from existing long-term business The non-GAAP measure of long-term and savings sales focuses on new business written in the year under review whilst the IFRS income statement includes premiums received from all business, both new and existing.
Consolidated results of operations The table below presents our consolidated sales from continuing operations for the three years ended 31 December 2013, 2012 and 2011.
Adjusted operating profit We report to our chief operating decision makers in the businesses the results of our operating segments using a nonGAAP financial performance measure we refer to as ‘adjusted operating profit’. We define our segment adjusted operating profit as profit before income taxes and non-controlling interests in earnings, excluding the following items: investment return variances and economic assumption changes on longterm and non-long-term business, impairment of goodwill, joint ventures and associates, amortisation and impairment of other intangibles (excluding the acquired value of in-force business), profit or loss on the disposal and remeasurement of subsidiaries, joint ventures and associates, integration and restructuring costs and exceptional items. Whilst these excluded items are significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of adjusted operating profit enhances the understanding and comparability of the underlying performance of our segments by highlighting net income attributable to on-going segment operations. Adjusted operating profit for long-term insurance and savings business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification. Where assets are classified as fair value through profit and loss, expected return is based on the same assumptions used under embedded value principles for fixed income securities, equities and properties. Where fixed interest securities are classified as available for sale, the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. Adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed as non-operating items.
Adjusted operating profit for non-long-term insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The longer-term return for other investments is the actual income receivable for the period. Changes due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed as non-operating items. The impact of changes in the discount rate applied to claims provisions is also treated outside adjusted operating profit. Adjusted operating profit is not a substitute for profit before income taxes and non-controlling interests in earnings or net income as determined in accordance with IFRS. Our definition of adjusted operating profit may differ from similar measures used by other companies, and may change over time. The table below presents our consolidated adjusted operating profit for the three years ended 31 December 2013, 2012 and 2011, as well as the reconciliation of adjusted operating profit to profit/loss before tax attributable to shareholders’ profits under IFRS.
Adjusted operating profit before tax attributable to shareholders’ profit (excluding Delta Lloyd as an associate) 2,049 1,926 2,029
Adjusted operating profit before tax attributable to shareholders’ profit 2,049 2,038 2,186
Adjusted operating profit before tax after integration and restructuring costs 1,686 1,577 1,925
Adjusted for the following: Investment return variances and economic assumption changes on long-term business (49) (620) (897) Short-term fluctuation in return on investments on non long-term business (336) 7 (266) Economic assumption changes on general insurance and health business 33 (21) (90) Impairment of goodwill, associates and joint ventures and other amounts expensed (77) (60) (392) Amortisation and impairment of intangibles (91) (128) (116) Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 115 (164) 565 Exceptional items — — (57)
Non-operating items before tax (405) (1,509) (1,243) Share of Delta Lloyd's tax expense, as an associate — 107 (34)
Profit before tax attributable to shareholders' profits – continuing operations 1,281 175 648
Profit/(loss) before tax attributable to shareholders' profits – discontinued operations 1,538 (2,696) (464)
Adjusted operating profit before tax (from continuing operations) 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.
Adjusting items (from continuing operations) Year ended 31 December 2013 Life investment return variances and economic assumption changes were £49 million negative (2012: £620 million negative). Negative variances in the UK resulting mainly from increasing the allowance for credit defaults on commercial mortgages were partly offset by narrowing spreads on government and corporate bonds in Italy and Spain. Short term fluctuations on non-long term business of £336 million negative (2012: £7 million positive) mainly reflect lower fixed income security market values. Goodwill impairment charges of £48 million have been recognised as expenses. Together with impairment charges of £29 million on joint ventures and associates, the total charge for impairment of goodwill, joint ventures and associates for the year was £77 million (2012: £60 million). Profit on disposal and remeasurement of subsidiaries, joint ventures and associates was £115 million (2012: £164 million loss). See ‘IFRS Financial Statements – note 4 – Subsidiaries’ for further details. Integration and restructuring costs from continuing operations were £363 million (2012: £461 million) and mainly include expenses associated with the Group’s transformation programme. Compared with 2012, integration and restructuring costs reduced by 21% as the level of transformation activity in UK and Ireland’s general insurance business in 2012 was not repeated and Solvency II implementation costs reduced to £79 million (2012: £117 million).
Income Gross written premiums 22,035 22,744 26,255 Premiums ceded to reinsurers (1,546) (1,571) (1,548)
Income (from continuing operations) Year ended 31 December 2013 Net written premiums for continuing operations decreased by £684 million, or 3%, to £20,489 million (2012: £21,173 million). Long-term insurance and savings decreased by £510 million, or 4%, to £11,769 million (2012: £12,279 million) with lower sales in the UK, Ireland, Spain and Asia partly offset by higher sales in France, Poland and Italy. General insurance and health premiums decreased by £174 million, or 2%, to £8,720 million (2012: £8,894 million) mainly reflecting lower sales in the UK and Ireland, partly offset by higher sales in Canada and Europe.
Year ended 31 December 2012 Net written premiums for continuing operations decreased by £3,534 million, or 14%, to £21,173 million (2011: £24,707 million). Long-term insurance and savings decreased by £3,266 million, or 21%, to £12,279 million (2011: £15,545 million) mainly reflecting lower sales in the UK and continental Europe. General and health insurance decreased by £268 million, or 3%, to £8,894 million (2011: £9,162 million). Excluding RAC in 2011, sales were broadly in line.
Other income (from continuing operations) Year ended 31 December 2013 Other income, which consists of fee and commission income, share of profit/(loss) after tax of joint ventures and associates, and profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates, increased by £660 million, or 77%, to £1,514 million in 2013 (2012: £854 million). This was mainly due to profits on disposal and remeasurement of subsidiaries of £115 million (2012: £164 million loss), including profits on disposal of Aseval in Spain (£197 million) and Ark Life in Ireland (£87 million), partly offset by a £178 million remeasurement loss relating to Eurovita in Italy following its classification as held for sale. Fee and commission income was stable and the share of profits from joint ventures and associates was £120 million (2012: £255 million loss).
Year ended 31 December 2012 Other income, which consists of fee and commission income, share of loss after tax of joint ventures and associates, and (loss)/profit on disposal of subsidiaries and associates, decreased by £1,053 million, or 55%, to £854 million in 2012 (2011: £1,907 million). 2011 benefited from the profit on disposal of RAC (£532 million), whilst 2012 saw a loss on disposal of our associate stake in Delta Lloyd, lower fee and commission income and higher losses from our share of JV’s and associates.
Year ended 31 December 2012 Claims and benefits paid net of reinsurance in 2012 decreased by £779 million, or 3%, to £23,601 million (2011: £24,380 million) mainly reflecting lower claims payments in our life businesses. Changes in insurance liabilities in 2012 was a charge of £430 million (2011: £2,284 million charge). This was primarily due to changes in economic and non-economic assumptions. The change in investment contract provisions was a charge of £4,450 million (2011: £1,478 million credit) as a result of improved investment market conditions causing an increase in contract liabilities. The change in unallocated divisible surplus (“UDS”) was a charge of £6,316 million (2011: £2,721 million credit). UDS in certain funds in Italy and Spain were negative as at 31 December 2012. The main driver of the movement was a charge in France due to an increase in fixed interest asset values from lower risk-free rates and credit spreads. Fee and commission expense, other expenses and finance costs increased by £137 million to £7,953 million (2011: £7,816 million). See ‘IFRS Financial Statements – note 7 – Details of expenses’ for further information.
Long term savings sales 11,888 12,772 13,860 UK Health net written premiums 536 528 473
Adjusted operating profit before tax United Kingdom 930 887 917 Ireland 22 5 47
Life business 952 892 964 General insurance and health – UK health 18 14 12 Fund management 23 11 11 Other operations 131 (14) (17)
Profit before tax attributable to shareholders’ profits 717 107 134 1 Restated for the adoption of IAS19. See note 1 for further details.
Year ended 31 December 2012 On a PVNBP basis, sales in the UK long-term insurance and savings business decreased by £844 million, or 7%, to £10,410 million (2011: £11,254 million). Protection sales were up 20% to £1,228 million (2011: £1,025 million), benefiting from a full year’s sales from the distribution deal with Santander. Sales of annuities were down 16% to £3,211 million (2011: £3,832 million) following the decision to withdraw from the large scale bulk purchase annuity market. However, sales of individual annuities were up 10% to £3,024 million despite price increases to manage capital usage. Sales of Equity Release were up 37% to £434 million (2011: £317 million) as Aviva deployed risk based pricing expertise, developed in the annuities market, to this product. Pensions sales were down 2% to £5,158 million (2011: £5,279 million). Within this, Group Personal Pensions sales were up 9% to £3,231 million (2011: £2,961 million) as benefits were seen from increased levels of activity in the run up to Retail Distribution Review (“RDR”) and Auto-Enrolment. Individual Pensions (including SIPP (self invested pension plan)) were down 4% to £1,803 million (2011: £1,876 million) as a disciplined approach to pricing was maintained. Sales of Bonds were down 53% to £379 million (2011: £801 million), impacted by changes in distribution channels in advance of RDR. Ireland sales were down 31% to £632 million (2011: £917 million) due to the closure to new business of the joint venture with Allied Irish Bank (“AIB”) from April 2012. Non AIB business sales were £530 million (2011: £485 million), with the increase driven by sales of fixed rate deposit funds and the re-launch of protection business in the second half of 2012. Net written premiums in our UK & Ireland long-term insurance and savings businesses decreased by £1,200 million, or 18%, to £5,623 million (2011: £6,823 million). The decrease is primarily due the reduction in BPA (bulk purchase annuities) premiums.
UK & Ireland general insurance and health The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK and Ireland general insurance and health businesses for the three years ended 31 December 2013, 2012 and 2011.
General insurance and health business 471 488 522 Other operations (6) (8) 2
Sales Long-term insurance and savings business 4,509 3,638 4,047 General insurance and health net written
Year ended 31 December 2013 On a PVNBP basis, long-term insurance and savings business sales in France increased by £871 million, or 24%, to £4,509 million (2012: £3,638 million), with higher sales in both savings (particularly unit-linked) and protection products. General insurance and health sales were up 10% to £1,105 million (2012: £1,002 million), benefiting from rating and other management actions. IFRS net written premiums were up 18% to £5,565 million (2012: £4,702 million) for similar reasons. Adjusted operating profit before tax increased by 6% to £448 million (2012: £422 million). Within this, life profits increased by 15% to £385 million (2012: £335 million), mainly reflecting increased margins. General insurance and health profits decreased to £84 million (2012: £95 million) with the reduction largely due to adverse weather, partly offset by higher profits from the health business. IFRS profit before tax decreased to £457 million (2012: £482 million). This includes the higher adjusted operating profits discussed above. The reduction in profits is due mainly to higher restructuring costs of £25 million (2012: £11 million), and lower favourable investment variances of £55 million (2012: £96 million favourable).
Italy, Spain and Other The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in Italy, Spain and Other for the three years ended 31 December 2013, 2012 and 2011.
Year ended 31 December 2012 Total long-term insurance and savings fell by £1,694 million, 31% to £3,736 million (2011: £5,430 million). In Italy, lower savings and protection sales reflected the challenging conditions and decreased by £1,022 million, or 34%, to £1,971 million (2011: £2,993 million). In Spain, life sales decreased by £631 million, or 33%, to £1,295 million (2011: £1,926 million) reflecting the continued tough economic conditions. Our general insurance and health sales decreased by £62 million, or 12%, to £446 million (2011: £508 million). The decrease was driven by Italy where credit protection sales fell reflecting low levels of loan activity by partner banks and motor sales were also lower. Net written premiums for the segment decreased £1,556 million, or 34%, to £3,036 million (2011: £4,592 million) due to lower sales as described above. Total adjusted operating profit increased £73 million, or 25%, to £365 million (2011: £292 million). General insurance and health adjusted operating loss improved by £41 million to £6 million loss (2011: £47 million loss) driven mainly by the Italian business which saw its combined operating ratio fall below 100%. The profit before tax attributable to shareholders’ profits was £273 million (2011: £95 million loss). In 2012, adjusted operating profits were higher as described above, and there were also favourable investment variances of £43 million (2011: £345 million negative variances).
Canada The table below presents sales, net written premiums, adjusted operating profit and IFRS profit before tax attributable to shareholders for the three years ended 31 December 2013, 2012 and 2011.
Year ended 31 December 2013 General insurance net written premiums increased by 3% to £2,250 million (2012: £2,176 million) driven by rating increases in personal and commercial property and growth in new business volumes across most lines. Adjusted operating profit was £246 million (2012: £277 million), an 11% reduction compared to the prior year. The reduction was driven by a negative £62 million impact from the severe flooding in Alberta and Toronto during the year (there was also a further adverse impact of £67 million from these floods in the results of our internal reinsurance business – see “other group activities” below), partly offset by lower expenses and favourable prior year reserve development. Long-term investment return was down £11 million to £135 million reflecting lower reinvestment yields. Profit before tax attributable to shareholders was £104 million (2012: £245 million), reflecting the lower operating profits and negative short-term investment variances of £122 million (2012: £10 million negative).
Financial and operating performance continued combination of improved retention levels and rate increases across both personal and commercial lines. Adjusted operating profit improved by £21 million, or 8%, to £277 million (2011: £256 million) mainly due to favourable underwriting results partially offset by lower long-term investment returns. Profit before tax attributable to shareholders’ profits decreased by £54 million, or 18%, to £245 million (2011: £299 million restated).
Adjusted operating profit before tax Long-term insurance and savings business Singapore 83 64 52 Other Asia 13 5 56
General insurance and health Singapore (3) (4) (5) Other Asia 4 (1) (4)
Year ended 31 December 2013 Long term insurance and savings sales in Asia decreased by 7% to £1,644 million (2012: £1,765 million). Excluding Malaysia and Sri Lanka, which were sold in April 2013 and December 2012 respectively, sales were 3% lower at £1,628 million (2012: £1,673 million) with higher sales in Singapore more than offset by lower sales in other Asian markets due to changes in business mix. General insurance and health net written premiums were £100 million (2012: £120 million), down 17%, with the decrease reflecting the withdrawal of some unprofitable health products in Singapore and the disposal of our Sri Lankan business in 2012. Total net written premiums were £532 million (2012: £636 million), down £104 million or 16%, for the same reasons. Adjusted operating profits increased by 64% to £87 million (2012: £53 million), mainly due to higher life profits of £96 million (2012: £69 million) driven by higher earnings on the inforce portfolio and favourable experience in China. Profit before tax attributable to shareholders was £98 million (2012: £62 million).
Year ended 31 December 2012 Long-term insurance and savings sales in Asia decreased by £17 million, or 1%, to £1,765 million (2011: £1,782 million) with higher sales in Singapore more than offset by lower sales in other markets. Net written premiums in the general insurance and health business rose to £120 million (2011: £108 million) due to growth in Singapore.
Adjusted operating profit decreased by £17 million, or 24%, to £53 million (2011: £70 million). The change mainly reflects the non-recurrence of a Hong Kong reserving change which benefited the results by £25 million in 2011. Profit before tax attributable to shareholders increased by £29 million, or 88%, to £62 million (2011: £33 million), reflecting a £12 million profit in 2012 on the disposal of our Sri Lankan business, and negative life investment variances and impairment charges of £35 million in 2011.