Quick, professional, helpful. Sorted me out with the minimum of fuss and the maximum of help.
I am very proud that we give our support, emotionally and financially, when it matters the most.
Paid out per day for UK life insurance and critical illness claims 319 years —
Across our 16 businesses, we protect our 29+ million customers and the things that are important to them
We have strong businesses in selected markets: UK, Europe, Asia and Canada. We offer: Read more on pages 32-45
— Focusing only in markets and segments where we can win
We strive to create a sustainable future for our customers and each other
Our values are at the heart of how we do business
Creating a bright and sustainable future for our customers, employees and communities Read more on pages 48-53
Strategic Report 04 Chairman’s statement 06 Group CEO’s statement 10 Performance indicators 14 The horizon 16 Business model 18 Our strategy 20 Our strategic anchor 25 Investment thesis 26 CFO’s review 32 Market focus 48 Our people and communities 56 Risk
IFRS Financial Statements 112 Independent auditors’ report 117 Accounting policies 130 Summary of consolidated financial statements 137 Notes to the statements
This Strategic Report (on pages 02 to 59) was approved by the Board of Directors on 4 March 2015 and signed on its behalf by the Group Chief Executive Officer.
Then came the bombshell. A routine mammogram showed I had breast cancer. Luckily we’d caught it early and the cancer was very small, but I still had a gruelling time with surgery, radiotherapy and chemotherapy.
Everything else had to take a back seat. Once I’d started treatment I remembered that I had critical illness cover with Aviva and might be able to make a claim.
I went back to work in February and things are getting back to normal. In fact, I turned 60 this year and celebrated by taking the whole family away for a week in the sun.“
The money meant one less thing to worry about and so it hugely helped in my recovery.
Dear shareholder I am enormously pleased that 2014 has been another year of progress for Aviva in its transformation to become one of the best performing financial institutions in our sector
Aside from good organic business performance, the year culminated with the announcement of the proposed acquisition of Friends Life, which will give us a considerably stronger underpinning.
Our Chief Executive Officer, Mark Wilson, has completed his second year with us and the advancement of the group under his leadership over a relatively short period has been impressive.
While Aviva’s recent organic growth and return prospects already present a compelling investment proposition, the proposed acquisition of Friends Life not only consolidates our leading position in the UK, it offers greater dividend capacity and balance sheet strength than would otherwise have been possible organically. I believe it offers an attractive outcome to both Aviva and Friends Life shareholders.
Headline operational performance improved in the year, despite having been impacted by a stronger sterling exchange rate and the decline in the annuities market following the Chancellor’s Budget decision.
Operating profit on an IFRS basis grew by 6% during the year to £2,173 million, which included lower operating expenses, down 7%. Value of new business increased by 11% to over £1 billion and there was a 1.6 percentage point improvement in the combined operating ratio to 95.7%. Net asset value increased to 340 pence per share and shareholders benefited from a total shareholder return of 11.5%.
It has indeed been an honour to have served you as your Chairman, and with Board and management colleagues for whom I have the greatest respect.
The membership of the Board was largely unchanged in the year, with the exception of Tom Stoddard who joined us as Chief Financial Officer in April 2014, following Pat Regan’s departure, and he already has made an important contribution.
John McFarlane Chairman 04 | Aviva plc Annual report and accounts 2014
would like to take this opportunity to thank her for her contribution to the Board.
Led by Mark Wilson, we are building a high performance and enlightened culture across the Group, and this is demonstrating tangible progress in making Aviva a great place to work and advance.
On behalf of the Board, I would express our gratitude to our people for their dedication and enthusiastic support for our customers.
As a responsible business, we strive to be a force for good across the markets in which we operate. We provide access to a range of insurance products tailored to the needs of low income groups and, through Aviva Investors, we work to integrate environmental, social and corporate governance issues into our investment decisions and analysis in order to create long-term value.
In addition, our global community development initiative, Street to School, has made a major investment in improving the lives of more than one million children and helped the issue of street children’s rights move to the centre stage of policy at the United Nations. Aviva will continue to work with the Consortium for Street Children and the
If the proposed acquisition of Friends Life completes, the enlarged Group should bring a stronger business and financial foundation, new commercial opportunities and the prospect of a higher and progressive dividend for shareholders.
The transformation is not yet complete however, I leave knowing the Company is in good hands and has the capacity to become one of the world’s leading institutions.
340p Net asset value per share, a 26% increase 1 million Children helped through our Street to School programme 18.1p Total dividend, a 21% increase
2014 was a year in which we were able to show tangible progress, despite headwinds from currency, changing regulation and lower interest rates.
Results show tangible progress, with all key metrics moving in the right direction. Cash1 is up 65%, operating earnings per share is up 10%, value of new business is up 15%2 and our book value is 26% higher. Operating expenses are £571 million lower than our 2011 baseline, debt ratios are down and our full year combined ratio of 95.7% is the best in eight years.
But these results do not by themselves show the progress on de-risking the business and the more efficient allocation of capital that has served us well in somewhat volatile markets over the past 12 months.
To reflect the progress made during the year and our improved financial position, we announced a 30% increase in the final dividend to coincide with the announcement of our proposed acquisition of Friends Life.
Our focus on Cash flow plus Growth has resulted in cash remittances increasing 11% to £1,412 million and holding company excess cash flow is 65% higher at £692 million. Our life insurance measure of growth, value of new business, is 15%2 higher at a record £1,010 million and we have grown general insurance underwriting profit 54% to £321 million. In asset management, the turnaround at Aviva Investors is progressing and the AIMS fund range has over £1 billion of assets under management eight months after launch.
Mark Wilson Group Chief Executive Officer 1 Excess centre cash flow. Refer to the glossary for a definition and more information. 2 On a constant currency basis.
£692m Excess centre cash flow1, a 65% increase £2,173m Operating profit on an IFRS basis 47.0p Operating earnings per share
Firstly, we are a True Customer Composite, which means we can provide customers with life, general and health insurance and asset management in one place. We are in a peer group of one – the only true composite of scale in the UK and one of only a few in the world. Our aim is to offer customers one view of Aviva - one statement, one premium, one phone number and one log-in.
Secondly, Digital First. Digital is increasingly how our customers want to deal with us – and how we will serve them. Therefore if it is a choice of where we will invest, it will be in digital first across any channel.
I also want to pay a personal tribute to John McFarlane, who will step down as Chairman at the AGM. John has shown strength and subtlety as Chairman and I am grateful for his guidance and challenge. John became Chairman during a challenging time for the business and has left with the business in a stronger position. Following the AGM, John will be replaced by Sir Adrian Montague. We have already benefited from working with Sir Adrian as Senior Independent Director and look forward to working with him as Chairman.
Proposed acquisition of Friends Life Our proposed acquisition of the FTSE 100 life insurer, Friends Life, is good for shareholders and customers alike. They will benefit from being part of a strong, more diversified and resilient business with a wide range of products: • It is consistent with our investment thesis of cash flow plus growth creating c.£600 million of incremental cash flow
• We are stronger together, with the best of both companies giving us a leadership position in the growing corporate pensions and protection markets
• It will increase our assets under management at Aviva Investors by up to £70 billion (a 28% increase)2
• It will allow us to invest in our other businesses for growth.
Strengthened management team We made a number of senior appointments in 2014 to strengthen our management team and bring new skills into the Group. Chris Wei
• Complete proposed acquisition of Friends Life to improve incremental cash flow by c.£0.6 billion and add significant scale and expertise to our back book initiative.
• Improvement in underwriting result has driven a 1.6 percentage point improvement in COR to 95.7%
• Launched our joint venture with Astra International in Indonesia and continued to work closely with COFCO Ltd in China
• Improve COR and underwriting in our general insurance business through automation
• Complete proposed acquisition of Friends Life to: – add up to c.£70 billion of funds for Aviva Investors
• Intercompany loan reduced from £4.1 billion to £2.8 billion as at 28 February 2015
• Disposals of River Road, Korea, Eurovita, Turkey general insurance and CxG completed
• Ensure readiness to start Solvency II reporting on 1 January 2016
• Complete proposed Friends Life transaction to: – reduce leverage – deliver £225 million of expected synergy benefits.
Relevance and performance Our five key financial metrics are closely tracked by management to evaluate Aviva’s operating performance. These financial metrics are calculated on a continuing basis.
Operating expenses on a continuing basis reduced by 7% (4% on a constant currency basis) showing the impact of cost savings initiatives across the majority of our markets. Foreign exchange has benefited operating expenses by £98 million. Compared with the 2011 baseline for the expense reduction target, there has been an overall reduction of £571 million, which shows the original £400 million expense target has been fully achieved.
Sustainable cash remittances from our businesses are a key financial priority and form part of our investment thesis.
Adjusted operating profit2: IFRS basis This is our key measure of operating profitability.
Combined Operating Ratio (COR) This is a key measure of underwriting profitability of our General Insurance business.
COR improved 1.6 percentage points with improvements in the UK, Ireland and Europe. These results more than offset an adverse movement in Canada.
VNB increased 11% (15% on a constant currency basis) driven by growth in France, Poland, Italy, Spain and Asia. Growth in these markets was partly offset by reductions in Turkey, mainly driven by a reduction in our share of the business following the partial IPO. In the UK, VNB was stable with the adverse impact of reduced individual annuity sales offset by increases in bulk annuities and equity release and protection.
£1,010m £909m (restated)5 1 2013 and 2014 dividend from UKGI was remitted to Group in January 2014 and February 2015 respectively. Cash remittances disclosed are on a continuing basis. 2 On a continuing basis excluding Delta Lloyd. 3 On a constant currency basis. 4 Excludes Eurovita, Aseval, CxG and Malaysia. 5 Restated to reflect changes in the MCEV methodology. 2012 was not restated and therefore is not included. Refer to the glossary for further details.
Our financial, customer, employee and community measures are all moving in the right direction, although we still have much to do. —
Our 2014 survey shows six of our businesses achieved upper quartile performance, four were at market average and two were at lower quartile relative to their local markets. During 2014, Aviva has returned the most consistent and improved set of RNPS results since the survey began in 2009.
Employee engagement We are focused on creating an environment in which employees can thrive and build a career at Aviva. We measure this through our annual global Voice of Aviva survey.
Engagement improved 9 percentage points in 2014, and now is 3 percentage points above the global financial services norm, driven by a double-digit uplift in trust of our senior leaders. There were also advances in levels of employee pride, motivation and advocacy.
In 2010 we set ourselves an ambitious target to cut CO2e emissions by 20% by 2020, with a minimum 5% reduction each year. In 2014, we exceeded that target, achieving a 32% reduction well ahead of plan. We are now setting new ambitious targets.
Community investment We have a long heritage of community investment which includes cash, in kind donations and skills-based volunteering.
Investment in communities £6.3m £6.2m Number of volunteering hours 6 The percentage figures from previous years have been restated to provide a like for like comparison. The restated figures are based on those markets within which Aviva has continued to operate from 2011, which are: UK, Ireland, Canada, France, Italy, Spain, Poland, Lithuania, Singapore, China and India.
Read more about our nonfinancial performance on pages 48 to 53 and in our CR report at www.aviva.com/cr2014
That was the devastating news given to one of our customers in Singapore, Mr Yeo Chong
Kheng and his family. But because Mr Yeo had a life insurance policy with us we could help and reassure him and his family at an awful time.
We made a payment to Mr Yeo when he received his diagnosis. This meant he could spend his last weeks more comfortably and put his affairs in order, knowing that his wife and son would be taken care of after he had gone.
Nothing can bring Mr Yeo back. But we know that what we could do meant a great deal to him and his family.
The power of communities The economic power of governments will have declined further and the power of ‘communities’ of mutual interests, both virtual and local, will have increased
Older and healthier The emergence of a generation aged 50 plus who will live longer and who are healthier. Markets will be driven increasingly by this group’s attitudes and needs
The rapid pace of technological change is expected to continue and customer expectations will continue to evolve, reinforcing the importance of the Digital First and True Customer Composite elements of our strategy.
Faster growing, developing markets provide opportunities for Aviva to help new customers to accumulate assets and to protect themselves and their families against unforeseen events.
Winning through data Those who interpret data quickly and intuitively to inform the development of products and services that provide real value for customers will lead the way 14 | Aviva plc Annual report and accounts 2014
In the UK, 2014 saw dramatic upheaval in the annuity market, and in Poland, the pensions market has been largely transferred to the state over the last few years.
We are being held to increasingly high standards of conduct by our regulators. This is consistent with the relationships with customers that we wish to achieve through our customer thesis.
We also face increased scrutiny as a Global Systemically Important Insurer, which could result in additional capital or other requirements on top of the Solvency II regime which comes into force in 2016, harmonising solvency rules across the European Union.
Aviva will continue to work closely with key regulatory bodies on these and other issues.
In addition to the six long-term horizons, Aviva closely monitors two further trends that are particularly relevant to our industry: climate and regulation.
The increasing effects of climate change present considerable uncertainty for our customers and communities.
Growth in connected objects Some 30 billion objects may be connected to the Internet of Things by 2020
Not only are increasing numbers of people and enterprises doing more and more online, but growth in the Internet of Things (smart embedded devices connected to the Internet) is providing businesses with new real-time data sources and business opportunities.
Ageing populations will be looking for help to meet their retirement needs. Population ageing is already advanced in our more mature markets; for example the proportion of the population over 65 in 2015 is 18% in the UK and 19% in France, and is anticipated to rise to 25% in 2050 for both markets. In contrast, in Indonesia, 5% of the population today is aged 65 or over, but that proportion will more than triple to 16% by 2050, and in China, the proportion aged 65 or over will rise from 9% to 24% in the same period.
For more information on our response to climate change see pages 52-53.
How we are different Aviva is the only insurer of scale in the UK which offers life, general and health insurance, and asset management – a True Customer Composite. We help customers manage the risks of everyday life, and provide them with an easy-to-understand, convenient experience when and how they want it
General insurance Home, Motor, Travel & Commercial General insurance policies protect customers from loss in the event of damage to their property or assets, or injury to themselves.
Health insurance Private Medical Insurance Customers buy health insurance products to protect their health, and for wellness support, supplementing any healthcare provision they receive from the state, and giving them a choice in the level of treatment they receive should they fall ill.
Asset management Asset management for Aviva and other clients Customers trust us with their money, and we invest it on their behalf to generate investment returns.
We support our individual and business customers through every stage of their lives 16 | Aviva plc Annual report and accounts 2014
We create value for our investors and deliver economic and social benefits for our customers, employees and society
Asset & liability management Customer premiums are invested by specialist teams to balance investment return with risk and to maintain sufficient funds to pay claims. Wherever possible we match liabilities to assets. For example, money received for annuities is invested in assets which will continue to pay a return for the long term, such as corporate bonds.
ustom er Com posite • Digital First • Not Everyw he re
The strategic framework has helped engage our people as well as providing clear direction for turning round our business; our strategic anchor is a clear statement of how we compete in a rapidly changing world.
Our strategic framework In a rapidly changing world, our purpose is to free people from fear of uncertainty. Our Strategic Framework sets the direction and priorities for the business and encapsulates our purpose and culture
Our strategy In 2013, we set out our new purpose and values, the theses that shape how we work, and our priorities. The theses were defined as: • cash flow plus growth for investors
• simplicity and convenience for our customers, which we called ‘simplicity your way’
Our Strategic Anchor builds on this framework to provide a clear statement of our business strategy to help us make decisions to compete in our rapidly evolving world. It comprises the “what we do, how we do it and where we do it” of our business strategy. There are three elements to our Strategic Anchor: • True Customer Composite
We are Not Everywhere. We are not interested in planting flags or being in 100 countries. We will focus on a select number of markets where we have scale and profitability or a distinct competitive advantage – where we can win.
In December, we ran our second worldwide ‘Week of Conversations’ about exactly that. It gave our people the opportunity to have open and constructive discussions, reflect on what they had achieved in 2014 and goals for 2015. These conversations were held within teams, but also at five live events broadcast across 12 locations around the world, led by members of the Group Executive.
In the past, the financial benefits of the composite were clear (lower capital requirements through diversifying our risk), but operational benefits were more elusive. Very few customers held more than one Aviva product as our business was distributed almost solely through intermediaries.
If customers are not relying on brokers to analyse their needs and recommend a suitable package of products, they could find themselves managing multiple different products from different providers. This is not what our customers tell us they want.
What they want is simplicity to meet all their insurance needs. This builds on our customer thesis priority of ‘simplicity, your way’.
MyAviva app – altogether better MyAviva brings together the products that help our customers in the UK protect their life, health, loved ones, future and possessions in one secure and simple-to-use online place. It has a single login so they can see all their Aviva policies in one place, offers access to discounts on a range of our products, as well as rewards and giveaways through Aviva Advantages. We’ve also launched a MyAviva app in the UK so customers can use their phone to view their policies, set reminders to renew their car and home insurance, check the value of their pension – and access a wealth of offers. It’s a whole new way for us to serve our customers when they want and how they want.
We have developed new composite corporate propositions, and are streamlining the way we interact with corporate clients.
In China our ‘All in One’ offer brings together life, health, accident and savings. We have also launched a health and wellness platform, to offer customers easy access via one portal to Aviva COFCO’s services, encompassing health, wellness and financial “wellbeing”.
We will build on our experience to capitalise on our unique position as one of very few True Customer Composites in the world, developing solutions that flexibly combine products to meet customers’ needs and reward their loyalty.
Making it easy for our customers We want to do what our customers want as simply and efficiently as possible. That’s why we’re revolutionising our processes and roles by applying Systems Thinking. It’s led by front line staff, who know our customers best. For example, through Systems Thinking, Aviva France has simplified the process to validate funeral claims, so that it can just take a single phone call.
We put Digital First because our customers are increasingly choosing this as their preferred way to deal with us. Through digital we can support customers more quickly with their enquiries and transactions, wherever they are in the world
Aviva puts Digital First – this is how we will capitalise on being a True Customer Composite. We have to think Digital First across all our distribution channels – it’s how customers want to connect with and do business with us.
Digital distribution Increasingly customers want to be able to self-serve: researching, buying and modifying policies online. Digital allows customers to connect with us directly, giving us the opportunity to improve customer experience, increase interaction with them and reduce the cost to serve them.
Predictive analytics A key part of digital is predictive analytics, which uses Big Data to predict risk, behavioural, and customer purchasing patterns.
We aim to bring to our customers the entire breadth of our offering digitally, in an integrated experience.
It’s a great option for busy people and is proving popular with investors who have little time to manage their finances or who can’t get to an adviser’s office.
It’s a great example of our customer thesis in action – ‘simplicity, your way’.
We will focus on a select number of markets where we have scale and profitability or a distinct competitive advantage – where we can win
Over the past two years we have reduced the number of businesses from 28 to 16, so that we can concentrate our efforts in our key markets. We are also a British champion and this is our home base – being the largest player in the UK is critical to our performance and the safety and reassurance this provides works well across many of our target markets.
March As part of Aviva’s strategy to focus on businesses where we have a leadership position and can generate attractive returns, we announced the sale of our Turkish general insurance business Aviva Sigorta A.S., to a private equity consortium led by EMF Capital Partners.
Banco), for €280 million (£221 million) in cash. The transaction resulted from a decision by the Arbitration Tribunal in Madrid, following the merger of Caixa Galicia and Caixa Nova into Novacaixagalicia in December 2010, and the bank’s subsequent restructuring in 2011.
1 Based on customer numbers as at 31 December 2013 and prior to the deduction of overlapping customers.
• We focus on increasing cash remittances from our business units to the Group centre. Our excess holding company cash flow is remittances less central spend and debt financing costs. Standalone, we have a target to more than double our excess holding company cash flow to £800 million by 2016
Growth We focus on growing value of new business in life insurance, underwriting profit in general insurance and external fund flows in Aviva Investors: • The value of new business (i.e. the present value of future profits from life business written during the year) has exceeded £1 billion for the first time
• We have businesses in selected growth markets of Europe, such as Poland and Turkey, as well as South East Asia and China
• In 2014, we increased general insurance underwriting profit (i.e. premiums less claims and expenses) by 54% to £321 million
In 2014, operating earnings per share (EPS)1 increased 10% to 47.0p and IFRS book value per share (NAV) increased 26% to 340p, primarily due to operating profit and favourable movements in our staff pension scheme. Excess centre cash flow2 from operations increased 65% to £0.7 billion, providing positive cash coverage of our annual dividend for the first time in several years. Consequently, the final dividend has been increased 30% to 12.25p per share.
Capital efficiency remains a primary theme of Aviva’s turnaround. We continue to take action at both the Group level and at the individual business cell level to improve return on capital, or to redeploy it to better use. The list of achievements in 2014 is long. We established our internal reinsurance entity, separated our capital and risk functions, and issued and refinanced €700 million long-term hybrid debt on better terms than a similar issue the year before. We divested our business in South Korea, our general insurance operation in Turkey, our River Road asset management business in the U.S., Eurovita in Italy and our stake in Spanish joint venture CxG Aviva. Together with our partner, we also conducted a successful partial initial public offering (IPO) of our life insurance operation in Turkey.
The proposed acquisition of Friends Life accelerates our financial transformation. Our integration planning to date has confirmed expected run rate cost savings of £225 million by the end of 2017. In addition, we expect to realise significant capital synergies from the combination over time.
In parallel to the Friends Life integration, we will increasingly focus management attention on organic growth initiatives within Aviva and the reallocation of capital and expenditures to our most promising business opportunities. Our challenge in 2015 through 2017 is to deliver the Friends Life synergies, develop our capabilities around the True Customer Composite and Digital First, and shift towards investing in growth.
In our largest unit, UK & Ireland Life, our focus has been on expense efficiency and improving the financial resilience of our large back book of existing business in force. The objective has been to both improve the solvency capital position within the business and deliver more cash to the Group. The results have been satisfactory. Operating profit was up 9% to £1,039 million (2013: £952 million) and cash remittances increased 18% to £437 million. In UK Life, changes in annuitant mortality experience resulted in a release of £282 million of longevity reserves (2013: £66 million) following an extensive review. Efficiency gains also allowed us to release expense reserves in the first half of the year, but the impact of this on profit was negated by a DAC writedown mainly related to new pension charging rules. Lower individual annuity volumes and dampened returns from increased hedging activities depressed underlying profitability. Value of new 1 On a continuing basis, excluding US Life. 2 Excess centre cash flow. Refer to the glossary for a definition and more information. 3 Between Aviva Insurance Limited and the Group.
(2013: 54.1%) Operating expense ratio 4 The economic capital surplus represents an estimated position. The economic capital requirement is based on Aviva’s own internal assessment and capital management policies. The term ‘economic capital’ does not imply capital as required by regulators or other third parties.
5 Net of tax, non-controlling interests, preference dividends and coupon payments in respect of direct capital instruments and fixed rate Tier 1 notes.
Along with the contribution from profits, the IFRS net asset value was boosted by a 45p increase in our pension surplus, as measured on an IAS 19 basis. We manage our staff pension scheme on a funding basis, not an IAS 19 basis, which means we hold higher technical provisions for funding and hedge on that basis, which introduces potential volatility into our IAS 19 reporting. The large increase in our IAS 19 pension surplus reported this year is largely attributable to a combination of wider credit spreads and lower interest rates. This could reverse in the future.
Prior to the declaration of our 2014 final dividend, our economic capital surplus4 increased marginally to £8.4 billion (2013: £8.3 billion), with a coverage ratio of 182% (2013: 182%), and is £8.0 billion after the early declaration of our final dividend, which we announced on 2 December 2014 coincident with the proposed Friends Life acquisition. The coverage ratio is 178% after deducting the accrual of the final dividend, which was reasonably foreseeable at year end. We have also improved our modelling and methodology to improve the quality of our estimate of economic capital surplus during the year.
Liquidity at Group centre is £1.1 billion as at the end of February 2015 (February 2014: £1.6 billion), and within our risk appetite. External and internal debt reduction, pension contributions, external dividends and the capitalisation of our internal reinsurance company offset remittances received from businesses and disposal proceeds.
business (VNB) of £482 million is flat year-on-year, as increased VNB from equity release, bulk purchase annuities and protection offset the lower contribution from individual annuities following the regulatory changes announced in March 2014. Throughout the year we have also taken steps to improve the quality of our asset portfolio, reducing exposure to certain non-core property assets.
Our UK & Ireland general insurance business has improved its combined operating ratio (COR) by 2.3 percentage points to 94.9% (2013: 97.2%) and increased its underwriting profit 66% to £204 million (2013: £123 million). Net written premium declined 4% to £3,935 million but most of this reduction occurred in the earlier part of the year. Our UK commercial book showed significant improvement, with the COR improving to 92.8% (2013: 102.9%) as we completed portfolio actions to improve the quality of our commercial motor book and reserves developed more favourably relative to the prior year.
Elsewhere in Europe, France delivered a solid result in benign economic conditions with operating profit of £452 million (2013: £448 million). French VNB was 25%7 higher as we continue to improve the business mix, focusing on unit-linked and protection. Our Spanish business is adapting to its smaller footprint with operating profit of £126 million (2013: £151 million) impacted by the disposals of Aseval and CxG.
In Asia, our Chinese business grew VNB 100%7 due to changes in product mix and effective bundling. The average product holding of our Chinese customers is now 3.5x. In Singapore, VNB increased 23%7 to £87 million (2013: £76 million). We are seeking to renew our distribution agreement with DBS this year on appropriate terms.
In 2014, IFRS net asset value (NAV) increased 26% to 340p (2013: 270p) and our Market Consistent Embedded Value per share was 14% higher at 527p, as shown below.
7 On a constant currency basis. 8 Net of tax and controlling interests.
excess centre cash flow increase 28 | Aviva plc Annual report and accounts 2014
Next year we expect to report our economic capital surplus on a Solvency II basis, which comes into effect from 1 January 2016. We continue to work with regulators on the application of Solvency II principles to our business, and will submit our Group internal model for formal regulatory review in June this year. Friends Life will be on a standard formula basis for reporting under Solvency II from year end 2015. Once Friends Life becomes part of Aviva, we will begin transitioning Friends to our internal model.
As we have said previously, there remains uncertainty regarding certain significant issues under Solvency II regulations and their interpretation by regulators. Our reported economic capital surplus and its composition may differ under Solvency II from the current regulatory regime. Regardless, we are currently managing the Group taking into account our understanding of how Solvency II principles are likely to apply from 2016 onwards.
In 2014, we made meaningful progress in bringing leverage down to desired levels. In the first half of the year we called £240 million of debt instruments with coupons in excess of 10% without refinancing.
The lower interest rate environment and better financial position of the Group allowed us to raise €700 million of Lower Tier 2 subordinated debt with a 3.875% coupon. In Q4 2014, we called a €700 million Direct Capital Instrument (DCI) with a 4.7291% coupon.
Considering Aviva’s overall turnaround in terms of capital, liquidity and internal and external leverage together, the Group has made substantial progress in improving its financial flexibility over the last two years. At the end of 2012, Aviva was reliant on expected proceeds from divestitures, with just £5.3 billion in economic capital surplus, low liquidity at the centre, lower excess centre cash flow from operations, a £5.8 billion intercompany loan balance, and external debt leverage approximating 50%. Entering 2015 we are much stronger on all these measures, our final dividend has been increased 30% to 12.25p per share, and we are looking forward to completing the proposed acquisition of Friends Life, which we expect to close in the second quarter of the year.
Our challenge in 2015 through 2017 is to develop our capabilities around the True Customer Composite and Digital First, and shift towards investing in growth. —
It includes operating profit, as well as non-operating items such as restructuring costs, impairments, investment variances and profits or losses arising on disposals.
On a continuing basis, non-operating items contributed £108 million to total profit (2013: £768 million loss). The two main reasons for the improvement are lower integration and restructuring costs and positive investment variances (2013: negative variances).
Integration and restructuring costs of £140 million (2013: £363 million) are £223 million lower due to a significant reduction in transformation spend. 2014 costs primarily relate to preparation for Solvency II.
As Sue Blazye explains: “We woke up on Christmas morning and came downstairs to find our exhibition under three feet of water because a local river had flooded. It was horrendous.”
Mr and Mrs Blazye wanted to get the exhibition up and running in time for the start of the tourist season and they didn’t want to disappoint their customers.
Helen Anderson said: “I’ve worked for Aviva for 13 years and this was one of the most unusual and complex claims I’ve worked on – but also one of the most gratifying. Delivering for our customers in this way is the best bit of my job.”
Much of our business is sold through a strong network of independent financial advisors and strategic partnerships with leading banks and retail brands in the UK. An increasing percentage is purchased direct by customers as we continue to simplify our products and make it easier for them to buy and self-serve online.
We received a record number of awards in 2014. These included Protection Provider of the Year, Health Provider of the Year (for the 5th year running) and a five star rating for life and pensions at the Financial Adviser Service Awards.
We delivered a good set of results despite a challenging market and regulatory environment. We increased our cash remittance to the Group centre by 18% to £437 million by improving our capital efficiency and reducing operating expenses by 7%.
Life operating profits increased to £1,039 million, which included a £282 million benefit from longevity assumption changes. Excluding non-recurring items, profits have decreased 10% with the benefits of cost savings offset by the impact of reduced annuity trading and lower expected investment returns as a result of de-risking activity.
VNB was up 1% to £482 million, with strong trading in equity release products and increased sales of bulk purchase annuities and protection partly offsetting the decline in volumes of individual annuities.
We aim to delight our customers, partners and shareholders by delivering innovative solutions.
We are continuing to reduce our reliance on individual annuities following reforms to the market announced in the 2014 Budget. We intend to mitigate loss of VNB through increased sales of income drawdown, equity release and Bulk Purchase Annuities (BPAs).
The protection market is a strategic priority. The proposed acquisition of Friends Life would make us number one in protection5, with an unrivalled product range and distribution reach, whether that is through intermediaries or, increasingly, direct-to-consumer.
In 2015 we will: • Deliver simplicity and convenience for customers and contribute to the Group’s cash flow
• Begin to integrate Friends Life, should the proposed acquisition complete
• Build on our existing strengths in protection by launching an innovative product range and increasing our growing direct-to-consumer business
3 Including Ireland Life. 4 Comparatives have been restated to reflect the changes in MCEV methodology. Refer to the glossary for further details. 5 Protection ranking based on 9M14 APE obtained from the Association of British Insurers.
Chairman, Global General Insurance and CEO, Aviva UK & Ireland General Insurance
A critical component of our general insurance business is a focus on our general insurance fundamentals: underwriting, pricing, claims management, predictive analytics and cost efficiency.
In a rapidly changing world, fuelled by digital, it is critical to share best practice across our businesses. Our expertise and experience will enable Aviva to grow our general insurance business.
Our strategy is to ensure all the businesses within Aviva work closely to share their insight and innovations to provide better services to customers across their markets and deliver value to our shareholders.
We aim to provide our customers with the products and quality of service they expect by ensuring our products meet evolving consumer needs and provide value. We leverage our extensive expertise in underwriting, pricing and analytics in the design process.
We aim to increase the average length of time our customers stay with us, while improving our analytics so we provide them with the products they want delivered how they want it.
The MyAviva app will continue to be at the heart of the digital services we offer our customers. We aim to deliver simpler digital solutions that make it easier for our customers to do business with us.
We will continue to take an industry lead on issues that increase costs for our customers, such as fraudulent whiplash claims.
In the UK, the combined operating ratio improved 2.2 percentage points to 94.8%. A better commercial lines result - particularly in motor – was partly offset by lower personal lines profits, which declined primarily due to less favourable weather-related claims experience in 2014 than 2013. In Ireland, the general insurance COR improved 2.6 percentage points to 96.6%.
In 2014 we: • Improved our customers’ satisfaction for both motor and home claims. We are the first insurer to publish how our customers rate our service on our website using the Defaqto star ratings
• Successfully launched multi-car products for existing customers in personal lines. Our UK Direct customers have rated us 4.5 out of 5 for motor insurance and 4.6 out of 5 for home insurance
• Acted as an industry and customer champion. We have continued to campaign against fraudulent whiplash claims as part of our Road to Reform campaign
• Grew the market share in our Irish business for the first time in eight years, with a 9% increase in policy count and delivered market leading customer service satisfaction, including a 37% increase in our Relationship Net Promoter Score®
Market conditions for private motor and home insurance remain highly competitive and we expect this to continue. Customers are rightly price conscious and this will not change.
Customers have grown accustomed to price comparison websites in personal lines. We will respond to this challenge by developing market-leading direct products and services, and investing in digital to sharpen our competitive edge.
Increased insurance capacity in the Small and Medium-sized Enterprise (SME) sector will increase competition. We continue to succeed in this market
Aviva is proud to support their customers in this way, keeping insurance premiums to a minimum, and sending a strong message out to those who decide to make disingenuous claims.
We are also developing telematics technology, which provides customer analytics so we can offer motor insurance based on vehicle use. This customises pricing to reflect how customers drive and rewards good driving behaviour. Our first step is to offer a young drivers’ solution in Ontario, distributed through our broker network.
We are improving our services so our customers can deal with us when, where and how they want.
Most of our business is intermediated, with our products sold through a network of independent broker partners.
We are specifically focusing on developing our direct digital capability, but are also supporting our broker partners to help them integrate digital technology, to because of the quality of our service and relationship management of SMEs. Aviva is uniquely well placed to be a trusted advisor and offer a complete one-stopshop for SMEs. Less complex products for commercial lines are increasingly transacted online. We will respond to this by further developing our FastTrade system, the online platform that allows brokers to trade SME business, to form the basis for the services we offer.
In 2015 we will: • Deliver market-leading customer service and products to increase average holdings per customer, as well as growing our business through new customers
• Continue to build on our strong performance in Ireland with a tailwind from GDP growth and lower unemployment.
In 2014 we: • Successfully executed our growth strategy in personal lines in Western Canada, increasing and diversifying our geographic exposure and increasing gross written premiums by 17%
We will also continue to work with the public authorities in Ontario to reduce claims costs and lower premiums to make car insurance more affordable and accessible in our largest market. We support the steps taken by the Ontario Government so far and will continue to ensure a sustainable and affordable solution for the people of Ontario.
In 2015 we will: • Make the most of the unique opportunity of being a composite insurer by expanding our range of offerings to include health and accident products. We will also introduce an Overland Water Coverage Option for home insurance, to provide water damage coverage for certain categories of claims
Responding to extreme weather The winter of 2013-14 was particularly harsh in Canada, with rarely-encountered weather conditions such as the polar vortex and frost quakes. Bitterly cold temperatures, plus snow and ice, dominated the weather from November to April. Aviva Canada helped 1,300 households impacted by the polar vortex which caused a devastating ice storm in Toronto. The damage cost the insurance industry over CAN$200 million. We’re working with the Insurance Bureau of Canada and the industry to use technology to provide affordable insurance, help customers manage risk and prepare them for future risks.
not previously covered by the industry • Broaden our distribution reach to customers, especially through digital • Continue to invest in telematics and digital so our services and propositions are better for our broker partners and customers
• Serve our customers better by continuing to deliver improved automation in commercial lines
Our European businesses have also delivered significant growth as a result of shifting our focus to more profitable products, such as unit-linked and zero per cent guarantee saving products in our developed markets, while continuing to profitably grow our business in Poland and Turkey.
Going forward, our priority is to capitalise on the potential of the composite model, build scale in protection and general insurance, and further strengthen our distribution, especially by developing our digital capability.
We expect stronger employment and disposable income to drive demand for life and savings products across the region. We are well positioned for a macro recovery in Europe but we are not dependent on it and have achieved growth despite the challenges in the Eurozone.
Digital will continue to be a key differentiator for insurers, as customers are increasingly looking for more efficient and customised service through new technologies and channels.
Our European businesses have delivered strongly on cash flow and growth. In particular, we have increased cash remittances by 17% to £454 million, grown VNB by 19% to £392 million and reduced operating expenses by 7% to £596 million.
Life operating profit of £852 million was broadly flat year-on-year, but improved by 5% on a constant currency basis primarily driven by France and Poland. Excluding Eurovita, Aseval and CxG, which have been sold, life operating profit grew 5% (11% in constant currency) with improvements across all markets.
What excites me is the prospect of becoming a True Customer
Chairman, Global Health Insurance and CEO, Europe 1 Aviva’s Polish business also has management responsibility for Aviva’s operation in Lithuania. 2 Defined as total premiums as a proportion of GDP. 3 Restated to reflect the changes in MCEV methodology. Refer to the glossary for further details.
channels we own or control. We have a tied agency network of over 900 agents and a majority stake in UFF, the largest IFA network in France.
We enjoy a longstanding and strong relationship with Association Française d’Epargne et de Retraite (AFER), the largest retirement savings association in France. We also have a strong direct business with 450,000 customers with Aviva Direct, the largest direct provider of funeral protection5, and 200,000 with Eurofil, our non-life brand and the second largest direct general insurer in the market.
France delivered profitable growth while continuing to increase cash remittances and operating profits, despite adverse weather affecting our general insurance business. Performance in the year improved across all five key financial metrics although the weakening of the Euro affected all metrics from a Group perspective.
Cash remittances were up 4% to £245 million and total operating profit increased 1% to £452 million (6% up in constant currency) driven by a strong performance in the life business. The combined operating ratio improved 0.2 percentage points to 96.9% despite the adverse weather experienced during the year. Operating expenses reduced 7% to £396 million.
In 2014 we: • Increased the weight of unit-linked sales as a proportion of total saving products sales from 22% in 2013 to 28% in 2014
• Improved our online presence, focusing on our product offering and providing quicker quotations
• Integrated our direct sales force network into UFF to improve efficiency.
Aviva France has been a stable cashgenerating business, with a well diversified distribution network and good prospects for further growth.
Aviva Poland provides life and general insurance products, pensions and asset management. We are a well established leading financial institution in Poland in a market with strong potential for further growth. The Polish market is relatively under-developed, with insurance penetration of only 3.4%6 (against a Europe-wide average of 6.8%6), but has a population with growing disposable income and consumption.
Performance indicators £454m (2013: £388m) Cash remitted to Group £852m (2013: £851m) Life operating profit £113m (2013: £112m) General insurance and health operating profit £596m (2013: £644m) Operating expenses £392m (2013: £329m restated3) Value of new business4
4 Excludes Eurovita, Aseval and CxG. 5 Federation Francaise des Societies d’Assurance. 6 Swiss Re, Sigma, 2014. 7 Bank of Lithuania,
• Aim to become the most trusted financial services brand and the first choice insurer for key market segments, including middle income and affluent customers, and the family segment.
Our joint venture with Sabancı Group, one of Turkey’s leading conglomerates, sells life and pensions products through banks and agents. Our main distribution channel is Akbank, one of Turkey’s largest privately owned banks, with over 900 branches, and part of the Sabancı Group.
Life operating profit of £10 million (2013: £8 million) reflects improved returns from our individual pension business.
• Improved the productivity and profitability of our network of agents by launching new products.
• Further enhanced our digital capability, including establishing our virtual branch.
Relatively low insurance penetration in Poland continues to represent a significant opportunity, especially around young and affluent segments of the population. Competitive pricing in general insurance will continue to put pressure on margins and efficiency. We expect to see our Polish business grow as the insurance sector matures.
• Continue to build our retail network and improve its productivity
We are a mid-sized composite insurer, offering life, general and health insurance. We are in the top four in the protection market9 and have a growing position in the general insurance market.
We have made significant progress in restructuring our business and improving our performance. We remain focused on capital efficiency and delivering cash to the Group. We have moved from turning around the business to seizing strategic opportunities and maximising the potential of the composite model.
There has been good progress with improvements across all key financial metrics. During 2014 we delivered improved cash remittances of £32 million (2013: £12 million) and a 47% increase in VNB10 to £63 million, which was due to increased volumes and improved margins on bonds and savings products.
Simplicity and convenience Our Aviva Italia app lets our customers deal with us when and how they want. They can get access to our agents’ contact details, find out more about our products, make a claim or report an incident and manage their policies in a secure client area. That delivers the simplicity and convenience our customers want.
www.avivaitalia.it/ aviva-app 8 Pension Monitoring Centre, Turkey. 9 IVAA - Istituto per la Vigilanza Sulle Assicurazioni. 10 Excludes Eurovita.
• Completed the sale of our stake in Eurovita to JC Flowers
• Invested in digital apps and portals for our customers and agents.
The Italian insurance market is expected to show signs of recovery.
In life insurance, customer demand for with-profit products will continue but the market is now becoming accustomed to lower/zero percent guarantee products. From July 2014 all new policies distributed are zero percent products. The protection market is expected to grow as the economy starts to recover.
• Invest in digital and position ourselves to make the most of opportunities in this space.
In Spain we have strong bancassurance relationships, and operate a small but growing retail business. The business has shown resilience and we continue to make progress with our turnaround and are well positioned to take advantage of improving economic conditions.
During the year we have significantly improved cash remittances to the Group, which were up 33% to £68 million which includes a one-off dividend of £19 million.
VNB12 has grown 20% to £30 million due to expense reductions and improved margins on with-profits business following management actions to reduce guarantees. Excluding Aseval and CxG, which were sold in April 2013 and December 2014 respectively, operating profit was broadly stable at £101 million (2013: £102 million) but up 5% in constant currency.
In 2014 we: • Successfully completed the sale of our stake in CxG to NCG Banco for £221 million, following a favourable award by the Spanish arbitration court
The restructuring of the banking sector is expected to complete in 2015, which will bring stability to the bancassurance sector. Lending conditions are expected to remain challenging, which will impact upon credit-linked insurance products.
• Continue to promote debate on sustainable savings and help people understand their financial decisions, through the pioneering work of the Aviva Savings and Pensions Institute.
Supporting our deaf and hearing-impaired customers There are around half a million deaf or hearing impaired people in France. Aviva Sourds is tailored for them. In 2014 we expanded this service, building on the pilot we set up in 2012. Now there’s a dedicated team of agents, fluent in French sign language, who also provide information on our products through Skype, Elision (a web-based simultaneous interpreting service), email, SMS, video-calls and fax and, if customers are in the Paris area, face-to-face meetings. It’s another example of Aviva serving customers how they want and when they want.
11 ICEA - Investigación Cooperativa entre Entidades Aseguaradoras y Fondos de Pensiones, Q3 2013. 12 Excludes Aseval and CxG.
We will strengthen our ability to achieve growth across the region by developing our capabilities in digital, analytics and customer marketing.
Performance in Asia has been encouraging, with cash remittances up 15% to £23 million and particular improvement in our key VNB metric.
Life operating profits reduced by 9% to £87 million, mainly driven by the investment in implementing our joint venture in Indonesia (see below), as well as the sale of our business in South Korea and adverse foreign exchange movements. Operating expenses, 7% lower at £80 million, were stable on a constant currency basis.
General insurance COR improved to 97.8%, with the prior year impacted by a one-off increase in reserves in the Singapore motor book following a change in the reserving methodology.
CEO, Global Life Insurance and Chairman Asia 1 As at 31 December 2014. 2 LIA statistics, by Individual Life APE.
• Expanded our multi-distribution platforms in a disciplined manner – growing our agency channel in China and Vietnam, strengthening our bancassurance business in Singapore, Indonesia and Taiwan, growing our business through financial advisers in Singapore and China, and enhancing our direct distribution capabilities
• Rolled out our “All-in-one” comprehensive protection product in China, which successfully met increasing customer demand for protection against cancer, illness and major diseases.
The Greater China and South East Asia markets are expected to deliver relatively good GDP growth in 2015. China is currently the fifth largest life insurance market in the world, and is expected to overtake Japan as Asia’s largest market in the next decade3.
Indonesia and Vietnam have large populations and growing consumer classes, but low insurance penetration which we expect to increase over the coming years.
Our priorities are to: • Continue to strengthen our multidistribution platforms, including investing in direct marketing, affinity and digital
• Capitalise on the strong distribution strength and customer reach of our partners and further expand these partnerships in all markets
• Capitalise on the potential of the composite model by further expanding our multi-line business in Singapore and seeking opportunities in other markets • Put Digital First by launching digital sales applications across our Asian markets, starting with Singapore, China and Indonesia
• Strengthen our digital capabilities and invest in a regional digital lab to nurture collaboration and innovation.
So far we have created the first two funds in our AIMS range. The first, which was launched in July 2014, aims to deliver steady capital growth. The second – launched in December – is designed to generate a reliable income stream. Both funds invest across a wide range of diversified asset classes and geographies, drawing on investment ideas from across our business.
Moreover, we are confident assets under management are set to grow further in coming months. The fund has already achieved positive ‘buy’ ratings from several pension consultants. This is translating into business opportunities across the globe, as evidenced by recent inflows from the UK, France and Ireland. In January 2015, we entered into a strategic partnership with a major US distributor to retail clients, Virtus Investment Partners Inc. to bring our AIMS target return strategy to the United States retail marketplace. This marked an important step in our strategic priority for 2015 of entering new markets.
We are Aviva’s investment management business, with £246 billion assets under management.
Our ambition is to make Aviva Investors a world-leading asset manager in outcome oriented solutions. In doing so, we aim to make a greater contribution to the profits of the Aviva Group.
Secondly, we aim to increase our contribution to the Group by utilising our expertise and skills managing Aviva’s own funds and becoming a renowned manager of other investors’ funds.
In serving our customers, we aim not to offer an à la carte menu of investment options, but investment outcomes that are created by bringing together our expertise and skills, global reach and best execution and as such deliver customers income and
It’s still early days in our efforts to transform Aviva Investors but the signs are extremely encouraging —
Cash remittances were up 14% to £16 million. Fund management profits also improved, up 16% to £79 million, which included a £12 million contribution from the UK retail fund management business which transferred to Aviva Investors from UK Life in May 2014. Assets under management increased by 2% to £246 billion, with favourable market movements partly offset by net redemptions and the disposal of River Road Asset Management.
In February 2015, Aviva Investors reached a settlement with the FCA for certain systems and controls failings that happened between August 2005 to June 2013 and agreed to pay a fine of £17.6 million. Provision for this cost has been made and is fully reflected within the FY14 result. We ensured no customers were disadvantaged.
2013 operating profit included an adverse impact of £96 million, reflecting the compensation in respect of the breaches of the dealing policy and associated costs.
In 2014, aside from laying the foundations for becoming a global leader in outcome- orientated solutions, we: • Significantly strengthened our risk and control team, with Steve Farrall appointed as our new Chief Risk Officer and Robin Mitchell as Global Head of Compliance
We will: • Continue to put our clients at the heart of everything we do • Strengthen our relationship with Aviva
Group businesses to make maximum use of Aviva’s powerful brand and sales network
Towards sustainable capital markets We’ve been around for 319 years and we’re a business that looks to the long term and looks at how to overcome long-term risks. We think there are strategic risks to economic growth in the future: • An assumption of unlimited natural resources. This creates a fundamentally flawed pricing system in capital markets.
We aim to deliver simple and specific outcomes that clients will value.
Trust and transparency To build trust and be more transparent, we will: • Strengthen Aviva’s business and reputation by embedding our business ethics code
• Demonstrate our sustainability in products, services and procurement through clear and transparent reporting
• Partner with experts to use our insight and expertise as a catalyst to create positive social change
• Support our people with volunteering time and matched fundraising for causes that matter to them.
In our 319 year history, the important things have never changed – people matter to us. There are a number of social and demographic trends affecting workplaces across the globe and these are having an impact upon our global workforce.
To meet these challenges, we need to continue recruiting talented colleagues, improving performance management and boosting employee engagement.
We measure progress in this area through levels of employee engagement. 2014 saw engagement improve 9% points to 65%, driven by a double-digit uplift in trust of our senior leaders, as well as advances in levels of pride, motivation and advocacy. Our engagement rating is now 3% points above the norm in the global financial services sector.
The survey told us that 87% of our employees feel informed about important events (26% points above global financial services’ norms), 81% understand our business priorities, 92% understand what is expected of them, and 82% feel it is safe to challenge the way we do things.
Our people managers across the world held open conversations with their teams about the survey results, and agreed actions they can take together. Aviva’s senior leaders spent time hosting ‘town halls’ and all-employee calls where they shared their response to results and announcements, and committed to actions they would take as leaders. We also held employee consultative forums in the UK and Europe to support further conversations about how we develop the business.
We are changing our culture and supporting our people to achieve their potential, so they can best serve our customers and enable us to achieve outstanding performance.
Embedding our purpose and values In 2014 we focused on embedding our purpose, values and their associated behaviours across Aviva. We believe our customers, communities and shareholders will benefit as we simplify our business, challenge the status quo, and tackle the issues that are important to them. We started with a “Leading Our Strategy” event for all our 3,500 Aviva leaders globally to help them focus on what our purpose and values mean both for the organisation and for each employee. Those leaders then delivered a training programme to all employees, called “Exploring Our Strategy”, to immerse them in Aviva’s strategy. This was designed to support our people to set goals for their work and personal lives, to help them make a more personal connection with Aviva’s values and strategy. When we measured progress at the end of 2014, 83% of our people agreed they know how the Aviva values apply to their role.
In 2014, we transformed our approach to leadership development, focusing on achieving outstanding performance. We have developed a leadership model and a programme to build capability in our leaders, called ‘Leading@Aviva’. This new approach has been developed in conjuction with the Group Executive team and senior leaders in each market, and we plan to deliver ‘Leading@Aviva’ to all 3,500 people managers globally in 2015. This will ensure that building our people’s capability will become an everyday element of Aviva’s leadership culture.
In addition to more traditional technical skills training (such as courses and computer-based training), our people like to work on projects which stretch and develop them in their current job. One of the ways in which we are delivering this is through Systems Thinking, a key differentiator for Aviva. We encourage employees to develop better ways of working and to make processes simpler for customers. We have extended the roll-out of Systems Thinking to all levels in some areas of Aviva’s business. This is being supported by an immersive programme targeted at senior leaders to help them understand Systems Thinking. This has been delivered to 400 senior leaders in 2014, with more sessions planned in 2015.
In 2014, we looked afresh at our Diversity and Inclusion strategy. Our core belief is that we will improve Aviva’s performance by embracing people who think and act differently. As a result, alongside building an inclusive and engaging culture, our immediate aim is to increase our overall diversity across all levels in the organisation, with an initial focus on gender.
In addition we focused on expanding and building the vibrancy of our employeerun women’s networks, including introducing new networks in the UK and Canada.
2014 also saw our Aviva Pride network, focused on Lesbian, Gay, Bisexual and Transgender (LGBT) issues, grow its membership in the UK. The network is a powerful voice in Aviva on LGBT issues, and works with HR, Marketing and customers to make improvements. Aviva Pride also works in the community to raise funds for the Albert Kennedy Trust. Aviva was ranked 15th in the Stonewall Top 100 list of Britain’s most gay-friendly workplaces.
Our fairness and equality policies in the UK, and their equivalent policies globally, ensure that Aviva fully supports employees who have a protected characteristic or who are from an under-represented group, ensuring no fear of bias for training, promotion or reward.
We are committed to ensuring we provide full and fair consideration to applications for employment from people with disabilities, as well as supporting employees who become disabled during their employment. We adapt the working environment and where we can, offer flexible working practices to ensure the retention of our employees, no matter what their personal circumstances.
We carried out a “How we work” survey in 2014. This confirmed that our people wanted a more inspiring environment, with more thinking time and space to increase collaboration. We are responding to this, for example by incorporating new quiet working areas.
To help our people maintain a healthy working life, we offer a number of initiatives including flexible working hours, career breaks and employee assistance programmes. In 2014, we launched well-being training for all our people as part of our “Essential Learning” programme.
During 2014, we engaged with our stakeholders on the way we run our business. In 2015, we will launch our new strategy, responding to the evolving needs of our people, customers, shareholders and employees.
employee comment 50 | Aviva plc Annual report and accounts 2014
We are responsible for managing the risks of financial crime so that the costs are not passed on to our customers. Our employees receive annual training on financial crime prevention. Our global confidential malpractice reporting service ‘Right Call’ provides the means to report employee fraud. All cases reported are referred for independent investigation. In 2014, 39 cases were received through ‘Right Call’. 33 cases reached conclusion and six cases remain under investigation. There has been no material litigation arising from cases reported through our malpractice reporting service in 2014.
Last year we responded to a number of key policy consultations focusing on the UN’s Post-2015 Sustainable Development Goals, the EU’s 2020 Strategy and Flood Re (the UK scheme to make sure all households can get affordable flood insurance). This year we have encouraged policy makers to tackle the risks of climate change. We hosted the launch of the UK Government’s vision for the 2015 UN Climate Negotiations, at which the Secretary of State for Energy and Climate Change spoke.
Supply chain We ask our suppliers to disclose their human rights policies, and engage with them where necessary to address any concerns we have. Our procurement contracts require suppliers to commit to the ILO core labour standards and uphold the UNUDHR.
Customers Our business ethics code requires us to conduct business in a way which respects human rights. This includes being clear in our communications and processing personal data responsibly.
Community Our corporate responsibility, climate change and environmental practices are aligned to the UNUDHR, ILO core labour standards and UN Global Compact principles.
Aviva has a long history of investing in communities. By focusing on the issues that matter most to our customers and those that are most closely aligned to our
We encourage all our employees to take up to three days paid leave a year to volunteer. In 2014, 23% of employees volunteered 40,220 hours (2013: 41,223 hours).
We continue to encourage volunteering related to our people’s skills across the business.
Since its launch in 2008, the Aviva Community Fund (ACF) in Canada has helped 91 community organisations and contributed CAN$4.5 million to local community projects. We have collaborated across the Group to replicate this model.
The UK Broker Fund has invested £300,000 since 2010 and in 2014 Aviva Poland launched its fund, which attracted over one million votes for community projects to support young families. In 2015 we will launch more funds in the UK, Europe & Asia.
Extreme weather events pose a serious risk to our business and customers, leading to potential fluctuations in claims and challenges to how we price risk. We are using our expertise as insurers, such as our knowledge of historical weather events and cutting-edge predictive modelling, to map future scenarios, and reduce the risk to our customers and our business.
We are also seeking to reduce our own environmental impact, including improving our energy efficiency, investing in the low-carbon economy and understanding our indirect impact, such as through our supply chain.
We are also building environmental benefits into our products and services, for example in the way in which we settle claims. In the UK, where possible, we now aim to clean and deodorise items damaged by fire on site rather than removing them and potentially replacing them. This means fewer goods go to waste.
In line with this we report emissions which are within our organisational boundary. We therefore do not have responsibility for any emission sources that are not included in our business operations.
We are proud of what Street to School has achieved together with our partners, people and customers. Over the last five years our employees have volunteered over 95,000 hours of their time for Street to School, and raised more than £1.7 million.
Scope 1 – Aviva controls directly Greenhouse gases emitted directly from activities Aviva owns or part-owns
We have used the two most appropriate intensity measures to our business: tCO2e per employee and tCO2e per £ million Gross Written Premiums which are expressed in the table below.
Scope 1 – operational emissions from owned sources e.g. gas, vehicle fleet as part of product/ service.
Aviva goes beyond the requirements of the 2013 Regulations and also reports on business travel and other scope three emissions.
We are liable under the Carbon Reduction Commitment Energy Efficiency Scheme whereby we reported total emissions of 97,323 tCO2e costing £1.16 million. The boundaries of measurement and reporting differ from our global operations emissions, being restricted to the UK businesses emissions from building energy and including the property portfolio of our investment funds managed by Aviva Investors.
We have been rated by CDP as the lowest carbon intensive insurer in its global performance ranking.
We were the first carbon neutral insurer worldwide in 2006 and we continue to offset all operational emissions. Our offsetting projects have also impacted nearly 500,000 lives (in terms of improved health) since 2012.
We believe that businesses which act in a sustainable and responsible manner are more likely to achieve long-term success, benefiting their customers and society as a whole.
In June, our Group CEO, Mark Wilson, launched Aviva’s ‘Roadmap for Sustainable Capital Markets’, which sets out recommendations to regulators and policy makers for transforming and aligning incentives in order to create a more sustainable economy. We have championed these reforms within the UK and at the EU and UN.
In our offsetting process we make a measurable difference to people as well as the environment.
Aviva Impact Investing France, run by Aviva France and Le Comptoir de L’Innovation, makes pioneering investments over five to seven years to support French social enterprises in their take-off and growth phases.
In December 2014 they made their first investment in a recycling factory in Lille called Le Relais (shown right). It’s the leader in France in the collection, sorting and recovery of second-hand clothing and textiles and has, since 1984, created 2,700 jobs.
We are delighted to invest in a sustainable business such as Le Relais – and contribute to creating a more sustainable future.
Such operational failures may adversely impact customers directly or our reputation with the public, customers, agents and regulators, and impair our ability to attract new business.
Our risk appetite framework comprises: • Overarching risk appetites: Quantitative expressions of the level of risk we can support (e.g. capital we are prepared to put at risk)
• Risk preferences: Qualitative statements on the risks we believe we are capable of managing to generate a return, risks we can support but need to be controlled, and risks we seek to avoid or minimise
• Operating risk limits and tolerances: Quantify specific boundaries (e.g. limits on specific risks).
• Liquidity: Based on stressing one year forecast central liquid assets and cash inflows and outflows (covering Group centre costs, debt costs and dividends)
Risk appetites are clearly defined, refreshed on a regular basis and form part of the planning process. Risk appetites exist in aggregate and by risk type.
The core business processes we use to identify, measure, manage, monitor and report (IMMMR) risks, delivered by our organisation and people, are set out below: Identify and measure Risk identification is carried out on a regular basis, including as part of the business planning process and any major business initiatives, and draws on a combination of internal and external data, covering both normal conditions and stressed environments. Risks are recorded on a business-wide key risk register.
We measure risks on the basis of economic capital (as well as other bases if appropriate) to determine their significance, relative to the potential return and to appropriately direct resources to their management.
Report Risk reporting is dynamic, focused on: • Material risks and trends • Performance and the impact on the risk profile, historical and prospective • Decisions, taking account of risk reward trade-offs • Projections/forward-looking views • Mitigating actions • Risk vs. appetite
Risk (including regulatory compliance and actuarial oversight functions) Accountable for providing objective challenge and oversight of the business’ management of all risks and for developing and maintaining the risk management framework.
Principal risk types The types of risk to which the Group is exposed, described in the table below, have not changed significantly over the year. The principal impact on the Group’s risk profile of the planned acquisition of Friends Life, subject to successful completion, will be to increase our exposure to equity price risk and UK life insurance risks, in particular persistency risk. The operational risks of integration will also require close management.
• Risk appetites set to limit overall level of credit risk • Credit limit framework imposes limits on credit concentration by issuer, sector and type of instrument • Investment restrictions on sovereign and corporate exposure to some eurozone countries • Credit risk hedging • Specific asset de-risking
• Risk appetites set to limit exposures to key market risks • Active asset management and hedging in business units • Scaleable Group-level equity and foreign exchange hedging programme • Pension fund de-risking • Asset and liability duration matching limits impact of interest rate changes and actions taken to manage guarantee risk, through product design
We take measured amounts of life and health insurance risks where we have the appropriate core skills in underwriting. We like longevity and mortality risks as they diversify well (i.e. have little or no correlation) against other risks we retain.
• Risk appetites set to limit exposures to key life and health insurance risks
• Use of reinsurance to mitigate mortality/morbidity risks • Staff pension scheme longevity swap covering approximately £5 billion of pensioner in payment liabilities
Operational risk • Conduct & reputation • Legal & regulatory • People • Process • Data security • Technology
• Scenario based approach to determine appropriate level of capital for operational risks
Emerging risks and causal factors We also manage and monitor risks and causal factors which may impact our longer term profitability and viability, in particular our ability to write profitable new business. For example, such risks and factors include: • Climate change – potentially resulting in higher than expected weather-related claims and inaccurate pricing of general insurance risk.
• New technologies – failure to understand and react to the impact of new technology and its effect on customer behaviour and how we distribute products could potentially result in our business model becoming obsolete.
• Regulatory change – our businesses face considerable regulatory change as a result of Solvency II, our designation by the Financial Stability Board as a Global systemically important insurer (G-SII) and developments in conduct regulation, which will affect how much capital we hold, how we operate and how we sell and distribute our products. While ongoing consultations on implementing standards and supervisory guidelines have reduced the level of uncertainty over the final capital impact on our business of Solvency II (effective 1 January 2016), some uncertainty remains, including over the outcome of the Group’s application to use an internal model to calculate our capital requirements.
• Political risk – governments in the markets in which we operate incentivise long-term saving and private pension provision through tax benefits, while also providing an alternative through state provision. In some markets there are (or could be in the future) restrictions and controls on premium rates, rating factors and charges. Any change in public policy could influence the demand for, and profitability of, our products. For example, in March 2014 the UK Government announced the end of compulsory annuitisation, which has significantly reduced demand for individual annuities. The diversity of our product offering and the geographies in which we operate partly mitigates this risk.
• Prolonged low interest rate environment – if current low interest rates continue for a prolonged period it will adversely affect the ‘spread’ we can earn between the returns we can offer customers and the return we earn on our investments, as well as the attractiveness of the returns we can offer to new customers.
• Macroeconomic growth – the slowdown in economic growth in Asia, and re-emerging concerns over the economic performance of the eurozone, could precipitate a wider global economic slowdown, which could adversely impact our investments, customer retention and new business levels.
• New and emerging latent claims – new claims on policies written a long time in the past may arise as a result of future court judgements extending liability, new legislation, new historic evidence and interpretation, emerging medical science on health effects of long-term exposures to chemicals etc. Examples over the last 30 years include asbestosis, repetitive strain injury and industrial deafness.
• Medical advances and healthier life styles – medical advances and healthier life styles may increase life expectancy of our annuitants and thus future payments over their lifetime may be in excess of the amounts we currently expect. Historic examples include the positive impact on life expectancy of reduced rates of smoking over the last 40 years.
• Big Data – failure to keep pace with the use of data to price more accurately and to detect insurance fraud could lead to loss of competitive advantage and financial losses.
• Changes in customer behaviour – changes in the legal environment or as a result of advances in technology may change the rates at which customers exercise options embedded in their contracts or enable them to take advantage of additional information available to them to exercise options in a way that is adverse to us.
See pages 18 and 52 on how we address the risks of new technologies and climate change through our business strategies and corporate responsibility respectively.
Being prepared for the worst The Group and its businesses have contingency plans in place to ensure a swift and effective response in case risks crystallise into major loss events, including: • Financial Event Response Plans – to ensure we can respond promptly to severe adverse financial events (e.g. equity market crash, sovereign default etc.) that may weaken the financial position of Aviva
• Major Incident Response Plans – to ensure we can maintain our level of customer service in response to a spike in demand resulting from a major weather event (e.g. floods, windstorms) or other loss event.
Key activities during 2014 — Board Reflecting on the results of the Board and committees’ effectiveness evaluation conducted at the end of 2013, the Board considered the balance of skills, knowledge and experience on the Board and its committees. The committees were all considered effective, however the Board agreed there was merit in making some changes to the membership of some of the committees.
central mechanism to further improve the monitoring and management of the Group’s control environment.
Risk Committee During the year the Risk Committee closely scrutinised the Group’s work towards compliance with Solvency II (SII), reviewing and approving interim measures on the path to compliance, including an Internal Model Validation Business Standard and, later in the year, the methodology and assumptions for the Individual Capital Adequacy submission to be made in 2015.
Remuneration Committee As advised in last year’s Annual report, during 2014 the Remuneration Committee undertook a strategic review of executive remuneration to ensure the Directors’ remuneration policy remained fit for purpose, aligned to the achievement of strategy, competitive, consistent with good governance and regulatory practice and compliant with relevant regulation. It was recognised at the time that such a strategic review might require the Company to propose changes to the policy at the 2015 Annual General Meeting (2015 AGM). Details of the review process, consultation and conclusions reached by the committee can be found in the Directors’ remuneration report, as can detail of the proposed revised policy. We are confident that we now have a fair and balanced set of policy changes, which align the interests of executives with the long term success of the Company, and hope you support these at this year’s AGM.
Nomination Committee The principal role of the Nomination Committee is to keep under review the composition of the Board to ensure that it has the right balance of skills, knowledge, experience and diversity. Increasing female representation on the Board to at least 25% remains our firm aim; however appointments will not be made on the basis of gender alone and will be made on merit and have regard to other criteria identified by the committee.
During the year, Scott Wheway chaired committee meetings to consider candidates to be appointed as Chairman upon my retirement following the 2015 AGM. Details regarding the process by which Sir Adrian Montague was recommended to the Board are set out in the Nomination Committee’s report.
UK Corporate Governance Code During the year the Company has been compliant with all relevant provisions of the 2012 UK Corporate Governance Code (the Code). A new version of the Code was published in September 2014 and the Company intends to be compliant with all new relevant provisions in the timeframes dictated by the Code. We disclose details of how we comply with the Code throughout the Directors’ and corporate governance report and the Directors’ remuneration report in the Annual report and accounts.
Board of directors We have a strong, experienced and diverse Board with a good balance of skills 64 | Aviva plc Annual report and accounts 2014
Previously, John was Chief Executive Officer of Australia and New Zealand Banking Group Ltd (banking), Executive Director at Standard Chartered plc (banking), head of Citicorp Investment Bank Ltd and later head of Citicorp and Citibank in the United Kingdom and Ireland (banking). Formerly a Non-Executive Director of The Royal Bank of Scotland Group plc (banking) and Capital Radio plc (media) and a director and council member of the London Stock Exchange. He was also a NonExecutive Director of the Securities Association (UK securities regulator), the Auditing Practices Board (auditing regulator) and the Business Council of Australia. He has extensive experience in banking, including investment, corporate and retail banking, and in general management, insurance, strategy, risk and cultural change.
On 12 September 2014, it was announced that John McFarlane would step down as Chairman of the Aviva Group. John will remain as Chairman of the Aviva Group until the conclusion of the 2015 AGM, at which point Sir Adrian Montague will be appointed in his place, subject to his re-election.
Mark Wilson Group Chief Executive Officer b.1966 — Mark joined the Board in December 2012 and became the Group Chief Executive Officer on 1 January 2013. He was formerly Chief Executive Officer and President of AIA Group (insurance) which he repositioned into the leading pan-Asian insurance company, improved its market valuation, successfully navigated the company through the global financial crisis and prepared it for an IPO. The company emerged as a stronger and significantly more valuable independent entity, leading to the largest IPO in corporate history in Hong Kong.
He also held senior investment banking positions at Donaldson, Lufkin & Jenrette (investment company) and its successor, Credit Suisse (financial services holding company), where he led the global insurance group as Managing Director. Tom also practiced corporate and securities law with Cravath, Swaine & Moore LLP (U.S. law firm) from 1992 to 1994.
He was formerly Chairman of Anglian Water Group Ltd (utilities), Friends Provident plc (life insurance), British Energy Group plc (utilities), Michael Page International plc (recruitment), and Cross London Rail Links Ltd (Crossrail) and was formerly Deputy Chairman of Network Rail Ltd (railway network provider), Partnerships UK plc (public private partnership) and UK Green Investment Bank plc (investment bank).
Glyn Barker Independent Non-Executive Director b.1953 — Glyn was appointed to the Board in February 2012 and is Chairman of the Audit Committee and a member of the Risk and Nomination Committees. He is currently Chairman of Irwin Mitchell (law firm), a Non-Executive Director of Transocean Limited (offshore drilling), Berkeley Group Holdings plc (construction) and a trustee of English National Opera. He was formerly Vice Chairman, UK of PricewaterhouseCoopers LLP with responsibility for leading the executive team for Europe, Middle East, Africa and India region following a long and successful career with the firm. Glyn has extensive experience as a business leader and a trusted adviser to FTSE100 companies and their boards on a wide variety of corporate and finance issues. He possesses a deep understanding of accounting and regulatory issues together with in-depth transactional and financial services experience.
Patricia Cross Independent Non-Executive Director b.1959 — Patricia joined the Board in December 2013. She chairs the Remuneration Committee and is a member of the Audit and Nomination Committees. She is currently a Non-Executive Director of Macquarie Group Limited (banking) and Macquarie Bank Ltd (banking) and Chairman of the Commonwealth Superannuation Corporation (Federal Government pension fund).
She is a Director of the Grattan Institute (Australian think tank) and an Ambassador for the Australian Indigenous Education Foundation (charity). Patricia was formerly a Non-Executive Director of Qantas Airways Ltd (airline) and National Australia Bank Ltd (NAB) (financial services). She was a NonExecutive Director at Wesfarmers Ltd (conglomerate including insurance), Suncorp-Metway Ltd (insurance and banking) and AMP Ltd (wealth management and life insurance). She was formerly Chairman of the Qantas Superannuation Fund (pension fund), Deputy Chairman of Victoria’s Transport Accident Commission (statutory insurer, Australia) and served in honorary Australian 66 | Aviva plc Annual report and accounts 2014
Michael Hawker, AM Independent Non-Executive Director b.1959 — Michael was appointed to the Board in January 2010 and is Chairman of the Risk Committee and a member of the Audit and Nomination Committees. He is currently Non-Executive Director of Macquarie Group Limited, Macquarie Bank Limited (banking) and Washington H Soul Pattinson and Company Ltd (investment). Michael is Independent Non-Executive Chairman of the Australian Rugby Union, Non-Executive Director of SANZAR Pty Ltd and is NonExecutive of the International Rugby Board (rugby union). With respect to medical research, Michael is Chairman of The George Institute for Global Health (research institution). He was formerly Chief Executive and Managing Director of Insurance Australia Group (insurance), Group Chief Executive of business and consumer banking at Westpac Banking Corporation (banking) and Chairman of the Insurance Council of Australia (insurance representative body).
Michael brings to the Board a wealth of knowledge and experience gained over a long career in the banking and insurance industries, in both executive and nonexecutive roles in Europe, Asia and Australia.
Gay will retire from the Board from the conclusion of the 2015 AGM.
Michael was a Senior Partner at McKinsey & Company (consultancy) where he worked for more than 30 years until July 2013. Initially an Associate in the financial services practice at McKinsey, he became a Partner in 1984 and Senior Partner in 1991 and his career focused on financial services, retail and transformation programmes.
He started his career at Rothschild (financial advisors) in 1970 as an Analyst and then a Foreign Exchange Dealer and spent three years seconded to the Central Policy Review Staff (now the Number 10 Policy Unit) to work on major initiatives including industrial policy and social security reform. Michael has extensive experience of advising companies on the implementation of transformation programmes and also has an in-depth understanding of the financial services sector.
Scott has a wealth of business experience in the retail sector and his understanding of customer priorities has been greatly beneficial in driving the customer agenda and excellence in customer service within the business.
Group executive 68 | Aviva plc Annual report and accounts 2014
01. Mark Wilson Group Chief Executive Officer — Go to page 66 to read Mark’s biography.
02. Tom Stoddard Chief Financial Officer — Go to page 66 to read Tom’s biography.
07. Kirstine Cooper Group General Counsel and Company Secretary — Kirstine joined Aviva in 1991 and is the Group General Counsel and Company Secretary. She is responsible for providing legal and company secretarial services to the Board and Group; legal risk management; corporate responsibility and public policy. She has held a number of legal roles across the Group.
08. Christine Deputy Group HR Director — Christine joined Aviva in 2013 and is responsible for Human Resources and communications. She aims to support employees to reach their full potential, to better serve our customers and to enable Aviva to achieve outstanding performance. Christine has a proven track record of leading HR functions and delivering cultural change programmes.
09. Khor Hock Seng Chief Executive Officer, Aviva Asia — Khor joined Aviva in 2013 and is responsible for Aviva’s Asian businesses including our new joint venture in Indonesia, Astra Aviva Life. He has over 30 years of experience within the insurance market in Asia and uses his deep business understanding and extensive knowledge of the Asian market and culture to drive Aviva’s success in the region.
Directors’ and corporate governance report This report sets out the role and activities of the Board and explains how the Group is governed.
The UK Corporate Governance Code — As a UK premium listed company, Aviva seeks to comply with the UK Corporate Governance Code 2012 (the Code). The 2014 version of the Code will apply to Aviva’s 2015 financial year and work is underway to ensure full compliance with the new requirements.
Further details of how the Company applied the Code principles and complied with its provisions, are set out in this report and the Directors’ remuneration report.
Further information on the Code can be found on the Financial Reporting Council’s website at www.frc.org.uk.
The Board’s view is that the Company was fully compliant throughout the accounting period with the relevant provisions of the Code.
The directors As at the date of this report the Board comprised the Chairman, Group Chief Executive Officer (Group CEO), Chief Financial Officer (CFO) and eight Independent Non-Executive Directors (NEDs). A number of changes to the Board are due to take place after the 2015 AGM, some of which are subject to the successful completion of the proposed acquisition of Friends Life. This will result in the Board comprising the Chairman, three executive directors and seven NEDs and the Board will still have a sufficient balance between executive and non-executives. The following charts show the balance of the Board between executive and non-executive representation, length of tenure and the diversity of the Board in terms of gender and nationality.
independent and free from any relationship or circumstances that could affect, or appear to affect, their independent judgement. Scott Wheway, who has served on the Board for seven years, was subject to a particularly rigorous review of his independence and the Board was satisfied that he remains independent and that his presence on the Board provides continuity given the number of changes to the Board during the previous two years. He makes a considerable contribution to the Board, through his knowledge of the Company and wide skill set.
Board activities during 2014 The work of the Board follows an agreed annual work plan and the following chart shows how the Board allocated its time during 2014.
Italian Life Insurance joint ventures with UBI Banca and Unicredit to simplify the structure and facilitate cash remittances
• Approved the redemption of three hybrid debt instruments and the re-financing of one of these instruments as part of the Group’s deleveraging plans
• Approved a proposal to launch an initial public offering of 20% of the shares in the Group’s life and pensions joint venture in Turkey
The Board held one meeting in Italy during the year to gain a deeper understanding of the operations of the Italian business.
Proposed acquisition of Friends Life Following careful consideration of the potential benefits and risks of the transaction and reviewing the due diligence, the Board approved the proposed acquisition of Friends Life and on 19 January 2015 the Company published a prospectus and circular in relation to the recommended all share acquisition of Friends Life Group Limited by the Company as announced on 2 December 2014. It is proposed that up to 1,105,000,000 new ordinary shares of 25 pence each will be issued by the Company in connection with the proposed acquisition of the entire issued and to be issued ordinary share capital of Friends Life. The proposed acquisition will be implemented by way of a scheme of arrangement under Part VIII of the Companies (Guernsey) Law 2008.
The review of the performance of the Chairman, led by the Senior Independent Director, concluded that the Chairman continued to operate to a high level, exhibiting positive leadership and ensuring that the necessary conditions for effective discussion both on an individual, and at Board level, were met.
The Chairman and Senior Independent Director assessed the performance of the NEDs and the Executive Directors in their capacity as directors. The Chairman concluded that each director contributes effectively and demonstrates full commitment to his/her duties. To assess the
During the year, directors attended a number of internal training sessions, including sessions on various aspects of SII, Aviva’s UK defined benefit pension scheme, remuneration, Aviva’s investment process and asset portfolio, and information security. Training sessions have been built into the Board’s and committees’ work plans for 2015.
The Chairman ensures that all new directors receive a comprehensive induction programme tailored to their particular needs and which consists of several separate training sessions over a number of months. These include presentations from key members of senior management, visits to the Group’s main operating businesses and functions, and meetings with the external auditor and one of the Company’s corporate brokers.
Glyn Barker 14 100% Patricia Cross 14 100% Michael Hawker 14 100% Gay Huey Evans 14 100% John McFarlane 14 100% Michael Mire 14 100% Sir Adrian Montague2 12 92% Patrick Regan3 2 67% Bob Stein 14 100% Tom Stoddard4 10 100% Scott Wheway 14 100% Mark Wilson 14 100%
2 Sir Adrian did not attend one meeting where the agenda was to approve his appointment as Chairman. There was also one ad hoc meeting that he was unable to attend due to technological difficulties but he did receive the papers for the meeting.
During 2014, 14 Board meetings were held, of which, nine were scheduled Board meetings and five were additional Board meetings called at short notice. In addition the Board delegated responsibility for certain items, such as giving final approval to proposals broadly agreed by the full Board, to specially created committees of the Board which met 14 times during 2014.
Conflicts of interest In line with the Companies Act 2006, the Company’s Articles of Association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such a decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success for the benefit of its shareholders as a whole. The Board’s procedure to regularly review and approve actual and potential conflicts of interest as they arise, and prior to the appointment of new directors, operated effectively during the year.
In-depth monitoring of the establishment and operation of prudent and effective controls in order to assess and manage risks associated with the Group’s operations is delegated to the Audit, Risk and Governance Committees which report regularly to the Board. However, the Board retains ultimate responsibility for the Group’s systems of internal control and risk management and their effectiveness and has carried out a review of the systems during the year.
These frameworks play a key role in the management of risks that may impact the fulfillment of the Board’s objectives. They are designed to identify and manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or losses. These frameworks are regularly reviewed and comply with the Financial Reporting Council’s Internal Control: Revised Guidance for Directors.
Risk Management Framework The Risk Management Framework (RMF) is designed to identify, measure, manage, monitor and report the significant risks to the achievement of the Group’s business objectives and is embedded throughout the Group. The RMF has been in place for the year under review and up to the date of approval of the Annual report and accounts. It is codified through risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. Further detail is in note 58.
Internal controls Internal controls facilitate effective and efficient business operations, the development of robust and reliable internal reporting and compliance with laws and regulations.
A Group reporting manual including International Financial Reporting Standards (IFRS) requirements and a Financial Reporting Control Framework (FRCF) are in place across the Group. FRCF relates to the preparation of reliable financial reporting and preparation of local and consolidated financial statements in accordance with applicable accounting standards and with the requirements of the Sarbanes-Oxley Act of 2002. The FRCF process follows a riskbased approach, with management identification, assessment (documentation and testing), remediation (as required), reporting and certification over key financial reporting-related controls. Management regularly undertakes quality assurance procedures over the application of the FRCF process and FRCF controls.
The Group Executive members and each business unit Chief Executive Officer are responsible for the implementation of Group strategies, plans and policies, the monitoring of operational and financial performance, the assessment and control of financial, business and operational risks and the maintenance and ongoing development of a robust control framework and environment in their areas of responsibility. Chaired by the Chief Risk Officer (CRO), the Asset Liability Committee (ALCO) assists the CFO with the discharge of his responsibilities in relation to management of the Group’s Balance Sheet within risk appetite and provides financial and insurance risk management oversight.
As the business responds to changing market conditions and customer needs, the Risk function regularly monitors the appropriateness of the Company’s risk policies and the RMF to ensure they remain up to date. This helps to provide assurance to the various risk oversight committees that there are appropriate controls in place for all core business activities, and that the processes for managing risk are understood and followed consistently across the Group.
Board oversight The Risk Committee assists the Board in its oversight of risk and risk management across the Group and makes recommendations on risk appetite to the Board. The responsibilities and activities of the Risk Committee are set out in the Risk Committee Report.
Effectiveness of controls — To support an assessment of the effectiveness of the Group’s governance, internal control and risk management requirements, the chief executive officer of each business unit is required to certify that: • There are sound risk management and internal control systems that are effective and fit for purpose in place across the business
The Audit Committee, working closely with the Risk Committee, on behalf of the Board, last carried out a review of the effectiveness of the systems of internal control and risk management in March 2015, covering all material controls, including financial, operational and compliance controls and the RMF and processes. The necessary actions have been or are being taken to remedy any significant failings and weaknesses identified from these reviews.
Communication with shareholders — The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues.
The Company is also holding a General Meeting on 26 March 2015 to request shareholder approval for the proposed acquisition of Friends Life. Further details are available on the Company’s website at www.aviva.com/friendsoffer and the results of the vote will be published after the meeting.
Board Committees 74 | Aviva plc Annual report and accounts 2014
Committee role and responsibilities — The committee assists the Board by regularly reviewing the composition of the Board and conducting a rigorous and transparent process when recommending or renewing the appointment of directors to the Board. The main responsibilities of the committee are to: • Evaluate and review the structure, size and composition of the Board including the balance of skills, knowledge, experience and diversity of the Board, taking into account the Company’s risk appetite and strategy
• Approve a report on the committee’s activities for inclusion in the Company’s Annual report and accounts
3 Sir Adrian Montague did not attend a meeting at which the only agenda item was the process for identifying and shortlisting candidates for the role of Chairman.
Board appointments and diversity The committee led the process to find a new CFO following Pat Regan’s resignation and appointed Spencer Stuart to assist in the search process. A role profile was agreed by the committee and a shortlist of internal and external candidates considered. The final candidates were interviewed by Spencer Stuart, the Chairman, Group CEO, HR Director, Group General Counsel & Company Secretary and members of the committee and the committee then met to review feedback and, after due consideration, recommended to the Board that Tom Stoddard was the best candidate and that he be appointed to the Board as CFO. Spencer Stuart is a signatory to the Voluntary Code for Executive Search Firms and is also used by the Group for other senior executive searches. In connection with the proposed acquisition of Friends Life, discussions were held with the current Chairman and Group Chief Executive of Friends Life and it was proposed that Andy Briggs, the current Group Chief Executive of Friends Life, join the Board and be appointed as CEO of the Group’s combined UK & Ireland Life business. The committee discussed this proposal and its potential impact and after due consideration recommended to the Board that Andy Briggs be appointed as an Executive Director of the Board. The committee also considered whether any of the Friends Life Non-Executive Directors would be suitable for appointment to the Board given their experience and knowledge of the Friends Life group, which would be invaluable in integrating the Friends Life business into the Group following the completion of the proposed acquisition. After due consideration, the committee recommended to the Board that Sir Malcolm Williamson, current Chairman of Friends Life, be appointed as a NonExecutive Director of the Board and that he become the Company’s Senior Independent Director once Sir Adrian Montague becomes Chairman. These appointments are subject to regulatory approval and the successful completion of the proposed acquisition.
Whilst the Board is currently below its target of 25% female representation at 18% it remains committed to achieving that goal as soon as possible.
Other activities During the year the committee reviewed the composition of the Board’s committees and recommended changes to the Board for approval.
I am pleased to present the Audit Committee’s report for the year ended 31 December 2014.
The principal purpose of the committee is to assist the Board in discharging its responsibilities for monitoring the integrity of the Group’s financial statements. In addition, we review the adequacy and effectiveness of the Group’s systems of internal control and monitor the effectiveness, performance and objectivity of the internal and external auditors.
During the year the committee welcomed Scott Wheway as a member and the committee is now comprised of five independent NEDs. I have been Chairman of the committee since May 2013.
Committee responsibilities — The committee acts independently of management, to ensure that the interests of shareholders are properly protected in relation to the financial reporting and the effectiveness of the Group’s systems of internal control.
• Approve and monitor the application of the Internal Audit Charter and Business Standard
3 Sir Adrian was unable to attend one ad hoc meeting due to technological difficulties but did receive the papers for the meeting.
Patricia Cross has financial experience gained through a number of senior executive roles at National Australia Bank, Chase Manhattan Bank and Banque Nationale de Paris and non-executive roles at a number of financial services companies. She has also held honorary roles on the Australian Financial Centre Forum and Financial Sector Advisory Council and meets the US financial expertise requirements.
Committee activities during 2014 The work of the committee followed an agreed annual work plan and fell under four main areas: financial statements and accounting policies, internal controls, oversight of the internal audit function and oversight of external audit. The committee’s work in each of these areas is described below. The chart below shows how the committee allocated its time during 2014.
The committee considered a number of significant issues in relation to the financial statements which are described in more detail below.
Key Financial Assumptions The committee reviewed the key assumptions used in calculating long-term business contract liabilities, including the annuitant mortality assumptions and credit default allowance on the corporate bond portfolio adopted by the UK Life business.
For annuitant mortality and corporate bond credit default, an external benchmarking exercise indicated that Aviva’s assumptions were within a reasonable range relative to its peers. The committee was satisfied with management’s review of these assumptions.
An ad hoc meeting was held in December 2014 at the request of the committee to give further insight into the judgements for the demographic assumptions and economic methodology adopted by the Aviva UK & Ireland Life business for the Full Year 2014.
The committee also reviewed the prudence requirements around the margins on IFRS assumptions for the life and pensions business.
The Group’s general insurance reserves were reviewed including understanding the key developments, risks and uncertainties and providing appropriate challenge. The committee was satisfied with management’s analysis and that the methodology and assumptions applied in calculating the year end liabilities are appropriate.
The committee considered a change in the model used to value equity release mortgage loans held by the UK Life Annuity business. The new methodology incorporates more explicit assumptions for property growth and the risk around future cash flows. The committee was satisfied with the change including the valuation at Full Year 2014.
Other matters The Group adopted amendments to IAS 32 Financial Instruments: Presentation regarding the offsetting of financial assets and financial liabilities during the year. The committee was satisfied that the restated presentation of the financial position for the Full Year 2013 was appropriate. The committee considered management’s best estimate for the completion adjustments relating to the sale of Aviva USA. The committee considered the carrying value of the goodwill in the Group’s Spanish business and was satisfied with the impairment testing. The committee also considered the held for sale classification of a number of businesses. With regard to the Group’s accounts prepared on a Market Consistent Embedded Value basis, the committee considered and challenged the key assumptions presented by management. In the 2013 Annual report and accounts we reported that we had identified controls failings in Aviva Investors that happened between August 2005 to June 2013. In February 2015,
Aviva Investors reached a settlement with the FCA in relation to this and agreed to pay a fine of £17.6 million. Aviva Investors has committed significant resources to enhancing its control environment. Aviva Investors has fixed the issues, improved the systems and controls and made substantial changes to the management team.
The committee reviewed the impact of the launch of the initial phase of a project to use Aviva International Insurance Limited as the primary reinsurance vehicle for the Group.
Internal control The committee received quarterly updates on the effectiveness of the FRCF framework and discussed rectification of any deficiencies in controls. The committee continued to challenge management to improve the quality of the overall control environment across the Group and reemphasised management’s role in identifying and addressing control issues. In this context, management identified the following nine major control improvement topics requiring focus in 2014, each topic being sponsored by a member of the Group Executive: IT security; underwriting risk accumulation for the General Insurance business; data governance/protection; Aviva Investors (including Group oversight); UK Commercial Finance; fraud management; second line effectiveness; Turkey Life and governance arrangements for business units that have been identified for disposal. Management reported to the committee throughout the year on their progress in addressing the major control improvement topics and Internal Audit provided their view of management’s assessment. Whilst progress has been made in addressing the nine topics, further work remains to be completed. Two new topics have also been added to monitor in 2015; disaster recovery in the UK data centres and outsourcing. The committee will continue to monitor progress in addressing all these topics in 2015. The committee considered the potential impact on the control environment by the proposed acquisition of Friends Life and will monitor this during integration should the transaction complete.
The committee reported to the Board regarding the effectiveness of the Group’s overall risk management and internal control systems including the risk management system in relation to the financial reporting process. The committee worked closely with the Risk Committee in its overall review of the Company’s systems of risk management and internal controls.
The systems of internal control extend to the Group’s business units, each of which has an Audit Committee that provides an oversight role for its business. Membership of these business unit Audit Committees is largely comprised of Non-Executive Directors of subsidiary companies. The CAO attended business unit Audit Committee meetings throughout the year and reported back on their effectiveness to the committee.
The committee’s Terms of Reference require it to establish and monitor procedures for dealing with complaints from employees in relation to accounting issues. The committee reviews the procedures annually and received regular updates from the CAO however, no significant complaints were received during the year. A description of the Company’s systems of internal control and the Group’s risk management framework is included on pages 73 to 74.
Internal Audit Charter and Business Standard The Charter sets out the purpose, functions, scope and responsibilities of the Internal Audit function and how it maintains independence from the first and second line management of the Group. The four main functions of Internal Audit are to: • Assess and report on the effectiveness of the design and operation of the framework of controls which enable risk to be assessed and managed
• Investigate and report on cases of suspected financial crime and employee fraud and malpractice
• Undertake designated advisory projects for management provided that they do not threaten the function’s actual or perceived independence from management
Effectiveness of the internal audit function The function made significant progress in implementing the recommendations to improve effectiveness which were made as part of the independent review of the function commissioned in the previous year. As a result the audit planning process was enhanced to increase management involvement and a significantly more structured approach to assessing and communicating audit coverage was introduced. Audit reporting was enhanced to assess and recognise management awareness of risk and control issues and reinforce first and second line responsibility. The approach to stakeholder management was strengthened through the development of a stakeholder management tool, together with a range of resources to help manage stakeholders and promote the function across the Group. The reward approach was reviewed to ensure that it was in line with industry and regulatory developments and the function successfully achieved a high level of movement of staff both into and from other parts of the Group. Work was also completed to improve efficiency through developing and implementing a range of initiatives, in particular through increasing the effectiveness of the function’s data analytics capabilities. In addition, an annual programme of internal quality assurance was completed and actions arising were implemented to continue to improve the effectiveness of the function.
Chief Audit Officer The CAO had direct access to the Board Chairman, the committee Chairman and the committee members. The committee worked with the Group CEO to determine the CAO’s objectives and evaluate his levels of achievement, and to approve the CAO’s remuneration. His annual performance related bonus was unconnected to the Group’s financial performance. The CAO reported to the Group CEO during the year.
Although he is a member of the Group Executive, the committee is satisfied that the CAO’s independence has been maintained as adequate safeguards are in place to maintain his independence, authority and standing. The committee remained satisfied that the Internal Audit function had sufficient resources during the year to undertake its duties.
The Company has an External Auditor Business Standard in place which is aimed at safeguarding and supporting the independence and objectivity of the Auditor. The Standard is in full compliance with all UK, US and International Federation of Accountants (IFAC) rules and takes into account the Auditing Practices Board Ethical Standards for Auditors.
The Standard regulates the appointment of former audit employees to senior finance positions in the Group and sets out the approach to be taken by the Group when using the non-audit services of the principal Auditor. It distinguishes between (i) those services where an independent view is required and services that should be performed by the Auditor (such as statutory and non-statutory audit and assurance work); (ii) prohibited services where the independence of the Auditor could be threatened and the Auditor must not be used; and (iii) other non-audit services where the Auditor may be used. Non-audit services where the external auditor may be used include: non-recurring internal controls (such as the work commissioned in relation to Aviva Investors referred to below) and risk management reviews (excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due diligence on acquisitions and disposals, project assurance and advice, tax compliance services, and employee tax services. During the year the committee received quarterly reports of compliance against the Standard.
The Group paid £14.7 million to PwC for audit and audit-related assurance services in 2014, relating to the statutory audit of the Group and Company’s financial statements, the audit of Group subsidiaries, additional fees relating to the prior year audit of Group subsidiaries and auditrelated assurance services (2013: £16.6 million).
In addition the Group paid PwC £0.2 million (2013: £0.2 million) in relation to the audit of Group occupational pension schemes.
The Group paid £1.5 million to PwC in relation to other non-audit services. This included £0.5 million relating to a controls review at Aviva Investors and £1.0 million for a number of other, individually smaller services. In line with the External Auditor Business Standard, the committee satisfied itself that for these engagements, robust controls (including appropriate levels of review) were in place to ensure that PwC’s objectivity and independence was safeguarded, and concluded that it was in the interests of the Company to purchase these services from PwC due to their specific expertise. Further details are provided in note 13.
As Chairman of the committee, I am pleased to present the Risk Committee’s report for the year ended 31 December 2014.
The principal purpose of the committee is to assist the Board in its oversight of risk within the Group, with particular focus on the Group’s risk appetite, risk profile and the effectiveness of the Group’s RMF. We review the risks inherent in both our investment portfolios and in the insurance products we offer our clients. In addition to the risks inherent in investing and in providing assurance, we review the strength of our capital base and our liquidity position, the level of our operational risk, and the significant ongoing changes to the regulatory framework. The capital implications of SII and the Group’s GSII status pose risks to the Group and the committee has monitored development of these issues closely during the year and will continue to do so throughout 2015. The committee ensures that due diligence appraisals are carried out on strategic or material transactions, and also works with the Remuneration Committee to ensure that risk management is properly considered in setting the Group’s Remuneration Policy.
During the year the committee welcomed Gay Huey Evans as a member and the committee is now comprised of five independent NEDs. I have been Chairman of the Committee since September 2011.
Committee responsibilities — The committee oversees all aspects of risk management in the Group, save for conduct and financial crime risk, and brand and reputation risk (oversight responsibility for which lies with the Governance Committee). Consequently the committee’s particular focus is on market, credit, liquidity, insurance and operational risk, and in considering their impact on both the financial and non-financial goals of the Group.
The key responsibilities of the committee are to: • Review the Group's future risk strategy and its risk appetite, particularly in relation to capital and liquidity and to make recommendations on risk appetite to the Board
• Review the Group's investment risk strategy, credit limit framework and approve individual counterparty exposures in excess of limits
• Review the methodology and assumptions used in the Group's model for determining its economic and regulatory capital requirements and satisfy itself that the assumptions and calibrations used reflect the Group's forward-looking risk profile
• Satisfy itself that risk-based information is used effectively by management
• Review relationships with prudential regulatory authorities in relevant jurisdictions and developments in the prudential regulatory environment, and review significant actual or potential breaches of prudential regulation and actions being taken to address these
• Review and recommend to the Board for approval any material regulatory filings
• Review the security and resilience of the IT infrastructure of the Group
Revised committee Terms of Reference were adopted in February 2015 following an annual refresh. The full Terms of Reference for the committee can be found on the Company’s website at www.aviva.com/terms-of-reference, and are also available from the Group Company Secretary.
The Chairman of the committee reported to subsequent meetings of the Board on the committee’s work and the Board received a copy of the CRO’s report, the meeting agenda and the minutes of each meeting of the committee. Throughout the year both the committee Chairman and Glyn Barker were also members of the Audit Committee (the latter as chairman of the Audit Committee), ensuring that risk considerations were appropriately communicated and taken into account in the decisions of that committee.
The committee Chairman, with the CRO, holds a series of semi-annual conference calls with the major subsidiary board risk committee chairmen and their Chief Risk Officers, to ensure that there are no significant risks occurring in the business that have not been raised through normal reporting routes.
During the year the committee focused on the following areas: Risk appetite monitoring The committee received regular detailed reports on key risk exposures, emerging and potential risks, and the drivers of risk throughout the Group. It assessed and challenged the appropriateness of the Group’s overall risk appetite. The committee monitored the Group’s exposure against this appetite, particularly in relation to the liquidity appetite, the Individual Capital Adequacy (ICA) and Group Regulatory Capital (IGD) surplus, and how the Group’s business plan affects the Group’s capital position over time. In December 2014 the committee reviewed the Group’s Business Plan for 2015-2017 and the Capital and Liquidity Plan for the same period and challenged management on a number of areas, particularly in relation to growth targets, and to ensure that further proposed expense reductions were achieved without compromising the control environment and in conjunction with re-engineering business processes to deliver efficiencies. The plans were recommended to the Board for approval with a number of items for consideration and it was noted that the plans had been prepared on the basis of the current Group and would be re-worked following the successful completion of the proposed acquisition of Friends Life.
Capital and liquidity management Throughout the year the committee closely monitored and stress tested the Group’s economic capital and liquidity positions against risk appetite and targets for the Group and for material subsidiaries. The Group’s liquidity position and ICA and IGD surplus has increased due to a programme of strategic, economic and operational actions, approved by the committee and the Board, designed to strengthen and provide greater resilience to the Group’s capital and liquidity position.
Actions taken by the committee included a detailed review of vulnerability of the Group’s liquidity position to certain stress event scenarios and an assessment of management’s mitigation proposals. The committee considered the transformation of Aviva International Insurance Limited into a Group internal captive reinsurer and challenged managements’ assumptions of the benefits that it would bring. The committee continues to monitor the progress of the second phase of this project and the interaction with relevant regulators in the UK and overseas. The Committee reviewed management’s proposal to redeem £200 million and €50 million lower tier two hybrid debt instruments and the Group’s plans to reduce leverage.
The committee reviewed management’s plan to address potential future capital requirements and the impacts associated with being classified as a GSII and the transition to SII, as well as the contingent actions that could or should be taken.
Risk Committee – allocation of agenda time 82 | Aviva plc Annual report and accounts 2014
IT risks are increasingly high profile and, following the appointment of a new Chief Information Officer during the year, the committee received detailed updates on IT, data and cyber security issues and the committee endorsed management’s proposed actions to reduce risk in these areas.
Internal controls Working with the Audit Committee, the committee monitored the adequacy of the RMF. During the year an updated RMF policy with associated revised Business Standards was reviewed and recommended for approval by the Board.
In addition to undertaking its agreed annual programme of activities, the committee agreed that its priorities for 2015 should be to continue monitoring the Group’s preparedness for SII; monitor the risks associated with completion of the proposed acquisition of Friends Life and its integration into the Group; capital and liquidity strength; IT security and resilience, and reviewing risks associated with different product lines.
As Chairman of the committee, I am pleased to present the Governance Committee’s report for the year ended 31 December 2014.
This report provides details of the role of the Governance Committee and the work it has undertaken during the year.
Committee responsibilities — The key responsibilities of the committee are to: • Take a leadership role in shaping the corporate governance principles, culture and ethical values of the Group in line with the Group’s strategic priorities
• Oversee the Group’s conduct in relation to its corporate and societal obligations, including setting the guidance, direction and policies for the Group’s customer and corporate responsibility (CR) agenda and related activities and advising the Board and management on these matters
Committee membership and attendance — The committee comprises independent NEDs only. On 19 February 2014, Gay Huey Evans stepped down as a member and Chairman of the committee and Scott Wheway was appointed as Chairman. The table below shows the committee members during the year and their attendance at committee meetings.
Gay Huey Evans3 1 100% Michael Mire 6 100% Sir Adrian Montague 6 100%
2 Scott Wheway was appointed as Chairman of the committee on 19 February 2014.
The following chart shows how the committee allocated its time during 2014, with key activities set out below: Conduct The committee reviewed conduct issues which had the potential to have a material impact on the Group and the management responses and actions in response to these.
Governance The committee continued to focus on strengthening the Group’s subsidiary board framework to ensure implementation of best practice corporate governance throughout the Group, being mindful of local laws, regulations and customs. This included presentations from Business Units on their governance structures and approving template Terms of Reference for subsidiary boards.
The committee also maintained oversight of appointments of NEDs and succession planning for material company subsidiary boards and received copies of the board effectiveness reviews undertaken by
Reputation The committee received regular reports concerning reputational, brand and franchise risks affecting the Group and considered issues arising from developments in the media and in areas of public policy which could potentially impact the Group.
The committee also continues to oversee the implementation of the People Thesis and the work in relation to the culture and values programme and received a summary of the 2014 Voice of Aviva employee survey results. Further details on this area can be found in the ‘Our people and communities’ section of the Strategic report.
The committee received progress reports on all the Group’s corporate responsibility key performance indicators and received an in-depth review of the business ethics code completion rates across all markets.
Corporate responsibility report The committee approved the Group’s CR non-financial metrics that can be found in the Strategic report and the Company’s full CR report that can be found at www.aviva.com/corporateresponsibility /reports.
The committee agreed a number of actions including: to refine its remit to remove any potential overlap with the Risk Committee’s responsibilities; to provide clearer guidance to subsidiaries on the standards of governance expected; and to further build relationships with subsidiary Chairmen.
The directors’ report required under the Companies Act 2006 comprises this Directors’ and corporate governance report; the Directors’ remuneration report; the following disclosures in the ‘Our people and communities’ section of the Strategic report: • Environment and climate change for disclosure of our greenhouse gas emissions
Details of our policy on hedging are in note 59 and details of likely future developments are throughout the Strategic report. The management report required under Disclosure and Transparency Rule 4.1.5R comprises the Strategic report, Shareholder information (which includes the risks relating to our business), and details of material acquisitions and disposals made by the Group during the year in note 4. This Director’s and corporate governance report fulfills the requirements of the corporate governance statement under Disclosure and Transparency Rule 7.2.1.
Share capital and control — The issued ordinary share capital of the Company was increased by 3,547,718 ordinary shares during the year which were allotted under the Group’s employee share and incentive plans. At 31 December 2014 the issued ordinary share capital totalled 2,950,487,340 shares of 25 pence each and the issued preference share capital totalled 200,000,000 shares of £1 each. Accordingly, the issued and paid-up ordinary share capital constituted 79% of the Company’s total issued share capital and the issued preference share capital constituted 21% of the Company’s total issued share capital at 31 December 2014. All the Company’s shares in issue are fully paid up and the ordinary and preference shares have a Premium and Standard listing respectively on the London Stock Exchange. The Company is listed on the New York Stock Exchange (NYSE) in the form of American Depositary Shares, referenced to ordinary shares, under a depositary agreement with Citibank. Details of the Company’s share capital and shares under option at 31 December 2014 and shares issued during the year are given in notes 31 to 34.
The rights and obligations attaching to the Company’s ordinary shares and preference shares, together with the powers of the Company’s directors, are set out in the Company’s Articles of Association, copies of which can be obtained from Companies House and the Company’s website at www.aviva.com/investorrelations /corporate-governance/articles-ofassociation, or by writing to the Group Company Secretary. The powers of the Company’s directors are subject to relevant legislation and, in certain circumstances (including in relation to the issue or buying back by the Company of its shares), are subject to authority being given to the directors by shareholders in General Meeting.
A General Meeting will be held on 26 March 2015 to approve the proposed acquisition of Friends Life. At this meeting shareholders will be asked to authorise the directors to allot ordinary shares of 25 pence each up to an aggregate nominal amount of £276,250,000 in relation to the acquisition. Details are contained in the Notice of General Meeting.
At the 2015 AGM, shareholders will be asked to renew the directors’ authority to allot new securities. Details are contained in the 2015 Notice of Annual General Meeting (Notice of AGM).
Where, under an employee share incentive plan operated by the Company, participants are the beneficial owners of shares but not the registered owners, the voting rights are normally exercised at the discretion of the participants. No person holds securities in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions in the transfer of securities or voting rights.
There are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None are considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s employee share incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans.
Authority to purchase own shares — At the Company’s 2014 AGM, shareholders renewed the Company’s authorities to make market purchases of up to 294 million ordinary shares, up to 100 million 8¾% preference shares and up to 100 million 83/8% preference shares. These authorities were not used during the year or up to the date of this report. At the 2015 AGM, shareholders will be asked to renew these authorities for another year and the resolution will once again propose a maximum aggregate number of ordinary shares which the Company can purchase of less than 10% of the issued ordinary share capital. Details are contained in the Notice of AGM. The Company held no treasury shares during the year or up to the date of this report.
Major shareholdings — The table below shows the holdings of major shareholders in the Company’s issued ordinary share capital in accordance with the Disclosure and Transparency Rules as at 31 December 2014 and 3 March 2015.
• Patrick Regan – resigned as Group CFO with effect from 28 March 2014.
Directors’ interests and indemnity arrangements — At no time during the year did any director hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an indemnity provision between each director and the Company and employment contracts between each executive director and a Group company. The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself and its directors. The Company has also executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. The Articles of Associationallow such indemnities to be granted.
Financial instruments — Group companies use financial instruments to manage certain types of risks, including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the Risk and Capital management section, the Shareholder information section and an companies to such risks is contained in note 58.
Political donations — At the 2014 AGM, shareholders passed a resolution, on a precautionary basis, to authorise the Company and its subsidiaries to make political donations and/or incur political expenditure (as such terms are defined in sections 362 to 379 of the Companies Act 2006), in each case in amounts not exceeding £100,000 in aggregate. As the authority granted will expire at the 2015 AGM, renewal of this authority will be sought at this year’s AGM. Further details are available in the Notice of AGM. The definitions of political donations and political expenditure used in the Companies Act 2006 are broad in nature and this authority is sought to ensure that any activities undertaken throughout the Group, which could otherwise be construed to fall within these provisions, can be undertaken without inadvertently infringing the rules. It is not the policy of the Company to make donations to EU political organisations or to incur any other political expenditure.
Articles of Association — Unless expressly stated to the contrary in the Article of Association, the Company’s Articles of Association may only be amended by special resolution of the shareholders. The Company’s current Articles of Association were adopted on 3 May 2012. Shareholders will be asked to adopt new Articles of Association at the 2015 AGM and further details can be found in the Notice of AGM.
Fair, balanced and understandable — To support the directors’ statement below that the Annual report and accounts, taken as a whole, is fair, balanced and understandable, the Board considered the process followed to draft the Annual report and accounts: • each section of the Annual report and accounts is prepared by a member of management with appropriate knowledge, seniority and experience. Each
• the overall co-ordination of the production of the Annual report and accounts is overseen by the Chief Accounting Officer to ensure consistency across the document
• an advanced draft is considered and reviewed by the Disclosure Committee and legal advisers
• our Board members also receive drafts of the Annual report and accounts in sufficient time to facilitate their review and input. This includes the opportunity to discuss the draft Annual report and accounts with both management and the external auditor and where appropriate challenging and disclosures as appropriate
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group and parent company financial statements in accordance with IFRSs as adopted by the European Union. In preparing these financial statements, the directors have also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently • make judgements and accounting estimates that are reasonable and prudent • state whether applicable IFRSs as adopted by the European Union and IFRSs issued by IASB have been followed, subject to any material departures disclosed and explained in the financial statements
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and the group and enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
• the Strategic report and the Directors’ and corporate governance report in this Annual report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
New York Stock Exchange listing requirements — The Company’s ordinary shares are admitted to the NYSE and are traded as American Depositary Shares. As a foreign company listed on the NYSE, the Company is required to comply with the NYSE corporate governance rules to the extent that these rules apply to foreign private issuers. As a foreign private issuer, the Company is therefore required to comply with NYSE Rule 303A.11 by making a disclosure of the differences between the Company’s corporate governance practices and NYSE corporate governance rules applicable to US companies listed on NYSE. The Company complied with the Code in respect of its 2014 financial year and other relevant best practice principles and guidelines. The main differences between UK and US requirements are summarised below together with Aviva’s approach to compliance: NYSE Listing Rules UK Corporate Governance Code Aviva approach
Independence criteria for directors Independent directors must form the majority of the board of directors. A director cannot qualify as independent unless the Board affirmatively determines that the director has no material relationship with the company. NYSE rules prescribe a list of specific factors and tests that US -listed companies must use for determining independence.
The majority of the Board comprises independent Non-Executive Directors who are deemed independent under the Code and meet the independence criteria in the NYSE rules.
The Chairman should hold meetings with the NonExecutive Directors without the Executive Directors present.
Committees US companies are required to have a Nominating/Corporate Governance Committee comprised of independent directors. In addition to identifying individuals qualified to become Board members, this committee must develop and recommend to the Board a set of corporate governance principles and oversee the evaluation of the Board and management.
The Company is required to have a Nomination Committee but not a Corporate Governance Committee. A majority of the members of the Nomination Committee should be independent NEDs. The Board is required to undertake a formal and rigorous annual appraisal of its own performance.
US companies are required to have a Compensation Committee made up entirely of independent directors.
The Company has a Remuneration Committee comprised of independent NEDs which covers all NYSE and Code requirements and recommends the remuneration policy for Executive Directors to the Board and shareholders for approval.
The Company must have an Audit Committee and at least one member must have recent and relevant financial experience. The Committee should be comprised of independent NEDs.
Remuneration policy and Strategic Reward Review (SRR) undertaken in 2014 Last year, in presenting our remuneration policy, we committed to undertake a strategic review during 2014 of our remuneration framework, policies and practices. This review has given us the opportunity to consider the continuously changing regulatory environment, and to have extensive dialogue with shareholders and governance advisory bodies.
The remuneration policy now being presented in the DRR, if approved, is to apply from the conclusion of the 2015 Annual General Meeting (AGM), and it incorporates a number of changes that we believe improves its effectiveness as a core pillar of good governance, an enabler for Aviva’s challenging strategic agenda and as a driver of reward outcomes that are fair for both shareholders and executives.
There is also a strong and evolving regulatory element that mandates aspects of governance concerning how remuneration policies should operate. It is assumed in our remuneration policy that, as a company, we will comply with the spirit and requirements of regulation on pay, and maintain a strong governance focus - but it is also a critical part of our reward approach that we identify, recognise and reward behaviours and performance that are consistent with the Aviva values of: • Care more • Kill complexity • Never rest • Create legacy
The key changes we are proposing to the remuneration policy are: • Clawback – Implementation of
• Shareholding requirement – Increase requirement from 200% to 300% of basic salary for the Group Chief Executive Officer (Group CEO)
• Annual bonus – Three changes to the existing approach are proposed. They relate to: − Bonus opportunity; − The addition of a quality of earnings assessment in determining outcomes; and
It is not the intention to “pay more for the same performance” – it is about proper calibration of the reward opportunity to the increasingly stretching year-on-year challenges required to deliver on our strategy.
Quality of earnings assessment – The committee this year implemented a “checkpoint” step focusing on quality of earnings in the assessment it undertakes of performance against the financial targets. This is intended to provide further assurance that the performance assessment reflects sustainable value for shareholders. It could, for example, involve the identification and exclusion of extraordinary gains in earnings attributable to matters beyond the direct control of management.
Disclosure of performance targets – The disclosure of annual bonus targets was discussed in depth in various shareholder consultation sessions.
We consider that the new policy achieves a good balance between rewarding success and demonstrating good governance, and we seek the support of shareholders for it.
This was achieved in a year of great challenges in the general insurance business and the UK life business that are discussed in detail earlier in the Annual report, and at a time that a major strategic and transformational agenda is being undertaken.
Whereas last year the bonus awards were impacted by disappointing results on the customer and employee measures, 2014 saw stronger performance on both. In 2013, the employee target scores were missed, so 0% was achieved on that measure and a lower bonus was awarded as a result. By contrast, in 2014 the employee engagement target was substantially exceeded and this has been a key factor in a higher bonus being awarded.
For the Group CFO, who joined in April 2014 and who since arriving has played a critical role in embedding the investment thesis and ensuring alignment of Aviva’s strategic and capital efficiency objectives, a bonus of 115% of basic salary was awarded.
These decisions are detailed on page 103 of the 2014 Annual report.
While this represents an increase from his 2014 grant, the decision to offer an increased opportunity was taken to recognise the level of achievement being displayed against the Group’s agenda and to help with retention during this critical time, strategically and in relation to the objectives of the proposed Friends Life transaction. It is the view of the committee that providing a substantial but “at risk” reward opportunity through the LTIP in this situation means there is a clear link to longer-term shareholder outcomes (i.e. via the relative total shareholder return performance measure and the five year time horizon for the award).
The award for the CFO of 250% of basic salary also represents an increase against the prior year grant (225%) but is less than the maximum that can be awarded (350%).
The committee did, however, carefully assess the outcomes under both the 2014 annual bonus and the 2012 LTIP before finalising its decisions on each. The committee considers that these earnings assessments, which it has now implemented, are an important safeguard against reward outcomes that might otherwise be unreasonable and inconsistent with shareholder experience.
Directors’ remuneration policy This section sets out Aviva’s remuneration policy for directors, in accordance with the requirements of the Companies Act 2006 (as amended) and the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). The policy approach set out in this section incorporates changes proposed as part of our SRR.
It is intended that this policy will formally apply from the date of Aviva’s 2015 AGM, for a duration of three years, subject to shareholders approving this policy at that meeting.
Alignment of Group strategy with executive remuneration The committee considers alignment between Group strategy and the remuneration of its EDs is critical. Our remuneration policy provides market competitive remuneration, and incentivises EDs to achieve both the annual business plan and the longer term strategic objectives of the Group. Significant levels of deferral and an aggregate shareholding requirement align EDs’ interests with those of shareholders and aid retention of key personnel. As well as rewarding the achievement of objectives, variable remuneration can be zero if performance thresholds are not met.
Table 1 below provides an overview of our proposed remuneration policy for EDs. For an overview of the remuneration policy for NonExecutive Directors (NEDs) see table 4.
To reward EDs who achieve the Company’s strategic objectives and demonstrate the Aviva values and behaviours.
Threshold performance would result in a bonus payment of no more than 25% of basic salary.
Performance is assessed against a range of relevant financial, employee, customer and risk targets designed to incentivise the achievement of our strategy, as well as individual strategic objectives as set by the committee. Although financial performance is the major factor in considering overall expenditure on bonuses, performance against non-financial measures including behaviours in line with our values will also be taken into consideration.
To motivate EDs to achieve the Company’s longer-term objectives, to align EDs’ interests with those of shareholders and to aid the retention of key personnel.
Shares are awarded which vest dependent on the achievement of performance conditions over a three year period. Additional shares are awarded at vesting in lieu of dividends on any shares which vest.
Currently, performance targets over three years are: • 50% vest based on targets for absolute Return on Equity (ROE) performance
Benefits To provide EDs with a suitable but reasonable package of benefits as part of a competitive remuneration package. This involves both core executive benefits, and the opportunity to participate in flexible benefits programmes offered by the Company (via salary sacrifice). This enables us to attract and retain the right level of talent necessary to deliver the Company’s strategy.
Benefits are provided on a market related basis. The Company reserves the right to deliver benefits to EDs depending on their individual circumstances, which may include a cash car allowance, life insurance and private medical insurance. In the case of non-UK executives, the committee may consider additional allowances in line with standard relevant market practice.
Set at a level which the committee considers appropriate against comparable roles in companies of a similar size and complexity to provide a reasonable level of benefit.
The committee would pay no more than it judged reasonably necessary, in the light of all applicable circumstances.
Target opportunity of 75% of basic salary and maximum opportunity of 150% of basic salary at maximum for all EDs.
Additional two year holding period for LTIPs post vesting. This increases the total period between when award is granted and the first opportunity to sell to five years.
• A significant failure of risk management and/or controls; or • A scenario or event which causes material reputational damage to the
Company; or • Misconduct which, in the opinion of the committee, ought to result in the complete or partial lapse of an award
A requirement to build a shareholding in the Company equivalent to 200% of basic salary for the Group CEO and 150% of basic salary for other EDs.
Increase in shareholding requirement from 200% to 300% of basic salary for the Group CEO.
Approach to recruitment remuneration On hiring a new ED, the committee would align the proposed remuneration package with our remuneration policy.
The committee may make awards on hiring an external candidate to ‘buyout’ remuneration arrangements forfeited on leaving a previous employer. In doing so the committee would take account of relevant factors including any performance conditions attached to these awards, the form in which it was paid (e.g. cash or shares) and the timeframe of awards. The committee considers that a buyout award is a significant investment in human capital by Aviva, and any buyout decision will involve careful consideration of the contribution that is expected from the individual. Buyout awards would be awarded on a “like for like“ basis compared to remuneration being forfeited, and would be capped to reflect the value being forfeited.
The maximum level of variable pay which could be awarded to a new ED, excluding any buyouts, would be in line with the policy set out above and would therefore be no more than 550% of basic salary for the Group CEO (200% of basic salary annual bonus opportunity and 350% of basic salary as the face value of a LTIP grant) and 500% of basic salary for other EDs (150% of basic salary annual bonus opportunity and 350% of basic salary as the face value of a LTIP grant).
Should the Company have any prior commitments outside of this policy in respect of an employee promoted internally to an ED position, the committee may continue to honour these for a period of time. Where an ED is appointed from within the organisation, the normal policy of the Company is that any legacy arrangements would be honoured in line with the original terms and conditions. Similarly, if an ED is appointed following Aviva’s acquisition of, or merger with, another company, legacy terms and conditions may be honoured.
On hiring a new NED, the committee would align the remuneration package with the remuneration policy for NEDs, outlined in table 4, including fees and travel benefits.
Illustration of the policy The charts below illustrate how much EDs could earn under different performance scenarios in one financial year: • Minimum – basic salary, pension or cash in lieu of pension and benefits, no bonus and no vesting of the LTIP • Target – basic salary, pension or cash in lieu of pension, benefits, and: − A bonus of 100% and an LTIP of 350% of basic salary (with notional LTIP vesting at 50% of maximum) for the Group CEO; − A bonus of 100% and an LTIP of 250% of basic salary (with notional LTIP vesting at 50% of maximum) for the CFO. • Maximum – basic salary, pension or cash in lieu of pension, benefits, and: − A bonus of 200% and an LTIP of 350% of basic salary (with notional LTIP vesting at maximum) for the Group CEO; − A bonus of 150% and an LTIP of 250% of basic salary (with notional LTIP vesting at maximum) for the CFO.
Tom Stoddard Potential earnings by pay element 96 | Aviva plc Annual report and accounts 2014
Termination payment Pay in lieu of notice up to a maximum of 12 months’ basic salary.
In the case of Mr Wilson, if his employment were to be terminated by the Company, other than for cause, by the end of 2015 then he would be entitled to be reimbursed against evidenced expenditure for reasonable and appropriate costs incurred in relocating outside the UK up to a maximum of £100,000, inclusive of any tax liability.
Remuneration and benefits The operation of the annual bonus and LTIP is at the Company’s discretion.
Other benefits Other benefits include private medical insurance and participation in the Company’s staff pension scheme.
Date current contract commenced: Notes 1 Mr Regan tendered his resignation as CFO on 22 January 2014 and left the Company on 28 March 2014.
There is no automatic entitlement to an annual bonus for the year in which loss of office occurs. The committee may determine that an ED may receive a pro rata bonus in respect of the period of employment during the year loss of office occurs based on an assessment of performance. Where an ED leaves the Company by reason of death, disability or ill health, or any other reason determined by the committee, there may be a payment of a pro rata bonus for the relevant year at the discretion of the committee.
The treatment of leavers under our ABP and LTIP is determined by the rules of the relevant plans. Good leaver status under these plans would be granted in the event of, for example, the death of an ED, or their departure on ill health grounds. Good leaver status for other leaving reasons is at the discretion of the committee, taking into account the circumstances of the individual’s departure, but would typically include planned retirement. In circumstances where good leaver status has been granted, awards may still be subject to malus and clawback in the event that inappropriate conduct of the ED is subsequently discovered post departure. If good leaver status is not granted, all outstanding awards will lapse.
Non-Executive Directors Table 4 below, sets out details of our remuneration policy for NEDs.
Table 4: Remuneration policy for Non-Executive Directors – overview Element Purpose and link to strategy Operation Maximum opportunity Performance measures
NEDs receive a basic annual fee in respect of their Board duties. Further fees are paid for membership and, where appropriate, chairmanship of Board committees.
The NEDs, including the Chairman of the Company, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in table 5 below.
Table 5: Non-Executive Directors’ key terms of appointment Provision Policy Period In line with the requirement of the UK Corporate Governance Code, all NEDs, including the Chairman, are subject to annual re-election by shareholders at each AGM.
Notes 1 The dates shown above reflect actual appointment dates where agreed following signature of the letter as all appointments are subject to regulatory approval. 2 Ms Huey Evans and Mr McFarlane will be retiring from the Board from the conclusion of the 2015 AGM.
Patricia Cross2, 3 (Chairman) 8 89% Scott Wheway4 1 100% Gay Huey Evans 9 100% Bob Stein 9 100%
Notes 1 This shows the percentage of meetings which the committee member attended during the year whilst a member of the committee. 2 Patricia Cross became Chairman of the committee on 19 February 2014. 3 Patricia Cross was not able to attend one of the committee meetings due to a family bereavement. 4 Scott Wheway ceased to be Chairman and a member of the committee on 19 February 2014.
Committee responsibilities The committee is responsible for reviewing and making recommendations to the Board regarding the remuneration policy of the Group and for reviewing compliance with the remuneration policy in so far as it relates to EDs and senior managers. The committee is also responsible for recommending to the Board to seek shareholder approval for the directors’ remuneration policy. A revised directors’ remuneration policy will be presented to shareholders for approval at the 2015 AGM and thereafter will be subject to a shareholder vote at least every three years, in accordance with the Companies Act 2006. Any change to the approved remuneration policy will only become effective if approved by the shareholders at a general meeting.
• Have regard to remuneration trends across the Group when setting remuneration policy for EDs • Ensure that remuneration arrangements for all employees are commensurate with promoting ethical behaviour • Approve the list of Code Staff and any severance packages for Code Staff under the relevant regulatory remuneration code and the remuneration for employees in control functions and those whose remuneration exceeds an agreed limit • Monitor and recommend to management the level and structure of remuneration for senior management and, other than in respect of
The full terms of reference for the committee can be found on the Company’s website at www.aviva.com/terms-of-reference and are also available from the Group General Counsel and Company Secretary.
Consideration by the committee of matters relating to directors remuneration The committee met nine times during 2014 of which six were scheduled committee meetings and three were additional committee meetings. The Group Chairman generally attended all meetings of the committee. The Group General Counsel and Company Secretary acted as secretary to the committee. The Chairman of the committee reported to subsequent meetings of the Board on the committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the committee. The committee received material assistance in considering executive remuneration from the Group Chairman, the Group CEO, the Group HR Director, the HR Director – Reward, the Chief Accounting Officer, the Chief Capital & Investments Officer, the CEO – Aviva Investors and the Chief Audit Officer. These people attended meetings by invitation during the year. No person was present during any discussion relating to their own remuneration.
Committee activities during 2014 Whilst not mutually exclusive the categories shown on the chart to the right were areas of focus for the committee during the year. The chart also shows how the committee dedicated its time to these activities.
As previously set out in this report, a significant part of the committee’s work programme during the year was dedicated to the SRR and consideration of shareholder feedback following consultation. Other significant committee activities included: Executive Directors’ and Group Executive Remuneration The committee benchmarked, reviewed and set salaries for the Group CEO, CFO and GE members from 1 April 2014. An assessment was conducted on the achievement of targets for 2013 for annual bonus calculation and the performance conditions were tested and reviewed for LTIP awards vesting in 2014.
A report from Internal Audit was received and considered by the committee following an internal review of the adequacy and effectiveness of controls over the preparation, validation and evaluation of financial and non-financial bonus metrics and noted that no material issues had been identified. The 2014 LTIP performance conditions and awards were approved. The committee also considered annual bonus targets for 2015.
Chief Financial Officer Patrick Regan tendered his resignation as CFO on 22 January 2014 and left the Board and the Group on 28 March 2014. • Mr Regan continued to receive basic salary and benefits up to his agreed departure date. There was no payment in lieu of any balance of his notice period • He received no bonus in respect of 2013 or 2014. No LTIP award was made for 2014 • The deferred element of Mr Regan’s 2010 and 2011 bonuses lapsed on termination of his employment • His 2011, 2012 and 2013 LTIP awards also lapsed on termination of his employment
Following Mr Regan’s departure, Mr Stoddard joined the Group and Board on 28 April 2014. Details of his remuneration were announced in the 2013 DRR and are as follows: • Basic salary – £675,000 per annum next subject to review in 2015 • Annual bonus – 75% of basic salary for target performance and up to 150% of basic salary for maximum performance. Two thirds of any bonus awarded is currently required to be deferred into Aviva shares for three years. The bonus payable for target performance will increase to 100% of basic salary for 2015, assuming the 2015 remuneration policy is approved
• LTIP – Eligible for an LTIP grant with a face value of up to 350% of basic salary. The LTIP is subject to performance conditions and vests after three years to the extent that those conditions have been met. His 2014 grant will be at 225% of basic salary
• Benefits – A cash car allowance and Private Medical Insurance (PMI) cover for himself and his family
• For the LTIP, a structured assessment of the earnings based performance measure (e.g. ROE under the current LTIP design) was developed and has been implemented
• Scrutiny on buyout proposals submitted to the committee for approval has been increased, with a range of valuation estimates (performed independently from Aviva) being obtained where appropriate, and a suitably robust business case being required in support of the buyout investment, including a clear statement of the contribution expected from the proposed appointment
Notes 1 Mr Regan tendered his resignation as CFO on 22 January 2014 and left the Board and the Group on 28 March 2014, and so received no bonus award for 2013 or 2014. 2 Bonus payable in respect of the financial year including any deferred element at face value at date of award. 3 Pension contributions consist of employer contributions into the defined contribution section of the Aviva Staff Pension Scheme, excluding salary exchange contributions made by the employees, plus payments in lieu of pension above the lifetime or annual allowance caps. 4 The prior year total has been recalculated to show the directors that continued in office during all or part of the current year and excludes remuneration of directors that left in the prior year.
Additional disclosures in respect of the single total figure of remuneration table (audited information) Benefits The benefits disclosure includes the cost where relevant of private medical insurance, life insurance, accommodation, travel and car benefits. In the case of Mr Wilson this also includes benefits resulting from the SAYE Scheme, as described below, which has been valued based on the monthly savings amount (£250) and the discount provided (20%) for two months of 2014. All the numbers disclosed include the tax charged on the benefits, where applicable. As disclosed in the 2013 DRR, Mr Stoddard is eligible to claim benefits of £200,000 inclusive of benefit-in-kind charges, against appropriate receipts or other evidence of expenditure, in respect of his relocation from the US to the UK. In respect of Mr Wilson, as indicated in the 2013 DRR, the committee has approved reimbursement of limited additional expenses over and above the £200,000 disclosed in the 2013 DRR to assist his family to complete their relocation to the UK.
Based on the outcomes against the KPIs, and an assessment of Mr Wilson’s and Mr Stoddard’s individual strategic performance, the committee approved: • A bonus of 130% of basic salary for Mr Wilson (87% of the maximum bonus available), with a total value of £1,274,000 • A bonus of 115% of basic salary for Mr Stoddard (77% of the maximum bonus available). This will be prorated based on the date Mr
Stoddard joined the Group and the Board, resulting in a total value of £526,457
COR improved 1.6 percentage points to 95.7%. Strong results in the UK and Ireland and an improvement in Europe were offset by poor weather in Canada.
Operating expense ratio has reduced significantly in 2014, moving from 54.1% to 51.5%. There remains significant opportunity to improve this in order to reach our target of an expense ratio below 50% in 2016.
APH targets were set for each market. Whilst these were achieved in some markets including Asia and Canada, they were not achieved in all markets across the Group.
Personal performance, • Progress against Group strategic objectives: – True customer composite – Digital first – Not everywhere
Group CFO – since joining the Board in April 2014, has provided significant input into shaping the strategic direction of the Group.
• Leadership and demonstration of the Aviva values: – Care more – Kill complexity – Never rest – Create legacy
Details of financial targets impacting the annual bonus for the 2013 financial year, and performance against them (which were not disclosed in the 2013 DRR) are disclosed in table 9 below. This also shows the relative outcomes of financial and non-financial targets on the Group CEO’s bonus for 2013. Strong financial outcomes against targets suggested a bonus outcome of over 90% of maximum but the effect of failing to meet customer and employee targets saw the final outcome reduced to 75% of maximum.
Financial KPIs 67.83% 90.44% Customer (measures commercially sensitive ) 3.48% 23.20% Employee (measures commercially sensitive and different definition to 2014)
2012 LTIP award vesting in respect of performance period 2012-2014 Although no current EDs will receive a vesting amount from this award, 50% of the award is expected to vest in March 2015. The performance conditions for this award are set out in table 10 below.
Single total figure of remuneration for 2014 – Non-Executive Directors (audited information) Table 11 below sets out the total remuneration earned by each NED who served during 2014.
Current non-executive directors Glyn Barker 136 122 1 - 137 122 1 The prior year total has been recalculated to show the directors that continued in office during all or part of the current year and excludes remuneration of directors that left in the prior year.
Face value has been calculated using the average of the middle-market closing price of an Aviva ordinary share on the three consecutive business days immediately preceding the date of grant, on 24 March 2014. Accordingly 601,226 LTIP shares and 150,306 ABP shares were awarded to the Group CEO based on a share price of 489 pence per share. The LTIP vests subject to the achievement of two equally weighted performance measures, absolute ROE and relative TSR performance, which have been chosen to reflect shareholders’ long-term interests. Details of the performance measures and targets are set out below. The ABP vesting is not subject to formal performance conditions.
The LTIP and buyout awards mentioned previously in respect of Mr Stoddard have not been made during 2014 as Mr Stoddard has been subject to share dealing restrictions, due to the proposed Friends Life transaction.
TSR targets (audited information) Relative TSR determines the vesting of the other 50% of the LTIP award. Performance of the 2014 grant will be assessed against the following companies: Aegon, Allianz, Axa, CNP Assurances, Direct Line Group, Friends Life Group, Generali, Legal & General, MetLife, Old Mutual, Prudential, RSA, Standard Life and Zurich. TSR vesting operates as set out in table 14 below.
Below median 0% Median 10% Between median and upper quintile Pro rata between 10% and 50% on a straight line basis Upper quintile and above 50%
Payments to past directors (audited information) Trevor Matthews resigned from the Board with effect from 8 May 2013 and left the Company on 6 June 2013. • As disclosed in the 2013 Annual Report and Accounts, Mr Matthews’ 2011 and 2012 LTIP awards were pro-rated to reflect his service during the performance period and vest the extent to which the performance conditions have been achieved at the end of the period • There was a maximum of 302,431 (not inclusive of shares awarded in lieu of dividends accrued) phantom shares available to vest in
• The 2012 award will vest in March 2015 to the extent to which the performance conditions have been achieved at the end of the period. Therefore it is expected that 115,036 of the 230,073 (not inclusive of shares awarded in lieu of dividends accrued) shares will vest
Russell Walls retired from the Board with effect from 8 May 2013. Mr Walls was appointed as Chairman and NED of Aviva Insurance Limited on 1 May 2013. Mr Walls was also appointed a NED of Aviva Italia Holdings S.p.A on 4 December 2014. Both are subsidiary companies of Aviva plc and the emoluments he received in respect of these directorships for the 2014 financial year were £115,067.
Implementation of remuneration policy in 2015 The implementation of the policy will be consistent with that outlined in the policy report.
Basic salaries The basic salary for the Group CEO will remain unchanged at £980,000 per annum. The basic salary for the CFO will remain unchanged at £675,000 per annum.
Annual bonus The maximum annual bonus opportunity will be in line with the levels set out in the policy section of this report. Annual bonus performance measures and weightings will be broadly in line with those for 2014.
Share buybacks3 — — — Total staff costs4 1,671 1,534 (8)%
Notes 1 Operating profit before tax attributable to shareholders’ profits for continuing operations after integration and restructuring costs. 2 The total cost of ordinary dividends paid to shareholders. 3 There were no share buybacks in 2013 or 2014 4 Total staff costs from continuing operations includes wages and salaries, social security costs, post-retirement obligations, profit sharing and incentive plans, equity compensation plans and termination benefits. The average number of employees in continuing operations was 29,970 (2013) and 26,937 (2014).
External Board appointments Tom Stoddard is a Trustee of Trout Unlimited (non profit conservation organisation). Mr Stoddard does not receive any fees or other compensation for this appointment.
Unvested share awards including shares held in connection with bonus deferrals are not taken into account in applying this test.
Notes 1 Shares ‘Owned outright’ are the directors’ beneficial holdings in the ordinary shares of the Company. This information includes holdings of any connected persons. 2 Shares ‘Unvested and subject to performance conditions’ are awards granted under the Aviva LTIP which vest only if the performance conditions are achieved. 3 Shares ‘Unvested and subject to continued employment’ are awards arising through the ABP. Under this plan, some of the earned bonuses are paid in the form of conditional shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if the ED leaves service before the end of the period.
4 ‘Options vested but not exercised’ are options over shares granted under the Aviva SAYE Scheme. 5 Based on the closing middle-market price of an ordinary share of the Company on 31 December 2014 of 484.5 pence. The closing middle-market price of an ordinary share of the Company during the year ranged from 436.7 pence to 539 pence. 6 As part of the SRR, it is proposed the Group CEO shareholding requirement be increased to 300% with a 5 year time limit to build the shareholding. Currently 50% of the net quantity of shares from any award vesting is retained, until the shareholding requirement is met. 7 The LTIP and buyout awards mentioned previously have not been made during 2014 as Mr Stoddard has been subject to share dealing restrictions, due to the Friends Life transaction. This has also prevented him from being able to purchase shares. 8 Shares held on 28 March 2014 (the date Mr Regan ceased to be a director of the Company).
Glyn Barker 11,700 11,700 Patricia Cross — 7,000 Michael Hawker 10,000 20,000 Gay Huey Evans 5,000 5,000 John McFarlane 10,000 10,000 Michael Mire 7,500 7,500 Sir Adrian Montague 21,503 22,068 Bob Stein 7,000 17,000 Scott Wheway 13,579 13,579
Mark Wilson Aviva long term incentive plan5, 6 2013 983,277 — — — 983,277 294.20 — Apr-16
Aviva annual bonus plan 2014 — 150,306 — — 150,306 476.40 — Mar-17
6 The performance periods for these awards begin at the commencement of the financial year in which the award is granted. 7 Any unexercised options will lapse at the end of the exercise period. 8 Options are not subject to performance conditions (the savings related options being granted under the SAYE plan). The option price was fixed by reference to a three day average closing middle-market price of an ordinary share of the Company, prior to grant date, with a discount of 20% as permitted under the SAYE plan. 9 Mr Regan exercised his options on 12 March 2014.
Patricia Cross Chairman, Remuneration Committee 110 | Aviva plc Annual report and accounts 2014
Union; and • Have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
What we have audited Aviva plc’s financial statements comprise: • The Consolidated and the Company statements of financial position as at 31 December 2014; • The Consolidated and the Company income statements and statements of comprehensive income for the year then ended; • The Reconciliation of the Group operating profit to profit for the year then ended; • The Consolidated and the Company statements of changes in equity and statements of cash flows for the year then ended; and • The Accounting policies and notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.
Certain required disclosures have been presented elsewhere in the Annual Report and Accounts (the ‘Annual Report’), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union.
Separate opinion in relation to IFRSs and as issued by the IASB As explained in the Accounting policies to the financial statements, the Group, in addition to applying IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the financial statements comply with IFRSs as issued by the IASB.
Our audit approach Overview • Overall Group materiality has been set at £102 million which represents 5% of the operating profit before tax attributable to shareholders’ profit adjusted for integration and restructuring costs. • Specific audit procedures were performed within the UK Life, UK General Insurance, Canada, France and Spain markets to address the areas of focus identified below. • We identified a further five markets where account balances are considered to be significant in size in relation to the Group, and scoped our audit to include detailed testing of those account balances. • Further audit procedures were performed by the Group engagement team, including over the head office operations and the consolidation process, to ensure that sufficient coverage was obtained. • Our risk assessment analysis identified the following as areas of focus: – Valuation of life insurance contract liabilities. – Methodology and assumptions used to value the non-life contract liabilities for the UK General Insurance and Canada markets. – Valuation of hard to value investments. – Valuation of goodwill in Spain.
Valuation of life insurance contract liabilities Refer to page 78 (Audit Committee Report), page 122 (Accounting policies) and page 188 (notes)
The Directors’ valuation of the provisions for the settlement of future claims involves complex and subjective judgements about future events, both internal and external to the business, for which small changes in assumptions can result in material impacts to the valuation of these liabilities.
The work to address the valuation of the UK Life insurance contract liabilities included the following procedures: • Testing the underlying company data to source documentation. • By applying our industry knowledge and experience we compared the methodology, models and assumptions used against recognised actuarial practices.
• We used the results of an independent PwC annual benchmarking survey of assumptions which allowed us to further challenge the assumption setting process by comparing certain assumptions used relative to the Group’s industry peers.
• We performed reasonableness checks on the modelled results of managements’ analysis of change and tested the accuracy of the manual calculations. This included assessing the appropriateness of changes to the model used to value the liabilities associated with the UK Equity Release Mortgages.
• Further testing was also conducted on specific assumptions such as UK Life Annuitant Mortality and UK Life Credit Default assumptions as set out below.
As part of our consideration of the entire set of assumptions we focused particularly on the following two within the UK Life market given their significance to the Group’s result and the level of judgement involved.
In addition to the procedures above, in respect of the UK Life annuitant mortality assumptions: • We understood and tested the governance process in place to determine the annuitant mortality methodology and assumptions.
• We tested the methodology and the model for rate of improvements used by management to derive the assumptions with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience.
In light of the work performed and the evidence obtained, we consider the assumptions used for annuitant mortality to be reasonable.
Valuation of non- life insurance contract liabilities Refer to page 78 (Audit Committee Report), page 122 (Accounting policies) and page 188 (notes)
The estimation of non-life insurance contract liabilities involves a significant degree of judgement. The liabilities are based on the bestestimate ultimate cost of all claims incurred but not settled at a given date, whether reported or not, together with the related claims handling costs. A range of methods, including stochastic projections, may be used to determine these provisions. Underlying these methods are a number of explicit or implicit assumptions relating to the expected settlement amount and settlement patterns of claims. Regulators across the globe continue to focus on reserving adequacy for non-life insurers, particularly in the current market.
Given the ongoing market volatility and macroeconomic uncertainty, investment valuation continues to be an area of inherent risk. The risk is not uniform for all investment types and is greatest for the following, where the investments are hard to value because quoted prices are not readily available: • Commercial mortgage loans (UK Life) • Equity release and securitised mortgage loans (UK Life) • Structured bond-type investments (France) • Collateralised loan obligations and non-recourse loans (UK Life)
For these hard to value investments we assessed both the methodology and assumptions used by management in the calculation of the year end values as well as testing the governance controls that the Directors have in place to monitor these processes.
Rationale for benchmark applied In determining our materiality, we considered financial metrics which we believed to be relevant, and concluded, consistent with last year, that operating profit before tax attributable to shareholders' profits adjusted for integration and restructuring costs was the most relevant benchmark.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £5 million (2013: £4 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Other required reporting Consistency of other information Companies Act 2006 opinions • In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. • The information given in the Corporate Governance Statement set out on pages 70 to 74 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.
• The statement given by the Directors on page 88, in accordance with provision C.1.1 of the UK Corporate Governance Code
• The section of the Annual Report on page 77, as required by provision C.3.8 of the Code, describing the work of the Audit
Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility.
Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • We have not received all the information and explanations we require for our audit; or • Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • The parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility.
Directors’ remuneration Directors’ remuneration report - Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. We have no exceptions to report arising from this responsibility.
Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • Whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; • The reasonableness of significant accounting estimates made by the Directors; and • The overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgments, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Aviva plc (the ‘Company’), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the ‘Group’ or ‘Aviva’) transacts life assurance and long-term savings business, fund management and most classes of general insurance and health business through its subsidiaries, joint ventures, associates and branches in the UK, Ireland, continental Europe, Canada, Asia and other countries throughout the world. The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.
New standards, interpretations and amendments to published standards that have been adopted by the Group The Group has adopted the following new standards or amendments to standards which became effective for financial years beginning on or after 1 January 2014.
These amendments clarify the meaning of ‘currently legally enforceable right to set-off’ to reinforce that a right to setoff must not be contingent on any future event, including counterparty default or bankruptcy. Additionally, amendments to IAS 32 clarify that a settlement mechanism must be in place to ensure settlement in practice that is either simultaneous or sufficient to result in insignificant credit and liquidity risk. The amendments to IAS 32 have been applied retrospectively in accordance with the transitional provisions of the standard. The primary impact of the application of the amendments has resulted in the grossing up of certain assets and liabilities related to derivatives and repurchase arrangements in the statement of financial position that were previously reported net.
There is no impact on the profit or loss or equity for any period presented. The effect on amounts previously reported at 1 January 2013 and 31 December 2013 is set out in note 1.
(ii) Amendments to IAS 39, Financial Instruments – Novation of Derivatives and Continuation of Hedge Accounting
The amendments provide an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity', such as certain investment funds. There are no implications for the Group’s consolidated financial statements as the Group does not meet the definition of an investment entity.
(v) Annual Improvements to IFRSs 2010-2012 These improvements to IFRSs consist of amendments to seven IFRSs including IFRS 2 Share-based Payment, IFRS 3 Business Combinations and IFRS 13 Fair Value Measurement. The amendments clarify existing guidance and there is no significant impact on the Group’s consolidated financial statements.
Standards, interpretations and amendments to published standards that are not yet effective and have not been adopted early by the Group The following new standards, amendments to existing standards and interpretations have been issued, are not yet effective and have not been adopted early by the Group: (i) Amendments to IAS 19, Employee Benefits – Employee Contributions
These narrow scope amendments simplify accounting for contributions from employees or third parties to defined benefit plans. It is not expected to have a significant impact on the Group’s consolidated financial statements. The amendments apply to annual reporting periods beginning on or after 1 July 2014 and have been endorsed by the EU.
These amendments provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. The amendments to IAS 16 and IAS 38 prohibit the use of revenue-based depreciation for property, plant and equipment and significantly limit the use of revenue-based amortisation for intangible assets. The adoption of these amendments is not expected to have significant impact for the Group’s consolidated financial statements. They are effective for annual reporting periods beginning on or after 1 January 2016 and have yet to be endorsed by the EU.
(vi) Narrow scope amendments to IFRS10, IFRS 12 and IAS 28 – Applying the Consolidation Exception
(viii) Annual Improvements to IFRSs 2012-2014 These improvements consist of amendments to five IFRSs including IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and IAS 19 Employee Benefits. The amendments clarify existing guidance. The adoption of these amendments is not expected to have a significant impact on the Group’s profit or loss or equity. The amendments are effective for annual reporting periods beginning on or after 30 June 2016 and have yet to be endorsed by the EU.
The impact of the adoption of IFRS 9 on the Group’s consolidated financial statements, to a large extent, will need to take into account the interaction of the requirements with the IASB’s ongoing insurance contracts accounting project. IFRS 9 has not been endorsed by the EU.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on an operating profit measure (also referred to as adjusted operating profit) that incorporates an expected return on investments supporting its long-term and non-long-term businesses. Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. Further details of this analysis and the assumptions used are given in notes 9 and 10. Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates; integration and restructuring costs; and exceptional items.
Insurance and participating investment contract liabilities G&L Goodwill, AVIF and intangible assets O Fair values of financial investments F&T Impairment of financial investments T Fair value of derivative financial instruments F&U Deferred acquisition costs and other assets X Provisions and contingent liabilities AA Pension obligations AB Deferred income taxes AC
Merger accounting and the merger reserve Prior to 1 January 2004, the date of first time adoption of IFRS, certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account. These transactions have not been restated, as permitted by the IFRS 1 transitional arrangements. The merger reserve is also used where more than 90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting merger relief under the Companies Act 1985 and, from 1 October 2009, the Companies Act 2006.