(AA) Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more probable than not that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Restructuring provisions include lease termination penalties and employee termination payments. They comprise only the direct expenditures arising from
Strategic report Governance IFRS financial statements Other information the restructuring, which are those that are necessarily entailed by the restructuring; and not associated with the ongoing activities of the entity. The amount recorded as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date. Where the effect of the time value of money is material, the provision is the present value of the expected expenditure. Provisions are not recognised for future operating losses. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.
Contingent liabilities are disclosed if there is a possible future obligation as a result of a past event, or if there is a present obligation as a result of a past event but either a payment is not probable or the amount cannot be reasonably estimated.
Past service costs are recognised at the earlier of the date the plan amendment or curtailment occurs or when related restructuring costs are recognised. The Group determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the year to the net defined benefit liability/(asset). Net interest expense is charged to finance costs, whereas, net interest income is credited to investment income. For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. The Group’s contributions are charged to the income statement in the year to which they relate and are included in staff costs.
Shares purchased by employee share trusts to fund these awards are shown as deduction from shareholders’ equity at their weighted average cost. When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited against the cost of these shares, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings.
Incremental external costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds of the issue and disclosed where material.
Interim dividends on ordinary shares are recognised in equity in the period in which they are paid. Final dividends on these shares are recognised when they have been approved by shareholders. Dividends on preference shares are recognised in the period in which they are declared and appropriately approved.
Where the Company or its subsidiaries purchase the Company’s share capital or obtain rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders’
Earnings per share has also been calculated on Group adjusted operating profit attributable to ordinary shareholders, net of tax, non-controlling interests, preference dividends, the direct capital instrument (the DCI) and tier one notes as the directors believe this figure provides a better indication of operating performance. Details are given in note 14.
Gross written premiums 27,606 25,442 Premiums ceded to reinsurers (2,229) (2,364)
Premiums written net of reinsurance 25,377 23,078 Net change in provision for unearned premiums (153) (210)
Expenses 6 Claims and benefits paid, net of recoveries from reinsurers (24,113) (23,782) Change in insurance liabilities, net of reinsurance 40a(ii) (1,074) (6,893) Change in investment contract provisions (13,837) (14,039) Change in unallocated divisible surplus 45 294 (381) Fee and commission expense (4,329) (3,885) Other expenses (3,537) (3,853) Finance costs 7 (683) (626)
Tax expense AC & 13 (728) (974) Less: tax attributable to policyholders' returns 13d 371 640 Tax attributable to shareholders' profits 13d (357) (334)
Attributable to: Equity holders of Aviva plc 1,497 703 Non-controlling interests 38 149 156
Earnings per share AG & 14 Basic (pence per share) 35.0p 15.3p Diluted (pence per share) 34.6p 15.1p
Other comprehensive income: Items that may be reclassified subsequently to income statement Investments classified as available for sale Fair value (losses)/gains 36 (7) 12 Fair value gains transferred to profit on disposals 36 (2) (2) Share of other comprehensive income of joint ventures and associates 36 6 (6) Foreign exchange rate movements 36, 38 68 1,128 Aggregate tax effect – shareholder tax on items that may be reclassified subsequently to income statement 13b 5 (34)
Items that will not be reclassified to income statement Owner-occupied properties – fair value (losses)/gains 36 (1) 4 Remeasurements of pension schemes 37, 48b(i) (5) 311 Aggregate tax effect – shareholder tax on items that will not be reclassified subsequently to income statement 13b 5 (70)
Attributable to: Equity holders of Aviva plc 1,523 1,901 Non-controlling interests 192 301
Group adjusted operating profit before tax attributable to shareholders' profits Life business 2,882 2,642 General insurance and health 700 833 Fund management 164 138 Other: Other operations (169) (94) Corporate centre (184) (184) Group debt costs and other interest (325) (325)
Group adjusted operating profit before tax attributable to shareholders' profits 3,068 3,010
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 8 34 379 Short-term fluctuation in return on investments on non-long-term business 9a (345) (518) Economic assumption changes on general insurance and health business 9a (7) (242) Impairment of goodwill, associates and joint ventures and other amounts expensed 16a, 19b (49) — Amortisation and impairment of intangibles (197) (175) Amortisation and impairment of acquired value of in-force business 17, 18(a), 19(b) (495) (540) Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 3b 135 (11) Other1 — (498)
United Kingdom 1,758 443 — (26) 2,175 Canada — 46 — — 46 France 425 104 — (29) 500 Poland 156 21 — 6 183 Italy, Ireland, Spain and Other 292 98 — (14) 376 Asia 235 (8) (4) (32) 191 Aviva Investors 1 — 168 32 201 Other Group activities 15 (4) — (106) (95)
Consolidated statement of changes in equity For the year ended 31 December 2017
Profit for the year — — — — — — 1,497 — 1,497 149 1,646 Other comprehensive income — — — — 121 (93) (2) — 26 43 69 Total comprehensive income for the year — — — — 121 (93) 1,495 — 1,523 192 1,715 Owner-occupied properties fair value gains transferred to retained earnings on disposals — — — — — (2) 2 — — — — Dividends and appropriations — — — — — — (1,081) — (1,081) — (1,081) Non-controlling interests share of dividends declared in the year — — — — — — — — — (103) (103) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — (126) 137 1 — 12 — 12 Capital contributions from non-controlling interests — — — — — — — — — 36 36 Changes in non-controlling interests in subsidiaries — — — — — — — — — (315) (315) Treasury shares held by subsidiary companies — — — 1 — — — — 1 — 1 Reserves credit for equity compensation plans — — — — — 77 — — 77 — 77 Shares issued under equity compensation plans 2 — 10 — — (44) 42 — 10 — 10 Shares purchased in buy-back (14) — 14 — — — (300) — (300) — (300) Reclassification of tier 1 notes to financial liabilities2 — — — — — — (92) (392) (484) — (484) Aggregate tax effect – shareholder tax — — — — — — 16 — 16 — 16 1 Capital reserves consist of share premium of £1,207 million, a capital redemption reserve of £14 million arising as a result of the shares purchased in buy-back and a merger reserve of £8,974 million. See note 30 for further details of the shares purchased in buy-back.
2 On 28 September 2017, notification was given that the Group would redeem the $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling on that date. The resulting foreign exchange loss of £92 million has been charged to retained earnings. See note 34 for further details.
Balance at 1 January 1,012 200 10,159 (29) 165 (279) 4,774 1,123 17,125 1,145 18,270 Profit for the year — — — — — — 703 — 703 156 859 Other comprehensive income — — — — 988 (32) 242 — 1,198 145 1,343 Total comprehensive income for the year — — — — 988 (32) 945 — 1,901 301 2,202 Owner-occupied properties fair value gains transferred to retained earnings on disposals — — — — — (46) 46 — — — — Dividends and appropriations — — — — — — (973) — (973) — (973) Non-controlling interests share of dividends declared in the year — — — — — — — — — (135) (135) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — (7) — — — (7) — (7) Capital contributions from non-controlling interests — — — — — — — — — 9 9 Changes in non-controlling interests in subsidiaries — — — — — — — — — 105 105 Treasury shares held by subsidiary companies — — — 13 — — — — 13 — 13 Reserves credit for equity compensation plans — — — — — 38 — — 38 — 38 Shares issued under equity compensation plans 3 — 12 1 — (30) 26 — 12 — 12 Aggregate tax effect – shareholder tax — — — — — — 17 — 17 — 17 1 Capital reserves consists of share premium of £1,197 million and a merger reserve of £8,974 million.
Consolidated statement of financial position As at 31 December 2017 £m
Ordinary share capital 30 1,003 1,015 Preference share capital 33 200 200
Equity attributable to shareholders of Aviva plc 17,169 17,003 Direct capital instrument and tier 1 notes 34 731 1,123
Equity excluding non-controlling interests 17,900 18,126 Non-controlling interests 38 1,235 1,425
Consolidated statement of cash flows For the year ended 31 December 2017
Cash flows from operating activities1 Cash generated from operating activities 55a 8,361 5,394 Tax paid (620) (647)
Cash flows from financing activities Proceeds from issue of ordinary shares 12 15 Shares purchased in buy-back 30 (300) — Treasury shares distributed from employee trusts 32 — — New borrowings drawn down, net of expenses 1,320 3,526 Repayment of borrowings2 (1,904) (2,340) Net (repayment)/drawdown of borrowings 49 (584) 1,186 Interest paid on borrowings (610) (595) Preference dividends paid 15 (17) (17) Ordinary dividends paid 15 (983) (871) Coupon payments on direct capital instrument and tier 1 notes 15 (81) (85) Capital contributions from non-controlling interests of subsidiaries 38 36 9 Dividends paid to non-controlling interests of subsidiaries 38 (103) (135) Changes in controlling interest in subsidiaries 38 — 105
Cash and cash equivalents at 1 January 38,405 33,170 Effect of exchange rate changes on cash and cash equivalents 266 1,283
Cash and cash equivalents at 31 December 55d 43,587 38,405 1 Cash flows from operating activities include interest received of £5,302 million (2016: £5,642 million) and dividends received of £2,606 million (2016: £2,536 million).
As a result of changes agreed by Aviva and Santander to the shareholders’ agreement, Aviva now controls the two joint venture companies and consolidates them with an effective date of 1 January 2017. The change from equity accounted joint ventures to consolidated subsidiaries resulted in a fair value remeasurement gain of £16 million on the previous equity interests of £48 million and recognition of a distribution agreement within intangible assets.
On 21 April 2017, Aviva plc announced the acquisition of VietinBank’s entire 50% shareholding in its life insurance joint venture VietinBank Aviva Life Insurance Company Limited (‘Aviva Vietnam’) for a consideration of £20 million and signing of a new life insurance distribution agreement. Following completion of the transaction on 22 May 2017, Aviva Vietnam is now a wholly owned subsidiary, with a change in the legal entity name to Aviva Vietnam Life Insurance Company Limited. The change from an equity accounted joint venture to consolidated subsidiary resulted in a fair value remeasurement gain of £7 million on the previous equity interest of £2 million and recognition of £18 million of goodwill and intangible assets.
(‘Friends First’) for a cash consideration of €130 million (approximately £116 million). As a result of this acquisition, Aviva will become one of the largest composite insurers in Ireland, with its market share in life insurance increasing to 15%, alongside its existing leading 15% market share in general insurance. The transaction is subject to regulatory approval and is expected to complete in the first quarter of 2018.
Strategic report Governance IFRS financial statements Other information 3 – Subsidiaries continued (b) Disposal and remeasurement of subsidiaries, joint ventures and associates
The profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises: Remeasurements due to change in control status Poland (see (a) (i) above) 16 — Asia – Vietnam (see (a) (ii) above) 7 —
FPI and Taiwan (see note 3 (c)(ii) and (c)(iii) for further details respectively).
Currency translation reserve and other reserves recycled to the income statement 26
On 1 November 2017, Aviva France disposed of a broker distributed individual health insurance portfolio to Malakoff Médéric (MM), a leading French mutual health insurer for cash consideration of €41 million (approximately £36 million), after transaction costs. Net assets disposed of were £nil, primarily relating to intangible assets not recognised by the Group under IFRS, resulting in a profit on disposal of approximately £36 million.
On 15 September 2017, Aviva announced that it had completed the sale of its 50% shareholding in life insurance and pension partnerships Unicorp Vida and Caja España Vida, as well as its wholly owned retail life business Aviva Vida y Pensiones, to Santalucía for a total consideration of €475 million (approximately £400 million). The transaction resulted in a profit on disposal of £28 million, calculated as follows: £m
Currency translation reserve and other reserves recycled to the income statement (42)
The assets and liabilities of operations classified as held for sale as at 31 December 2017 are as follows: Assets Goodwill, AVIF and other intangibles 1,467 12 Property and equipment 5 — Investment property — 48 Loans 6 75 Financial investments 8,306 10,706 Reinsurance assets 123 411 Other assets 225 1,521 Cash and cash equivalents 739 255
Assets and liabilities of operations classified as held for sale as at 31 December 2017 relate to the expected disposal of two businesses in Italy, the international operations of Friends Life (‘FPI’), Aviva Taiwan and the remaining life insurance businesses in Spain. See below for further details. Assets and liabilities of operations classified as held for sale during 2016 relate to Antarius (see note 3 (b)(i) for further details) disposed of during 2017.
On 29 September 2017, Aviva announced that it had agreed the sale of its entire shareholding of Avipop Assicurazioni S.p.A and Avipop Vita S.p.A to Banco BPM for a consideration of €265 million (approximately £233 million) payable in cash upon completion. This agreement follows a notification received by Aviva on 29 June 2017 of Banco BPM’s intention to not renew its distribution agreement with Aviva and Aviva's subsequent decision, announced on 25 August 2017, to exercise its put option. The transaction is subject to regulatory approval and is expected to complete in 2018. In accordance with IFRS 5, these businesses have been classified as held for sale from June 2017. These businesses are measured at their carrying amount and remain consolidated subsidiaries of Aviva at the balance sheet date.
(ii) FPI On 19 July 2017, Aviva announced the sale of Friends Provident International Limited (‘FPI’) to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited, for a total consideration of £340 million. The transaction is subject to regulatory approvals and is expected to complete in the first half of 2018. In accordance with IFRS 5, the subsidiary has been classified as held for sale from July 2017 and has been re-measured at fair value based on the expected sales price less costs to sell, calculated as £334 million, after deducting a £6 million reinsurance recapture fee between FPI and Aviva Re Limited which is embedded in the sale agreement. This resulted in a total loss on re-measurement of £118 million in 2017. The business remains a consolidated subsidiary of Aviva at the balance sheet date.
On 13 October 2017, Aviva announced that it has agreed to sell its entire 49% shareholding in its joint venture in Taiwan, First Aviva Life (‘Aviva Taiwan’) to Aviva’s joint venture partner, First Financial Holding Co. Ltd. (‘FFH’). In accordance with IFRS 5, the joint venture has been classified as held for sale from October 2017 and has been re-measured at fair value based on the expected sales prices less costs to sell resulting in a total loss on re-measurement of £7 million in the second half of 2017 following its classification as held for sale. The business remains a joint venture of Aviva at the balance sheet date and was subsequently disposed of on 19 January 2018 following completion of the transaction.
On 13 February 2018, Aviva announced that it has completed the transaction to develop a digital insurance joint venture in Hong Kong with Hillhouse Capital Group (‘Hillhouse’) and Tencent Holdings Limited (‘Tencent’). The joint venture has been approved by the Hong Kong
Insurance Authority and is expected to start operating under its new corporate structure during the first half of 2018. This follows the announcement on 20 January 2017 by which Hillhouse and Tencent have acquired a combined 60% shareholding in Aviva Life Insurance
In certain jurisdictions the ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations and solvency requirements. There are no protective rights of non-controlling interests which significantly restrict the Group’s ability to access or use the assets and settle the liabilities of the Group.
Strategic report Governance IFRS financial statements Other information 4 – Segmental information The Group’s results can be segmented either by activity or by geography. Our primary reporting format is along market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and consolidated statement of financial position.
Following the launch of UK Insurance which brings together the UK Life, UK General Insurance and UK Health businesses, the Group’s operating segments were changed to align them with the new management structure (see note 1 for further details). The revised segments are set out below. Results for prior years have been restated to facilitate comparison with this new structure.
The principal activities of our French operations are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals, with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines insurance products through agents and a direct insurer. As set out in note 3(b), the results of Antarius are included up to the date of disposal on 5 April 2017.
Turkey. As set out in note 3(b), the results of certain entities within our Spanish business are included up to the date of disposal on 15 September 2017 and as set out in note 3(c), certain entities within our Italian business and the remaining entities within our Spanish business are classified as held for sale as at 31 December 2017.
Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France, North America, Asia Pacific and other international businesses, managing policyholders’ and shareholders’ invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs.
Strategic report Governance IFRS financial statements Other information 4 – Segmental information continued Measurement basis
The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are subject to normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of: (i) profit or loss from operations before tax attributable to shareholders (ii) profit or loss from operations before tax attributable to shareholders, adjusted for items outside the segment management’s control, including investment market performance and fiscal policy changes.
(a) (i) Segmental income statement for the year ended 31 December 2017
Profit/(loss) before tax 1,951 307 (54) 426 202 352 (138) 188 (860) 2,374 Tax attributable to policyholders’ returns (330) — — — — (4) (37) — — (371)
Profit/(loss) before tax attributable to shareholders’ profits 1,621 307 (54) 426 202 348 (175) 188 (860) 2,003
Adjusting items: Reclassification of corporate costs and unallocated interest — (12) 28 48 — — — 5 (69) — Investment return variances and economic assumption changes on long-term business (323) — — 249 (7) 12 38 — (3) (34) Short-term fluctuation in return on investments backing non-long-term business — 56 7 (26) (3) 27 — — 284 345 Economic assumption changes on general insurance and health business — 18 (2) (9) — — — — — 7 Impairment of goodwill, joint ventures and associates and other amounts expensed — — 2 — — — 47 — — 49 Amortisation and impairment of intangibles 74 31 50 1 7 5 9 5 15 197 Amortisation and impairment of AVIF 327 — — 2 — 1 154 — 11 495 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — (216) (16) (28) 118 — 7 (135)
Group adjusted operating profit before tax attributable to shareholders' profits after integration and restructuring costs 1,699 400 31 475 183 365 191 198 (615) 2,927
Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 1,764 411 46 500 183 376 191 201 (604) 3,068 1 Total reported income, excluding inter-segment revenue, includes £26,949 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written.
2 Aviva Investors group adjusted operating profit includes £1 million profit relating to Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance.
Claims and benefits paid, net of recoveries from reinsurers (10,996) (2,409) (1,521) (5,397) (315) (2,705) (399) — (40) (23,782) Change in insurance liabilities, net of reinsurance (3,362) (560) (16) (1,221) (79) (1,312) (349) — 6 (6,893) Change in investment contract provisions (9,968) — — (1,636) — (1,281) (1,069) (85) — (14,039) Change in unallocated divisible surplus (294) — — (276) 2 167 20 — — (381) Fee and commission expense (815) (1,204) (628) (632) (77) (395) (108) (35) 9 (3,885) Other expenses (1,396) (162) (150) (266) (64) (238) (289) (393) (895) (3,853) Inter-segment expenses (204) (7) (5) (1) (5) (9) — — (3) (234) Finance costs (191) (2) (4) (1) — (7) (3) — (418) (626)
Profit/(loss) before tax attributable to shareholders’ profits 1,605 (271) 164 325 141 324 23 130 (1,248) 1,193
5 Other items include exceptional charge of £475 million relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017. Other items also include a loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premiums ceded less £78 million in reinsurance recoverables recognised and £6 million claims handling provisions.
Insurance liabilities Long-term business and outstanding claims provisions 100,178 5,305 3,325 17,162 3,275 10,103 4,056 — 9 143,413 Unearned premiums 228 2,003 1,578 458 119 520 74 — — 4,980 Other insurance liabilities 5 68 124 51 — 7 — — 2 257
Liability for investment contracts 130,890 — — 53,529 2 18,335 — 1,230 — 203,986 Unallocated divisible surplus 2,514 — — 5,239 68 922 339 — — 9,082 Net asset value attributable to unitholders 57 — — 2,472 — — — — 15,798 18,327 External borrowings 1,566 — — 1 — 70 — — 8,649 10,286 Other liabilities, including inter-segment liabilities 14,234 (294) 971 4,927 253 869 618 392 1,376 23,346 Liabilities of operations classified as held for sale — — — — — 1,021 8,852 — — 9,873
Strategic report Governance IFRS financial statements Other information 4 – Segmental information continued (a) (iv) Segmental statement of financial position as at 31 December 2016 – restated1
Insurance liabilities Long-term business and outstanding claims provisions 101,906 5,461 3,248 15,932 2,698 13,166 3,750 — 12 146,173 Unearned premiums 227 1,925 1,527 463 68 492 64 — — 4,766 Other insurance liabilities — 66 118 51 — 6 — — 3 244
The Group’s results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities.
Our general insurance and health business provides insurance cover to individuals and to small and medium-sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability, and medical expenses.
ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.
Strategic report Governance IFRS financial statements Other information 4 – Segmental information continued (b) (i) Segmental income statement – products and services for the year ended 31 December 2017
Gross written premiums1 17,083 10,523 — — 27,606 Premiums ceded to reinsurers (1,741) (488) — — (2,229)
Premiums written net of reinsurance 15,342 10,035 — — 25,377 Net change in provision for unearned premiums — (153) — — (153)
Net earned premiums 15,342 9,882 — — 25,224 Fee and commission income 1,334 23 369 461 2,187 16,676 9,905 369 461 27,411 Net investment income/(expense) 21,468 331 (1) 268 22,066 Inter-segment revenue — — 244 — 244 Share of profit of joint ventures and associates 41 — — — 41 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 100 42 — (7) 135
Claims and benefits paid, net of recoveries from reinsurers (17,791) (6,322) — — (24,113) Change in insurance liabilities, net of reinsurance (863) (211) — — (1,074) Change in investment contract provisions (13,837) — — — (13,837) Change in unallocated divisible surplus 294 — — — 294 Fee and commission expense (1,140) (2,615) (36) (538) (4,329) Other expenses (1,807) (572) (425) (733) (3,537) Inter-segment expenses (226) (15) — (3) (244) Finance costs (240) (6) — (437) (683)
Profit/(loss) before tax 2,675 537 151 (989) 2,374 Tax attributable to policyholders’ returns (371) — — — (371)
2 General insurance and health business segment includes gross written premiums of £914 million relating to health business. The remaining business relates to property and liability insurance.
Profit/(loss) before tax 2,834 (16) 108 (1,093) 1,833 Tax attributable to policyholders’ returns (640) — — — (640)
Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 2,642 833 138 (603) 3,010 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £138 million, of which £54 million relates to property and liability insurance and £84 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,030 million relating to health business. The remaining business relates to property and liability insurance
Goodwill 720 1,084 3 69 1,876 Acquired value of in-force business and intangible assets 2,922 439 4 90 3,455 Interests in, and loans to, joint ventures and associates 1,617 9 — 16 1,642 Property and equipment 240 136 4 129 509 Investment property 10,392 499 — (94) 10,797 Loans 27,671 186 — — 27,857 Financial investments 290,840 11,934 54 8,254 311,082 Deferred acquisition costs 1,804 1,100 2 — 2,906 Other assets 49,054 9,075 905 12,656 71,690 Assets of operations classified as held for sale 10,552 319 — — 10,871
Gross insurance liabilities 131,987 16,663 — — 148,650 Gross liabilities for investment contracts 203,986 — — — 203,986 Unallocated divisible surplus 9,082 — — — 9,082 Net asset value attributable to unitholders 2,529 — — 15,798 18,327 External borrowings 1,601 — — 8,685 10,286 Other liabilities, including inter-segment liabilities 18,740 1,369 376 2,861 23,346 Liabilities of operations classified as held for sale 9,694 179 — — 9,873
(b) (iv) Segmental statement of financial position – products and services as at 31 December 2016
Gross written premiums (note 4a and 4b) Long-term: Insurance contracts 11,192 9,915 Participating investment contracts 5,891 5,833
General insurance and health 10,523 9,694 27,606 25,442 Less: premiums ceded to reinsurers (note 4a and 4b) (2,229) (2,364) Gross change in provision for unearned premiums (note 40e) (158) (191) Reinsurers’ share of change in provision for unearned premiums (note 43ciii) 5 (19) Net change in provision for unearned premiums (153) (210)
From financial instruments designated as trading and other than trading 4,994 5,392 From AFS investments and financial instruments at amortised cost 42 35 5,036 5,427 Dividend income 2,542 2,544 Other income from investments designated as trading
(75) (270) 436 (204) Other income from investments designated as other than trading
Realised gains on disposals 6,198 1,457 Unrealised gains and losses (see policy K)
Gains arising in the year 13,153 21,179 Gains recognised now realised (6,198) (1,457)
Gains recognised in prior periods as unrealised in equity 2 2
Share of profit after tax of joint ventures (note 18) 89 170 Share of profit after tax of associates (note 19a) (48) 46 Share of profit after tax of joint ventures and associates 41 216 Profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates (note 3b) 135 (11)
Claims and benefits paid to policyholders on long-term business Insurance contracts 13,547 12,875 Participating investment contracts 5,694 6,552 Non-participating investment contracts 20 26
Claims and benefits paid to policyholders on general insurance and health business 6,647 6,164 25,908 25,617 Less: Claim recoveries from reinsurers
Claims and benefits paid, net of recoveries from reinsurers 24,113 23,782
Change in insurance liabilities Change in insurance liabilities (note 40 (a)(ii)) 623 8,111 Change in reinsurance asset for insurance provisions (note 40(a)(ii)) 451 (1,218)
Change in investment contract provisions Investment income allocated to investment contracts 9,899 9,695 Other changes in provisions
Participating investment contracts (note 41(c)(i)) 2,684 2,914 Non-participating investment contracts 1,247 1,438
Commission expenses for insurance and participating investment contracts 2,776 2,567 Change in deferred acquisition costs for insurance and participating investment contracts (182) (195) Deferrable costs for non-participating investment contracts 33 24 Other acquisition costs 958 846 Change in deferred acquisition costs for non-participating investment contracts (206) 98
Staff costs (note 10b) 1,115 1,059 Central costs and sharesave schemes 184 186 Depreciation 35 25 Impairment of goodwill on subsidiaries (note 16) 2 — Amortisation of acquired value of in-force business on insurance/investment contracts (note 17) 468 539 Amortisation of intangible assets (note 17) 186 155 Net impairment of acquired value of in-force business (note 17) 8 — Impairment of intangible assets (note 17) 7 14 Integration and restructuring costs (see below) 141 212 Other expenses 1,335 1,089
Impairments Net impairment on loans 2 1 Net impairment on financial investments (note 26 (c)) — (9) Net impairment on receivables and other financial assets 4 8 Net impairment on non-financial assets 1 —
Other net foreign exchange losses 49 574 Finance costs (note 7) 683 626
Strategic report Governance IFRS financial statements Other information 7 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 49) and similar charges. Finance costs comprise: Interest expense on core structural borrowings Subordinated debt 391 387 Long term senior debt 4 1 Commercial paper (2) —
Group adjusted 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 consistent allowance for the corresponding expected movements in liabilities. Group adjusted operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as other items. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit.
The negative variance in France reflected losses on equity hedges managed on an economic basis rather than an IFRS basis and falling interest rates, while the negative variance in Italy reflected widening credit spreads.
Strategic report Governance IFRS financial statements Other information 8 – Long-term business economic volatility continued (c) Methodology
The expected investment returns and corresponding expected movements in long-term business liabilities are calculated separately for each principal long-term business unit.
The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating experience of the long-term business, or management decisions to change asset mix, the effect is included in the Group adjusted operating profit. The residual difference between actual and expected investment return is included in investment variances, outside Group adjusted operating profit but included in profit before tax. The movement in liabilities included in Group adjusted operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. This would include movements in liabilities due to changes in the discount rate arising from discretionary management decisions that impact on product profitability over the lifetime of products. The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside Group adjusted operating profit. For many types of long-term business, including unit-linked and withprofits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The profit impact of economic volatility on other long-term business depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The ten year mid-price swap rates as at the start of the period are set out in the table below: For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risks (assessed on a best estimate basis); this includes an adjustment for credit risk on all eurozone sovereign debt. Where such securities are classified as available for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-long-term business result and reported outside operating profit were as follows: Non-long-term business 2017
Short-term fluctuations in investment return (see (b) below) (345) (518) Economic assumption changes (see (g) below) (7) (242)
Analysed between: Longer-term investment return, reported within operating profit 370 347 Short-term fluctuation in investment return, reported outside operating profit General insurance and health (57) 5 Other operations1 (288) (523) (345) (518)
Total assets supporting non-long-term business 15,623 15,325 1 Includes the internal loan to Group from UKI. 2 Represents assets backing non-long-term business in Group centre investments, including the centre hedging programme.
Equities 1% higher/lower Group adjusted operating profit before tax 3 2 Properties 1% higher/lower Group adjusted operating profit before tax 3 3
(g) The economic assumption changes arise as a result of a slight decrease in the estimated future inflation rate used to value periodic payment orders offset by a slight decrease in the interest rates used to discount claim reserves for periodic payment orders and latent claims.
As explained in accounting policy L, provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the duration of the expected settlement of the claims. The discount rate is set at the start of the accounting period, with any change in rates between the start and end of the accounting period being reflected below
Group adjusted operating profit as an economic assumption change. The range of discount rates used is disclosed in note 40.
The number of persons employed by the Group, including directors under a service contract, was: At 31 December Average for the year2
United Kingdom 14,639 14,283 14,785 14,942 Canada 4,259 4,232 4,242 3,937 France 3,959 4,154 3,962 4,144 Poland 1,718 1,542 1,715 1,544 Italy, Ireland, Spain and Other 1,687 1,850 1,723 1,841 Asia 1,558 1,533 1,565 1,483 Aviva Investors 1,437 1,316 1,350 1,238 Other Group activities 764 620 748 524 1 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Group’s operating segments were changed to align them with the new management structure. Employee numbers for 2016 have been restated to facilitate comparison with this new structure.
2 Average employee numbers have been calculated using a monthly average that takes into account recruitment, leavers, transfers, acquisitions and disposals of businesses during the year.
Wages and salaries 1,241 1,123 Social security costs 224 215 Post-retirement obligations
Audit of Group subsidiaries 14.1 14.1 Additional fees related to the prior year audit of Group subsidiaries 0.9 0.7
Tax compliance services — 0.1 Tax advisory services — 0.1 Services relating to corporate finance transactions — 0.1 Other non-audit services not covered above 0.8 1.0
Fees payable to PwC LLP and its associates for services to Group companies 25.3 33.3
The table above reflects the disclosure requirements of SI2011/2198 – The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011.
Strategic report Governance IFRS financial statements Other information 13 – Tax This note analyses the tax charge for the year and explains the factors that affect it.
Deferred tax Origination and reversal of temporary differences 134 72 Changes in tax rates or tax laws (8) (14) Write down/(back) of deferred tax assets (3) (15)
(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £371 million (2016: charge of £640 million).
In respect of pensions and other post-retirement obligations 42 94 In respect of fair value (losses)/gains on owner-occupied properties (2) 1 In respect of unrealised (losses)/gains on investments (9) 3
(ii) The tax charge attributable to policyholders’ returns included above is £nil (2016: £nil).
Strategic report Governance IFRS financial statements Other information 13 – Tax continued (c) Tax credited to equity
Tax credited directly to equity in the year in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £16 million (2016: £17 million).
Tax calculated at standard UK corporation tax rate of 19.25% (2016: 20.00%) 386 71 457 239 128 367 Reconciling items
Total tax charged to income statement 357 371 728 334 640 974
The tax charge/(credit) attributable to policyholder returns is removed from the Group’s total profit before tax in arriving at the Group’s profit before tax attributable to shareholders’ profits. As the net of tax profits attributable to with-profits and unit-linked policyholders is zero, the Group’s pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge/(credit) attributable to policyholders included in the total tax charge. Finance (No 2) Act 2015 introduced legislation reducing the UK rate of corporation tax from 20% at 1 April 2016 to 19% from 1 April 2017 and to 18% from 1 April 2020. Finance Act 2016 further reduced the corporation tax rate from 1 April 2020 to 17%. In addition, in France, the rate of corporation tax was reduced from 34.43% to 28.92% with effect from 1 January 2020. These reduced rates were used in the calculation of the Group’s deferred tax assets and liabilities as at 31 December 2016. In 2017 further changes were made in France to reduce the corporation tax rate to 32.02% from 1 January 2019 and to 27.37% from 1
(the diluted earnings per share). We have also shown the same calculations based on our Group adjusted operating profit as we believe this gives a better indication of operating performance. Consideration of both these measures gives a full picture of the performance of the business in the period.
(i) The profit attributable to ordinary shareholders is: Group adjusted operating profit £m
Profit before tax attributable to shareholders’ profits 3,068 (1,065) 2,003 3,010 (1,817) 1,193 Tax attributable to shareholders’ profit (639) 282 (357) (706) 372 (334)
Adjusting items: Investment return variances and economic assumption changes on long-term business 34 86 2.1 379 313 7.8 Short-term fluctuation in return on investments backing non-long-term business (345) (250) (6.3) (518) (398) (9.8) Economic assumption changes on general insurance and health business (7) (6) (0.1) (242) (193) (4.8) Impairment of goodwill, joint ventures and associates and other amounts expensed (49) (49) (1.2) — — — Amortisation and impairment of intangibles (197) (151) (3.7) (175) (137) (3.4) Amortisation and impairment of acquired value of in-force business (495) (430) (10.6) (540) (455) (11.2) Profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates 135 113 2.8 (11) (16) (0.4) Other2 — — — (498) (398) (9.8)
Profit attributable to ordinary shareholders 2,003 1,415 35.0 1,193 618 15.3 1 DCI includes the direct capital instrument and tier 1 notes.
2 Other items include an exceptional charge of £nil (2016: £475 million), £nil net of tax (2016: £380 million), relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the
Strategic report Governance IFRS financial statements Other information 14 – Earnings per share continued (b) Diluted earnings per share
(i) Diluted earnings per share is calculated as follows: Total £m
Profit attributable to ordinary shareholders 1,415 4,041 35.0 618 4,051 15.3 Dilutive effect of share awards and options — 48 (0.4) — 38 (0.2)
Weighted average number of shares million Per share p Total £m
Group adjusted operating profit attributable to ordinary shareholders 2,213 4,041 54.8 2,072 4,051 51.1 Dilutive effect of share awards and options — 48 (0.7) — 38 (0.4)
Ordinary dividends declared and charged to equity in the year Final 2016 – 15.88 pence per share, paid on 17 May 2017 646 — Final 2015 – 14.05 pence per share, paid on 17 May 2016 — 570 Interim 2017 – 8.40 pence per share, paid on 17 November 2017 337 — Interim 2016 – 7.42 pence per share, paid on 17 November 2016 — 301 983 871 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instrument and tier 1 notes 81 85
Gross amount At 1 January 2,292 2,170 Acquisitions and additions 11 59 Disposals (241) (28) Foreign exchange rate movements 18 91
Carrying amount at 31 December 1,876 2,045 1 Impairment charges comprise £2 million of goodwill impairment in Elite Insurance Company of Canada recognised within other expenses (see note 6) and £8 million of goodwill impairment in FPI recognised within profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates following FPI’s classification as held for sale (see note 3).
Goodwill from acquisitions and additions in 2017 arose on the acquisition of VietinBank’s 50% shareholding in VietinBank Aviva Life Insurance Company Limited (‘Aviva Vietnam’) which resulted in Aviva Vietnam becoming a wholly owned subsidiary of the Group (see note 3(a)). Goodwill from acquisitions and additions in 2016 primarily arose on the acquisition of RBC General Insurance Company. Disposals in 2017 include the disposal of the Group’s 50% shareholdings in its Spanish life insurance and pension partnerships as well as its wholly owned retail life business in Spain (see note 3(b)(iii)). The total impairment of goodwill in 2017 is a charge of £10 million following management’s assessment that goodwill of £8 million in
Friends Provident International Limited (‘FPI’) and £2 million in Elite Insurance Company of Canada was impaired. There was no impairment of goodwill in 2016. Impairment tests on goodwill were conducted as described in note 16(b).
United Kingdom – long-term business 663 663 — — 663 663 United Kingdom – general insurance and health 924 924 — — 924 924 Canada 84 88 — — 84 88 France – long-term business — — 55 53 55 53 Poland 29 26 7 6 36 32 Italy – general insurance and health 29 28 — — 29 28 Italy – long-term business 8 8 — — 8 8 Ireland – general insurance and health 98 94 — — 98 94 Spain – long-term business 25 163 190 183 215 346 Asia 52 51 — — 52 51
Following the cessation of full MCEV reporting from 1 January 2016, value in use has been calculated based on a shareholder value of the business calculated in accordance with Solvency II principles, adjusted where Solvency II does not represent a best estimate of shareholders’ interests. The principal adjustments relate to the exclusion of the benefit of transitional measures on technical provisions and the volatility adjustment under Solvency II, modification of the Solvency II risk margin to an economic view and removal of restrictions on contract boundaries or business scope.
Strategic report Governance IFRS financial statements Other information 16 – Goodwill continued The present value of expected profits arising from future new business may be included within the shareholder value and is calculated on an adjusted Solvency II basis, using profit projections based on the most recent three year business plans approved by management.
(iv) for more information). In 2016 the recoverable amount for the aforementioned businesses was based on a value in use calculation as explained above with the key underlying assumptions presented in the table that follows.
The recoverable amount of the indefinite life intangible asset has been assessed based on the fair value less costs to sell of the cash generating unit to which it relates. The fair value less costs to sell was determined based on the quoted market value of Aviva’s share of the subsidiary to which it relates.
The recoverable amount of the indefinite life intangible asset relating to the remaining Spanish business has been assessed using consistent assumptions with those for Spain long-term business goodwill impairment testing as explained above for the years 2017 and 2016 respectively.
Management’s impairment review in relation to the goodwill allocated to the Canadian cash generating unit, Quebec personal lines, indicated the need to write-down a remaining balance of £2 million of goodwill allocated to Elite Insurance Company, resulting from the continued deterioration of the financial position of the cash generating unit. Other than for the cash generating units noted above, the recoverable amount exceeds the carrying value of the cash generating units including goodwill, and there is no impairment of goodwill in 2017. For these cash generating units, a reasonably possible change in assumptions would not cause the carrying amount to exceed its recoverable amount.
17 – Acquired value of in-force business (AVIF) and intangible assets This note shows the movements in cost, amortisation and impairment of the acquired value of in-force business and intangible assets during the year.
At 31 December 2016 2,639 2,704 1,976 367 7,686 Additions 8 — 184 — 192 Disposals (40) (7) (208) — (255) Foreign exchange rate movements 13 — 14 13 40
Accumulated Impairment At 1 January 2016 (43) (24) (78) (59) (204) Impairment losses charged to expenses — — (14) — (14) Disposals — — — — — Foreign exchange rate movements 24 — 11 (9) 26
Carrying amount At 1 January 2016 2,002 2,381 1,139 209 5,731 At 31 December 2016 1,750 2,097 1,391 242 5,480
Less: Assets classified as held for sale (5) (793) (633) — (1,431)
3 Impairment charges comprise £8 million of AVIF impairment in Aviva Re Limited recognised within other expenses (see note 6) and £110 million of AVIF impairment in FPI recognised within profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates following FPI’s classification as held for sale (see note 3 and 16(b)).
Share of (loss)/profit after tax (7) 89 — 82 (8) 178 — 170 Reclassification to subsidiary (23) (34) — (57) — — — — Additions — 55 — 55 — 307 3 310 Disposals — (409) — (409) — (346) — (346) Share of gains/(losses) taken to other comprehensive income — 6 — 6 — (6) — (6) Loans repaid — — — — — — (97) (97) Dividends received from joint ventures — (38) — (38) — (53) — (53) Foreign exchange rate movements (5) (17) — (22) 10 26 — 36 1 Comprises amortisation of AVIF on insurance contracts of £1 million (2016: £1 million) and other intangibles of £6 million (2016: £7 million).
Group’s agreement to sell its shareholding to its joint venture partner First Financial Holding Co. Limited. On classification as held for sale, the business was re-measured at fair value less costs to sell, which resulted in a full write-down of its carrying amount of £7 million as explained in note 3(c) (iii). The Group’s share of total comprehensive income related to joint venture entities is £88 million (2016: £164 million).
Property management undertakings — 820 — 820 — 1,146 — 1,146 Long-term business undertakings 57 335 — 392 78 338 — 416 General insurance and health undertakings — 9 — 9 14 28 — 42
(iii) No joint ventures are considered to be material from a Group perspective (2016: none). The Group’s principal joint ventures are as follows: Proportion of ownership interest
Ascot Real Estate Investments LP Property management UK 50.00% 50.00% 2-10 Mortimer Street Limited Partnership Property management UK 50.00% 50.00% Aviva-COFCO Life Insurance Co. Ltd Life insurance China 50.00% 50.00% PT Astra Aviva Life Life and Health insurance Indonesia 50.00% 50.00% AvivaSA Emeklilik ve Hayat A.S Life insurance Turkey 40.00% 40.00%
Interests in joint ventures are tested for impairment when there is an indicator of impairment. They are tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill or intangible relates to the recoverable value of that cash generating unit. Recoverable amount for long-term and general insurance businesses is calculated on a consistent basis with that used for impairment testing of goodwill, as set out in note 16 (b). The recoverable amount of property management undertakings is the fair value less costs to sell of the joint venture, measured in accordance with the Group’s accounting policy for investment property (see accounting policy Q).
At 1 January 65 416 481 26 303 329 Share of results before tax — 22 22 — 57 57 Share of tax — (5) (5) — (11) (11)
Share of results after tax — 17 17 — 46 46 Impairment (65) — (65) — — —
The Group’s share of total comprehensive losses related to associates is £48 million (2016: £46 million income).
1 The Group has significant influence over AI UK Commercial Real Estate Debt Fund and Encore+ so they are therefore accounted for as associates.
At 31 December 2016 5 341 3 270 277 896 Additions 1 3 — 18 47 69 Disposals1 — (20) — (134) (61) (215) Transfers (to)/from investment property (note 21) (5) 11 — — — 6 Fair value losses — (4) — — — (4) Foreign exchange rate movements — 9 — 1 2 12
Less: Amounts classified as held for sale — (4) — — (1) (5)
1 Disposals of computer equipment primarily comprise exhausted assets within Aviva Central Services.
Property, Plant and Equipment. Similar considerations apply to properties under construction, where an estimate is made of valuation when complete, adjusted for anticipated costs to completion, profit and risk, reflecting market conditions at the valuation date. If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £349 million (2016: £341 million).
Carrying value At 1 January 9,169 1,647 10,816 9,372 1,929 11,301 Additions 530 12 542 566 1 567 Capitalised expenditure on existing properties 99 31 130 119 36 155 Fair value gains/(losses) 440 41 481 (77) (52) (129) Disposals (1,216) (85) (1,301) (1,133) (307) (1,440) Transfers to property and equipment (note 20) (6) — (6) (39) — (39) Foreign exchange rate movements 131 4 135 361 40 401
Please refer to note 22 ‘Fair value methodology’ for further information on the fair value measurement and valuation techniques of investment property.
The fair value of investment properties leased to third parties under operating leases at 31 December 2017 was £10,513 million (2016: £10,754 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 53(b)(i).
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the ‘fair value hierarchy’ described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets and liabilities that the entity can access at the measurement date.
• Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
• Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, implied volatilities, and credit spreads).
Strategic report Governance IFRS financial statements Other information 22 – Fair value methodology continued The majority of the Group’s assets and liabilities measured at fair value are based on quoted market information or observable market data. Of the total assets and liabilities measured at fair value 15.7% (2016: 15.8%) of assets and 3.2% (2016: 4.4%) of liabilities are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.
Fixed maturity securities 174,808 174,808 178,970 178,970 Equity securities 89,968 89,968 72,042 72,042 Other investments (including derivatives) 46,306 46,306 48,823 48,823
Financial liabilities Non-participating investment contracts (note 41 (a)) 116,332 116,332 114,527 114,527 Net asset value attributable to unitholders 18,327 18,327 15,638 15,638 Borrowings2 (note 49 (a)) 11,538 10,286 10,926 10,295 Derivative liabilities (note 57 (b)) 5,751 5,751 6,795 6,795 1 Following a review of the Group’s investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported.
Refer to note 26 for further details of this adjustment and the financial impact arising. 2 Within the fair value total, the estimated fair value has been provided for the portion of loans and borrowings that are carried at amortised cost as disclosed in note 22 (h).
An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below.
Recurring fair value measurements Investment Property (note 21) — — 10,797 10,797 — 10,797 Loans (note 23 (a)) — 443 23,949 24,392 3,465 27,857 Financial investments measured at fair value (note 26 (a))
Financial liabilities measured at fair value Non-participating investment contracts2 (note 41 (a)) 110,900 219 3,408 114,527 — 114,527 Net asset value attributable to unit holders 15,618 — 20 15,638 — 15,638 Borrowings (note 49 (a)) — — 1,110 1,110 9,185 10,295 Derivative liabilities (note 57 (b)) 401 4,794 1,600 6,795 — 6,795
2 In addition to the balances in this table, included within Reinsurance assets in the Statement of financial position and note 43 are £18,366 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets
Non-recurring fair value measurement Properties occupied by Group companies — — 321 321
There were no significant transfers between Level 1 and Level 2 during the year.
Transfers to/from Level 3 £1.0 billion of assets transferred into Level 3 and £1.6 billion of assets transferred out of Level 3 relate principally to debt securities held by our businesses in the UK and France. These are transferred between levels 2 and 3 depending on the availability of observable inputs and whether the counterparty and broker quotes are corroborated using valuation models with observable inputs. Transfers of liabilities out of Level 3 amounting to £1.5 billion primarily relate to RPI swaps held by the UK business included within derivative liabilities. The levelling review conducted during the period suggested that the market for these is liquid and deep, the inputs are now deemed to be observable and as a result these were transferred to Level 2.
Please see note 22(a) for a description of typical Level 2 inputs. Debt securities, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced from brokers.
Strategic report Governance IFRS financial statements Other information 22 – Fair value methodology continued Total net gains recognised in the income statement in the year ended 31 December 2017 in respect of Level 3 assets measured at fair value amounted to £397 million (2016: net gains of £1,223 million) with net losses in respect of liabilities of £360 million (2016: net losses of £467 million). Net gains of £200 million (2016: net gains of £833 million) attributable to assets and net losses of £212 million (2016: net losses of £333 million) attributable to liabilities relate to those still held at the end of the year.
• Investment property amounting to £10.8 billion (2016: £10.8 billion) is valued in the UK at least annually by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period.
Outside the UK, valuations are produced by external qualified professional appraisers in the countries concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break options taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. The uplift and discount rates are derived from rates implied by recent market transactions on similar properties. These inputs are deemed unobservable.
• Structured bond-type and non-standard debt products held by our business in France amounting to £5.9 billion (2016: £7.4 billion) and bonds held by our UK business of £1.2 billion (2016: £2.6 billion) have no active market. These debt securities are valued either using counterparty or broker quotes and validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the third-party models includes a significant unobservable liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model are sufficiently significant to result in a Level 3 classification. • Debt securities held by our French business of £2.7 billion (2016: £1.5 billion) and by our UK and Asia businesses of £3.0 billion (2016: £1.4 billion) which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.
Where possible, the Group tests the sensitivity of the fair values of Level 3 investments to changes in unobservable inputs to reasonable alternatives. Valuations for Level 3 investments are sourced from independent third parties when available and, where appropriate, validated against internally-modelled valuations, third-party models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations, the Group undertakes, where feasible, sensitivity analysis on the following basis: • For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity of the internally-modelled valuation to changes in unobservable inputs to a reasonable alternative is determined.
On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £56 billion (2016: £54 billion) of the Group’s Level 3 assets. For these Level 3 assets, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by ± £2.5 billion (2016: ± £2.5 billion).
On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £5 billion (2016: £6 billion) of the Group’s Level 3 liabilities. For these Level 3 liabilities, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by approximately ± £0.5 billion (2016: ± £0.7 billion).
(h) Assets and liabilities not carried at fair value for which fair value is disclosed
Strategic report Governance IFRS financial statements Other information 23 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
Less: Amounts classified as held for sale (6) — (6) — (75) (75)
Fair values have been calculated by using cash flow models appropriate for each portfolio of mortgages. Further details of the fair value methodology and models utilised are given in note 22 (g). The cumulative change in fair value of loans attributable to changes in credit risk to 31 December 2017 was a £1,090 million loss (2016: £1,735 million loss). Non-securitised mortgage loans include £3.4 billion (2016: £3.3 billion) relating to UK primary healthcare and PFI businesses which are secured against General Practitioner premises, other primary health-related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not government-guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default. Healthcare, Infrastructure and PFI other loans of £3.6 billion (2016: £2.5 billion) are secured against the income from healthcare and educational premises.
The fair value of these loans at 31 December 2017 was £3,404 million (2016: £3,497 million).
Policy loans 792 — 792 881 — 881 Loans to banks 1,970 — 1,970 2,010 — 2,010 Non-securitised mortgage loans 9 (9) — 8 (7) 1 Loans to brokers and other intermediaries 180 — 180 170 — 170 Other loans 523 — 523 514 — 514
Strategic report Governance IFRS financial statements Other information 23 – Loans continued (c) Collateral
The Group holds collateral in respect of loans where it is considered appropriate in order to reduce the risk of non-recovery. This collateral generally takes the form of liens or charges over properties and, in the case of policy loans, the underlying policy for the majority of the loan balances above. In all other situations, the collateral must be in a readily realisable form, such as listed securities, and is held in segregated accounts.
24 – Securitised mortgages and related assets The Group, in its UK Life business has loans receivable, secured by mortgages, which have then been securitised through non-recourse borrowings. This note gives details of the relevant transactions.
Securitised mortgage loans At fair value (note 23)1 2,463 (1,411) 2,424 (1,327) Other securitisation assets/(liabilities)1 265 (1,317) 253 (1,350)
All of the investment vehicles in the investment portfolio are managed by portfolio managers who are compensated by the respective investment vehicles for their services. Such compensation generally consists of an asset-based fee and a performance- based incentive fee, and is reflected in the valuation of the investment vehicles.
The Group has determined that where it has control over investment vehicles, these investments are consolidated structured entities. As at 31 December 2017 the Group has granted loans to consolidated PLPs for a total of £82 million (2016: £114 million). The purpose of these loans is to assist the consolidated PLPs to purchase or construct properties. The Group has also provided support, without having a contractual obligation to do so, to certain consolidated PLPs via letters of support amounting to £72 million (2016: £167 million). The Group has no commitments to provide funding to consolidated structured entities (2016: £10 million). The Group has also given support to five special purpose securitisation companies (the ERF companies) that are consolidated structured entities. As set out in note 24, at the inception of the securitisation vehicles, the UK subsidiary, Aviva Equity Release UK Limited (AER), has granted subordinated loan facilities to some of the ERF companies. AER receives various fees in return for the services provided to the entities. AER receives cash management fees based on the outstanding loan balance at the start of each quarter for the administration of the loan note liabilities. AER receives portfolio administration fees as compensation for managing the mortgage assets.
Refer to note 24 for details of securitised mortgages and related assets as at 31 December 2017. As at the reporting date, the Group has no intentions to provide financial or other support in relation to any other investment vehicles.
As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2017, the Group’s total interest in unconsolidated structured entities was £57.1 billion (2016 : £52.7 billion) on the Group’s statement of financial position. The
Refer to note 26 for further details of this adjustment and the financial statement impact arising.
The Group’s maximum exposure to loss related to the interests in unconsolidated structured entities is £57.1 billion (2016: £52.7 billion).
The majority of debt securities above are investment grade securities held by the UK business. In some cases, the Group may be required to absorb losses from an unconsolidated structured entity before other parties when and if Aviva’s interest is more subordinated with respect to other owners of the same security. For commitments to property management joint ventures and associates, please refer to Notes 18 and 19, respectively. The Group has not provided any other financial or other support in addition to that described above as at the reporting date, and there are no intentions to provide support in relation to any other unconsolidated structured entities in the foreseeable future.
In relation to risk management, disclosures on debt securities and investment vehicles are given in note 56(b)(iii) ‘Risk management’. In relation to other guarantees and commitments that the Group provides in the course of its business, please refer to Note 52(f) ‘Contingent liabilities and other risk factors’. Aviva’s interest in unconsolidated structured entities that it also manages at 31 December 2017 is £1.9 billion (2016: £2.1 billion) and the total funds under management relating to these investments at 31 December 2017 is £16.2 billion (2016: £14.5 billion).
The Group receives management fees and other fees in respect of its asset management businesses. The Group does not sponsor any of the funds or investment vehicles from which it receives fees. Management fees received for investments that the Group manages but does not have a holding in also represent an interest in unconsolidated structured entities. As these investments are not held by the Group, the investment risk is borne by the external investors and therefore the Group’s maximum exposure to loss relates to future management fees. The table below shows the assets under management of entities that the Group manages but does not have a holding in and the fees earned from those entities.
UK government — 30,242 — 30,242 — 31,143 — 31,143 UK local authorities — 19 — 19 — 19 — 19 Non-UK government (note 26e) — 51,399 1,342 52,741 — 53,026 842 53,868 Corporate bonds
Equity securities Ordinary shares Public utilities — 2,402 — 2,402 — 2,188 — 2,188 Banks, trusts and insurance companies — 24,295 1 24,296 — 16,351 1 16,352 Industrial miscellaneous and all other — 63,213 8 63,221 — 53,855 6 53,861
Other investments Unit trusts and other investment vehicles — 45,665 1 45,666 — 43,061 1 43,062 Derivative financial instruments (note 57) 5,507 — — 5,507 6,119 — — 6,119 Deposits with credit institutions — 161 — 161 — 325 — 325 Minority holdings in property management undertakings — 1,435 — 1,435 — 1,186 — 1,186 Other investments – long-term — 507 — 507 — 434 — 434 Other investments – short-term — 1 — 1 — 1 — 1
Fixed maturity securities — (1,140) — (1,140) — (7,738) — (7,738) Equity securities — (195) — (195) — (664) — (664) Other investments (8) (6,963) — (6,971) — (2,304) — (2,304)
Of the above total, £154,835 million (2016: £197,734 million) is due to be recovered in more than one year after the statement of financial position date.
The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of financial investments: Cost/ amortised cost £m
Strategic report Governance IFRS financial statements Other information 26 – Financial investments continued (e) Non-UK Government Debt Securities (gross of non-controlling interests)
Austria 5 11 550 715 127 138 682 864 Belgium 22 21 967 1,273 314 357 1,303 1,651 France 133 115 13,454 13,285 2,093 1,859 15,680 15,259 Germany 127 142 1,437 1,629 615 606 2,179 2,377 Greece — — — — — — — — Ireland 3 3 679 662 84 130 766 795 Italy 183 223 8,223 7,500 823 556 9,229 8,279 Netherlands 43 47 88 976 322 329 453 1,352 Poland 845 807 790 769 598 384 2,233 1,960 Portugal 2 2 136 118 — — 138 120 Spain 87 88 314 1,386 233 659 634 2,133 European Supranational debt 213 174 1,841 2,404 1,777 1,821 3,831 4,399 Other European countries 176 272 2,104 1,029 917 642 3,197 1,943
Assets of operations classified as held for sale 1 — — 2,325 531 — 532 2,325
Total (excluding assets held for sale) 5,714 5,981 35,375 34,189 11,120 11,373 52,209 51,543 1 Following a review of the Group’s investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note 26 (a) for further details of this adjustment and the financial statement impact arising.
Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £11.7 billion (2016: £11.4 billion). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (22%), French (18%), Italian (7%), German
Strategic report Governance IFRS financial statements Other information 26 – Financial investments continued (f) Exposure to worldwide banks – debt securities
Assets of operations classified as held for sale — — — — — —
Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.4 billion (2016: £6.7 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (31%), US (22%), Dutch (11%), and French
Amounts owed by contract holders 2,154 2,012 Amounts owed by intermediaries 1,235 1,202 Deposits with ceding undertakings 103 1,430 Amounts due from reinsurers 348 400 Amounts due from brokers for investment sales 206 93 Amounts receivable for cash collateral pledged 2,515 2,410 Amounts due from government, social security and taxes 744 532 Other receivables 1,018 1,119
Total deferred acquisition costs 3,074 2,614 Surpluses in the staff pension schemes (note 48(a)) 3,399 3,190 Other assets 71 89
The movements in deferred acquisition costs (DAC) during the year were: Long-term business £m
DAC balance and a corresponding impact on profit. It is estimated that the movement in the DAC balance would reduce profit by £38 million (2016: £19 million) if market yields on fixed income investments were to increase by 1% and increase profit by £29 million (2016: reduce profit by £1 million) if yields were to reduce by 1%. At both 31 December 2017 and 31 December 2016 the DAC balance has been restricted by the value of projected future profits and hence is more sensitive to changes in the value of those projected profits.
Prepayments and accrued income of £2,876 million (2016: £2,996 million) include assets classified as held for sale of £16 million (2016: £114 million) and includes £7 million (2016: £8 million) that is expected to be recovered more than one year after the statement of financial position date.
Loans 8 1,027 Debt securities 30,987 29,517 Equity securities 74,110 55,651 Reinsurance assets 6,103 18,525 Cash and cash equivalents 12,000 8,874 Units trusts and other investment vehicles 42,368 40,081 Other 7,059 7,453
The reinsurance assets balance in the table above includes £6,094 million (2016: £18,366 million) of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
At the 2017 Annual General Meeting, the Company was authorised to allot up to a further maximum nominal amount of: • £677,082,434 of which £338,541,217 can be in connection with an offer by way of a rights issue • £100 million of new ordinary shares in relation to any issue of Solvency II instruments
(b) During 2017, a total of 57,724,500 ordinary shares of 25 pence each were cancelled and 8,867,985 were allotted and issued by the Company as follows: Number of shares Share capital £m
At 1 January 4,061,539,206 1,015 — 1,197 4,048,465,173 1,012 — 1,185 Shares issued under the Group’s Employee and
Executive Share Option Schemes 8,867,985 2 — 10 13,074,033 3 — 12 Shares cancelled through buy-back (57,724,500) (14) 14 — — — — —
On 20 September 2017, the Company announced that it had successfully completed the share buy-back programme (the programme) which was notified to the market on 25 May 2017. As a result of the programme, Aviva acquired 57,724,500 shares at an average price of £5.20 per share. These shares with a nominal value of £14 million were bought back and subsequently cancelled during the year, giving rise to a capital redemption reserve of an equivalent amount as required by the Companies Act 2006. The aggregate consideration paid was £300 million which is reflected in retained earnings (see note 37).
Strategic report Governance IFRS financial statements Other information 31 – Group’s share plans This note describes various equity compensation plans operated by the Group, and shows how the Group values the options and awards of shares in the Company.
SAYE share option scheme in Ireland. The SAYE allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% of their market value at the date of grant.
Options are normally exercisable during the six-month period following either the 3rd or 5th anniversary of the start of the relevant savings contract. 7 year contracts were offered prior to 2012. Savings contracts are subject to the statutory savings limits of £500 per month in the UK and €500 per month in Ireland. A limit of £250 per month was applied to contracts in the UK prior to 2016.
These awards have been made under the Aviva Long-Term Incentive Plan 2011 (LTIP), and are described in section (b) below and in the directors’ remuneration report.
These awards have been made under the Aviva Annual Bonus Plan 2011 (ABP), and are described in section (b) below and in the directors’ remuneration report.
These are conditional awards granted under the Aviva Recruitment and Retention Share Award plan (RRSAP) in relation to the recruitment or retention of senior managers excluding executive directors. The awards vest in tranches on various dates and vesting is conditional upon the participant being employed by the Group on the vesting date and not having served notice of resignation. Some awards can be subject to performance conditions. If a participant’s employment is terminated due to resignation or dismissal, any tranche of the award which has vested within the 12 months prior to the termination date will be subject to clawback and any unvested tranches of the award will lapse in full.
These awards have been made under the Aviva Investors Deferred Share Award Plan (AI DSAP), where employees can choose to have the deferred element of their bonus deferred into awards over Aviva shares. The awards vest in three equal tranches on the 2nd, 3rd and 4th year following the year of grant.
At 31 December 2017, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva savings related share option scheme
Strategic report Governance IFRS financial statements Other information 31 – Group’s share plans continued The following table summarises information about options outstanding at 31 December 2017: Range of exercise prices
The comparative figures as at 31 December 2016 were: Range of exercise prices
No performance conditions are attached to the awards under the ABP, AI DSAP or some of the awards under the RRSAP except as outlined below. There are no performance conditions attached to LTIP awards granted since 2017, with the exception of grants made to the Group Executive.
Under the RRSAP, some shares are subject to the attainment of the same performance conditions that apply to the LTIP grants as follows.
• Shares which vest in 2020: 5,305 are subject to the performance conditions relating to the performance of the participant’s previous employer
• Shares which vest in 2021: 5,305 are subject to the performance conditions relating to the performance of the participant’s previous employer
New issue shares are now generally used to satisfy all awards and options granted under plans that have received shareholder approval and where local regulations permit. Further details are given in note 32.
A summary of the status of the option plans as at 31 December 2016 and 2017, and changes during the years ended on those dates, is shown below.
The total expense recognised for the year arising from equity compensation plans were as follows: £m
(e) Fair value of options and awards granted after 7 November 2002
Share price 506p 448p Exercise price 409p 351p Expected volatility 26.04% 28.29% Expected life 3.70 years 3.79 years Expected dividend yield 4.61% 4.65% Risk-free interest rate 0.55% 0.15%
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. 3,094,372 options granted after 7 November 2002 were exercised during the year (2016: 4,709,978).
The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions: Weighted average assumption 2017 2016
The shares are owned by employee share trusts with an undertaking to satisfy awards of shares in the Company under the Company’s share plans and schemes. Details of the features of the plans can be found in the directors’ remuneration report and/or in note 31.
These shares were either purchased in the market or, in 2015, new shares were issued to the trust and are carried at weighted average cost. At 31 December 2017, they had an aggregate nominal value of £73,977 (2016: £281,868) and a market value of £1,498,764 (2016: £5,484,028). The trustees have waived their rights to dividends on the shares held in the trusts.
Strategic report Governance IFRS financial statements Other information 34 – Direct capital instrument and tier 1 notes
The direct capital instrument (the DCI) was issued on 25 November 2004. The DCI has no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the principal amount on 27 July 2020, at which date the interest rate changes to a variable rate, or on any respective coupon payment date thereafter. The variable rate will be the six month sterling deposit rate plus margin. The $650 million fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012. On 28 September 2017 notification was given that the
Group would redeem the FxdRNs at first call date on 3 November 2017. At the notification date the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling at that date. The resulting foreign exchange loss of £92 million has been charged to retained earnings. The FxdRNs were redeemed in full on 3 November 2017 at a cost of £488 million, including an additional £4 million of exchange losses subsequent to the reclassification which are included within other expenses within the income statement. The Step-up Tier one Insurance Capital Securities (‘STICS’) were issued on 21 November 2003 by Friends Life Holdings plc, substituted as issuer by Aviva plc on 1 October 2015. The STICS are irrevocably guaranteed on a subordinated basis by Aviva Life & Pensions Limited. Prior to the Part VII transfer of the Friends Life business into UK Life on 1 October 2017 the guarantor for the STICS was Friends Life Limited.
In relation to the STICS, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons upon the earliest of the following: • Resumption of payment of coupons on the STICS; or • Redemption; or
At the end of 2017 the fair value of the DCI and the STICS was £778 million (2016: £736 million).
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. 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.
Balance at 1 January 2016 165 71 58 (478) 70 (279) Arising in the year through other comprehensive income: Fair value gains — 4 12 — — 16 Fair value gains transferred to profit on disposals — — (2) — — (2) Share of other comprehensive income of joint ventures and associates — — (6) — — (6) Foreign exchange rate movements1 1,019 — — (36) — (36) Aggregate tax effect – shareholders’ tax (31) (1) (3) — — (4)
Total other comprehensive income for the year 988 3 1 (36) — (32) Fair value gains transferred to retained earnings on disposals — (46) — — — (46) Transfer to profit on disposal of subsidiaries, joint ventures and associates (7) — — — — — Reserves credit for equity compensation plans — — — — 38 38 Shares issued under equity compensation plans — — — — (30) (30)
Profit for the year attributable to non-controlling interests 149 156 Foreign exchange rate movements 43 145
Total comprehensive income attributable to non-controlling interests 192 301 Capital contributions from non-controlling interests 36 9 Non-controlling interests share of dividends declared in the year (103) (135) Changes in non-controlling interests in subsidiaries1 (315) 105 1 Changes in non-controlling interests in 2017 primarily relate to Aviva’s sale of its 50% shareholding in Antarius (France), the sale of its 50% shareholding in life insurance and pension partnerships Unicorp Vida and Caja España
(357,220) 13,358 (343,862) (355,122) 26,504 (328,618) Provision for unearned premiums (4,980) 257 (4,723) (4,766) 250 (4,516) Provision arising from liability adequacy tests2 (13) — (13) (13) — (13)
Less: Amounts classified as held for sale 9,577 (123) 9,454 11,623 (411) 11,212 1 Reinsurance assets at 31 December 2016 for General insurance and health business include the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business and the remaining recoveries expected in respect of the Alberta fires in Canada.
2 Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations are included in other line items.
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.
Long-term business provisions Participating 49,928 — 49,928 56,760 — 56,760 Unit-linked non-participating 16,040 — 16,040 16,026 — 16,026 Other non-participating 65,004 — 65,004 64,432 — 64,432
Provision for unearned premiums — 4,980 4,980 — 4,766 4,766 Provision arising from liability adequacy tests1 — 13 13 — 13 13
The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown on the income statement, to the change in insurance liabilities recognised as an expense in the relevant movement tables in this note. The components of the reconciliation are the change in provision for outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on general insurance reserves (which is included within finance costs in the income statement). For general insurance and health business, the change in the provision for unearned premiums is not included in the reconciliation as, within the income statement, this is included within earned premiums.
Long-term business Change in long-term business provisions (note 40b(iv)) 624 315 939 Change in provision for outstanding claims (65) (11) (76)
Total change in insurance liabilities (note 6) 623 451 1,074 £m Reinsurance1 £m Net £m
(WL WPSF) and FLAS With-Profits Sub-Fund (FLAS WPSF) which are closed to new business and where policyholders are entitled to 90% of the distributed profits aside from certain policies in the FLC New WPSF and the FLC Old WPSF with guaranteed bonus rates, and certain policies in the WL WPSF which are reinsured into the fund where the shareholders do not receive one-ninth of the bonus. FPLAL With-Profits Sub-Fund (FPLAL WPSF) and Secure Growth Fund (SGF), which are closed to new business and where policyholders are entitled to 100% of the distributed profits. The ‘Non-profit’ fund, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profits business written in UKLAP WPSF and on stakeholder unitised with-profits business written in NWPSF and OWPSF are derived from management fees and policy charges, and emerge in the non-profit funds.
The long-term business provision is calculated separately for each of the Group’s life operations. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect the requirements of the Companies Act 2006.
The main method of actuarial valuation of liabilities arising under long-term insurance contracts is the gross premium method which involves the discounting of projected premiums and claims.
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued (a) UK With-profits business
For periods subsequent to 31 December 2015, the with-profits business is valued based on an adjusted Solvency II BEL assessment. The principal assumptions underlying the cost of future policy-related liabilities are as follows: Future investment return
A ‘risk-free’ rate equal to the spot yield on UK swaps is used for the valuation of with-profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2017 of 1.29% (2016: 1.25%) for a policy with ten years outstanding.
Annual bonus assumptions for 2018 have been set consistently with the year-end 2017 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued Expenses
Maintenance charge assumptions for with-profits business are generally expressed as a fixed ‘per policy’ charge in line with agreements between Aviva Life Services UK (UKLS) and Aviva Life & Pensions UK (UKLAP). The assumptions increase by future charge inflation over the lifetime of each contract, which is 50% RPI, 100% RPI or 100% RPI + 1% depending on product type. Any excess of expenses charged by UKLS to UKLAP over the charges specified by the agreements is borne by the non-profits business.
Maintenance expense assumptions for non-profit business are generally expressed as a ‘per policy’ charge set with regards to an allocation of current year expense levels by broad category of business and using the policy counts for in-force business. The assumptions also include an allowance for prudence and increase by future expense inflation over the lifetime of each contract. Expense inflation is assumed to be in line with RPI. An additional liability is held if projected per-policy expenses in future years are expected to exceed current assumptions. Further, explicit project expense liabilities are held for non-discretionary project costs that typically relate to mandatory regulatory requirements. Expense-related liabilities are only held where expenses are not covered by anticipated future profits in the liability methodology, notably for unit-linked contracts. Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates
Annuities Conventional immediate and deferred annuities 1.0% to 2.8% 0.6% to 2.8%
The above valuation discount rates are after reduction for risk, but before allowance for investment expenses. For conventional immediate annuity business the allowance for risk comprises long-term assumptions for defaults or (in the case of equity release assets) expected losses arising from the No-Negative-Equity guarantee. These allowances vary by asset category and for some asset classes by rating. The risk allowances made for corporate bonds, mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets), and Equity Release for business transferred in from Aviva Annuity UK Ltd in 2017 equated to 48 bps, 40 bps, and 102 bps respectively at 31
UK Limited in respect of equity release assets was £1.2 billion (2016: £1.1 billion). Total liabilities for the annuity business were £52 billion at 31 December 2017 (2016: £50 billion).
For the largest portfolio of pensions annuity business transferred from Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 104.0% of PCMA00 (2016: 98.0% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 94.5% of PCFA00 (2016: 91.0% of PCFA00) with base year 2000. A negative provision of £0.1billion is also held to allow for higher mortality at old ages being experienced in our portfolio relative to the above assumptions. For the largest portfolio of pensions annuity business transferred from Friends Life Limited, the underlying mortality assumptions for Males are 103.4% of PCMA00 (2016: 98.5% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 104.4% of PCFA00 (2016: 98.5% of PCFA00) with base year 2000. For all the main portfolios of annuities, improvements are based on ‘CMI_2016 (S=7.5) Advanced with adjustments’ (2016: CMI_2015)
with a long-term improvement rate of 1.75% (2016: 1.75%) for males and 1.5% (2016: 1.5%) for females, both with an addition for prudence of 0.5% (2016: 0.5%) to all future annual improvement adjustments. The CMI_2016 tables have been adjusted by adding 0.25% and 0.35% to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the annuitant population relative to the general population on which CMI_2016 is based), and uses the advanced parameters to taper the long-term improvement rates to zero between ages 90 and 115 (the ‘core’ parameters taper the long-term improvement rates to zero between ages 85 and 110). For pension annuity business transferred in from Aviva Annuity UK limited, year-specific adjustments are made to allow for potential selection effects due to the development of the Enhanced Annuity market and covering possible selection effects from pension freedom reforms.
The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract.
The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.
Life assurances 0% to 4.5% 0% to 4.5% H_SSDBS, F_SSDBS Annuities 0% to 2.0% 0% to 4.5% TGF05/TGH05
In all other countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The £1.5 billion impact of variance between actual and expected experience in 2017 is mainly due to higher than expected equity returns in the UK increasing with-profits and unit-linked liabilities.
The impact of non-economic assumption changes of £(1.2) billion in 2017 reduces the carrying value of insurance liabilities and relates mainly to release of reserves for longevity which is partially offset by increase in expense and persistency reserves for the UK business (with the impact on profit partially offset by a corresponding reduction in reinsurance assets). The £2.1 billion impact of economic assumption changes in 2017 reflects a decrease in valuation interest rates in response to increasing interest rates and narrowing spreads, primarily in respect of immediate annuity and participating insurance contracts in the UK. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 44, together with the impact of movements in related non-financial assets.
Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments. Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE.
The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability. The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business.
Motor 5,039 1,339 6,378 4,690 1,623 6,313 Property 1,734 114 1,848 1,711 57 1,768 Liability 1,814 1,270 3,084 1,907 1,257 3,164 Creditor 24 11 35 23 20 43 Other 353 103 456 418 3 421
Reinsured London Market business 0.7% to 2.6% 2.0% 9 years 9 years Latent claims 0.7% to 1.9% 0.00% to 2.31% 8 to 17 years 6 to 15 years Structured settlements 0.5% to 3.0% 0.15% to 2.98% 7 to 39 years 13 to 39 years
The gross outstanding claims provision before discounting was £11,346 million (2016: £12,196 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claims technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation.
The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range. The following explicit assumptions are made which could materially impact the level of booked net reserves: (a) UK mesothelioma claims
The level of uncertainty associated with latent claims is considerable due to the relatively small number of claims and the long-tail nature of the liabilities. UK mesothelioma claims account for a large proportion of the Group’s latent claims. The key assumptions underlying the estimation of these claims include claim numbers, the base average cost per claim, future inflation in the average cost of claims and legal fees. The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of the different assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate of £35 million (2016: £25 million) greater than the best estimate, or £40 million (2016: £45 million) lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.
(b) Interest rates used to discount latent claim liabilities and structured settlements
The discount rates used in determining our latent claim liabilities and structured settlements are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2017, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £110 million (2016: £220 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact has fallen during 2017 due to a reduction in bodily injury claims in the UK settled by periodic payment orders (PPOs) or structured settlements as a result of a reduction in the Ogden rate from 2.5% to -0.75% making them less attractive compared to a lump sum settlement. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note 56.
The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods.
Due to the uncertainty around the Ogden discount rate, the claim reserves in the UK have been calculated using the current Ogden discount rate of -0.75%, as this is the enacted legislative rate that was announced by the Lord Chancellor last year. However, the discount rate used in the Ogden Tables is currently being reviewed by the Lord Chancellor and draft legislation has been proposed (but not yet enacted) which, at the time it was published, indicated a discount rate in the range of 0% to 1%. By way of illustration, should the Ogden discount rate increase in the future by 1% then this would be expected to reduce reserves by approximately £250 million with an equivalent positive impact on profit before tax.
Impact of changes in assumptions (7) 324 Claim losses and expenses incurred in the current year 6,890 6,703 Decrease in estimated claim losses and expenses incurred in prior periods (172) (7)
Incurred claims losses and expenses 6,711 7,020 Less: Payments made on claims incurred in the current year (3,642) (3,505) Payments made on claims incurred in prior periods (3,283) (2,893) Recoveries on claim payments 278 234
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued (d) Loss development tables (i) Description of tables
Key elements of the release from prior accident year general insurance and health net provisions during 2016 were: • £208 million strengthening from UK & Ireland due to the impact of the change in the Ogden discount rate in the UK partly offset by other favourable developments on personal motor and commercial liability claims.
• £154 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario. • £90 million release from Europe mainly due to favourable development in France and Italy.
There was also a £78 million reduction in net claim reserves relating to an outwards reinsurance contract completed by the UK General
Estimate of gross ultimate claims At end of accident year 9,508 7,364 6,911 6,428 6,201 6,122 5,896 5,851 6,947 6,894 One year later 9,322 7,297 7,006 6,330 6,028 6,039 5,833 5,930 6,931 Two years later 9,277 7,281 6,950 6,315 6,002 6,029 5,865 5,912 Three years later 9,272 7,215 6,914 6,292 5,952 6,067 5,842 Four years later 9,235 7,204 6,912 6,262 6,002 6,034 Five years later 9,252 7,239 6,906 6,265 5,979 Six years later 9,213 7,217 6,926 6,265 Seven years later 9,207 7,256 6,913 Eight years later 9,202 7,228 Nine years later 9,195
Estimate of gross ultimate claims 9,195 7,228 6,913 6,265 5,979 6,034 5,842 5,912 6,931 6,894 Cumulative payments (9,033) (7,078) (6,690) (5,978) (5,556) (5,467) (4,974) (4,710) (4,972) (3,517)
Present value recognised in the statement of financial position 2,132 145 139 202 307 453 615 971 1,425 2,035 3,377 11,801
Net cumulative claim payments At end of accident year (4,808) (3,650) (3,386) (3,300) (2,925) (2,905) (2,972) (2,867) (3,309) (3,483) One year later (7,165) (5,286) (5,242) (4,578) (4,166) (4,240) (4,079) (4,061) (4,591) Two years later (7,638) (5,885) (5,637) (4,963) (4,575) (4,649) (4,432) (4,452) Three years later (8,094) (6,177) (5,905) (5,263) (4,870) (4,918) (4,720) Four years later (8,356) (6,410) (6,137) (5,485) (5,110) (5,159) Five years later (8,515) (6,568) (6,278) (5,626) (5,289) Six years later (8,626) (6,657) (6,361) (5,740) Seven years later (8,682) (6,708) (6,411) Eight years later (8,714) (6,744) Nine years later (8,735)
Estimate of net ultimate claims 8,886 6,896 6,615 6,003 5,680 5,689 5,559 5,608 6,458 6,714 Cumulative payments (8,735) (6,744) (6,411) (5,740) (5,289) (5,159) (4,720) (4,452) (4,591) (3,483)
In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed entity as ‘paid’ at the date of disposal. The loss development tables above include information on asbestos and environmental pollution claims provisions from business written before 2008. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2017 were £95 million (2016: £134 million). The movement in the year reflects a reduction of £14 million due to favourable claims development, claim payments net of reinsurance recoveries and foreign exchange rate movements.
Changes in UPR recognised as an (income)/expense 158 191 Gross portfolio transfers and acquisitions1 46 124 Foreign exchange rate movements 10 403
Strategic report Governance IFRS financial statements Other information 41 – Liability for investment contracts This note analyses our investment contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.
Long-term business Participating contracts 87,654 89,739 Non-participating contracts at fair value 124,995 114,531
Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for long-term business liabilities as described in note 40. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB deferred consideration of participating contracts to Phase II of its insurance contracts project. This is addressed in the insurance contract standard (i.e. IFRS 17).
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus. Guarantees on long-term investment products are discussed in note 42.
The following movements have occurred in the gross provisions for investment contracts in the year: (i) Participating investment contracts £m
Carrying amount at 1 January 89,739 78,048 Provisions in respect of new business 5,193 4,584 Expected change in existing business provisions (4,986) (4,893) Variance between actual and expected experience 2,072 3,084 Impact of non-economic assumption changes 10 36 Impact of economic assumption changes 411 450 Other movements recognised as an expense1 (16) (347)
Carrying amount at 31 December 87,654 89,739 1 Other movements during 2017 primarily relates to a special bonus distribution to UK with-profits policyholders.
2 Total interest expense for participating investment contracts recognised in profit or loss is £2,489 million (2016: £3,111 million).
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience in 2017 of £10 billion is primarily driven by the impact of positive equity returns in the UK. The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non-participating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note 44, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.
As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products. Further information on assumptions is given in
The Group’s UK with-profits liabilities are evaluated by reference to FRS27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. Under the PRA’s rules, provision for guarantees and options within realistic liabilities are measured using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
Substantially all of the conventional with-profits business and a significant proportion of unitised with-profits business have minimum maturity (and in some cases death benefit) values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products. For some unitised with-profits life contracts the amount paid after the fifth policy anniversary is guaranteed to be at least as high as the premium paid increased in line with the rise in RPI/CPI.
The Group’s UK with-profits funds also have certain policies that contain a guaranteed minimum level of pension as part of the condition of the original transfer from state benefits to the policy.
Similar options to those written on with-profits business have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £100 million at 31
In addition to guarantees written in the Group’s UK life businesses, our overseas businesses have also written contracts containing guarantees and options. Details of the significant guarantees and options provided by overseas life businesses are set out below.
Strategic report Governance IFRS financial statements Other information 42 – Financial guarantees and options continued Guaranteed death and maturity benefits
The Group has written contracts containing guaranteed investment returns and guaranteed surrender values in Italy. Traditional profitsharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 4% on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations.
In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, real estate prices and equity prices. Interest rate guaranteed returns, such as those available on
Long-term business Insurance contracts 5,469 6,186 Participating investment contracts 2 2 Non-participating investment contracts1 6,094 18,366
General insurance and health Outstanding claims provisions2 845 1,090 Provisions for claims incurred but not reported2 884 795 13,615 26,754 Less: Amounts classified as held for sale (123) (411)
1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss. During 2017, £14,353 million of reinsurance assets (UK Life) have been reclassified as collective investments in unit-linked funds following a restructure of a reinsurance treaty.
2 Reinsurance assets at 31 December 2016 for General insurance and health business include the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business and the remaining recoveries expected in respect of the Alberta fires in Canada.
The assumptions, including discount rates, used for reinsurance contracts follow those used for insurance contracts. Reinsurance assets are valued net of an allowance for their recoverability.
The following movements have occurred in the reinsurance assets during the year: (i) In respect of long-term business provisions £m
Assets in respect of new business 1,004 941 Expected change in existing business assets (786) 300 Variance between actual and expected experience 2,264 3,149 Impact of non-economic assumption changes (634) (182) Impact of economic assumption changes 94 171 Other movements1 (14,529) 1,003
2 Change in assets does not reconcile with values in Note 40(a)(ii) due to the inclusion of reinsurance assets classified as non-participating investment contracts, where, for such contracts, deposit accounting is applied on the income statement.
Carrying amount at 1 January 1,885 1,595 Impact of changes in assumptions (15) 80 Reinsurers’ share of claim losses and expenses
Reinsurers’ share of incurred claim losses and expenses 194 542 Less: Reinsurance recoveries received on claims Incurred in current year (32) (195)
Incurred in prior years (293) (214) Reinsurance recoveries received in the year (325) (409)
Change in reinsurance asset recognised as income (note 40a(ii)) (138) 222 Effect of portfolio transfers, acquisitions and disposals — (25) Foreign exchange rate movements (18) 97 Other movements — (4)
Carrying amount at 31 December 1,729 1,885 1 The change in reinsurance assets for 2016 includes the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business.
Assumptions Long-term insurance business Interest rates (1,720) (4,490) Expenses (128) 48 Persistency rates (79) (80) Mortality and morbidity for assurance contracts 113 (11) Mortality for annuity contracts 779 294 Tax and other assumptions 2 97 Investment contracts Expenses — — General insurance and health business Change in discount rate assumptions (7) (242) Change in expense ratio and other assumptions — —
(2016: £19 million). The impact of persistency rates on long-term business has resulted in an increase in reserves following a review of recent experience in the UK. The impact of mortality and morbidity for assurance contracts on long-term business has resulted in a reduction in reserves following a review of recent experience, most notably for critical illness in the UK. The impact of mortality for annuitant contracts on long-term business relates primarily to the UK. In 2017, this has resulted in a reduction in reserves due to recognition of benefits from changes in longevity assumptions including: the impact of completing our review of the allowance for anti-selection risk of £170 million, updates reflecting our recent experience of £200 million, updates to the rate of historic and future mortality improvements, including the adoption of CMI 2016, of £340 million, and other less significant movements of £31 million. In Ireland there was a reduction of £38 million following a review of recent experience.
Change in liability recognised as an expense (294) 381 Effect of portfolio transfers, acquisition and disposals1 (1,076) — Foreign exchange rate movements 263 1,016
1 The movement during 2017 relates to the disposal of Antarius (£832 million) and majority of Spanish business (£244 million).
The amount of UDS at 31 December 2017 has decreased to £9.1 billion (2016: £10.2 billion) including amounts classified as held for sale, and £9.1 billion (2016: £9.3 billion) excluding amounts classified as held for sale. The decrease is mainly due to the sale of both Antarius and the majority of Spanish business and a distribution of assets out of UK Life’s UDS in anticipation of a special bonus to policyholders, partly offset by the weakening of sterling against the euro. The participating assets and liabilities have offsetting impacts across the UK and Europe in 2017. In Europe they have increased mainly driven by an increase in new business and in the UK they have reduced, mainly driven by an increase in bond yields and the distribution of assets. In 2016, the impacts did not offset. The participating assets and liabilities increased across all the markets mainly driven by an increase in new business in Europe and a decrease in bond yields in the UK. Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. There are no material negative UDS balances at the participating fund-level within each life entity in the current and comparative periods, with the exception of one fund in UK Life in the comparative period (2016: a negative UDS of £16 million). This negative UDS balance was tested for recoverability and considered to be recoverable by comparing the excess of IFRS participating liabilities over the adjusted Solvency II best estimate liabilities for the relevant contracts. The Solvency II best estimate liabilities were adjusted where Solvency II does not represent a best estimate of shareholders’ interests consistent with the impairment test for goodwill for long-term business (see note 16) and for AVIF on insurance contracts (see note 17).
Amounts classified as held for sale include £2 million of deferred tax assets (2016: £3 million) and £185 million of deferred tax liabilities (2016: £1 million).
(iii) The movement in the net deferred tax liability was as follows: Net liability at 1 January (2,231) (1,953) Acquisition and disposal of subsidiaries1 (6) (50) Amounts (charged)/credited to income statement (note 13a) (123) (43) Amounts (charged)/credited to other comprehensive income (note 13b) (31) (98) Foreign exchange rate movements (18) (83) Other movements (7) (4)
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future taxable profits will be available. Where this is the case, the directors have relied on business plans supporting future profits. The Group has unrecognised gross tax losses (excluding capital losses) and other temporary differences of £787 million (2016: £796 million) to carry forward against future taxable income of the necessary category in the companies concerned. Of these, trading losses of £92 million will expire within the next 20 years. The remaining losses have no expiry date.
Strategic report Governance IFRS financial statements Other information 47 – Pension deficits and other provisions This note details the non-insurance provisions that the Group holds, and shows the movements in these during the year.
Total IAS 19 obligations to main staff pension schemes (note 48(a)) 764 843 Deficits in other staff pension schemes 64 56
Strategic report Governance IFRS financial statements Other information 48 – Pension obligations (a) Introduction
The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland and Canada with the main UK scheme being the largest. The assets and liabilities of these defined benefit schemes as at 31
Total fair value of scheme assets (see b(ii) below) 17,744 658 276 18,678 18,803 610 281 19,694 Present value of defined benefit obligation (14,824) (847) (372) (16,043) (16,131) (848) (368) (17,347)
Surpluses included in other assets (note 28) 3,399 — — 3,399 3,190 — — 3,190 Deficits included in provisions (note 47) (479) (189) (96) (764) (518) (238) (87) (843)
Under the IAS 19 valuation basis, the Group applies the principles of IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, whereby a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. The Group has determined that it can derive economic benefit from the surplus in the ASPS via a reduction to future employer contributions for DC members, which could theoretically be paid from the surplus funds in the ASPS. In the RAC and FPPS, the Group has determined that the rules set out in the schemes' governing documentation provide for an unconditional right to a refund from any future surplus funds in the schemes. The assets of the UK, Irish and Canadian schemes are held in separate trustee-administered funds to meet long-term pension liabilities to past and present employees. In all schemes, the appointment of trustees of the funds is determined by their trust documentation, and they are required to act in the best interests of the schemes’ beneficiaries. The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes.
In the UK, the Group operates three main pension schemes, the Aviva Staff Pension Scheme (ASPS), the smaller RAC (2003) Pension Scheme which was retained after the sale of RAC Limited in September 2011 and the Friends Provident Pension Scheme (FPPS) which was acquired as part of the Friends Life acquisition in 2015. As the defined benefit section of the UK schemes is now closed to both new members and future accrual, existing deferred members in active service and new entrants participate in the defined contribution section of the ASPS. The UK schemes operate within the UK pensions’ regulatory framework.
Strategic report Governance IFRS financial statements Other information 48 – Pension obligations continued (b) IAS 19 disclosures
Disclosures under IAS 19 for the material defined benefit schemes in the UK, Ireland and Canada, are given below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
Remeasurements: Actual return on these assets 740 — 740 Less: Interest income on scheme assets (470) — (470)
The present value of unfunded post-retirement benefit obligations included in the table above is £129 million at 31 December 2017 (2016: £126 million). The increase in the surplus during the period is primarily due to employer contributions paid into the schemes.
Employer contributions 190 — 190 Plan participant contributions 6 (6) — Benefits paid (825) 825 — Administrative expenses paid from scheme assets1 (15) 13 (2) Foreign exchange rate movements 133 (181) (48)
Net IAS 19 surplus in the schemes at 31 December 19,694 (17,347) 2,347 1 Administrative expenses are expensed as incurred.
2 Net interest income of £102 million has been credited to investment income and net interest expense of £29 million has been charged to finance costs (see note 7).
Equities 129 — — 129 71 — — 71 Property 365 — — 365 338 — — 338 Pooled investment vehicles 4,955 238 107 5,300 3,433 200 96 3,729 Derivatives (34) 4 — (30) 86 1 — 87 Cash and other1 (5,710) (284) 6 (5,988) (3,046) 3 34 (3,009)
Total fair value of scheme assets 18,374 658 276 19,308 19,436 610 281 20,327 Less: consolidation elimination for non-transferable Group
2 As at 31 December 2017, the FPPS’s cash and other balances include an insurance policy of £630 million (2016: £633 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group’s IAS 19 scheme assets.
Total fair value of scheme assets 14,366 4,942 19,308 15,882 4,445 20,327 Less: consolidation elimination for non-transferable Group insurance policy2 — (630) (630) — (633) (633)
The valuations used for accounting under IAS 19 have been based on the most recent full actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2017.
The inherent uncertainties affecting the measurement of scheme liabilities require these to be measured on an actuarial basis. This involves discounting the best estimate of future cash flows to be paid out by the scheme using the projected unit credit method. This is an accrued benefits valuation method which calculates the past service liability to members and makes allowance for their projected future earnings. It is based on a number of actuarial assumptions, which vary according to the economic conditions of the countries in which the relevant businesses are situated, and changes in these assumptions can materially affect the measurement of the pension obligations.
The main financial assumptions used to calculate scheme liabilities under IAS 19 are: UK Ireland Canada
Inflation rate1 3.2%/2.1% 3.3%/2.2% 1.7% 1.7% 2.0% 2.0% General salary increases2 5.0% 5.1% 3.2% 3.2% 2.5% 2.5% Pension increases3 3.2%/2.1% 3.3%/2.2% 0.4% 0.4% 1.25% 1.25% Deferred pension increases3 3.2%/2.1% 3.3%/2.2% 1.7% 1.7% — — Discount rate4 2.4%/
3 For the UK schemes, assumptions provided for RPI/CPI. In the UK, the assumptions for the ASPS and RAC schemes are single rates for RPI/CPI; for FPPS, relevant RPI/CPI swap curves are used, which are broadly equivalent to these single rates. The assumptions are also adjusted to reflect the relevant caps/floors and the inflation volatility. 4 To calculate scheme liabilities in the UK, a single discount rate is used in ASPS/RAC, whereas in FPPS, separate discount rates are used for the defined benefit obligation for pensioners and deferred.
Mortality assumptions are significant in measuring the Group’s obligations under its defined benefit schemes, particularly given the maturity of these obligations in the material schemes. The assumptions used are summarised in the table below and have been selected to reflect the characteristics and experience of the membership of these schemes.
The mortality tables, average life expectancy and pension duration used at 31 December 2017 for scheme members are as follows: Life expectancy/(pension duration) at NRA of a male
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivities analyses below have been determined based on reasonably possible changes of the respective assumptions, holding all other assumptions constant. The following table summarises how the defined benefit obligation would have increased/(decreased) as a result of the change in the respective assumptions: Impact on present value of defined benefit obligation
The sensitivity analysis presented above may not be representative as in practice it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, the present value of the defined benefit obligation has been calculated using the projected unit credit method, which is the same as that applied in calculating the defined benefit obligation recognised within the consolidated statement of financial position. In addition, the sensitivities shown are for liabilities only and ignore the impact on assets, which would significantly mitigate the net interest rate and inflation sensitivity impact on the net surplus.
The discounted scheme liabilities have an average duration of 20 years in ASPS, 21 years in FPPS, 21 years in the RAC scheme, 19 years in the Irish scheme and 12 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below: Undiscounted benefit payments (£m)
The Company works closely with the trustee, who is required to consult with the Company on the investment strategy.
The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme. In 2015, the
RAC pension scheme entered into a longevity swap covering approximately £600 million of pensioner in payment scheme liabilities.
The total pension charge to staff costs for all of the Group’s defined benefit and defined contribution schemes were: £m
There were no significant contributions payable or prepaid in the consolidated statement of financial position as at either 31 December 2017 or 2016.
Strategic report Governance IFRS financial statements Other information 49 – Borrowings Our borrowings are classified as either core structural borrowings, which are included within the Group’s capital employed, or operational borrowings drawn by operating subsidiaries. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.
Senior notes 0.100% €350 million senior notes 2018 310 298 0.625% €500 million senior notes 2023 441 424
Total contractual undiscounted cash flows 8,566 8,851 17,417 8,465 9,127 17,592 1 Following a review of the treatment of undated subordinated debt we have reallocated £1,265 million of such instruments from the 10 to 15 years category to the Over 15 years category. As a result of this change prior year comparatives have been restated.
Borrowings are considered current if the contractual maturity dates are within a year. Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £82 million (2016: £82 million).
Securitised mortgage loan notes UK lifetime mortgage business (note 24(b)) 1,180 1,110
The securitised mortgage loan notes are at various fixed, floating and index-linked rates. Further details about these notes are given in note 24.
Within one year 174 52 226 45 60 105 1 to 5 years 547 202 749 469 246 715 5 to 10 years 548 178 726 555 269 824 10 to 15 years 325 140 465 666 128 794 Over 15 years 208 144 352 448 113 561
A description of each of the subordinated notes is set out in the table below: Notional amount Issue date Redemption date Callable at par at option of the
The commercial paper consists of £668 million issued by the Company (2016: £642 million) and is considered core structural funding. The fair value of the commercial paper is considered to be the same as its carrying value and all issuances are repayable within one year.
Strategic report Governance IFRS financial statements Other information 49 – Borrowings continued (iv) Loans
Loans comprise: Non-recourse Loans to property partnerships (see (a) below) 61 66 UK Life reassurance (see (b) below) 111 131 Other non-recourse loans (see (c) below) 58 193
(a) As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property funds and structures (the ‘Property Funds’), some of which have raised external debt, secured on the relevant Property Fund’s property portfolio. The lenders are only entitled to obtain payment of interest and principal to the extent there are sufficient resources in the relevant Property
Net cash inflow/(outflow) (488) (96) (584) 1,094 92 1,186 Foreign exchange rate movements 104 (17) 87 574 33 607 Borrowings reclassified/(loans repaid) for non-cash consideration1 484 (13) 471 — — — Fair value movements — 108 108 — (220) (220) Amortisation of discounts and other non-cash items (37) (16) (53) (34) (16) (50) Movements in debt held by Group companies3 — (38) (38) 31 (29) 2
Movements in the year 63 (72) (9) 1,665 (140) 1,525 Balance at 1 January 8,577 1,718 10,295 6,912 1,858 8,770 1 On 28 September 2017, notification was given that the Group would redeem the $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into Sterling at that date. On 3 November 2017 the instrument was redeemed in full at a cost of £488 million. See note 34 for further details.
2 Gross issuances of commercial paper were £1,265 million in 2017 (2016: £2,006 million), offset by repayments of £1,265 million (2016: £1,964 million).
All movements in fair value in 2016 and 2017 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
Expected to be settled within one year 11,460 12,016 Expected to be settled in more than one year 5,041 5,744
In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents they cover and the uncertainties associated with establishing liability, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims and substantial reinsurance cover now in place, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.
Group’s UK subsidiaries are dual regulated (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation) while others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the
typically have similar powers, but in some cases they also operate a system of ‘prior product approval’. The Group’s regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required.
The Company has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Company is exposed to credit risk to the extent that any of the life insurers fail to fulfill their obligations.
The Company’s maximum exposure to credit risk for these types of arrangements is approximately CAD$1,213 million as at 31 December 2017 (2016: CAD$1,181 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December 2017, no information has come to the Company’s attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.
Strategic report Governance IFRS financial statements Other information 53 – Commitments This note gives details of our commitments to capital expenditure and under operating leases.
Infrastructure loan advances1 782 516 Investment property 42 46 Property and equipment 53 37 Other investment vehicles2 265 202 1 Additional capital commitments in relation to infrastructure loans of £516 million were identified in UK Life at 31 December 2016, prior year comparatives have been restated. 2 Represents commitments for further investment in certain private equity vehicles. Such commitments do not expose the Group to the risk of future losses in excess of its investment.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2016: £nil). Notes 18 and 19 set out the commitments the Group has to its joint ventures and associates.
(i) Future contractual aggregate minimum lease rentals receivable under non-cancellable operating leases are as follows: Within 1 year 317 335 Later than 1 year and not later than 5 years 980 1,027 Later than 5 years 1,408 1,326
(ii) Future contractual aggregate minimum lease payments under non-cancellable operating leases are as follows: Within 1 year 101 103 Later than 1 year and not later than 5 years 339 336 Later than 5 years 413 423
Group capital is represented by Solvency II Own Funds1. At 31 December 2017, the estimated Solvency II Own Funds (shareholder view) amounts to £24.7 billion (31 December 2016: £24.0 billion). This excludes the contribution to Group Own Funds of fully ring fenced withprofits funds of £3.3 billion (31 December 2016: £2.9 billion) and staff pension schemes in surplus of £1.5 billion (31 December 2016: £1.1 billion). These exclusions have no impact on Solvency II surplus. The most material fully ring fenced with-profit funds and staff pension schemes are self-supporting on a Solvency II capital basis with any surplus capital above Solvency Capital Requirements (‘SCR’) not recognised in the Group position. The shareholder view is considered by Management to be more representative of the shareholders’ risk exposure and the Group’s ability to cover the SCR with eligible own funds. The Solvency II Own Funds is shown inclusive of pro forma adjustments to align it with the capital information presented to management internally. This represents a change from the prior year presentation when such adjustments were excluded. Pro forma adjustments are made when, in the opinion of the Directors, the cover ratio does not fully reflect the effect of transactions or capital actions that are known as at each reporting date. Such adjustments may be required in respect of planned acquisitions and disposals, group reorganisations and adjustments to the Solvency II valuation basis arising from changes to the underlying Regulations or updated interpretations provided by EIOPA. The 31 December 2017 Solvency II Own Funds position includes the net pro forma impact arising from the disposals of Friends
Aviva’s 50% shareholding in Antarius to Sogecap, which completed on 5 April 2017, and a then anticipated future change to UK tax rules restricting the tax relief that could be claimed in respect of tax losses announced in the Chancellor of the Exchequer’s Autumn statement of 23 November 2016, which has been removed in 2017 following a clarification in the 13 July 2017 Finance Bill. The Solvency II risk margin is highly sensitive to movements in interest rates, which can be offset by a rest in the transitional measure on technical provisions (‘TMTP’). The 31 December 2016 Solvency II position disclosed includes a notional reset of the TMTP to reflect interest rates at 31 December 2016 of £0.4 billion. This presentation is consistent with the Group’s approach to manage its capital position assuming a dynamic TMTP in respect of interest rate movements on the risk margin, as this avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The estimated 31 December 2017 Solvency II position includes an estimated reset of the TMTP in line with the regulatory requirement to reset the TMTP every two years. The TMTP is amortised on a straightline basis over 16 years from 1 January 2016 in line with the Solvency II rules.
Own Funds are comprised of a combination of shareholders’ funds, preference share capital, direct capital instrument, tier 1 notes, subordinated debt, and deferred tax assets measured on a Solvency II basis. Refer to note 54(b) for further details on Solvency II.
Management also considers a capital employed metric prepared on an IFRS basis in managing capital and measuring business unit performance. The total capital employed comprises of similar items to Own Funds but measured in accordance with IFRS and includes senior debt. In particular, analysis of return on equity calculated based on the capital employed has been used as one of the inputs to Management’s decision making process for capital allocation purposes.
1 Own funds is capital available to cover the Solvency capital requirement (SCR) and Minimum Capital Requirement (MCR) under Solvency II.
In 2017, the Group maintained a strong capital position through a combination of increased profits and management actions contributing to operating capital generation offset by hybrid debt repayment, share buy-back and dividend distributions. At 31 December 2017, total capital employed prepared on an IFRS basis amounted to £27.7 billion (2016: £28.1 billion). This comprises: 2017 Capital employed £m 2016 Capital employed £m
Total capital employed2 27,775 28,128 1 Subordinated debt excludes amounts held by Group companies of £9 million (2016: £9 million).
Strategic report Governance IFRS financial statements Other information 55 – Statement of cash flows This note gives further detail behind the figures in the statement of cash flows.
Profit before tax 2,374 1,833 Adjustments for: Share of profits of joint ventures and associates (41) (216) Dividends received from joint ventures and associates 51 66 (Profit)/loss on sale of: Investment property (30) (56) Property and equipment — — Subsidiaries, joint ventures and associates (135) 11 Investments (6,711) (1,525)
(6,876) (1,570) Fair value (gains)/losses on: (7,356) (19,300) Depreciation of property and equipment 35 25 Equity compensation plans, equity settled expense 77 38 Impairment and expensing of: Goodwill on subsidiaries 2 — Financial investments, loans and other assets 6 — Acquired value of in-force business and intangibles 15 14 Non-financial assets 7 —
Premium/discount on debt securities 720 648 Premium/discount on borrowings (53) (50) Premium/discount on non-participating investment contracts 262 284 Financial instruments 26 25 Acquired value of in-force business and intangibles 392 410 1,347 1,317 Change in unallocated divisible surplus (294) 381 Interest expense on borrowings 610 593 Net finance income on pension schemes (63) (73) Foreign currency exchange gains 61 (405)
A regular top-down key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees. Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. For those risk types managed through the holding of capital, being our principal risk types except for liquidity risk, we measure and monitor our risk profile on the basis of the Solvency II
solvency capital requirement. Roles and responsibilities for risk management in Aviva are based around the ‘three lines of defence model’ where ownership for risk is taken at all levels in the Group. Line management in the business is accountable for risk management, including the implementation of the risk management framework and embedding of the risk culture. The risk function is accountable for quantitative and qualitative oversight and challenge of the risk identification, measurement, monitoring, management and reporting processes and for developing the risk management framework. Internal Audit provides an independent assessment of the risk framework and internal control processes.
Credit risk is the risk of financial loss as a result of the default or failure of third parties to meet their payment obligations to Aviva, or variations in market values as a result of changes in expectations related to these risks. Credit risk is taken so that we can provide the returns required to satisfy policyholder liabilities and to generate returns for our shareholders. In general we prefer to take credit risk over equity and property risks, due to the better expected risk adjusted return, our credit risk analysis capability and the structural investment advantages conferred to insurers with long-dated, relatively illiquid liabilities. Our approach to managing credit risk recognises that there is a risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default, rating transition and credit spread movements. Our credit risks arise principally through exposures to debt security investments, structured asset investments, bank deposits, derivative counterparties, mortgage lending and reinsurance counterparties. The Group manages its credit risk at business unit and Group level. All business units are required to implement credit risk management processes (including limits frameworks), operate specific risk management committees, and ensure detailed reporting and monitoring of their exposures against pre-established risk criteria. At Group level, we manage and monitor all exposures across our business units on a consolidated basis, and operate a Group limit framework that must be adhered to by all. A detailed breakdown of the Group’s current credit exposure by credit quality is shown below.
Financial assets are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as sub-investment grade. The following table provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings. ‘Not rated’ assets capture assets not rated by external ratings agencies.
Debt securities 10.6% 32.5% 20.0% 23.3% 7.8% 5.8% 175,948 (1,140) 174,808 Reinsurance assets — 87.3% 8.2% 1.9% — 2.6% 13,615 (123) 13,492 Other investments — 0.2% 0.3% 0.1% — 99.4% 53,277 (6,971) 46,306 Loans — 7.1% — — — 92.9% 27,863 (6) 27,857
Debt securities 11.8% 33.4% 19.0% 23.9% 6.0% 5.9% 186,708 (7,738) 178,970 Reinsurance assets — 92.0% 6.3% 0.1% — 1.6% 26,754 (411) 26,343 Other investments — 0.2% 0.6% — — 99.2% 51,127 (2,304) 48,823 1 Following a review of the Group’s investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note 26 for further details of this adjustment and the financial statement impact arising.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued (ii) Financial exposures to peripheral European countries and worldwide banks
Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2017 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain. Information on our exposures to peripheral European sovereigns and banks is provided in notes 26(e) and 26(f). We continue to review whether the restrictions on investment in place since late 2009 can be relaxed, given the improved economic situation in these economies.
The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to Group ALCO. With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets (i.e. excluding potential exposures arising from reinsurance of unit-linked funds) is to the Swiss Reinsurance Company Limited (including subsidiaries), representing approximately 2.3% of the total shareholder assets.
BlackRock Life Ltd was £5,307 million (2016: £17,087 million), a significant reduction in exposure as a result of action taken to restructure the agreements with BlackRock Life Ltd, and will be further significantly reduced during 2018.
In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the shareholders’ exposure to credit risk is limited to the extent of the income arising from asset management charges based on the value of assets in the fund.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued
Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £174.2 billion of debt securities (2016: £185.6 billion), £53.3 billion of other investments (2016: £51.1 billion), £24.4 billion of loans (2016: £21.3 billion) and £6.1 billion of reinsurance assets (2016: £18.4 billion).
Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, inflation, foreign currency exchange rates, equity and property prices. Market risk arises in business units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. We actively seek some market risks as part of our investment and product strategy. However, we have limited appetite for interest rate risk as we do not believe it is adequately rewarded.
The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group Capital is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements. In addition, where the Group’s long-term savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders’ risk and reward objectives. The Group writes unit-linked business in a number of its operations. The shareholders’
exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund.
The Group is subject to direct equity price risk arising from changes in the market values of its equity securities portfolio. Our most material indirect equity price risk exposures are to policyholder unit-linked funds, which are exposed to a fall in the value of the fund thereby reducing the fees we earn on those funds, and participating contracts, which are exposed to a fall in the value of the funds thereby increasing our costs for policyholder guarantees. We also have some equity exposure in shareholder funds through equities held to match inflation-linked liabilities. We continue to limit our direct equity exposure in line with our risk preferences. At a business unit level, investment limits and local investment regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.
As at 31 December 2017, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Sensitivity to changes in property prices is given in section ‘(j) risk and capital management’ below.
Group’s key exposure to low interest rates arises through its other participating contracts, principally in Italy and France. Some of these contracts also include features such as guaranteed minimum bonuses, guaranteed investment returns and guaranteed surrender values. In a low interest rate environment there is a risk that the yield on assets might not be sufficient to cover these obligations. For certain of its participating contracts the Group is able to amend guaranteed crediting rates. Our ability to lower crediting rates may be limited by competition, bonus mechanisms and contractual arrangements. Details of material guarantees and options are given in note 42. In addition, the following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2017 for our Italian and French participating contracts, where the Group’s key exposure to sustained low interest rates arises.
The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profits contract liabilities or hedging. As a result the foreign exchange and losses on investments (see note 5) are largely offset by changes in unit-linked and with-profits liabilities and fair value changes in derivatives attributable to changes in foreign exchange rates recognised in the income statement.
Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group’s regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting (see note 57(a)(i)), foreign exchange gains and losses on foreign currency borrowings (see note 6) are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At 31 December 2017 and 2016, the Group’s total equity deployment by currency including assets ‘held for sale’
Impact on profit before tax 31 December 2017 (78) 95 6 (7) Impact on profit before tax 31 December 2016 (55) 67 (15) (9)
Derivatives are used by a number of the businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. Activity is overseen by the Group Capital and Group Risk teams, which monitor exposure levels and approve large or complex transactions.
The Group recognises that lapse behaviour and potential increases in consumer expectations are sensitive to and interdependent with market movements and interest rates. These interdependencies are taken into consideration in the internal capital model and in scenario analysis.
For non-linked insurance business, the following table shows the gross liability at 31 December 2017 and 2016 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts. Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date. This table includes assets held for sale.
Long-term business Insurance contracts – non-linked 109,900 10,105 27,278 41,720 30,797 Investment contracts – non-linked 71,948 5,370 17,088 26,300 23,190 Linked business 163,571 17,609 27,632 55,519 62,811 General insurance and health 16,794 6,877 6,838 2,462 617
This reclassification has no impact on total contract liabilities reported at 31 December 2016.
Debt securities 174,808 28,037 47,289 99,078 404 Equity securities 89,968 — — — 89,968 Other investments 46,306 40,500 364 4,680 762 Loans 27,857 1,651 5,053 21,149 4 Cash and cash equivalents 43,347 43,347 — — —
Debt securities 178,970 24,293 49,061 105,448 168 Equity securities 72,042 — — — 72,042 Other investments 48,823 45,889 1,112 275 1,547 Loans 24,784 1,352 5,609 17,819 4 Cash and cash equivalents 38,708 38,708 — — —
The underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2017, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. We are also exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities. Longevity risk remains the Group’s most significant life insurance risk, while persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal capital model and subject to sensitivity and stress and scenario testing. The assumption and management of life and health insurance risks is governed by the Group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life and health insurance risks are managed as follows: • Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitors that the aggregation of risk ceded is within credit risk appetite. • Longevity risk and internal experience analysis are monitored against the latest external industry data and emerging trends. Whilst individual businesses are responsible for reserving and pricing for annuity business, the Group monitors the exposure to this risk and any associated capital implications. The Group has used reinsurance solutions to reduce the risks from longevity and continually monitors and evaluates emerging market solutions to mitigate this risk further. • Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarked against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve the retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management. • Expense risk is primarily managed by the business units through the assessment of business unit profitability and frequent monitoring of expense levels.
The Group is exposed to the risk of changes in policyholder behaviour due to the exercise of options, guarantees and other product features embedded in its long-term savings products. These product features offer policyholders varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in the exercise of options as well as market risk.
The impact of these is reflected in the capital model and managed as part of the asset liability framework. Further disclosure on financial guarantees and options embedded in contracts and their inclusion in insurance and investment contract liabilities is provided in note 42.
Significant reinsurance purchases are reviewed annually at both business unit and Group level to verify that the levels of protection being bought reflect any developments in exposure and the risk appetite of the Group. The basis of these purchases is underpinned by analysis of capital, earnings and capital volatility, cash flow and liquidity and the Group’s franchise value. Detailed actuarial analysis is used to calculate the Group’s extreme risk profile and then design cost and capital efficient reinsurance programmes to mitigate these risks to within agreed appetites. For businesses writing general insurance we analyse the natural catastrophe exposure using our own internal probabilistic catastrophe model which is benchmarked against external catastrophe models widely used by the rest of the (re)insurance industry. The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a group-wide catastrophe reinsurance programme to protect against catastrophe losses exceeding a 1 in 200 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe
Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 200 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers’ liability and public liability business written prior
Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. Funds invested in illiquid assets such as commercial property are particularly exposed to liquidity risk. The risk profile is regularly monitored.
Investment performance against client objectives relative to agreed benchmarks is monitored as part of our investment performance and risk management process, and subject to further independent oversight and challenge by a specialist risk team, reporting directly to the
We are exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory investigations, media speculation and negative publicity, disclosure of confidential client information, inadequate services, whether or not founded, could impact our brands or reputation. Any of our brands or our reputation could also be affected if products or services recommended by us (or any of our intermediaries) do not perform as expected (whether or not the expectations are founded) or customers’ expectations for the product change. We seek to reduce this risk to as low a level as commercially sensible. The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation.
The Group uses a number of sensitivity tests to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic and operating experience are regularly produced on the Group’s key financial performance metrics to inform the Group’s decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of its business units, and the Group as a whole, are exposed.
General insurance and health claim liabilities are estimated by using standard actuarial claims projection techniques. These methods extrapolate the claims development for each accident year based on the observed development of earlier years. In most cases, no explicit assumptions are made as projections are based on assumptions implicit in the historic claims.
Illustrative results of sensitivity testing for long-term business, general insurance and health business and the fund management and noninsurance business are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged.
Insurance participating (45) 25 (15) (20) (40) (25) (5) (10) Insurance non-participating (475) 485 (790) (135) 115 (215) (105) (905) Investment participating — 10 (5) (5) — (15) — — Investment non-participating — (10) (5) 10 (10) (30) — — Assets backing life shareholders' funds (90) 115 (25) 20 (20) — — —
Insurance Participating (50) 30 (10) (130) 65 (30) (5) (15) Insurance non-participating (190) 20 (775) (35) 10 (190) (90) (920) Investment participating (10) 5 (5) — — (5) — — Investment non-participating 10 (15) — 50 (70) (65) — — Assets backing life shareholders' funds (115) 190 10 (85) 85 — — —
Changes in sensitivities between 2017 and 2016 reflect underlying movements in the value of assets and liabilities, the relative duration of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK.
Fund management and non-insurance business sensitivities as at 31 December 2017 31 December 2017 Impact on profit before tax £m Interest rates
Equity/ property 1 Revised from £10 million to £30 million to include Aviva International Insurance.
Strategic report Governance IFRS financial statements Other information 57 – Derivative financial instruments and hedging continued The carrying value of the debt at 31 December 2017 was £2,885 million (2016: £2,774 million) and its fair value at that date was £3,202 million (2016: £2,918 million).
The were no cash flow hedges designated in the year. In 2016 gains of £2 million in respect of a cash flow hedge terminated during the year were reclassified from shareholders’ equity into the income statement.
Fair value assets of £5,507 million (2016: £6,119 million) are recognised as ‘Derivative financial instruments’ in note 26(a), while fair value liabilities of £5,766 million (2016: £6,795 million) are recognised as ‘Derivative liabilities’ in note 50.
Within 1 year 1,071 1,075 Between 1 and 2 years 597 601 Between 2 and 3 years 503 578 Between 3 and 4 years 404 558 Between 4 and 5 years 328 406 After 5 years 3,461 4,154
Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously.
Aviva for securities and a related receivable is recognised within ‘Loans to banks’ (note 23). These arrangements are reflected in the tables below. In instances where the collateral is recognised on the statement of financial position, the obligation for its return is included within
‘Payables and other financial liabilities’. In other arrangements, securities are exchanged for other securities. The collateral received must be in a readily realisable form such as listed securities and is held in segregated accounts. Transfer of title always occurs for the collateral received. In many instances, however, no market risk or economic benefit is exchanged and these transactions are not recognised on the statement of financial position in accordance with our accounting policies, and accordingly not included in the tables below.
Financial liabilities Derivative financial liabilities (6,762) 827 (5,935) 3,649 474 1,360 (452) Other financial liabilities (2,779) — (2,779) — — 2,779 —
In the tables above, the amounts of assets or liabilities presented in the consolidated statement of financial position are offset first by financial instruments that have the right of offset under master netting or similar arrangements with any remaining amount reduced by the amount of cash and securities collateral. The actual amount of collateral may be greater than amounts presented in the tables above in the case of over collateralisation.
The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: £m
Aviva France SA (99.99%) and its principal subsidiaries: Aviva Assurances S.A. (99.9%)
Caja Murcia Vida y Pensiones, de Seguros y Reaseguros S.A. (50%)1 Pelayo Vida Seguros Y Reaseguros Sociedad Anonima (50%)1
The Group also operates through branches, the most significant of which is based in Ireland.
The definition of a subsidiary undertaking in accordance with the Companies Act 2006 is different from the definition under IFRS. As a result, the related undertakings included within the list below may not be the same as the undertakings consolidated in the Group IFRS
The direct related undertakings of the Company as at 31 December 2017 are listed below.
Name of undertaking Country of incorporation Registered address Share class1 % held
The indirect related undertakings of the Company as at 31 December 2017 are listed below: Company name Share Class1 % held
Wayfarer Insurance Brokers Limited Common Shares 100 100 King Street West, Suite 4900,
A-Win Insurance Ltd. Ordinary Shares 100 328 Mill Street, Unit 11, Beaverton L0K
Bay-Mill Specialty Insurance Adjusters Inc. Common Shares 100 480 University Avenue, Suite 800,
Aviva Agency Services Inc. Common A Shares 100 600 Cochrane Drive, Suite 205, Markham
Aviva Impact Investing France Ordinary Shares 100 11 rue la Boétie, 75008 Paris
UFF Petrocontext C. FCP 99 13 Avenue le Brun, 92160, Antony
Company name Share Class1 % held 153, Boulevard Haussmann, 75008, Paris
Financiere Du Carrousel Ordinary Shares 74 19, Avenue de Suffren, 75007, Paris
Croissance Pme A C. Mutual Fund 100 24 Rue de la Pépinière, 75008 Paris
Capza Priv Debt 2 A C. UCITS 100 24-26 Rue De La Pépinière, 75008, Paris 100 Courcelles Ordinary Shares 100
Infinitis Ordinary Shares 74 4 Rue Marivaux,75002, Paris 7-13 Boulevard Paul Emile Victor S.a.r.l Ordinary Shares 100
SCPI Sélectipierre 2 Ordinary Shares 29 47 rue du Faubourg Saint-Honoré, 75008,
UFF Valeurs Pme-A (Fintrma) FCP 99 62 Rue de la Chaussee d'Antin, 75009
Vip Conseils Ordinary Shares 34 70 Avenue De L'Europe, 92270 Bois-
Societe Civile Immobiliere Montaigne Ordinary Shares 100 80 Avenue De L'Europe, 92270 Bois-
GA Life Property Ireland Limited Ordinary Shares 100 2nd Floor IFSC House, Int'l Financial
Baring Korea Feeder Fund Unit Trust 22 33 Sir John Rogerson's Quay, Dublin 2
11-12 Hanover Square UT2 Unit Trust 50 130 Fenchurch Street UT2 Unit Trust 50 30 Warwick Street UT2 Unit Trust 50 30-31 Golden Square UT2 Unit Trust 50
Energy S.A. Ordinary Shares 100 15 rue du Fort Bourbon, L-1249
Lend Lease Retail Partners Ordinary Shares 100 1c rue Gabriel Lippmann
Encore Plus Lux Co Franklin II S.à r.l. Ordinary Shares 5
Victor Hugo 1 S.à r.l. Ordinary Each Eur 25 Shares 100 2 Rue du Fort Bourbon, L-1249
Aviva Investors Cells Fund FCP 50 26 Avenue De La Liberte, L-1930
Ubi Sicav Short Term Eur Sicav Cl I SICAV 29 4 rue du Fort Bourbon, L-1249
Portfolios US Dollar Growth SICAV 23 6 rue du Fort Bourbon, L-1249
Sachsenfonds GmbH Ordinary Shares 98 7 rue du Fort Bourbon, L-1249
Optimum Investment Management Limited Ordinary B Shares 50 24 Birch Street, Wolverhampton, WV1 4HY
CF Bentley Global Growth OEIC 33 30 Finsbury Square, London, EC2P 2YU
Schroder Qep Us Core Fund Unit Trust 40 42 Dingwall Road, Croydon, Surrey, CR0 2NE
Lazard Multicap UK Income Fund OEIC 50 7 Lochside View, Edinburgh, EH12 9DH
Origo Services Limited Ordinary Shares 22 7 Newgate Street, EC1A 7NX
AXA Rosenberg Japan OEIC 97 8 Surrey Street, Norwich, Norfolk, NR1 3NG
Aviva Investors GR SPV 16 Limited Ordinary Shares 100 c/o Scottish Canals Canal House, 1
Company Limited A Shares, B Shares 76 6-10 Lowndes Square Management
Aviva Investors Idx-Lkd Gilts Ovr 5 Yrs Idx Fd ACS 100
Investec American Fund OEIC 24 61 Conduit Street London W1S 2GB
Sociétés Civiles de Placement Immobilier (‘SCPI’) 2 Please refer to accounting policies (D) Consolidation principles, for further details on Joint Ventures and the factors on which joint management is based.
62 – Subsequent events For details of subsequent events relating to: • subsidiaries – refer to note 3a (iii) • joint ventures – refer to note 3c (iii)
Profit for the year before tax 1,112 1,464 Tax credit C 113 95
Profit for the year — — — — — — — 1,225 — 1,225 Other comprehensive income — — — — — 707 — (2) — 705 Total comprehensive income for the year — — — — — 707 — 1,223 — 1,930 Dividends and appropriations 15 — — — — — — — (1,081) — (1,081) Reserves credit for equity compensation plans 31 — — — — — — 77 — — 77 Shares issued under equity compensation plans 30 2 — 10 — — — (44) 42 — 10 Shares purchased in buy-back 30 (14) — — 14 — — — (300) — (300) Redemption of fixed rate tier 1
Assets Non-current assets Investments in subsidiaries A 41,192 40,521 Investment in joint venture 18a 547 511 Loans owed by subsidiaries I 3,680 5,941 Deferred tax assets C 9 156 Current tax assets C 255 135 45,683 47,264 Current assets Other amounts owed by subsidiaries I 298 321 Loans owed by subsidiaries I 1,730 — Other assets 9 11 Cash and cash equivalents 87 82
Liabilities Non-current liabilities Borrowings F 6,450 6,638 Loans owed to subsidiaries I 9,900 13,098 Deferred tax liabilities C — 4 Provisions 53 47 16,403 19,787 Current liabilities Borrowings F 978 642 Loans owed to subsidiaries I 3,108 156 Other amounts owed to subsidiaries I 4,084 4,042 Other creditors 154 139
Statement of cash flows For the year ended 31 December 2017
Cash flows from investing activities (Purchase)/sale of financial investments — 29
Cash flows from financing activities Shares purchased in buy-back (300) — Funding provided from subsidiaries 2,365 11 Repayment of loans owed to subsidiaries (156) — New borrowings drawn down, net of expenses 1,265 3,378 Repayment of borrowings (1,753) (2,285) Net (repayment)/drawdown of borrowings1 (488) 1,093 Preference dividends paid (17) (17) Ordinary dividends paid (983) (871) Coupon payments on direct capital instrument and tier 1 notes (81) (85) Interest paid on borrowings (346) (330) Proceeds from issue of ordinary shares 10 13
Cash and cash equivalents at 1 January 82 188 Exchange gains on cash and cash equivalents 1 51
Cash and cash equivalents at 31 December 87 82 1 On 28 September 2017, notification was given that the Group would redeem the 8.25% US $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling at that date. The instrument was redeemed in full on 3 November 2017 at a cost of £488 million. This included £4 million exchange losses subsequent to the reclassification which are included within other operating costs within the income statement. See note 34 for further details.
Fair value as at 1 January 40,521 42,452 Movement in fair value 671 (1,931)
Fair values are estimated using applicable valuation models underpinned by the Company’s market capitalisation, and are classified as Level 2 in the fair value hierarchy described in note 22 to the Group consolidated financial statements.
Staff costs and other employee related expenditure (see below) 107 97 Other operating costs 105 127 Net foreign exchange losses/(gains) 5 379
Wages and salaries 54 57 Social security costs 7 8 Defined contribution schemes 8 8 Equity compensation plans (see (iii) below) 30 19 Termination benefits 8 5
The staff costs recognised by the Company represent recharges of employee related expenses attributable to the Company. The number of persons employed by the Company was nil (2016: nil).
All transactions in the Group’s equity compensation plans involve options and awards for ordinary shares of the Company. Full disclosure of these plans is given in the Group consolidated financial statements, note 31. The cost of such options and awards is borne by all participating businesses and, where relevant, the Company bears an appropriate charge. As the majority of the charge to the Company relates to directors’ options and awards, for which full disclosure is made in the Directors’ Remuneration Report, no further disclosure is given here.
Current tax For this year (253) (131) Prior year adjustments (3) (1)
Deferred tax Origination and reversal of temporary differences 143 26 Changes in tax rates or tax laws — 11
Tax credited directly to other comprehensive income is £nil (2016: £1 million). This is in respect of deferred tax on the remeasurement of the pension scheme.
The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the Company as follows: £m
Tax calculated at standard UK corporation tax rate of 19.25% (2016: 20%) 214 293 Adjustment to tax charge in respect of prior years (3) (1) Non-assessable dividend income (335) (502) Disallowable expenses 8 8 Different local basis of tax on overseas profits (4) 1 Change in future local statutory tax rates (19) 6 Losses surrendered intra-group for nil value 26 100
Finance (No 2) Act 2015 introduced legislation reducing the rate of corporation tax from 20% at 1 April 2016 to 19% from 1 April 2017 and to 18% from 1 April 2020. The Finance Act 2016 reduced the corporation tax rate further to 17% from 1 April 2020.
The reductions in rate from 20% to 19% and then to 17% have been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2017.
The majority of the 2016 deferred tax asset was utilised during 2017 as a corporation tax deduction giving rise to a credit of £19 million.
A deferred tax asset of £9 million (2016: £156 million), arises in respect of expected future pension contributions and other post retirement obligations. In 2017 the majority of the deferred tax asset brought forward has been realised and offset against taxable profits in the UK. In addition, a deferred tax liability from 2016 of £4 million in respect of anticipated future income was written down to £nil in 2017.
Deferred tax is recognised at 17% (2016: 17%). The Company does not have any unrecognised temporary differences (2016: £nil).
D – Direct capital instrument and tier 1 notes Details of the Direct Capital instrument and tier 1 notes are given in the Group consolidated financial statements, note 34. The 6.875% £210 million STICS are reflected in the Company financial statements at a value of £224 million (2016: £224 million) following the transfer at fair value from Friends Life Holdings plc on 1 October 2015.
Balance at 31 December 2016 6,438 9,121 78 3,747 Arising in the year: Profit for the year — — — 1,225 Fair value gains on investments in subsidiaries and joint venture — 707 — — Remeasurements of pension schemes — — — (2) Dividends and appropriations — — — (1,081) Reserves credit for equity compensation plans — — 77 — Issue of share capital under equity compensation scheme — — (44) 42 Shares purchased in buy-back — — — (300) Redemption of fixed rate tier 1 notes2 — — — (92) Aggregate tax effect — — — 16 1 Refer to notes 31d and 36 for further details of balances included in Equity-compensation reserve.
2 On 28 September 2017, notification was given that the Group would redeem the 8.25% US $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling at that date. The resulting foreign exchange loss of £92 million has been charged to retained earnings. See note 34 for further details.
The tax effect of £16 million (2016: £17 million) is recognised in respect of coupon payments of £81 million (2016: £85 million) on the direct capital instrument and tier 1 notes.
H – Risk management Risk management in the context of the Group is considered in the Group consolidated financial statements, note 56.
The business of the Company is managing its investments in subsidiaries and joint venture operations. Its risks are considered to be the same as those in the operations themselves and full details of the major risks and the Group’s approach to managing these are given in the Group consolidated financial statements, note 56. Such investments are held by the Company at fair value in accordance with accounting policy D. The fair values of the subsidiaries and joint ventures are estimated using applicable valuation models, underpinned by the Company’s market capitalisation. This uses the Company’s closing share price at year end. Given that the key input into the valuation model is based on an observable current share price, and therefore sensitive to movements in that price, the valuation process is not sensitive to nonobservable market assumptions. Financial assets, other than investments in subsidiaries and the joint ventures, largely consist of amounts due from subsidiaries. As at the balance sheet date, these receivable amounts were neither past due nor impaired. Financial liabilities owed by the Company as at the balance sheet date are largely in respect of borrowings (details of which are provided in note F and the Group consolidated financial statements, note 49) and loans owed to subsidiaries. Loans owed to subsidiaries were within agreed credit terms as at the balance sheet date.
Loans to and from subsidiaries are at either fixed or floating rates of interest, with the latter being exposed to fluctuations in these rates.
All of the Company’s long-term external borrowings are at fixed rates of interest and are therefore not exposed to changes in these rates. However, for short term commercial paper, the Company is affected by changes in these rates to the extent the redemption of these borrowings is funded by the issuance of new commercial paper or other borrowings. Further details of the Company’s borrowings are provided in note F and the Group consolidated financial statements, note 49.
The effect of a 100 basis point increase/decrease in interest rates on floating rate loans due to and from subsidiaries and on refinancing short term commercial paper as it matures would be a decrease/increase in profit before tax of £114 million (2016: decrease/increase of £108 million). The net asset value of the Company’s financial resources is not materially affected by fluctuations in interest rates.
Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The Company’s main sources of liquidity are liquid assets held within the Company and its subsidiary Aviva Group Holdings Limited, and dividends received from the Group’s insurance and asset management businesses. Sources of liquidity in normal markets also includes a variety of short and long-term instruments including commercial papers and medium and long-term debt. In addition to the existing liquid resources and expected inflows, the Company maintains significant undrawn committed borrowing facilities (£1,650 million) from a range of leading international banks to further mitigate this risk.
Within 1 year 1,730 — 1 – 5 years 754 3,111 Over 5 years 2,926 2,830
On 1 January 2013, Aviva International Holdings Limited, an indirect subsidiary, transferred the following loan liabilities with the Company to Aviva Group Holdings Limited, its direct subsidiary: • An unsecured loan of €250 million, entered into on 7 May 2003 accruing interest at fixed rate of 5.5% with settlement to be paid at maturity in May 2033. As at the Statement of Financial Position date, the total amount drawn down on the facility was £222 million (2016: £213 million).
• An unsecured loan of €500 million, entered into on 20 May 2008 accruing interest at a fixed rate of 6.88% with settlement to be paid at maturity in May 2018. As at the Statement of Financial Position date, the total amount drawn down on the facility was £444 million
On 23 December 2014, the Company provided an unsecured revolving credit facility of £2,000 million to Aviva Group Holdings Limited, its subsidiary, with a maturity date of 3 September 2018. The facility accrues interest at 75 basis points above 6 month LIBOR. As at the
On 30 September 2016, the Company provided the following loans to Aviva Group Holdings Limited, its subsidiary: • An unsecured loan of €850 million with a maturity date of 30 September 2021. The loan accrues interest at 115 basis points above 12 month EURIBOR with settlement to be paid at maturity. As at the Statement of Financial Position date, the total amount drawn was £754 million (2016: £725 million).
• An unsecured loan of €650 million with a maturity date of 5 July 2023. The loan accrues interest at a fixed rate of 1.54% with settlement to be paid at maturity. As at the Statement of Financial Position date, the total amount drawn down on the facility was £577 million
(2016: £555 million). • An unsecured loan of €700 million with a maturity date of 3 July 2024. The loan accrues interest at a fixed rate of 1.64% with settlement to be paid at maturity. As at the Statement of Financial Position date, the total amount drawn down on the facility was £621 million (2016: £597 million).
• An unsecured loan of €900 million with a maturity date of 4 December 2025. The loan accrues interest at a fixed rate of 1.74% with settlement to be paid at maturity. As at the Statement of Financial Position date, the total amount drawn down on the facility was £799 million (2016: £769 million).
On 21 November 2016, the Company provided an unsecured loan €500 million to Aviva Group Holdings Limited, its subsidiary, with a maturity date of 27 October 2023. The loan accrues interest at a fixed rate of 1.75% with settlement to be paid at maturity. As at the
On 14 December 2017, the Company renewed its facility with GA plc, its subsidiary, of £9,990 million and the Board approved the extension of the maturity of the loan by five years from 31 December 2017 to 31 December 2022. The other terms of the loan will remain unchanged, including the rate of interest payable by the Company to GA plc (65 basis points above 3 months LIBOR and in the event that the LIBOR rate is less than zero, the rate shall be deemed to be zero). As at 31 December 2017, the loan balance outstanding was £9,900 million (2016: £9,990 million). This loan is secured against the ordinary share capital of Aviva Group Holdings Limited. Other related party balances comprise dividends and interest receivable and payable, as well as intercompany balances for fees and other transactions in the normal course of business.
The Company incurred expenses in the year of £0.2 million (2016: £0.2 million) representing audit fees paid by the Company on behalf of subsidiaries. The Company did not recharge subsidiaries for these expenses.
Of the related parties’ payables, £9,900 million (2016: £9,990 million) are secured. The remaining £7,192 million (2016: £7,306 million) are not secured and no guarantees were received in respect thereof. The payables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties given by the Company on behalf of related parties are given in note 52(f). The directors and key management of the Company are considered to be the same as for the Group. Information on both the Company and Group key management compensation can be found in note 59.
Alternative Performance Measures In order to fully explain the performance of our business, we discuss and analyse our results in terms of financial measures which include a number of alternative performance measures (APMs). APMs are non-GAAP measures which are used to supplement the disclosures prepared in accordance with other regulations such as International Financial Reporting Standards (IFRS) and Solvency II. We believe these measures provide useful information to enhance the understanding of our financial performance. However, APMs should be viewed as complementary to, rather than as a substitute for, the figures determined according to other regulations.
The APMs utilised by Aviva may not be the same as those used by other insurers and may change over time. These metrics are reviewed annually and updated as appropriate to ensure they remain an effective measurement that underpins the objectives for the Group. This section includes additional detail in respect of APMs utilised by the Group, including a reconciliation to the relevant amounts appearing in the Group’s IFRS financial statements and, where appropriate, a commentary on the material reconciling items. This section should be read in conjunction with the Strategic report which includes an analysis of the development and performance of the Group’s business during the year and its overall financial position at the end of the year.
Operating profit is a non-GAAP APM which is reported to the Group chief operating decision maker for the purpose of decision making and internal performance management of the Group’s operating segments that incorporates an expected return on investments supporting the life and non-life insurance businesses. The various items taken out of operating profit are: Investment variances and economic assumptions changes
Operating profit for the non-life insurance business is based on expected investment returns on financial investments backing shareholder funds over the period.
reflects the long-term nature of much of our business. The operating profit which is used in managing the performance of our operating segments excludes the impact of economic factors, to provide a comparable measure year-on-year.