Committee changes during the year In May 2020, George Culmer succeeded Sir Adrian Montague as Chair and therefore retired from the Committee. Patrick Flynn joined the Committee in June 2020, bringing with him significant experience in financial services. Pippa Lambert joined the Committee in January 2021. Pippa has significant experience in global financial services as a HR professional and has an excellent record of delivery across a range of people strategies and transformation programmes.
The LTIP opportunities are lower than the scheme maximum which is 350%.
2021 Focus areas 2021 promises to be another busy year for the Committee, the focus of which is reviewing our workforce demographics. While considerable efforts have been made in diversity and inclusion, we are particularly focussed on two priorities, gender and diversity. We are determined to keep challenging ourselves to do more to build a workplace and society that works for all.
Conclusion In what has been a difficult year, Aviva has responded well and delivered resilient results against a challenging external backdrop. As a Committee, we have sought to make decisions which effectively drive and support this progress, while continuing to align with UK best practice remuneration and governance expectations.
I hope that you find this report clear and informative, and that the Committee has your support for our Policy and Annual Report on Remuneration at our forthcoming AGM.
2 Group adjusted operating profit is an APM which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the ‘Other Information’ section within the Annual Report and Accounts for further information.
In determining the Policy for EDs, the Committee seeks to put in place arrangements that support the execution of our strategy and the delivery of sustainable long-term shareholder value.
Financial KPIs focusing on economic value Shareholder value creation Non-financial goals
The inclusion of a cumulative cash remittance measure emphasises the importance of delivering on our long-term dividend ambitions whilst balancing short term cash delivery and investment in the business to drive long-term growth. TSR directly measures the value we create for shareholders and the non-financial metrics will enable Aviva take a more prominent role in society by focusing on climate change issues and diversity and inclusion.
UK Corporate Governance Code The Committee is mindful of the UK Corporate Governance Code’s six principles when it determines remuneration policy.
Clarity • Our remuneration framework is structured to support the financial and strategic objectives of the Company, aligning the interests of our EDs with those of shareholders
• We are committed to transparent communication with all our stakeholders, including shareholders – further details of our engagement process for the Policy are set out under the consideration of wider colleague pay and shareholder views section
• This structure provides clear line of sight for both executives and shareholders
• The annual bonus and LTIP are focused, rewarding performance against key measures of success for the business
Predictability • The Policy sets out the possible future value of remuneration which EDs could receive, including the impact of share price appreciation of 50% – see under the illustration of the Policy for further details
• Incentive elements are closely aligned to our strategic goals, transparent and robustly assessed, with the Committee having full discretion to adjust outcomes to ensure they align with overall Aviva performance
Shareholder views In its ongoing dialogue with shareholders and proxy advisory bodies, the Committee actively seeks their views, ensuring that feedback received is discussed at Committee meetings, and ultimately feeds into, and guides, development of new proposals. Shareholders were consulted extensively during the recent Policy review, and the Committee is grateful for their feedback and challenge.
Our colleagues’ views The Committee has sight of colleague views on remuneration through the colleague opinion survey (Voice of Aviva) and colleague forums, input from the People function during Committee meetings and the Evolution Council, chaired by the Chair. The Evolution Council consists of a diverse group of high calibre leaders from across the business who discuss a range of topics related to the Group strategy and input into final decisions. When determining the Policy and arrangements for EDs, the Committee also reviews: • Pay and employment conditions elsewhere in the Group to ensure reward structures are suitably aligned and that levels of remuneration remain appropriate as set out below table 18. Other considerations include: – Changes in remuneration (salary, benefits and bonus) of UK
January 2021, along with details of actions we are taking to drive change and close the gap. The report can be found at www.aviva.com/gpgr
How we pay our colleagues As a company, we aim to ensure all colleagues are motivated and rewarded fairly for their performance. We work hard to recognise the individual needs of colleagues and in this context, we are proud of our reward, benefits and overall support offering and apply principles consistent with how we pay our EDs: • We aim for transparency and a fair cascade of remuneration throughout the Group by sharing our pay ranges with our colleagues. We decided to increase salary budgets for 2021 by 1.5% for junior grades as we believed that allowed leaders to deliver remuneration fairly, while balancing the need for prudence at a time of economic uncertainty
• We have a market-leading benefits offering: – Carers – We continue to provide colleagues up to 35 hours paid leave per year to help balance caring responsibilities with work. Over 600 UK colleagues used this scheme in 2020; and
– Parental leave – We offer up to 12 months’ parental leave in the UK, including 26 weeks at full pay regardless of parent gender. We are proud that 97% of new dads at Aviva took more than two weeks’ leave, with an average of five months. We also provide half a day’s leave when a child is starting a new school.
How we support our colleagues We recognise that 2020 was clearly a difficult year in many respects; although all our colleagues felt the impact of COVID-19 in their personal and professional lives, they continued to provide our customers with outstanding service and commitment. We felt that it was important to recognise that our colleagues have gone above and beyond for our customers during a challenging period. Therefore, in addition to the regular annual bonus, and in direct recognition of the impact of COVID-19, Aviva rolled out a series of initiatives to recognise colleagues’ hard work during the challenges due to COVID-19, including a festive thank-you voucher of £100 for UK colleagues.
A range of tools is also available to assist our colleagues through challenging times such as: • DigiCare+, a smartphone app to help detect, manage and prevent physical and mental health problems, is available free to colleagues
• Free access to wellbeing apps, Headspace and Thrive that help build overall resilience
• Flexible working available for all our people. Since the first lockdown we have paid, and will continue to pay, all our people in full, regardless of the hours they are able to work
The proposed Remuneration Policy for directors is set out in accordance with the requirements of the Companies Act 2006 (as amended) and the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) and is subject to shareholder approval at the 2021 AGM on 6 May 2021. If approved, it will apply immediately, for up to three years.
The key changes between this Policy and the current Policy as approved at the 2018 AGM are detailed below. • LTIP – The current Policy provides for up to 20% of the LTIP to be based on strategic performance metrics. For 2021, ESG metrics will comprise 10% of the LTIP (we would engage with shareholders before changing the weighting in future years)
• Malus and clawback – Malus and clawback triggers have been strengthened to include events which lead to corporate failure, aligning the provisions with those of our internal malus and clawback policy
Operation Annual review, with changes normally taking effect from 1 April each year. The review is informed by: • Individual and business performance • Levels of increase for the broader employee population • Relevant pay data including market practice among relevant
Maximum opportunity There is no maximum increase within the Policy. However, basic salary increases take account of the average basic salary increase awarded to the broader employee population. Different levels of increase may be agreed in certain circumstances at the Committee’s discretion, such as: • An increase in job scope and responsibility • Development of the individual in the role • A significant increase in the size, value or complexity of the Group
Form and timing of payment • One-third of any bonus is payable in cash at the end of the year • Two-thirds of any bonus awarded is deferred into shares which vest in three equal annual tranches Additional shares are awarded at vesting in lieu of dividends paid on the deferred shares.
Outcome at threshold and on target Performance is assessed against multiple metrics. Threshold performance against a single metric would result in a bonus payment of no more than 25% of basic salary. 100% of basic salary is payable for on target performance.
Purpose To reward EDs for achievement against the Company’s longerterm objectives; to align EDs’ interests with those of shareholders and to aid the retention of key personnel and to encourage focus on long-term growth in enterprise value.
For the 2021 awards the measures and weightings will be: • 22.5% Solvency II RoE1 • 22.5% Cumulative cash remittances1 • 45% TSR against a comparator group • 10% ESG measures
Purpose To give a market competitive level of provision for postretirement income.
Maximum opportunity If suitable employee contributions are made, the Company contributes 14% of basic salary for all EDs, aligned to the rate available to the majority of the UK workforce.
Operation Benefits are provided on a market related basis. The Company reserves the right to deliver benefits to EDs depending on their individual circumstances, which may include a cash car allowance, life insurance, private medical insurance and access to a company car and driver for business use. In the case of nonUK executives, the Committee may consider additional allowances in line with standard relevant market practice. EDs are eligible to participate in the Company’s broad based employee share plans on the same basis as other eligible employees.
Maximum opportunity Dependent on location and family size, benefits are market related and time bound. They are not compensated for performing the role but to defray costs of a relocation or residence outside the home country. The Committee would reward no more than it judged reasonably necessary, in the light of all applicable circumstances.
Notes to the table: Performance measures For the annual bonus, performance measures are chosen to align to the Group’s KPIs and include financial, strategic, risk, employee and customer measures. Achievement against individual strategic objectives is also taken into account.
As a minimum, at any Committee meeting where LTIP vesting or annual bonus scorecard decisions are considered, the Chief Financial Controller prepares a report to the Committee on the quality of earnings reflected in the results being assessed, against performance targets. Extensive information from the audited accounts is used to explain the vesting and scorecard outcomes – ranging from movements in reserves, capital management decisions, consistency of accounting treatment and period to period comparability. The Chief Financial Controller attends the Committee meeting to answer any questions that any member of the Committee may choose to ask. Any vesting decision or confirmation of awards is made after this process has been undertaken.
Malus and clawback The circumstances when malus (the forfeiture or reduction of unvested shares awarded under the ABP and LTIP) and clawback (the recovery of cash and share awards after release) may apply include (but are not limited to) where the Committee considers that the employee concerned has been involved in or partially/wholly responsible for: • A materially adverse misstatement (as defined by the Board) of the
Company’s financial statements, or a misleading representation of performance; • A significant failure of risk management and/or controls; • A scenario or event which causes material reputational damage to the Company; • A scenario or event which causes material corporate failure; • Any regulatory investigation or breach of laws, rules or codes of conduct; • Misconduct which, in the opinion of the Committee, ought to result in the complete or partial lapse of an award; • Conduct which resulted in significant loss(es) or summary termination of employment; • Failure to meet appropriate standards of fitness and propriety; • A material error (as defined by the Board) in the calculation of a financial or non-financial performance metric used to determine the outcome of variable pay, or any other error or material misstatement that results in overpayment to employees; • Any circumstances determined by the Board that mean the underlying financial health of the Group or member of the Group has significantly deteriorated, resulting in severe financial constraints which preclude or limit the ability to fund variable pay; • Any other circumstance required by local regulatory obligations or, in the Board’s opinion, justifies the reduction or repayment of variable pay.
• It is appropriate to do so, taking into account a range of factors, including the management of risk and good governance and, in all cases, the experience of shareholders.
Change in control In the event of a change in control, unless a new award is granted in exchange for an existing award, or if there is a significant corporate event like a demerger, awards under the LTIP would normally vest to the extent that the performance conditions have been satisfied as at the date of the change in control, and unless the Committee decides otherwise, would be pro-rated to reflect the time between the date of grant and the change in control event. Awards under the ABP would normally vest on the date of the change in control and may vest if there is a significant corporate event.
Consistency of executive Policy across the Group The Policy for our EDs is designed as part of the remuneration philosophy and principles that underpin remuneration for the wider Group. Remuneration arrangements for employees below the EDs take account of the seniority and nature of the role, individual performance and local market practice. The components and levels of remuneration for different employees may therefore differ from the Policy for EDs.
Any such elements are reviewed against market practice and approved in line with internal guidelines and frameworks.
Illustration of the Policy The charts below illustrate how much EDs could earn under different performance scenarios in one financial year: • Minimum – basic salary, pension or cash in lieu of pension and benefits, no bonus and no vesting of the LTIP • Target – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 100% and an LTIP of 300% of basic salary (with notional LTIP vesting at 50% of maximum) for the Group CEO; and
– A bonus of 100% and an LTIP of 225% of basic salary (with notional LTIP vesting at 50% of maximum) for the CFO.
In circumstances where good leaver status has been granted, awards may still be subject to malus and clawback in the event that inappropriate conduct of the ED is subsequently discovered post departure, and retirees are subject to post-activity restrictions which allow the Committee to reduce or recover awards if certain employment is taken elsewhere. If good leaver status is not granted, all outstanding awards will lapse.
• In its ongoing dialogue with shareholders, the Committee seeks shareholder views and takes them into account when any significant changes are being proposed to remuneration arrangements and when formulating and implementing the Policy.
Expenses Reimbursement of expenses reasonably incurred in accordance with their duties. Holiday entitlement 30 working days plus public holidays. Private medical insurance
Private medical insurance is provided for the ED and their family. The ED can choose to opt out of this benefit or take a lower level of cover. However, no payments are made in lieu of reduced or no cover.
To attract individuals with the required range of skills and experience to serve as a Chair or as a NED.
Operation NEDs receive a basic annual fee in respect of their Board duties. Further fees are paid for membership and, where appropriate, chairing Board committees. The Chair receives a fixed annual fee. Fees are reviewed annually taking into account market data and trends and the scope of specific Board duties. NEDs are able to use up to 100 percent of their post-tax base fees to acquire shares in Aviva plc. The Chair and NEDs do not participate in any incentive or performance plans or pension arrangements and do not receive an expense allowance. NEDs are reimbursed for reasonable expenses, and any tax arising on those expenses is settled directly by Aviva. To the extent that these are deemed taxable benefits, they will be included in the DRR, as required.
Operation Reasonable costs of travel and accommodation for business purposes are reimbursed to NEDs. On the limited occasions when it is appropriate for a NED’s spouse or partner to attend, such as a business event, the Company will meet these costs. The Company will meet any tax liabilities that may arise on such expenses.
The NEDs, including the Chair of the Company, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in the table below.
Time commitment Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively.
Jim McConville ✓ ✓ C ✓ 1 December 2020 AGM 2021
This section of the report sets out how Aviva has implemented its Policy for EDs during the course of 2020. This is in accordance with the requirements of the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended).
No person was present during any discussion relating to their own remuneration.
During the year, the Committee received advice on executive remuneration matters from Deloitte LLP. Deloitte LLP were approved by the Committee and appointed as their advisers in 2012 following a competitive tender process. The Committee regularly reviews and satisfies itself that the advice received from Deloitte LLP is independent and objective.
The Committee notes they are a member of the Remuneration Consultants Group and adhere to its Code of Conduct. During the year, Deloitte LLP also provided advice to the Group on taxation, financial due diligence, risk, compliance and other consulting advisory services (including technology transformation and cyber). Tapestry Compliance Limited, appointed by the Company, provided advice on share incentive plan related matters, including on senior executive remuneration matters and views on shareholder perspectives.
The Committee’s decisions are taken in the context of the Reward Governance Framework, which sets out the key policies, guidelines and internal controls and is summarised on the next page.
Committee performance and effectiveness During 2020, the Committee undertook an evaluation of its effectiveness, alongside the exercise undertaken by the Board. Further details on how this has been carried out and the actions arising are contained in the Directors and Corporate Governance report.
• Reviewed the Risk and Internal Audit 2020 Performance Opinion in relation to remuneration Discussed and approved the overall maximum bonus pool available to senior managers for the 2020 performance year, taking into account metrics on culture and risk as well as on financial performance
Remuneration Committee terms of reference Sets out the Committee’s scope and responsibilities, including authorities which may be delegated but which still retain Committee oversight Remuneration business standard
Global Remuneration Policy Approved by the Committee, applies to all employees in entities within Aviva Group
3 Pension contributions consist of employer defined contribution benefits, excluding salary exchange contributions made by the employees, plus cash payments in lieu of pension. For Maurice, following his appointment as Group CEO on 4 March 2019 and for Jason the total was 12.34% of basic salary (pension contribution of 14% which is reduced for the effect of employers’ National Insurance contributions when paid as cash). For former EDs (and Maurice prior to his appointment as Group CEO) the aggregate total was 28% of basic salary. No ED has prospective entitlement to benefit in a defined benefit scheme.
No incidents concerning the EDs are currently subject to action under Aviva’s Malus and Clawback policy.
Allen & Overy’s review has concluded that the adjustments the Committee decided to apply to the relevant EDs variable remuneration, which we announced in 2019, were reasonable in the circumstances and that these adjustments were applied after careful and thorough consideration by the Committee. The review has also confirmed that, taking into account the FCA’s decision, there was no reasonable basis for further adjustments to be made to the relevant EDs variable remuneration in relation to the preference shares matter. In addition, it concluded that there was no basis for Aviva to make any adjustments to the fees of the relevant NEDs in light of the preference shares matter.
The Committee has discussed, considered and accepted the findings of the review.
Strategic report Governance IFRS financial statements Other information 2020 Annual bonus outcomes The chart below summarises how our annual bonus operates for 2020.
1 Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the ‘Other Information’ section within the Annual Report and Accounts for further information.
Financial measures (70% of total) Group adjusted operating profit1 15.0% £2,450m £2,650m £2,850m £3,098m 30.0% Cash remittances2 25.0% £1,825m £1,975m £2,125m £1,500m 0.0% SII OCG2 30.0% £1,730m £1,880m £2,030m £1,932m 40.4% Total financial measures 70.0% — — — — 70.4% Strategic measures (30% of total) RNPS 7.5% 8 13 18 11.5 6.4% TNPS 7.5% 38 41 44 44 15.0% RIT 15.0% 92.5% 95% 97% 96.3% 15.0%3 Total strategic measures 30.0% — — — — 36.4% Scorecard outcome 100.0% 106.8%
Profit1,2 25% Cash remittances2 30% SII OCG2 15% RIT St ra te gi c m ea su re s
Individual adjustments are not determined in a formulaic manner. The Committee reviews overall performance against each individual’s objectives and applies judgement as to whether any adjustment is warranted. In recent years adjustments have ranged from -17.5% to +22%.
In 2020 our global employee opinion survey, the Voice of Aviva, showed another solid uplift in engagement, with 80% of colleagues saying they would recommend Aviva as a great place to work. The rise was driven by stronger belief in the Aviva strategy (up 12 points) and greater trust in senior leaders (up seven points). This shows colleagues are clear about how they contribute to the business’ success.
The assessments performed by our risk and internal audit functions looked at the effectiveness and robustness of the risk framework and control environment. The outputs of the assessments were shared with the Risk and Audit Committees ahead of decisions being made on impacts to bonus. Notwithstanding improvements made in 2020, it was concluded that further work is required to improve the overall control environment. As a result, and to provide a clear statement of the focus on continual improvement across 2021 the Committee considered a downwards adjustment of 5% in respect of the risks and controls non-financial performance modifier appropriate for the year.
The impact of the assessment of non-financial modifiers is shown in the table 8.
Amanda was appointed Group CEO on 6 July 2020 having previously been a NED of Aviva plc since 2 January 2020. Since being appointed, Amanda has provided strong leadership across the Group with many significant achievements: • Establishment and implementation of a new strategy for the
Bonus scorecard (0% – 200%) 106.8% 106.8% Non-financial modifiers 5% 5% Sub-total (pre-discretion) 111.8% 111.8% Committee discretion (11.8%) (11.8%)
2018 LTIP vesting in respect of performance period 2018-2020 The Operating EPS1 and TSR2 outcome for the 2018 LTIP are detailed in the table below. 0% of the award will vest in March 2021. No discretion regarding the vesting outcome of the 2018 LTIP was exercised by the Committee.
2 Face value for the awards granted on 23 March 2020 and 6 August 2020 has been calculated using the average of the middle-market closing price of an Aviva ordinary share on the three consecutive business days immediately preceding the main date of grant, of 229.00 pence.
At the point the 2020 LTIP awards were due to be made in March 2020, the impact of COVID-19 was causing significant volatility in the wider market and the Aviva share price. As it was not clear when more normal conditions would resume, the Committee decided to grant the 2020 LTIP award at the normal opportunity for our EDs, but committed to review the outcome at vesting to determine whether there had been windfall gains as a result of the award being made at an artificially depressed share price. The award documentation was drafted to provide the Committee with the discretion to make an adjustment should it be considered appropriate.
Full details of the outcome of the assessment will be provided in our 2022 DRR.
Solvency II RoE1 targets for awards made in 2020 Solvency II RoE1 performance determines the vesting of 50% of the LTIP award. Three-year targets are set annually within the context of the Company’s strategic plan. The 2020 targets are provided below.
Achievement of SII RoE1 targets over the three-year performance period Percentage of shares in award that vests based on achievement of SII RoE1 targets
Less than 11.0% 0% 11.0% 10% Between 11.0% and 13.0% Pro-rata between 10% and 50% on a straight line basis 13% and above 50%
TSR targets for awards made in 2020 Relative TSR performance determines the vesting of the other 50% of the LTIP award. For the 2020 grant, Aviva’s TSR performance will be assessed against that of the following companies: Aegon, Allianz, Assicurazioni Generali, AXA, Direct Line Group, Intact, Legal & General, Lloyds Banking Group, M&G, Phoenix, RSA, Standard Life Aberdeen and Zurich Insurance.
Table 12 TSR vesting schedule for the 2020 LTIP award (audited information)
• While Maurice remained eligible for a 2020 annual bonus in respect of the period up to and including 5 July 2020, when he left active service with Aviva, the Committee determined, taking all factors into account including Aviva’s performance for the first half of 2020, shareholder experience during that period and the wider economic context, that Maurice would not receive a 2020 annual bonus
• In line with the Policy, Maurice was entitled to a capped contribution of £10,000 (excluding VAT) towards legal fees incurred in connection with his departure. In addition, assistance with filing tax returns in the UK and Canada with an appropriately qualified tax advisor will be provided to ensure Maurice’s and the Company’s compliance requirements for trailing income are met. The total value of this benefit is anticipated to be £39,562
Former Chair4 Sir Adrian Montague 229 550 36 88 265 638 — — 265 638
Total emoluments of NEDs 1,318 1,019 53 110 1,371 1,129 104 104 1,475 1,233 1 Benefits include the gross taxable value of expenses relating to accommodation, travel and other expenses incurred on Company business in accordance with our expense policy and may vary year-on-year dependent on the time required to be spent in the UK. 2 George Culmer was appointed as Chair on 27 May 2020 after being on the Board since 25 September 2019. 3 Mohit and Jim were appointed to the Board 1 December 2020. 4 Sir Adrian retired from the Board on 31 May 2020. 5 Amanda retired from the Board as a NED on 5 July 2020. Amanda was subsequently appointed as Group CEO on 6 July 2020.
Holdings Limited. Patricia subsequently stepped down on 31 December 2020 • Belén Romana García received an additional fee of €49,538 (2019: €50,000) in respect of her duties as a Board member of Aviva Italia Holding
S.p.A., and as a committee member of the Audit and Risk Committees. Belén subsequently stepped down on 17 December 2020
Percentage change in remuneration of the Directors The table below sets out the increase in the basic salary, bonus and benefits of each of the Directors and that of the wider workforce. The UK employee workforce was chosen as a suitable comparator group, as the Group CEO and CFO are based in the UK (albeit with global responsibilities), and pay changes across the Group vary widely depending on local market conditions.
All UK-based employees5 3.3% 0.5% 10.7% 1 Salary, annual bonus and benefit amounts for the EDs, Chair and Patrick have been annualised where applicable to reflect what they would have been over a full 12-month period to aid comparison. The increase in benefits for
Table 15 Aviva plc ten-year TSR performance against the FTSE 100 and the median of the comparator group
Amanda Blanc1 — — — — — — — — — 60% Maurice Tulloch2 — — — — — — — — 48.1% 0% Mark Wilson3 — — 75.0% 86.7% 91.0% 91.0% 94% 42.0% — — Andrew Moss4 81.0% — — — — — — — — —
Amanda Blanc — — — — — — — — — — Maurice Tulloch — — — — — — — — 50.0% 0% Mark Wilson — — — — 53.0% 41.3% 36.9% — — — Andrew Moss 81.7% — — — — — — — — —
Amanda Blanc — — — — — — — — — 1,205 Maurice Tulloch — — — — — — — — 2,352 1,030 Mark Wilson — — 2,615 2,600 5,438 4,523 4,318 1,836 — — Andrew Moss 3,477 554 — — — — — — — —
1 Amanda was appointed Group CEO on 6 July 2020. 2 Maurice was appointed Group CEO on 4 March 2019. Maurice stepped down as Group CEO and retired from the Board on 6 July 2020. 3 Mark joined the Board as an ED with effect from 1 December 2012 and became Group CEO on 1 January 2013. Mark stepped down as Group CEO and left the Board on 9 October 2018. 4 Andrew resigned from the Board with effect from 8 May 2012 and left the Company on 31 May 2012.
We would highlight the following in terms of the approach taken. • In calculating the Group CEO data for 2020, we have aggregated the amount shown in the single figure table of £1,029,794 for Maurice in respect of his services as Group CEO from 1 January to 5 July and the amount shown in the single figure table of £1,204,967 for Amanda in respect of her services from 6 July to 31 December 2020
• Similar to prior years, we have provided an additional ratio below, calculated on a full-year basis using total target remuneration due to changes in Group CEO during the year
Whilst the CEO pay ratio has decreased, the salary and total remuneration for each quartile employee has also remained broadly flat (although median salary has increased 2.7% and median total compensation increased 2.3%).
In reviewing the employee pay data, the Committee is comfortable that the P25, P50 and P75 individuals identified appropriately reflect the employee pay profile at those quartiles, and that the overall picture presented by the ratios is consistent with our pay, reward and progression policies for UK employees.
As referred to above, we recognise that 2020 was an unusual year for Aviva resulting in a Group CEO pay ratio which is likely to be lower than we might typically expect. Shareholders may find it helpful to consider what the ratio might have been in a more normal year, recognising that the ratio may well vary significantly from year-to-year. Specifically, we have considered the ratio if Amanda had been employed for the full year 2020 and had received an on-target annual bonus of 100% of salary (half of maximum) and LTIP vesting at 150% of salary (half of maximum).
At Aviva, we consider that we are equally focused on our colleagues as we are on our customers. We work hard to recognise the individual needs of colleagues and in this context, we are proud of the reward, benefits and overall career packages that we offer our colleagues. • In the UK, we have been an accredited Living Wage employer since April 2014 • We have a structured salary progression scheme for our frontline colleagues, providing incremental salary increases over the first few years in role as individuals develop and gain experience • We conduct regular market reviews of our salary ranges in order to maintain competitiveness to market rates, and we move everyone who is below a band to at least the minimum of that range each year • We have a comprehensive flexible benefits offering, providing colleagues with the opportunity to select the benefits that matter most to them including equal parental leave • Our competitive pension scheme provides an employer contribution of 14% of salary (subject to the level of employee contribution). Above this level, we share employer National Insurance savings with our colleagues • UK colleagues are eligible to participate in our SAYE and AESOP offerings with similar plans operating for many of our overseas colleagues.
We are proud of the participation rates in these plans, with over 60% participating in the SAYE and over 70% in the AESOP
Statement of directors’ shareholdings and share interests EDs share ownership requirements Under our Employment Shareholding Policy applicable to 2020, the Company requires the Group CEO to build a shareholding in the Company equivalent to 300% of basic salary and each ED to build a shareholding in the Company equivalent to 200% of basic salary. • The EDs are required to retain 50% of the net shares released from ABP and LTIP awards until the shareholding requirement is met • The shareholding requirement needs to be built up over a period not exceeding five-years • Unvested share awards, including shares held in connection with bonus deferrals, are not taken into account in applying this test • A post-cessation holding period of two years applies. The post-cessation guideline is the same level as the current (within employment)
There were changes to the NEDs interests in Aviva shares during the period 1 January 2021 to 3 March 2021. Belén Romana García acquired a further 351 shares and Mohit Joshi acquired 7,618 shares. There have been no further changes.
Share awards and share options Details of the EDs who were in office for any part of the 2020 financial year and hold or held outstanding share awards or options over ordinary shares of the Company pursuant to the Company’s share based incentive plans are set out in table 22. EDs are eligible to participate in the Company’s broad-based employee share plans on the same basis as other eligible employees. Details of awards and options granted to EDs under these plans are also included in tables 5, 10 and 21 (and SAYE options are included in table 22). More information around HMRC taxadvantaged plans can also be found in note 34. EDs are restricted from entering into any form of hedging arrangement or remuneration and liability-related insurance policies which might undermine the risk alignment features of share awards (such as delivery in shares, performance conditions, malus and clawback provisions).
Table 22 LTIP, ABP and options over Aviva shares (audited information)
Amanda Blanc LTIP3,4 2020 — 641,921 — — 641,921 297.50 — — Mar-23 Jason Windsor LTIP 20175 77,358 — 92,8708 — — 523.00 — 268.50 Mar-20 20185 83,333 — — — 83,333 494.10 — — Mar-21 20195 73,634 — — — 73,634 409.00 — — Mar-22 20203,4 — 663,209 — — 663,209 211.00 — — Mar-23 ABP 2017 9,361 — 11,2388 — — 523.00 — 268.50 Mar-20 2018 22,222 — 12,6608 — 11,111 494.10 — — Mar-21 2019 32,310 — 11,5978 — 21,540 409.00 — — Mar-22 2020 — 127,684 — — 127,684 211.00 — — Mar-23 SAYE7 — 2019 6,338 0 — — 6,338 — 284.00 — Dec-22 – May-23
RSA Insurance Group, Standard Life and Zurich Insurance Group. For the 2018 and 2019 LTIP, the comparator group is: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, Legal & General, Lloyds Banking Group, Old Mutual, Phoenix, Prudential, RSA, Standard Life Aberdeen, Zurich Insurance Group. For the 2020 LTIP, the TSR comparator group is: Aegon, Allianz, Assicurazioni Generali, Axa, Direct Line Group, Intact, Legal & General, Lloyds Banking Group, M&G, Phoenix, RSA, Standard Life Aberdeen, Zurich Insurance Group.
Statement of voting at AGM The result of the shareholder vote at the Company’s 2020 AGM in respect of the 2019 Directors’ Remuneration report is set out in table 23. The Committee was pleased with the level of support received from shareholders for the resolution.
Approach to NED fees for 2021 NED fees are reviewed annually and the Committee Chair and membership fees were increased with effect from 1 July 2020, the first such increase since 1 April 2014. This recognised the increased time commitment and regulatory burden for NEDs over the past six years, and to maintain competitiveness within the financial services sector.
• Group CEO – 200% of salary • CFO – 150% of salary • One-year performance assessed against financial and non-financial performance measures • The SII OCG4 measure has been replaced by SII OFG4 and in respect of the non-financial measures, the modifiers have been removed and a formal employee engagement measure has been incorporated into the framework: – Financial measures (70% of total) • 15% – Group adjusted operating profit3 • 30% – Annual cash remittances4 • 25% – SII OFG4
• Group CEO – 300% of salary • CFO – 225% of salary • Performance assessed over three years against financial and nonfinancial performance measures • Financial metrics aim to balance longer-term value creation (SII RoE4)
and medium-term dividend coverage (cumulative cash remittances) Performance measures • 22.5% – SII ROE4 subject to a SII shareholder cover ratio4 • 22.5% – Cumulative cash remittances4, subject to a SII shareholder cover ratio4 • 45% – relative TSR against a comparator group5 • 10% – Environmental and diversity and inclusion measures For the 2021 awards, the SII shareholder cover ratio4 is to meet or exceed the minimum of the stated working range (currently 160% to 180%).
Target Vesting Levels for all metrics Metric Weighting Threshold Maximum Outturn Vesting Level SII RoE 4 22.5% 9% 11% Below Threshold 0% Cumulative cash remittances 4 22.5% £5.1bn £5.6bn Threshold 20% TSR 5 45% Median Upper Quintile Between threshold and maximum 20-100% straight line Environmental Reduction in CO2 intensity of shareholders' assets 5% 10% 15% Above maximum 100% Diversity and Inclusion Females in senior leadership roles 6 2.5% 36% 40% Ethnic minority employees in senior leadership roles 7 2.5% 7.5% 12.5%
Share Ownership guidelines • Group CEO – 300% of salary Other EDs – 225% • To be built up over a period not exceeding 5 years • Post-cessation shareholding requirements also apply to EDs being the guideline or the holding on termination of employment, for two years post-cessation.
‘Other Information’ section within the Annual Report and Accounts for further information. 4 This is an Alternative Performance Measure (APM) which provides useful information to enhance the understanding of financial performance. Further information on APMs, including a reconciliation to the financial statements
AGM so will be made under the proposed Policy. The grant will be made using the same share price as if they were granted in March, in line with other employees. 6 Senior leadership in the UK, Ireland, Canada and Group Functions. 7 Senior leadership in the UK.
Patricia Cross Chair, Remuneration Committee 1/3rd paid in cash 2/3rd deferred into shares vesting in three equal tranches over three years
In this section Independent auditors’ report to the members of Aviva plc 121 Accounting policies 130
Consolidated financial statements 144 Consolidated income statement 144 Consolidated statement of comprehensive income 145 Reconciliation of Group adjusted operating profit to profit for the year
Consolidated statement of changes in equity 148 Consolidated statement of financial position 149 Consolidated statement of cash flows 150
Company’s loss and the Group’s and Company’s cash flows for the year then ended; • have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise: • the Consolidated and Company statements of financial position as at 31 December 2020; • the Consolidated and Company income statements and statements of comprehensive income for the year then ended; • the Reconciliation of Group adjusted operating profit to profit for the year then ended; • the Consolidated and Company statements of cash flows for the year then ended; • the Consolidated and Company statements of changes in equity for the year then ended; • the principal accounting policies adopted in the preparation of financial statements; and • the notes to the financial statements, which includes other explanatory information.
Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union As explained in note the accounting policies to the Group financial statements, the Group, in addition to applying international accounting standards in conformity with the requirements of the Companies Act 2006, has also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
Materiality • Overall Group materiality: £157,900,000 (2019: £158,000,000) based on 5% of three-year average of the Group adjusted operating profit before tax attributable to shareholders’ profits. • Overall Company materiality: £61,250,000 (2019: £47,800,000) based on 0.5% of net assets. • Performance materiality: £118,425,000 (Group) and £45,937,500 (Company).
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of UK and European regulatory principles, such as those governed by the Prudential Regulation Authority and the Financial Conduct Authority, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to management bias in accounting estimates and judgmental areas of the financial statements as shown in our “Key Audit Matters”. The Group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or component auditors included: • Discussions with the Board, management, Internal Audit, senior management involved in the Risk and Compliance functions and Group and Company’s legal function, including consideration of known or suspected instances of non-compliance with laws and regulation and fraud.
As part of our consideration of the entire set of assumptions, we focused particularly on annuitant mortality, credit default for illiquid assets and expense assumptions for the UK Life component given their significance to the Group’s result and the level of judgement involved. These aspects of our work have been considered in more detail below.
• Rate of mortality improvements: this component is more subjective given the uncertainty over how life expectancy will change in the future and the lack of available data to support judgements made in respect of this
Credit default assumptions for illiquid assets, specifically: commercial mortgages and equity release mortgages (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 42 Insurance liabilities methodology and assumptions (b) Long-term business liabilities.
Management takes an active approach to setting the associated credit default assumptions on these illiquid assets. A long term deduction for credit default is made from the current market yields and a supplementary allowance is also held to cover the risk of higher short term default rates along with a margin for prudence.
• Validated significant assumptions used by management by ensuring consistency with the assumptions used for the valuation of the assets, and against market observable data (to the extent available and relevant) and our experience of market practices.
In respect of the expense assumptions, we performed the following: • Tested the methodology used by management to derive the assumptions with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience. This included testing the split of expenses between acquisition and maintenance by agreeing a sample to supporting evidence; and
Based on the work performed and the evidence obtained, we consider the expense assumptions to be appropriate.
Valuation of non-life insurance contract liabilities (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 42 Insurance liabilities methodology and assumptions (c) General insurance and health liabilities.
Given their size in relation to the consolidated Group and the complexity of the judgements involved, our work focused on the actuarial liabilities in the UK General Insurance, Canada General Insurance and France General Insurance components.
Valuation for hard to value investments (Group) Refer to Audit Committee report, Accounting policies (F) and (T) and note 24 Fair Value methodology, note 26 Securitised mortgages and related assets and note 28 Financial Investments..
We assessed the Directors’ approach to valuation of hard to value investments by performing the following procedures: • Tested data inputs used in the valuation models to underlying documentation on a sample basis; • Evaluated the methodology and assumptions used by management, including yield curves, discounted cash flows, property growth rates, longevity and liquidity premiums as relevant to each asset class; • Tested the operation of data integrity and change management controls for the valuation models; • Using our valuation experts, performed independent valuations for a sample of infrastructure loans and structured bonds; and Assessed the disclosures in the financial statements.
Risk of error arising from the implementation of new Bulk Purchase Annuities (“BPA”) actuarial model (Group)
We assessed the implementation of new BPA actuarial model by performing the following procedures: • For a sample of immediate bulk purchase annuity policies we remodelled the gross valuations to within 0.01% on average of management’s valuation.
• We have replicated the calculation of benefits in deferment on a sample of deferred bulk purchase annuity policies to within 0.01% on average.
Based on the work performed and evidence obtained, we consider the valuation of the BPAs valued using the new model to be appropriate.
In assessing management’s consideration of the impact of COVID-19 on the Company we have performed the following procedures: • Obtained management’s updated going concern assessment and challenged the rationale for the downside scenarios adopted and material assumptions made using our knowledge of Aviva’s business performance, review of regulatory correspondence and obtaining further corroborating evidence; • Considered information obtained during the course of the audit and publicly available market information to identify any evidence that would contradict management’s assessment of the impact of COVID-19; and
• Inquired and understood the actions taken by management to mitigate the impacts of COVID-19, including review of Board Risk Committee minutes and attendance of all Audit Committees.
• Challenged the judgements applied by management to determine the insurance contract liabilities, including annuitant
Report and Accounts with respect to COVID-19 and, where relevant, considered the material consistency of this other information to the audited financial statements and the information obtained in the audit.
How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
We completed review procedures over the other components not subject to full scope audits.
Due to the impact of COVID-19, we were unable to visit component teams in person. Consistent with previous years, we performed a detailed review of key audit working papers at all in-scope components, however this was performed remotely.
In determining our materiality, we considered financial metrics which we believed to be relevant, and concluded, consistent with prior year, that Group adjusted operating profit was the most relevant benchmark. For the year ended 31 December 2020, we have determined that a 3-year average of this metric is more appropriate as it normalises both economic and non-economic assumption changes and provides more consistency which aligns better with the trend in the primary metrics used to assess the businesses performance and dividend capability such as capital metrics.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between £20,000,000 and £145,000,000. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% of overall materiality, amounting to £118,425,000 for the Group financial statements and £45,937,500 for the Company financial statements.
In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls – and concluded that an amount at the upper end of our normal range was appropriate.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
With respect to the Strategic report and Directors’ and Corporate Governance report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.
Strategic report and Directors’ and corporate governance report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ and Corporate Governance report for the year ended 31 December 2020 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors’ and Corporate Governance report.
Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Directors’ Responsibilities section of the Directors’ and Corporate Governance Report, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not obtained all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration specified by law are not made; or • the Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns.; or
Appointment Following the recommendation of the Audit Committee, we were appointed by the members on 3 May 2012 to audit the financial statements for the year ended 31 December 2012 and subsequent financial periods. The period of total uninterrupted engagement is 9 years, covering the years ended 31 December 2012 to 31 December 2020.
(A) Basis of preparation The consolidated financial statements and those of the Company have been prepared and approved by the Directors in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 (IFRS) and the legal requirements of the Companies Act 2006. In addition, the consolidated financial statements also comply with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (EU). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, investment property, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
In accordance with IFRS 4 Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in accounting policy L.
(i) Amendments to References to the Conceptual Framework in IFRS Standards (published by the IASB in March 2018)
(ii) Amendment to IFRS 3 Business Combinations (published by the IASB in October 2018)
(iii) Amendment to IAS 1 and IAS 8: Definition of material (published by the IASB in October 2018)
On adoption IFRS 17 will significantly impact the measurement and presentation of the contracts in scope of the standard. Following amendments to the standard published in June 2020, it is now expected that the standard will apply to annual reporting periods beginning on or after 1 January 2023. The final standard remains subject to endorsement. Following departure from the EU and the end of the transition period in December 2020 the Group will be subject to IFRS as endorsed by the UK. The UK endorsement process has commenced and we expect it to complete in time for the 1 January 2023 effective date.
(ii) IFRS 9, Financial Instruments In September 2016, the IASB published amendments to IFRS 4 Insurance Contracts that addressed the accounting consequences of the application of IFRS 9 to insurers prior to implementing IFRS 17. The amendments introduced two options for insurers: the deferral approach and the overlay approach. The deferral approach provides an entity, if eligible, with a temporary exemption from applying IFRS 9. The overlay approach allows an entity to remove from profit or loss the effects of some of the accounting mismatches that may occur before the new insurance contracts standard is applied. The Group has met the eligibility requirements of the deferral approach as set out below and has opted to apply this deferral from 1 January 2018. The Group has however been required to apply the additional disclosure requirements of IFRS 9 which are set out in note 53 and note 59.
In December 2020, the EU endorsed the IASB’s Amendments to IFRS 4 Insurance Contracts – deferral of IFRS 9. This extends the fixed expiry date for the temporary exemption for insurers from applying IFRS 9 from 1 January 2021 until 1 January 2023, to align the effective dates of IFRS 9 Financial Instruments with IFRS 17 Insurance contracts.
The impact of the adoption of IFRS 9 on the Group’s consolidated financial statements will be dependent on the interaction with the new insurance contracts standard, IFRS 17. As such, it is not possible to fully assess the effect of the adoption of IFRS 9. IFRS 9 has been endorsed by the EU.
IFRS 9 incorporates new classification and measurement requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39, and new hedge accounting requirements. Under IFRS 9, all financial assets will be measured at either amortised cost or fair value. The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. The standard retains most of IAS 39’s requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the fair value changes attributable to own credit is to be recognised in other comprehensive income instead of the income statement. The hedge accounting requirements are more closely aligned with risk management practices and follow a more principle based approach.
The following new standards and amendments to existing standards have been issued, are not effective for the current reporting period and are not expected to have a significant impact on the Group’s consolidated financial statements: (iii) Amendments to IFRS 16 Leases: COVID-19 related rent concessions Published by the IASB in May 2020. The amendments are effective for annual reporting beginning on or after 30 June 2020 and have been endorsed by the EU.
Group adjusted operating profit excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of intangibles acquired in business combinations; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to mergers, acquisition and disposal activity which we view as strategic in nature, hence they are excluded from the operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group’s chief operating decision maker.
Consolidation Assessment of whether the Group controls the underlying entities including consideration of its decision making authority and rights to the variable returns from the entity. As part of this assessment Aviva applies a corridor approach to consolidation thresholds, where the Group’s percentage ownership in certain investment vehicles fluctuates daily.
Assessment of the significance of insurance risk transferred to the Group in determining whether a contract should be accounted for as insurance or investment contract. Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract.
Classification of investments including the application of the fair value option. The Group classifies its investments as either FVTPL or AFS. The classification depends on the purpose for which the investments were acquired and is determined by local management at initial recognition.
(D) Consolidation principles Subsidiaries Subsidiaries are those entities over which the Group has control. The Group controls an investee, if and only if, the Group has all of the following: • power over the investee; • exposure, or rights, to variable returns from its involvement with the investee; and • the ability to use its power over the investee to affect its returns.
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including the purpose and design of an investee, relevant activities, substantive and protective rights, voting rights and potential voting rights.
Accounting for the PUTs and PLPs as subsidiaries, joint ventures, associates or other financial investments depends on whether the Group is deemed to have control or joint control over the PUTs and PLPs’ shareholdings in the GPs and the terms of each partnership agreement are considered along with other factors that determine control, as outlined above. Where the Group exerts control over a PUT or a PLP, it has been treated as a subsidiary and its results, assets and liabilities have been consolidated. Where the partnership is managed by an agreement such that there is joint control between the parties, notwithstanding that the Group’s partnership share in the PLP (including its indirect stake via the relevant PUT and GP) may be lower or higher than 50%, such PUTs and PLPs have been classified as joint ventures (see below). Where the Group has significant influence over the PUT or PLP, as defined in the following section, the PUT or PLP is classified as an associate. Where the Group holds non-controlling interests in PLPs, with no significant influence or control over their associated GPs, the relevant investments are carried at fair value through profit or loss within financial investments.
Consolidation procedure Subsidiaries are consolidated from the date the Group obtains control and are excluded from consolidation from the date the Group loses control. All intercompany transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated. Accounting policies of subsidiaries are aligned on acquisition to ensure consistency with Group policies.
The Group is required to use the acquisition method of accounting for business combinations. Under this method, the Group recognises identifiable assets, liabilities and contingent liabilities at fair value, and any non-controlling interest in the acquiree. For each business combination, the Group has the option to measure the noncontrolling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets.
If the fair value is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging), or is based on a valuation technique whose variables include only data from observable markets, then the difference between the fair value at initial recognition and the transaction price is recognised as a gain or loss in the income statement. When unobservable market data has a significant impact on the valuation of financial instruments, the difference between the fair value at initial recognition and the transaction price is not recognised immediately in the income statement, but deferred and recognised in the income statement on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out or otherwise matured.
(H) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are recognised at the date when payments are due. Premiums are shown before deduction of commission and before any sales-based taxes or duties.
Provisions for latent claims and claims that are settled on an annuity type basis such as structured settlements are discounted, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims and the nature of the liabilities. The range of discount rates used is described in note 43(b). Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts.
In prior periods, the accounting policy was to disclose anticipated recoveries as receivables where material, otherwise they were deducted from outstanding claims provisions. To remove the potential for inconsistent presentation of these balances in different reporting periods, the accounting policy has been changed to present outstanding claims provisions net of anticipated recoveries.
The revised accounting policy is consistent with previous practice and so there is no restatement of 2019 comparatives in the statement of financial position or related notes.
Liability adequacy At each reporting date, the Group reviews its unexpired risks and carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts after taking account of the investment return expected to arise on assets relating to the relevant general business provisions.
The majority of the Group’s contracts classified as non-participating investment contracts are unit-linked contracts and are measured at fair value.
(O) Goodwill, AVIF and intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill arising on the Group’s investments in subsidiaries is shown as a separate asset, while that on associates and joint ventures is included within the carrying value of those investments.
Intangible assets Intangible assets consist primarily of contractual relationships such as access to distribution networks, customer lists and software. The economic lives of these are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position and the period of control over the assets. Finite life intangibles are amortised over their useful lives, which range from three to 30 years, using the straight-line method.
The amortisation charge for the year is included in the income statement under ‘Other expenses’. For intangibles with finite lives, impairment charges will be recognised in the income statement where evidence of such impairment is observed.
Intangibles with indefinite lives are subject to regular impairment testing, as described below.
This excludes owner-occupied properties held under lease arrangements, which are measured at amortised cost, as described in accounting policy Z.
• Computer equipment Three to five years • Other assets Three to five years
(R) Impairment of non-financial assets Property and equipment and other non-financial assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Non-financial assets, except goodwill which have suffered an impairment, are reviewed annually for possible reversal of the impairment.
Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values.
AFS equity securities An AFS equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair value relative to cost has been either at least 20% for a continuous six-month period or more than 40% at the end of the reporting period, or been in an unrealised loss position for a continuous period of more than 12 months at the end of the reporting period. We also review our largest equity holdings for evidence of impairment, as well as individual equity holdings in industry sectors known to be in difficulty. Where there is objective evidence that impairment exists, the security is written down regardless of the size of the unrealised loss.
Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve.
Interest rate futures, forwards and options contracts Interest rate futures are exchange-traded instruments and represent commitments to purchase or sell a designated security or money market instrument at a specified future date and price.
Interest rate forward agreements are OTC contracts in which two parties agree on an interest rate and other terms that will become a reference point in determining, in concert with an agreed notional principal amount, a net payment to be made by one party to the other, depending upon what rate prevails at a future point in time. Interest rate options, which consist primarily of caps and floors, are interest rate protection instruments that involve the potential obligation of the seller to pay the buyer an interest rate differential in exchange for a premium paid by the buyer. This differential represents the difference between current rate and an agreed rate applied to a notional amount. Exposure to gain or loss on all interest rate contracts will increase or decrease over their respective lives as interest rates fluctuate. Certain contracts, known as swaptions, contain features which can act as swaps or options.
Foreign exchange contracts Foreign exchange contracts, which include spot, forward and futures contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed price and settlement date. Foreign exchange option contracts are similar to interest rate option contracts, except that they are based on currencies, rather than interest rates.
Changes in the fair value of hedging instruments that are designated and qualify as a hedge of the fair value of a recognised asset or liability (fair value hedges) are recognised in the income statement. The gain or loss on the hedged item that is attributable to the hedged risk is recognised in the income statement.
This applies even if the hedged item is an available for sale financial asset or is measured at amortised cost. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment made to the carrying amount of the hedged item is amortised to the income statement, based on a recalculated effective interest rate over the residual period to maturity. In cases where the hedged item has been derecognised, the cumulative adjustment is released to the income statement immediately.
The Company classifies and measures loans at either amortised cost, fair value through other comprehensive income, or fair value through profit or loss based on the outcome of an assessment of the Company’s business model for managing financial assets and the extent to which the financial assets’ contractual cash flows are solely payment of principal and interest.
(X) Deferred acquisition costs and other assets Costs relating to the acquisition of new business for insurance and participating investment contracts are deferred in line with existing local accounting practices, to the extent that they are expected to be recovered out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these contracts is calculated on a realistic basis which was grandfathered from UK regulatory requirements prior to the adoption of Solvency II (see accounting policy L). For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred.
(Y) Statement of cash flows Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.
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.
Current and deferred tax relating to items recognised in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity respectively.
Deferred tax related to fair value re-measurement of available for sale investments, pensions and other post-retirement obligations and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on the direct capital instrument is credited to the income statement. In prior periods, the accounting policy was to recognise the credit directly in equity. The change in accounting policy followed an amendment to IAS 12 as part of the IASB’s Annual improvements to IFRS standards 2015-2017 cycle which required the tax consequences of distributions from certain equity instruments to be recognised in the income statement. There is no restatement of 2019 comparatives as the impact of this change is not material.
In addition to paying tax on shareholders’ profits (shareholder tax), the Group’s life businesses in the UK, Ireland and Singapore pay tax on policyholders’ investment returns (policyholder tax) on certain products at policyholder tax rates. The incremental tax borne by the Group represents income tax on policyholder’s investment return. In jurisdictions where policyholder tax is applicable, the total tax charge in the income statement is allocated between shareholder tax and policyholder tax. The shareholder tax is calculated by applying the corporate tax rate to the shareholder profit. The difference between the total tax charge and shareholder tax is allocated to policyholder tax. This calculation methodology is consistent with the legislation relating to the calculation of tax on shareholder profits. The Group has decided to show separately the amounts of policyholder tax to provide a meaningful measure of the tax the Group pays on its profit. In the pro forma reconciliations, the Group adjusted operating profit has been calculated after charging policyholder tax.
The results of discontinued operations are presented as a single line in the consolidated income statement and consolidated statement of cash flows and comparatives are re-presented where applicable. Notes to the consolidated statement of financial position are presented on a total group basis and, as a result, income statement and cash flow movements included within these notes may not reconcile to those presented in the consolidated income statement and the consolidated statement of cash flows. For more information on amounts relating to discontinued operations, see note 4(d).
Continuing operations Income 6 Gross written premiums 29,015 29,711 Premiums ceded to reinsurers (3,638) (3,184)
Premiums written net of reinsurance 25,377 26,527 Net change in provision for unearned premiums (123) (193) Net earned premiums H 25,254 26,334 Fee and commission income I & J 1,946 1,936 Net investment income K 19,330 39,611 Share of profit after tax of joint ventures and associates 27 94 Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 12 6 46,569 67,981
Profit before tax attributable to shareholders’ profits 2,570 3,320 Tax expense AC & 14 (571) (1,201) Less: tax attributable to policyholders’ returns 14(d) 43 501 Tax attributable to shareholders’ profits (528) (700) Profit from continuing operations 2,042 2,620 Profit from discontinued operations 4(d) 868 43
Attributable to: Equity holders of Aviva plc 2,798 2,548 Non-controlling interests 40 112 115
Consolidated statement of comprehensive income For the year ended 31 December 2020 £m
Fair value gains 38 22 39 Fair value gains transferred to profit on disposals 38 (7) (19)
Total comprehensive income for the year from continuing operations 2,025 1,714
Profit for the year from discontinued operations 4(d) 868 43 Other comprehensive income, net of tax from discontinued operations 4(d) 4 (26) Total comprehensive income for the year from discontinued operations 872 17
The above consolidated statement of comprehensive income should be read in conjunction with the accounting policies and accompanying notes to the financial statements.
Reconciliation of Group adjusted operating profit to profit for the year For the year ended 31 December 2020 £m
Profit before tax attributable to shareholders’ profits from continuing operations and discontinued operations 3,474 3,374 Tax on group adjusted operating profit (634) (668) Tax on other activities 70 (43) (564) (711)
Operating segments UK & Ireland Life2 1,948 35 — (9) 1,974 General Insurance
Group adjusted operating profit before tax attributable to shareholders’ profits 3,184 1 The 2019 comparative results have been restated from those previously published due to a change in presentation of segmental information and re-presented to reclassify the amounts relating to certain operations in Asia as discontinued operations as described in note 1. 2 The 2019 comparative results have been amended to reclassify £65 million net interest expense from UK & Ireland Life to Group debt costs and other interest. The change has no impact on Group adjusted operating profit before tax attributable to shareholders’ profits.
Consolidated statement of changes in equity For the year ended 31 December 2020
The above consolidated statement of changes in equity should be read in conjunction with the accounting policies and accompanying notes to the financial statements.
Consolidated statement of financial position As at 31 December 2020 £m
Assets Goodwill O & 17 1,799 1,855 Acquired value of in-force business and intangible assets O & 18 2,434 2,800 Interests in, and loans to, joint ventures D & 19 1,702 1,227 Interests in, and loans to, associates D & 20 263 304 Property and equipment P & 21 768 889 Investment property Q & 22 11,369 11,203 Loans V & 25 43,679 38,579 Financial investments S, T, U & 28 351,378 343,418 Reinsurance assets N & 46 13,338 12,356 Deferred tax assets AC & 49 119 151 Current tax assets 183 132 Receivables 29 9,352 8,995 Deferred acquisition costs X & 30 3,264 3,156 Pension surpluses and other assets X & 31 2,834 2,799 Prepayments and accrued income X & 31(b) 2,742 3,143 Cash and cash equivalents Y & 58(d) 16,900 19,524 Assets of operations classified as held for sale AH & 4(c) 17,733 9,512
Total equity 20,560 18,685 Liabilities Gross insurance liabilities L & 42 152,482 149,338 Gross liabilities for investment contracts M & 44 222,831 222,127 Unallocated divisible surplus L & 48 9,736 9,597 Net asset value attributable to unitholders D 20,301 16,610 Pension deficits and other provisions AA, AB & 50 1,435 1,565 Deferred tax liabilities AC & 49 1,828 2,155 Current tax liabilities 114 569 Borrowings AD & 52 9,684 9,039 Payables and other financial liabilities S & 53 20,667 18,138 Other liabilities 54 3,043 3,094 Liabilities of operations classified as held for sale AH & 4(c) 17,176 9,126
Cash flows from financing activities Proceeds from issue of ordinary shares 3 27 Treasury shares purchased for employee trusts (2) (9) New borrowings drawn down, net of expenses 966 552 Repayment of borrowings3 (1,005) (927) Net repayment of borrowings (39) (375) Interest paid on borrowings (536) (545) Preference dividends paid 16 (17) (17) Ordinary dividends paid 16 (236) (1,184) Forfeited dividend income 2 4 Coupon payments on direct capital instrument and tier 1 notes 16 (27) (43) Dividends paid to non-controlling interests of subsidiaries 40 (30) (63) Other (2) (5)
Total net (decrease)/increase in cash and cash equivalents from continuing operations (3,733) 3,516 Net cash flows from discontinued operations 4(d) 245 112 Cash and cash equivalents at 1 January 19,434 16,051 Effect of exchange rate changes on cash and cash equivalents 236 (245) Cash and cash equivalents at 31 December 58(d) 16,182 19,434 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1. 2 Cash flows from operating activities include interest received of £5,705 million (2019: £5,693 million) and dividends received of £3,434 million (2019: £5,568 million). 3 2020 includes the redemption of 5.902% £500 million direct capital instrument and lease payments of £76 million. 2019 includes the redemption of 6.875% £210 million tier 1 notes.
(b) Amendment to segmental analysis At our interim results announcement on 6 August 2020, we announced our strategic priorities to focus on building and extending leadership in the UK, Ireland and Canada (Core markets), and managing our other international businesses for long-term shareholder value (Manage- for-value markets). As a result, the financial performance of our ‘Core markets’ are presented as UK & Ireland Life, General Insurance (which brings together our UK & Ireland General Insurance businesses and Canada) and Aviva Investors. Our ‘Manage-for-value markets’ consist of our other international businesses: France, Italy, Poland and Other. The 2019 comparative results have been restated from those previously published to reclassify operations on this basis. See note 5 for further information.
This note sets out key considerations in relation to the impact of COVID-19 on the Group’s results.
(ii) Fund management The widespread economic disruption caused by of COVID-19 has led to significant volatility in financial markets and elevated levels of investor activity throughout 2020. Information on the revenue earned by the Group’s fund management segment can be found within note 5(b).
Other (i) Dividend On 26 November 2020, the Group announced a new dividend policy and capital framework. Information on dividends paid during the year and the proposed final dividend for 2020 can be found within note 16.
3 – Exchange rates The Group’s principal overseas operations during the year were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into sterling at the average rates for the year, and the assets and liabilities have been translated at the year end rates as follows: Eurozone Average rate (€1 equals) £0.88 £0.88 Year end rate (€1 equals) £0.90 £0.85 Canada Average rate ($CAD1 equals) £0.58 £0.59 Year end rate ($CAD1 equals) £0.57 £0.58 Poland Average rate (PLN1 equals) £0.20 £0.20 Year end rate (PLN1 equals) £0.20 £0.20 4 – Strategic transactions This note provides details of the acquisitions and disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with the details of business held for sale at 31 December 2020 and discontinued operations.
Strategic report Governance IFRS financial statements Other information 4 – Strategic transactions continued (b) Disposals and remeasurements continued Disposals of subsidiaries, joint ventures and associates The following businesses were disposed of in 2020: FPI(i)
Assets Goodwill, acquired value of in-force business and intangible assets 442 44 486 Interests in, and loans to, associates and joint ventures — 38 38 Property and equipment 5 4 9 Financial investments 6,981 5,573 12,554 Reinsurance assets 15 734 749 Receivables and other financial assets 36 87 123 Deferred acquisition costs 205 10 215 Prepayments and accrued income 6 40 46 Cash and cash equivalents 851 186 1,037
Total assets 8,541 6,716 15,257 Liabilities Gross insurance liabilities 103 4,276 4,379 Gross liabilities for investment contracts 8,033 — 8,033 Unallocated divisible surplus — 693 693 Tax liabilities — 388 388 Other liabilities 104 367 471
Total liabilities 8,240 5,724 13,964 Net assets 301 992 1,293 Total consideration 309 1,540 1,849 Less: transaction costs (11) (34) (45)
(i) FPI On 19 July 2017, Aviva announced the sale of FPI to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited and FPI has been reported as held for sale by the Group since 31 December 2017. In 2020, a revised structure was agreed for Aviva to sell a 76% shareholding in FPI for a consideration of £259 million, including £50 million of deferred consideration.
On 11 December 2020, an option was exercised by RL360 requiring Aviva to recapture a book of business from FPI, subject to regulatory approval, resulting in Aviva forgoing both the deferred consideration and its remaining shareholding in FPI. The estimated value of the book of business matches the total value of the deferred consideration and the shareholding, therefore there is no impact on the value of consideration received.
(ii) Singapore On 11 September 2020, Aviva announced the sale of a majority shareholding in Aviva Singapore to a consortium led by Singapore Life Ltd (Singlife) for a consideration of SGD 2.7 billion (approximately £1.5 billion), which is comprised of SGD 2.0 billion in cash and marketable securities, SGD 250 million in vendor finance notes and a 26% equity shareholding in the new group (Aviva Singlife Holdings Pte. Ltd – see note 19(a)). The transaction completed on 30 November 2020.
Assets Acquired value of in-force business and intangible assets 18 526 Interests in, and loans to, joint ventures and associates — 8 Property and equipment 69 8 Loans — 1 Financial investments 16,907 7,824 Reinsurance assets 18 75 Other assets 531 290 Cash and cash equivalents 190 780
Liabilities Gross insurance liabilities 3,166 687 Gross liabilities for investment contracts 12,425 8,324 Unallocated divisible surplus 1,234 — Borrowings 43 28 Other liabilities 308 87
(i) Vietnam On 14 December 2020, Aviva announced the sale of its entire shareholding in Aviva Vietnam Life Insurance Limited to Manulife Financial Asia Limited. The transaction is expected to complete in the second half of 2021, subject to regulatory approvals.
(ii) Aviva Vita (Italy) On 23 November 2020, Aviva announced the sale of its entire 80% shareholding in the Italian life insurance joint venture, Aviva Vita to its partner UBI Banca. The transaction is subject to customary closing conditions, including regulatory approval, and is expected to complete in the first half of 2021.
In accordance with IFRS 5 Non-current assets held for sale and discontinued operations, the results of these operations have been reclassified as discontinued operations in these consolidated financial statements. Profit from discontinued operations for the year ended 31 December 2020 has been shown as a single line in the consolidated income statement and net cash flows from discontinued operations have been shown as a single line in the consolidated statement of cash flows, with 2019 comparatives being re-presented accordingly. Notes to the consolidated statement of financial position are presented on a total group basis and, as a result, income statement and cash flow movements included within these notes may not reconcile to those presented in the consolidated income statement and the consolidated statement of cash flows.
Net written premiums 1,284 1,153 Net change in provision for unearned premiums 3 (16)
Other comprehensive income from discontinued operations: Items that may be reclassified subsequently to income statement Foreign exchange rate movements 4 (26) Total other comprehensive income for the year from discontinued operations 4 (26)
Aviva Investors Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France, North America and Asia Pacific. Aviva Investors manages policyholders’ and shareholders’ invested funds, provides investment management services for institutional pension fund mandates and manages a range of retail investment products. These include investment funds, unit trusts, open-ended investment companies and individual savings accounts.
Manage-for-value France The principal activities of our operations in France 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.
Italy The principal activities of our operations in Italy are in the life and non-domestic insurance markets. We offer savings, investments, pension and protection products with distribution through a major bancassurance partnership with Unione di Banche Italiane S.p.A. and also through independent financial advisor networks.
Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in ‘Other Group activities’. The results of our internal reinsurance operations are also included in this segment, as are the elimination entries for certain inter-segment transactions and group consolidation adjustments.
Strategic report Governance IFRS financial statements Other information 5 – 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 non-operating items, including investment market performance.
Aviva Investors £m France £m Italy £m Poland £m Other £m
Gross written premiums 10,268 5,051 3,271 — 5,326 4,473 626 — — 29,015 Premiums ceded to reinsurers (2,904) (421) (175) — (78) (44) (16) — — (3,638) Internal reinsurance revenue — — — — — — — — — — Premiums written net of reinsurance 7,364 4,630 3,096 — 5,248 4,429 610 — — 25,377 Net change in provision for unearned premiums (1) (38) (56) — (28) (1) 1 — — (123) Net earned premiums 7,363 4,592 3,040 — 5,220 4,428 611 — — 25,254 Fee and commission income 989 101 25 325 327 80 95 — 4 1,946 8,352 4,693 3,065 325 5,547 4,508 706 — 4 27,200 Net investment income 13,842 123 227 31 1,881 2,318 157 — 751 19,330 Inter-segment revenue — — — 217 — — — — — 217 Share of profit/(loss) after tax of joint ventures and associates (58) — — — 15 — — 54 16 27 Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates — — 12 — — — — — — 12 Segmental income1 22,136 4,816 3,304 573 7,443 6,826 863 54 771 46,786 Claims and benefits paid, net of recoveries from reinsurers (8,748) (2,559) (1,712) — (5,418) (2,260) (339) — (9) (21,045) Change in insurance liabilities, net of reinsurance (4,505) (345) (148) — (670) (925) (54) — 7 (6,640) Change in investment contract provisions (5,221) — — (30) 631 (1,793) — — — (6,413) Change in unallocated divisible surplus 505 — — — (844) (1,179) (10) — — (1,528) Fee and commission expense (730) (1,372) (914) (27) (698) (257) (159) — (4) (4,161) Investment expense attributable to unitholders — — — — 9 — — — (588) (579) Other expenses (1,112) (474) (168) (432) (245) (90) (103) (3) (410) (3,037) Inter-segment expenses (201) (5) (7) — (1) — (3) — — (217) Finance costs (166) (4) (6) — (1) (2) (1) — (373) (553) Segmental expenses (20,178) (4,759) (2,955) (489) (7,237) (6,506) (669) (3) (1,377) (44,173) Profit/(loss) before tax 1,958 57 349 84 206 320 194 51 (606) 2,613 Tax attributable to policyholders’ returns (43) — — — — — — — — (43) Profit/(loss) before tax attributable to shareholders’ profits 1,915 57 349 84 206 320 194 51 (606) 2,570 Adjusting items: Reclassification of unallocated interest 48 (13) 29 1 53 — — — (118) — Life business: Investment variances and economic assumption changes (314) — — — 145 (31) 2 (26) — (224) Non-life business: Short-term fluctuation in return on investments — 92 (118) — 40 8 (5) — 47 64 General insurance and health business: Economic assumption changes — 77 7 — 19 — — — 1 104 Impairment of goodwill, joint ventures, associates and other amounts expensed — — 16 — — — — 13 — 29 Amortisation and impairment of intangibles acquired in business combinations 46 — 16 — 2 1 5 — — 70 Amortisation and impairment of acquired value of in-force business 212 — — — 2 — — — — 214 Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates — — (12) — — — — — — (12) Other2 — — — — — — — — 34 34 Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 1,907 213 287 85 467 298 196 38 (642) 2,849 1 Total reported income, excluding inter-segment revenue, includes £26,051 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 Other includes a charge of £16 million relating to costs on contracts that have become onerous following the disposals of FPI, Singapore, Indonesia and Hong Kong and a charge of £18 million relating to the estimated additional liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise members’ benefits for the effects of Guaranteed Minimum Pension (GMP).
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2019 – restated1
Claims and benefits paid, net of recoveries from reinsurers (9,878) (2,844) (1,938) — (4,751) (2,280) (380) — (21) (22,092) Change in insurance liabilities, net of reinsurance (3,431) (80) (16) — (1,112) (1,032) (49) — 50 (5,670) Change in investment contract provisions (17,186) — — (63) (4,041) (2,589) 1 — — (23,878) Change in unallocated divisible surplus 174 — — — (2,010) (1,776) (4) — — (3,616) Fee and commission expense (711) (1,337) (823) (27) (659) (238) (156) — 27 (3,924) Investment expense attributable to unitholders — — — — (157) — — — (1,198) (1,355) Other expenses (1,416) (340) (162) (447) (246) (109) (95) (11) (231) (3,057) Inter-segment expenses (228) (6) (6) — (2) — (5) — — (247) Finance costs (192) (4) (7) — (1) (3) (1) — (360) (568) Segmental expenses (32,868) (4,611) (2,952) (537) (12,979) (8,027) (689) (11) (1,733) (64,407)
Profit/(loss) before tax attributable to shareholders’ profits 2,324 338 211 91 410 227 198 44 (523) 3,320
Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits2 1,974 297 191 96 473 195 194 37 (524) 2,933 1 The 2019 comparative results have been restated from those previously published due to the change in presentation of segmental information. See note 1. 2 Total reported income, excluding inter-segment revenue, includes £39,041 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. 3 Other relates to a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims and a charge of £2 million relating to negative goodwill which arose on the acquisition of Friends First.
(b) (i) Segmental income statement – products and services for the year ended 31 December 2020
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (b) (ii) Segmental income statement – products and services for the year ended 31 December 2019
Net earned premiums 16,529 9,805 — — 26,334 Fee and commission income 1,301 126 315 194 1,936 17,830 9,931 315 194 28,270 Net investment income/(expense) 37,756 622 (1) 1,234 39,611 Inter-segment revenue — — 250 — 250 Share of profit/(loss) after tax of joint ventures and associates 122 — — (28) 94 Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates — 6 — — 6 Segmental income 55,708 10,559 564 1,400 68,231
Segmental expenses (52,143) (9,746) (472) (2,049) (64,410) Profit/(loss) before tax 3,565 813 92 (649) 3,821 Tax attributable to policyholders’ returns (501) — — — (501)
Profit/(loss) before tax attributable to shareholders’ profits 3,064 813 92 (649) 3,320 Adjusting items (265) (161) 4 35 (387)
Realised (losses)/gains on disposals (238) 1,393 Unrealised gains and losses (see accounting policy K)
1,480 446 1,242 1,839 Other income from investments designated as other than trading
Gains arising in the year 9,164 26,272 Losses recognised now realised (4,079) (8,847)
Rent 554 555 Expenses relating to these properties (124) (158) Realised gains on disposal 5 58 Fair value (losses)/gains on investment properties (note 22) (372) 93 63 548 Foreign exchange losses on investments other than trading (67) (458) Other investment expenses (138) (45)
Insurance contracts 11,197 12,100 Participating investment contracts 5,927 5,333 Non-participating investment contracts 6 7
Claims and benefits paid to policyholders on general insurance and health business 5,987 6,575 23,117 24,015 Less: Claim recoveries from reinsurers
Staff costs (note 11(b)) 998 1,100 Central costs 250 183 Depreciation 103 93 Impairment of goodwill on subsidiaries 17 2 Amortisation of acquired value of in-force business on insurance/investment contracts 214 280 Amortisation of intangible assets 193 204 Impairment of intangible assets 23 13 Other expenses (see below) 1,135 1,277
Other expenses were £1,135 million (2019: £1,277 million) which mainly included costs relating to property and IT.
Subordinated debt 352 336 Long term senior debt 16 16 Commercial paper (1) (1)
Interest expense on operational borrowings Amounts owed to financial institutions 14 21 Securitised mortgage loan notes at fair value 75 77
Interest on collateral received 2 10 Net finance charge on pension schemes (note 51(b)(i)) 17 23 Interest on lease liabilities 11 14 Other similar charges 67 72
Finance costs from continuing operations 553 568 Finance costs from discontinued operations — 8 Total finance costs 553 576 1 The 2019 comparative results have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1.
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 principal assumptions underlying the calculation of the expected investment return for equity and property are: Equity Property
The expected return on equity and property has been calculated by reference to the ten-year mid-price swap rate for an AA rated bank in the relevant currency plus a risk premium. The use of risk premium reflects management’s long-term expectations of asset return in excess of the swap yield from investing in different asset classes. The asset risk premiums are set out in the table below: Equity risk premium 3.5% 3.5% Property risk premium 2.0% 2.0%
Investment variances and economic assumption changes were £174 million positive (2019: £654 million positive), mainly due to a reduction in yields, partially offset by a reduction in equities in the UK and France.
10 – Non-life business: short-term fluctuations in return on investments (a) Definitions Group adjusted operating profit for non-life business is based on an expected long-term investment return over the period. Any variance between the total investment return (including realised and unrealised gains) and the expected return over the period is disclosed separately outside Group adjusted operating profit, in short-term fluctuations.
The short-term fluctuations in investment return and economic assumption changes attributable to the non-life business result and reported outside Group adjusted operating profit were as follows: Non-life business 2020 £m
(b) Methodology The long-term investment return is calculated separately for each principal non-life market. In respect of equities and investment properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the long-term rate of investment return.
(c) Assumptions The principal assumptions underlying the calculation of the long-term investment return are: Long-term rates of return equities Long-term rates of return properties
The long-term rates of return on equities and properties have been calculated by reference to the ten-year mid-price swap rate for an AA rated bank in the relevant currency plus a risk premium. The underlying reference rates and risk premiums for the United Kingdom and eurozone are shown in note 9.
(d) Analysis of investment return The total investment income on our non-life business, including short-term fluctuations, are as follows: Non-life business 2020 £m
Analysis of investment income: Net investment income 322 511 Foreign exchange (losses)/gains and other charges (45) 55
The short-term fluctuations during 2020 of £64 million adverse is primarily due to falling equity markets and foreign exchange losses. These losses are partly offset by an increase in the value of fixed income securities as a result of falls in interest rates.
The short-term fluctuations during 2019 were mainly due to strong market conditions across all our major markets. This resulted in significant gains on equities plus gains on fixed income securities driven by interest rates falling and a narrowing of credit spreads. These gains are partly offset by losses on hedges held by the Group, including the Group centre hedging programme, and other adverse movements on centre holdings.
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 43.
Strategic report Governance IFRS financial statements Other information 11 – Employee information This note shows where our staff are employed throughout the world, excluding staff employed by our joint ventures and associates, and analyses the total staff costs. The comparative amounts in (a) and (b) have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1.
Continuing operations Wages and salaries 1,182 1,236 Social security costs 237 235 Post-retirement obligations
Defined benefit schemes (note 51(d)) 18 22 Defined contribution schemes (note 51(d)) 168 162
Continuing operations Acquisition costs 599 580 Claims handling expenses 205 197 Central costs 55 67 Other operating expenses (note 7) 998 1,100 Staff costs from continuing operations 1,857 1,944 Staff costs from discontinued operations 73 92
Fees payable to PwC LLP and its associates for the statutory audit of the Aviva Group and Company financial statements 1.9 1.8 Fees payable to PwC LLP and its associates for other services
Audit of Group subsidiaries 12.6 12.4 Additional fees related to the prior year audit of Group subsidiaries 1.0 0.8
Tax compliance services — — Tax advisory services — — Services relating to corporate finance transactions — — Other non-audit services not covered above — 0.1 Fees payable to PwC LLP and its associates for services to Group companies 23.8 20.4
Fees payable to PwC LLP and its associates for Audit of Group subsidiaries 0.8 1.3 Fees payable to PwC LLP and its associates for Audit related assurance — 0.3
Audit related assurance comprises services in relation to statutory and regulatory filings. These include fees for the audit of the Group’s Solvency II regulatory returns for 2020, services for the audit of other regulatory returns of the Group’s subsidiaries and review of interim financial information under the Listing Rules of the UK Listing Authority. Total audit fees for continuing and discontinued operations (including additional fees related to the prior year audit of Group subsidiaries) and audit-related assurance fees were £21.2 million (2019: £21.2 million).
Other assurance services in 2020 of £3.4 million (2019: £0.7 million) mainly include a fee of £2.4 million to undertake a ‘reasonable assurance’ review of the Solvency II Partial Internal Model following the correction of the misapplication of regulatory rules in our French actuarial models and fees relating to providing an annual Audit and Assurance Faculty (AAF) report for Aviva Investors to give internal and external clients and their auditors comfort over the operating effectiveness of internal controls and review of the information security business protection standard and associated controls.
Strategic report Governance IFRS financial statements Other information 14 – Tax This note analyses the tax charge for the year and explains the factors that affect it. The comparative amounts in (a), (b) and (d) have been re-presented from those previously published to reclassify certain operations in Asia as discontinued operations as described in note 1.
(a) Tax charged to the income statement (i) The total tax charge comprises: £m
Continuing operations Current tax For the period 648 1,041 Prior period adjustments (64) (178)
Total current tax from continuing operations 584 863 Deferred tax Origination and reversal of temporary differences 12 344 Changes in tax rates or tax laws (14) (6) Write (back) of deferred tax assets (11) —
(iii) The tax charge from continuing operations above, comprising current and deferred tax, can be analysed as follows: Continuing operations 2020 £m
Total deferred tax (credited)/charged to income statement from continuing operations (13) 338 Total deferred tax charged to income statement from discontinued operations 70 49 Total deferred tax charged to income statement 57 387
Total tax charged/(credited) to other comprehensive income arising from continuing operations 33 (109) Total tax charged/(credited) to other comprehensive income arising from discontinued operations — — Total tax charged/(credited) to other comprehensive income 33 (109)
Strategic report Governance IFRS financial statements Other information 14 – Tax continued (ii) There is no tax charge/(credit) attributable to policyholders’ return included above in either 2020 or 2019.
Profit before tax from continuing operations 2,570 43 2,613 3,320 501 3,821 Profit before tax from discontinued operations 904 44 948 54 58 112 Total profit before tax 3,474 87 3,561 3,374 559 3,933
Tax calculated at standard UK corporation tax rate of 19.00% (2019: 19.00%) 660 17 677 641 106 747 Reconciling items
Different basis of tax – policyholders — 73 73 — 454 454 Adjustment to tax charge in respect of prior periods (30) — (30) 5 — 5 Non-assessable income and items not taxed at the full statutory rate (72) — (72) (51) — (51) Non-taxable profit on sale of subsidiaries and associates (138) — (138) (1) — (1) Disallowable expenses 33 — 33 41 — 41 Different local basis of tax on overseas profits 100 (3) 97 98 (1) 97 Change in future local statutory tax rates 30 — 30 (6) — (6) Movement in deferred tax not recognised (3) — (3) (4) — (4) Tax effect of profit from joint ventures and associates (10) — (10) (8) — (8) Other (6) — (6) (4) — (4)
Total tax charged to income statement 564 87 651 711 559 1,270
The rate of corporation tax in the UK was due to be reduced from 19% to 17% from 1 April 2020. In addition, the French government has introduced a stepped reduction to the French corporation tax rate from 34.43% to 25.83% from 1 January 2022. These reduced rates were used in the calculation of deferred tax assets and liabilities in the UK and France at 31 December 2019.
During 2020, the reduction in the UK corporation tax rate that was due to take effect from 1 April 2020 was cancelled and as a result, the rate has remained at 19%. This revised rate has been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2020 and increased the Group’s deferred tax liabilities by £81 million.
Continuing operations Profit before tax attributable to shareholders’ profits 2,849 (279) 2,570 2,933 387 3,320 Tax attributable to shareholders’ profits (596) 68 (528) (640) (60) (700)
Profit from continuing operations 2,253 (211) 2,042 2,293 327 2,620 Amount attributable to non-controlling interests (98) (14) (112) (98) (17) (115) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of DCI and tier 1 notes (net of tax) (27) — (27) (34) — (34) Profit attributable to ordinary shareholders from continuing operations 2,111 (225) 1,886 2,144 310 2,454 Profit/(loss) attributable to ordinary shareholders from discontinued operations 274 594 868 223 (180) 43
Continuing operations Group adjusted operating profit attributable to ordinary shareholders2 2,849 2,111 53.8 2,933 2,144 54.8 Adjusting items: Life business: Investment variances and economic assumption changes 224 143 3.6 683 558 14.3 Non-life business: Short-term fluctuation in return on investments (64) (11) (0.3) 167 118 3.0 General insurance and health business: Economic assumption changes (104) (83) (2.1) (54) (33) (0.8) Impairment of goodwill, joint ventures, associates and other amounts expensed (29) (27) (0.7) (11) (11) (0.3) Amortisation and impairment of intangibles acquired in business combinations (70) (55) (1.4) (77) (51) (1.3) Amortisation and impairment of acquired value of in-force business (214) (174) (4.4) (280) (230) (5.9) Loss on disposal and remeasurement of subsidiaries, joint ventures and associates 12 12 0.3 6 5 0.1 Other (34) (30) (0.7) (47) (46) (1.2)
Discontinued operations Group adjusted operating profit attributable to ordinary shareholders2 312 274 7.0 251 223 5.7 Adjusting items 592 594 15.1 (197) (180) (4.6) Profit attributable to ordinary shareholders from discontinued operations 904 868 22.1 54 43 1.1
(b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: Total £m
Diluted earnings per share from discontinued operations 868 3,944 22.0 43 3,925 1.1
Diluted group adjusted operating profit per share from discontinued operations 274 3,944 7.0 223 3,925 5.7
Strategic report Governance IFRS financial statements Other information 16 – Dividends and appropriations This note analyses the total dividends and other appropriations paid during the year, as set out in the table below. Details are also provided of the 2020 interim dividend, paid in January 2021, and the proposed final dividend for 2020, which are not accrued in these financial statements and are therefore excluded from the table.
Subsequent to 31 December 2020, the directors proposed a final dividend for 2020 of 14 pence per ordinary share, amounting to £550 million in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 14 May 2021 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2021. Subsequent to 31 December 2019, the directors agreed a final dividend for 2019 of 21.40 pence per ordinary share, amounting to £839 million. On 8 April 2020 the Group announced that the Board of Directors had agreed to withdraw this recommendation.
On 23 June 2020, notification was given that the Group would redeem the 5.9021% £500 million DCI at its principal amount together with accrued interest to (but excluding) 27 July 2020, the date on which the DCI was redeemed. Interest payable up to 23 June 2020 has been recorded as an appropriation of retained profits with the remaining interest payable from 24 June 2020 until the redemption date recorded within profit before tax attributable to shareholders’ profits. In prior periods, the interest on the DCI and tier 1 notes was treated as an appropriation of retained profits and, accordingly, accounted for when paid.
United Kingdom – long-term business 663 663 — — 663 663 United Kingdom – general insurance and health 927 927 1 1 928 928 Ireland – general insurance and health 98 94 — — 98 94 Canada 60 77 — — 60 77 France – long-term business — — 55 52 55 52 Italy – general insurance and health 26 24 — — 26 24 Poland 25 25 7 7 32 32 Other 6 45 — 1 6 46
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. These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, mortality, morbidity and persistency.
Future new business profits beyond the initial three years are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to management estimates, past experience and relevant available market statistics.
At 31 December 2019 (1,409) (1,306) (887) — (3,602) Amortisation for the year3 (132) (146) (197) — (475) Disposals and transfers 73 708 177 — 958 Foreign exchange rate movements (16) — 2 — (14) At 31 December 2020 (1,484) (744) (905) — (3,133) Accumulated Impairment At 1 January 2019 (27) (147) (38) (71) (283) Impairment charges — (28) (13) — (41) Disposals — — 6 — 6 Foreign exchange rate movements — — 1 4 5 At 31 December 2019 (27) (175) (44) (67) (313) Impairment charges — (19) (23) — (42) Disposals 8 170 7 — 185 Foreign exchange rate movements — — (1) (4) (5) At 31 December 2020 (19) (24) (61) (71) (175) Carrying amount At 1 January 2019 1,418 1,498 882 63 3,861 At 31 December 2019 1,235 1,244 786 61 3,326 At 31 December 2020 1,078 664 641 63 2,446 Less: Assets classified as held for sale (6) — (6) — (12) 1,072 664 635 63 2,434 1 On insurance and participating investment contracts. 2 On non-participating investment contracts. 3 Amortisation of other intangible assets with finite useful lives includes £76 million (2019: £87 million) of amortisation in respect of intangible assets acquired in business combinations.
(a) Acquired value of in-force business AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total of £1,742 million, £1,553 million (2019: £2,380 million) is expected to be recoverable more than one year after the statement of financial position date.
Non-participating investment AVIF is reviewed for evidence of impairment, consistent with reviews conducted for other finite life intangible assets. Insurance and participating investment contract AVIF is reviewed for impairment at each reporting date as part of the liability adequacy requirements in IFRS 4. AVIF is reviewed for evidence of impairment and impairment tested at product portfolio level by reference to the value of future profits in accordance with Solvency II principles, 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 17(b)).
(b) Other intangible assets with finite useful lives Other intangible assets with finite useful lives consist mainly of the value of bancassurance and other distribution agreements and capitalised software. Additions of intangible assets with finite lives in 2020 and 2019 relate to capitalisation of software costs in relation to the Group’s digital initiatives. Impairments totalling £23 million have been recognised in 2020 in relation to capitalised software.
(c) Intangible assets with indefinite useful lives Intangible assets with indefinite useful lives primarily comprise the value of distribution channel Union Financière de France Banque in France where the existing life of the asset supports this classification. Impairment testing of these intangible assets is covered in note 17(b). No impairment has been recognised in 2020 (2019: £nil).
At 1 January 38 1,197 1,235 46 1,168 1,214 Share of results before tax — 10 10 — 27 27 Share of tax — (7) (7) — (4) (4) Share of results after tax — 3 3 — 23 23 Amortisation of intangibles (4) — (4) (5) — (5)
Share of (loss)/profit after tax (4) 3 (1) (5) 23 18 Reclassification from subsidiary — 45 45 — — — Acquisitions — 457 457 — — — Additions — 47 47 — 131 131 Disposals (18) (29) (47) — (96) (96) Share of gains taken to other comprehensive income — 17 17 — 22 22 Dividends received from joint ventures — (39) (39) — (27) (27) Foreign exchange rate movements (4) (8) (12) (3) (24) (27)
Acquisitions of £457 million represents the Group’s 25.95% equity shareholding in Aviva Singlife Holdings Pte. Ltd recognised as part of the consideration received on sale of the Aviva Singapore business on 30 November 2020. More details of this transaction are set out in note 4(b).
The reclassification from subsidiary and additions during 2020 relate to changes in the Group’s holdings in property management undertakings.
Disposals of £47 million comprises the sale of the entire shareholdings in the Group’s joint ventures in Indonesia and Hong Kong, which are detailed in note 4(b).
The Group’s share of total comprehensive income related to joint venture entities is £16 million (2019: £40 million).
Property management undertakings — 807 807 — 792 792 Long-term business undertakings 12 883 895 38 397 435 General insurance and health undertakings — — — — 8 8 Total 12 1,690 1,702 38 1,197 1,235
The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted with the exception of AvivaSA Emeklilik ve Hayat A.S which has issued publicly a minority portion of shares. All investments in such undertakings are held by subsidiaries, except for the shares in the Chinese joint venture, Aviva-COFCO Life Insurance Co. Ltd, which are held by Aviva plc. The Group’s share of net assets of that company is £378 million (2019: £320 million) and it has a carrying value at cost of £123 million (2019: £123 million).
Strategic report Governance IFRS financial statements Other information 19 – Interests in, and loans to, joint ventures continued (iii) No joint ventures are considered to be material from a Group perspective (2019: none). The Group’s principal joint ventures are as follows: Proportion of ownership interest
(iv) From time to time group joint ventures may receive liability claims or become involved in actual or threatened related litigation. At 31 December 2020 this includes a contingent liability in respect of a dispute where the Group’s maximum exposure is approximately £65 million (2019: £95 million). In the opinion of the directors it is unlikely that the Group will suffer financial loss arising from this dispute. The joint ventures have no other contingent liabilities to which the Group has significant exposure. The Group has commitments to provide funding to property management joint ventures of £4 million (2019: £13 million).
At 1 January 304 304 Share of results before tax 18 80 Share of tax 11 (4)
Aviva Life Insurance Company India Limited Life insurance India 49.00% 49.00% SCPI Logipierre 1 Property management France 44.46% 44.46% Lend Lease JEM Partners Fund Limited Investment holding Singapore — 22.50% SCPI Ufifrance Immobilier Property management France 20.40% 20.40% AI UK Commercial Real Estate Debt Fund1 Property management UK 19.39% 17.53% 1 The Group has significant influence over AI UK Commercial Real Estate Debt Fund so it is therefore accounted for as an associate.
Strategic report Governance IFRS financial statements Other information 20 – Interests in, and loans to, associates continued (a) Carrying amount and details of associates continued (iii) The associates have no contingent liabilities to which the Group has significant exposure. The Group has commitments to provide funding to property management associates of £nil (2019: £6 million).
An impairment charge of £13 million (2019: £9 million) was recognised within the income statement as a component of share of profit after tax of joint ventures and associates following management’s annual impairment review of the Group’s associate in India, Aviva Life Insurance Company India Limited (Aviva India).
Cost or valuation At 1 January 2019 359 — — 4 175 306 844 Adjustment at 1 January 2019 for adoption of IFRS 16 — 1,149 — — — — 1,149
At 1 January 2019 restated 359 1,149 — 4 175 306 1,993 Additions 11 42 — — 19 12 84 Disposals (4) (2) — — (16) (16) (38) Fair value losses (3) — — — — — (3) Foreign exchange rate movements (14) (4) — — (3) (6) (27)
At 1 January 2019 restated (3) (739) — (3) (137) (148) (1,030) Depreciation charge for the year — (62) — — (16) (20) (98) Disposals — 1 — — 16 15 32 Impairment charge (22) — — — — — (22) Foreign exchange rate movements — — — — 2 4 6
Carrying amount At 31 December 2019 324 385 — 1 40 147 897 At 31 December 2020 335 337 — 7 26 132 837 Less: Assets classified as held for sale (69) — — — — — (69)
Owner-occupied properties, excluding £337 million (2019: £385 million) held under lease arrangements, are stated at their revalued amounts, as assessed by qualified external valuers. These values are assessed in accordance with the relevant parts of the current Royal Institute of Chartered Surveyors Appraisal and Valuation Standards in the UK, and with current local valuation practices in other countries. This assessment is in accordance with UK Valuations Standards ‘Red book’, and is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing wherein the parties had acted knowledgeably and without compulsion, on the basis of the highest and best use of asset that is physically possible, legally permissible and financially feasible. The valuation assessment adopts market-based evidence and is in line with guidance from the International Valuation Standards Committee and the requirements of IAS 16 Property, Plant and Equipment.
Strategic report Governance IFRS financial statements Other information 21 – Property and equipment continued Owner-occupied properties held under lease arrangements are stated at amortised cost and are amortised on a straight-line basis over the lease term, unless the carrying value of the leased asset exceeds the recoverable amount. Where this is the case, the asset is impaired to its recoverable amount and the impaired carrying value is amortised on a straight-line basis over the remainder of the lease term. For further information on the Group’s lease arrangements see note 23.
See note 24 for further information on the fair value measurement and valuation techniques of investment property.
Although the Group is exposed to changes in the residual value at the end of the current leases to third parties on investment property, the Group typically enters into new operating leases and therefore is not expected to immediately realise any reduction in residual value at the end of these leases. Expectations about the future residual values are reflected in the fair value of the properties.
(i) The following amounts in respect of leased assets have been recognised in the Group’s consolidated income statement.
Total cash outflows recognised in the period in relation to leases were £76 million (2019: £70 million). Expenses recognised in the Group consolidated income statement in relation to short-term and low-value leases were £nil (2019: £nil). Variable lease payments not included in the measurement of lease liabilities were £nil (2019: £nil).
Within 1 year 266 265 Between 1 and 2 years 223 205 Between 2 and 3 years 193 183 Between 3 and 4 years 162 161 Between 4 and 5 years 179 208 Later than 5 years 1,233 1,599 2,256 2,621 24 – Fair value methodology This note explains the methodology for valuing our assets and liabilities measured at fair value, and for fair value disclosures. It also provides an analysis of these according to a ‘fair value hierarchy’, determined by the market observability of valuation inputs.
Level 3 Inputs to Level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset or liability. Examples are investment properties and commercial and equity release mortgage loans.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (a) Basis for determining fair value hierarchy 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 16.7% (2019: 16.8%) of assets and 1.2% (2019: 3.1%) 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 thirdparty price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.
(b) Changes to valuation techniques There were no changes in the valuation techniques during the year compared to those described in the 2019 annual consolidated financial statements.
Financial assets Loans (note 25(a)) 43,672 43,679 38,559 38,579 Financial investments (note 28(a)) 351,378 351,378 343,418 343,418 Fixed maturity securities 202,837 202,837 198,832 198,832 Equity securities 100,404 100,404 99,570 99,570 Other investments (including derivatives) 48,137 48,137 45,016 45,016
Financial liabilities Non-participating investment contracts (note 44(a)) 135,347 135,347 129,365 129,365 Net asset value attributable to unitholders 20,301 20,301 16,610 16,610 Borrowings (note 52(a))1 11,141 9,684 10,268 9,039 Derivative liabilities (note 60(b)) 7,562 7,562 6,517 6,517 1 Within the fair value total, the estimated fair value has been provided for the portion of borrowings that are carried at amortised cost as disclosed in note 24 (h).
Total 32,937 407,832 31,000 390,366 1 Instruments within this category include financial assets that meet the definition of held for trading, financial assets that are managed and evaluated on a fair value basis, and instruments with contractual terms that do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (d) Fair value hierarchy analysis An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below.
IFRS 13 Fair Value Measurement permits assets and liabilities to be measured at fair value on either a recurring or non-recurring basis. Recurring fair value measurements are those that other IFRSs require or permit in the statement of financial position at the end of each reporting period, whereas non-recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit in the statement of financial position in particular circumstances. The value of freehold owner-occupied property measured on a non-recurring basis at 31 December 2020 was £335 million (2019: £324 million), stated at their revalued amounts in line with the requirements of IAS 16 Property, Plant and Equipment.
Recurring fair value measurements Investment property (note (22)) — — 11,203 11,203 — 11,203 Loans (note 25(a)) — — 28,319 28,319 10,260 38,579 Financial investments measured at fair value (note 28(a)) Fixed maturity securities1 56,124 125,113 17,595 198,832 — 198,832 Equity securities 98,850 — 720 99,570 — 99,570 Other investments (including derivatives)1 32,465 6,878 5,673 45,016 — 45,016 Financial assets classified as held for sale 5,788 50 1,986 7,824 1 7,825
Financial liabilities measured at fair value Non-participating investment contracts2 (note 44(a)) 129,323 42 — 129,365 — 129,365 Net asset value attributable to unit holders 16,498 — 112 16,610 — 16,610 Borrowings (note 52(a)) — — 1,233 1,233 7,806 9,039 Derivative liabilities (note 60(b)) 418 5,444 655 6,517 — 6,517 Financial liabilities classified as held for sale 5,259 20 3,045 8,324 28 8,352 Total 151,498 5,506 5,045 162,049 7,834 169,883 1 Following a review of the fair value hierarchy for fixed maturity securities, a new framework has been implemented to improve consistency across the Group. Comparative amounts have been amended from those previously reported and the effect of this change is to move £14,681 million of fixed maturity securities from fair value hierarchy Level 1 to Level 2 and £3,167 million from Level 2 to Level 1. 2 In addition to the balances in this table, included within reinsurance assets in the statement of financial position and note 46 are £4,006 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 — — 324 324
Less: Assets classified as held for sale — — (4) (4)
Transfers to/from Level 3 £810 million of assets transferred into Level 3 and £1,042 million of assets transferred out of Level 3 relate principally to fixed maturity 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.
Opening balance at 1 January 2020 11,203 28,319 17,595 720 5,673 1,986 — (112) (655) (1,233) (3,045) Total net (losses)/gains recognised in the income statement1 (399) 831 393 (52) 88 (280) — — (47) 18 170 Purchases 1,263 2,611 4,640 74 1,798 177 — (38) (1) (1) (146) Issuances — 177 106 — 137 — — — — — — Disposals (971) (2,111) (3,776) (124) (653) (1,876) — — 21 50 3,002 Settlements — — — — 1 — — — 18 — — Transfers into Level 3 — — 768 1 35 6 — — — — (31) Transfers out of Level 3 — — (692) (218) (119) (13) — — — — 50 Reclassification to held for sale — — (487) (8) (538) 1,033 — — 98 — (98) Foreign exchange rate movements 273 12 506 14 237 — — — (5) — — Balance at 31 December 2020 11,369 29,839 19,053 407 6,659 1,033 — (150) (571) (1,166) (98) 1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.
(i) Investment property • Investment property 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. Valuations have been performed more frequently since the onset of COVID-19 and have taken place at least quarterly, with a particular focus on sectors deemed to be exposed to higher risk of default as a result of the pandemic, such as retail. Valuations have been performed for all UK properties since the onset of COVID-19. 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 option 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. External valuations relating to properties in the retail and leisure sectors include a capital deduction where tenant risk is deemed to have increased as a result of COVID-19.
• Equity release mortgage loans held by our UK Life business are valued using an internal model, with fair value initially being equal to the transaction price. The value of these loans is dependent on the expected term of the mortgage and the forecast property value at the end of the term, and is calculated by adjusting future cash flows for credit risk and discounting using a yield curve plus an allowance for illiquidity. At 31 December 2020 the illiquidity premium used in the discount rate was 190 bps (2019: 160 bps).
• The mortgages have a no negative equity guarantee (‘NNEG’) such that the cost of any potential shortfall between the value of the loan and the realised value of the property, at the end of the term, is recognised by a deduction to the value of the loan. Property valuations at the reporting date are obtained by taking the most recent valuation for the property and indexing using market observable regional house price indices. NNEG is calculated using base property growth rates reduced for the cost of potential dilapidations, using a stochastic model. In addition, a cost of capital charge is applied to reflect the variability in these cash flows. The base property growth rate assumption is RPI +0.75% which equates to a long-term average growth rate of 4.0% pa at 31 December 2020 (2019: 4.0%). After applying the cost of capital charge, dilapidations and the stochastic distribution, the effective net long-term growth rate equates to 0.6% pa (2019: 0.5%).
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (g) Further information on Level 3 assets and liabilities continued (iii) Fixed maturity securities • Structured bond-type and non-standard debt products held by our business in France have no active market and are valued either using counterparty or broker quotes and validated against internal or third-party models. They have been classified as Level 3 because either (i) the third-party models include 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.
(iv) Equity securities • Equity securities which primarily comprise private equity holdings held in the UK are valued by a number of third party specialists. These are valued using a range of techniques, including earnings multiples, forecast cash flows and price/earnings ratios which are deemed to be unobservable.
• Where valuations are at a date other than the balance sheet date, as is the case for some private equity funds, adjustments are made for items such as subsequent draw-downs and distributions and the fund manager’s carried interest.
(vii) Liabilities The principal liabilities classified as Level 3, and the valuation techniques applied to them, are: • Securitised mortgage loan notes, presented within Borrowings, are valued using a similar technique to the related Level 3 securitised mortgage assets. • £nil million (2019: £3,045 million) of non-participating investment contract liabilities. Comparative figures were included within financial liabilities of operations classified as held for sale. These were classified as Level 3, either because the underlying unit funds were classified as Level 3 or because the liability related to unfunded units or other non-unit adjustments which were based on a discounted cash flow analysis using unobservable market data and assumptions. These liabilities are included within the relevant asset category within the sensitivity table below.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (g) Further information on Level 3 assets and liabilities continued Valuation uncertainty on assets which rely on either unobservable long-term assumptions or comparable market transactions as valuation inputs has been impacted by the economic disruption resulting from the COVID-19 pandemic. In particular, certain assets relying on comparable market transactions for a valuation, such as investment properties within the leisure and hospitality sectors, have been more difficult to value due to a reduction in the level of available market evidence. A number of property valuers have included ‘material uncertainty declarations’ in their valuation reports on these assets to reflect this. The pandemic has also increased uncertainty in relation to long term economic assumptions such as residential and commercial property growth rate assumptions.
Investment property 11.2 Equivalent rental yields +/- 5-10% 0.9 (0.9) Loans Commercial mortgage loans and Primary Healthcare loans 12.9 Illiquidity premium +/- 20 bps 0.2 (0.2) Base property growth rate +/- 100 bps p.a. 0.2 (0.1) Equity release mortgage loans 11.0 Base property growth rate1 +/- 40 bps p.a. 0.2 (0.2) Current property market values1 +/- 10% 0.3 (0.4) Infrastructure and Private Finance Initiative (PFI) loans 4.0 Illiquidity premium +/- 25 bps2 0.2 (0.2) Other 0.4 Illiquidity premium +/- 25 bps2 — —
Fixed maturity securities Structured bond-type and non-standard debt products 6.4 Market spread (credit, liquidity and other) +/- 25 bps 0.1 (0.1) Privately placed notes 1.7 Credit spreads +/- 25 bps2 0.1 (0.1) Other debt securities 9.9 Credit and liquidity spreads +/- 20-25 bps 0.5 (0.5)
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (g) Further information on Level 3 assets and liabilities continued The above tables demonstrate the effect of a change in one unobservable input while other assumptions remain unchanged. In reality, there may be a correlation between the unobservable inputs and other factors. It should also be noted that some of these sensitivities are nonlinear, and larger or smaller impacts should not be interpolated or extrapolated from these results.
Policy loans 2 635 637 1 684 685 Loans to banks 481 11,849 12,330 302 8,528 8,830 Healthcare, infrastructure and PFI other loans 7,283 — 7,283 6,467 — 6,467 UK securitised mortgage loans (see note 26) 2,391 — 2,391 2,432 — 2,432 Non-securitised mortgage loans 19,682 — 19,682 19,117 — 19,117 Other loans — 1,356 1,356 — 1,049 1,049
Less: Assets classified as held for sale — — — — (1) (1)
The cumulative change in fair value of loans attributable to changes in credit risk to 31 December 2020 was a £1,302 million loss (2019: £1,224 million loss).
Strategic report Governance IFRS financial statements Other information 25 – Loans continued (a) Carrying amounts continued The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above.
26 – 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.
AER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. In addition, Group companies have invested £230 million (2019: £224 million) in loan notes issued by the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the statement of financial position.
Total loan notes issued, as above 1,396 1,457 Less: Loan notes held by Group companies (230) (224)
(a) Interests in consolidated structured entities The Group has determined that where it has control over investment vehicles, these investments are consolidated structured entities. As at 31 December 2020 the Group has granted loans to consolidated PLPs for a total of £61 million (2019: £64 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 £68 million (2019: £57 million). The Group has commitments to provide funding to consolidated structured entities of £4 million (2019: £nil).
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 26, 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 26 for details of securitised mortgages and related assets as at 31 December 2020.
As at the reporting date, the Group has no intentions to provide financial or other support in relation to any other investment vehicles.
Strategic report Governance IFRS financial statements Other information 27 – Interests in structured entities continued As at 31 December 2020, a summary of the Group’s interest in unconsolidated structured entities is as follows: Interest in, and loans to, joint ventures £m
Analysed as: Unit trust and other investment vehicles2 — — 37,945 — 37,945 — — 42,154 — 42,154 PLPs and property funds 807 173 3,647 — 4,627 792 209 2,395 — 3,396 Other (Including other funds and equity securities)2 — — 2 — 2 — — 120 — 120
to Unit trust and other investment vehicles. 3 Loans include Healthcare, infrastructure & PFI other loans along with certain non-securitised mortgage loans.
The Group’s maximum exposure to loss related to the interests in unconsolidated structured entities is £55,961 million (2019: £58,519 million).
In relation to risk management, disclosures on debt securities and investment vehicles are given in note 59(b)(ii) ‘Risk management’. In relation to other guarantees and commitments that the Group provides in the course of its business, please see note 55(f) ‘Contingent liabilities and other risk factors’.
Convertibles and bonds with warrants attached — 6 7 13 — 35 6 41 Other — 7,787 — 7,787 — 7,378 — 7,378 — 197,565 1,579 199,144 — 183,479 1,461 184,940 Certificates of deposit — 17,010 — 17,010 — 14,541 — 14,541
Other investments Unit trusts and other investment vehicles1 — 37,944 1 37,945 — 42,153 1 42,154 Derivative financial instruments (note 60) 9,722 — — 9,722 7,097 — — 7,097 Deposits with credit institutions — 211 — 211 — 169 — 169 Minority holdings in property management undertakings — 3,647 — 3,647 — 2,395 — 2,395 Other investments – long-term1 — 101 — 101 — 119 — 119 Other investments – short-term — 1 — 1 — — 1 1
Fixed maturity securities — (13,317) — (13,317) — (649) — (649) Equity securities — (100) — (100) — (256) — (256) Other investments — (3,490) — (3,490) — (6,919) — (6,919)
9,722 340,069 1,587 351,378 7,097 334,843 1,478 343,418 1 Following a review of the presentation of investments held by the Singapore business, comparative amounts have been amended to reclassify £318 million of investments from Other investments – long-term to Unit trusts and other investment vehicles.
Other debt securities of £7,787 million (2019: £7,378 million) include residential and commercial mortgage-backed securities, as well as other structured credit securities.
These are further analysed as follows: At fair value through profit or loss 322,704 59,066 (15,072) 366,698 313,893 49,264 (13,393) 349,764 Available for sale 1,462 126 (1) 1,587 1,381 98 (1) 1,478 324,166 59,192 (15,073) 368,285 315,274 49,362 (13,394) 351,242 1 Following a review of the presentation of investments held by the Singapore business, comparative amounts have been amended to reclassify £318 million of investments from Other investments – long-term to Unit trusts and other investment vehicles.
Unrealised gains and losses on financial investments classified as fair value through profit or loss, recognised in the income statement in the year, were a net loss of £3,841 million (2019: £18,398 million net gain). Of this net loss, £4,079 million net loss (2019: £17,920 million net gain) related to investments designated as other than trading and £238 million net gain (2019: £478 million net gain) related to financial investments designated as trading.
(c) Financial investment arrangements (i) Stock lending arrangements The Group has entered into stock lending arrangements in the UK and overseas in accordance with established market conventions. The majority of the Group’s stock lending transactions occur in the UK, where investments are lent to EEA-regulated, locally domiciled counterparties and governed by agreements written under English law.
(ii) Other arrangements In carrying on its bulk purchase annuity business, the Group’s UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits. At 31 December 2020, £2,621 million (2019: £2,472 million) of financial investments were restricted in this way.
Strategic report Governance IFRS financial statements Other information 28 – Financial investments continued (d) Non-UK Government debt securities (gross of non-controlling interests) The following is a summary of non-UK government debt by issuer as at 31 December 2020, analysed by policyholder, participating and shareholder funds.
Austria 106 66 772 434 170 215 1,048 715 Belgium 158 166 1,021 877 270 336 1,449 1,379 France 866 698 15,662 14,537 1,956 1,878 18,484 17,113 Germany 420 305 1,864 1,795 765 455 3,049 2,555 Greece 2 1 — — — — 2 1 Ireland 108 75 892 774 301 389 1,301 1,238 Italy 952 801 11,428 10,849 28 194 12,408 11,844 Netherlands 99 53 493 562 376 318 968 933 Poland 722 674 465 655 555 581 1,742 1,910 Portugal 117 71 596 175 119 160 832 406 Spain 582 627 1,117 688 176 229 1,875 1,544 European supranational debt 671 512 1,509 1,837 2,435 1,968 4,615 4,317 Other European countries 630 553 1,607 944 986 1,051 3,223 2,548
Less: Assets classified as held for sale (285) (23) (8,252) — (247) (93) (8,784) (116)
At 31 December 2020, the Group’s total government (non-UK) debt securities stood at £65,765 million (2019: £61,702 million). The majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.
Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £14,072 million (2019: £12,983 million). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (24%), French (14%), US (10%), German (5%), Polish (4%) and Dutch (3%) government debt securities.
The participating funds exposure to (non-UK) government debt amounts to £42,639 million (2019: £39,408 million). The primary exposures, relative to total (non-UK) government debt exposures included within our participating funds, are to the (non-UK) government debt securities of France (37%), Italy (27%), Germany (4%), Spain (3%), Belgium (2%) and Ireland (2%).
Strategic report Governance IFRS financial statements Other information 29 – Receivables This note analyses our total receivables.
Amounts owed by contract holders 2,126 2,187 Amounts owed by intermediaries 1,504 1,379 Deposits with ceding undertakings 38 68 Amounts due from reinsurers 432 347 Amounts due from brokers for investment sales 156 274 Amounts receivable for collateral pledged 3,170 2,786 Amounts due from government, social security and taxes 976 812 Other receivables 1,323 1,211
Exposure to significant concentrations of credit risk is limited due to the regulations applicable in most markets and the Group credit policy and limits framework, which limits investments in individual assets and asset classes.
30 – Deferred acquisition costs (a) Deferred acquisition costs – carrying amount The carrying amount of deferred acquisition costs was as follows: £m
Deferred acquisition costs in respect of: Insurance contracts – Long-term business 1,075 993 Insurance contracts – General insurance and health business 1,146 1,141 Participating investment contracts – Long-term business 118 116 Non-participating investment contracts – Long-term business 950 1,108
Deferred acquisition costs (DAC) on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year. Of the above total, £1,707 million (2019: £1,751 million) is expected to be recovered in more than one year after the statement of financial position date. For long-term business where amortisation of the DAC balance depends on projected profits, the amount expected to be recovered is estimated and actual experience will differ.
Strategic report Governance IFRS financial statements Other information 30 – Deferred acquisition costs continued (b) Deferred acquisition costs – movements in the year continued
Carrying amount at 1 January 931 101 1,036 1,088 — 3,156 Acquisition costs deferred during the year 248 13 174 2,543 — 2,978 Amortisation (149) 2 (90) (2,482) — (2,719) Impact of assumption changes (16) 4 — — — (12) Effect of portfolio transfers, acquisitions and disposals — — — — — — Foreign exchange rate movements (20) (4) (9) (8) — (41) Other movements (1) — (3) — — (4) Carrying amount at 31 December 993 116 1,108 1,141 — 3,358
Less: Classified as held for sale — — (202) — — (202)
DAC for long-term business decreased overall over 2020 as increases from new business sales across the UK and European markets were lower than the decrease arising from the disposals of FPI and Singapore businesses. DAC for general insurance and health business increased slightly over 2020.
Where amortisation of the DAC balance depends on projected profits, changes to economic conditions may lead to a movement in the DAC balance and a corresponding impact on profit. It is estimated that the movement in the DAC balance would reduce profit by £116 million (2019: £29 million) if market yields on fixed income investments were to increase by 1% and increase profit by £135 million (2019: £36 million) if yields were to reduce by 1%.
At both 31 December 2020 and 31 December 2019, the DAC balance has been restricted by the value of projected future profits.
31 – Pension surpluses, other assets, prepayments and accrued income (a) Pension surpluses and other assets – carrying amount The carrying amount comprises: £m
Less: Assets classified as held for sale (1) — 2,834 2,799
Surpluses in the staff pension schemes and £2 million (2019: £1 million) of other assets are recoverable more than one year after the statement of financial position date.
(b) Prepayments and accrued income Prepayments and accrued income of £2,865 million (2019: £3,151 million) include assets classified as held for sale of £123 million (2019: £8 million) and £62 million (2019: £30 million) that is expected to be recovered more than one year after the statement of financial position date.
The reinsurance assets balance in the table above includes £3,860 million (2019: £4,006 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.
33 – Ordinary share capital This note gives details of Aviva plc’s ordinary share capital and shows the movements during the year.
The allotted, called up and fully paid share capital of the Company at 31 December 2020 was: 3,928,490,420 (2019: 3,921,129,145) ordinary shares of 25 pence each 982 980
At 1 January 3,921,129,145 980 44 1,239 3,902,352,211 975 44 1,214 Shares issued under the Group’s Employee and
(a) Description of the plans The Group maintains a number of active share option and award plans and schemes (the Group’s share plans). These are as follows: (i) Savings-related options These are options granted under the tax-advantaged Save As You Earn (SAYE) share option scheme in the UK and Irish revenue-approved 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 third or fifth anniversary of the start of the relevant savings contract. 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.
Strategic report Governance IFRS financial statements Other information 34 – Group’s share plans continued (a) Description of the plans continued (iii) Aviva annual bonus plan awards 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.
The comparative figures as at 31 December 2019 were: Range of exercise prices
(c) Movements in the year A summary of the status of the option and share plans as at 31 December 2019 and 2020, and changes during the years ended on those dates, is shown below.
Outstanding at 1 January 39,290,294 314.36 35,442,035 28,658,026 375.13 40,574,481 Granted during the year 34,852,776 220.00 26,293,467 26,798,392 284.00 17,713,898 Exercised/ released during the year (1,126,489) 348.71 (11,829,285) (7,340,420) 359.44 (12,308,712) Forfeited during the year (19,149,479) 299.36 (3,959,889) (8,112,308) 382.94 (10,557,632) Cancelled during the year (202,718) 300.97 — (240,979) 372.02 — Expired during the year (3,526,600) 351.07 — (472,417) 379.66 — Outstanding at 31 December 50,137,784 251.16 45,926,327 39,290,294 314.31 35,442,035
(d) Expense charged to the income statement The total expense recognised for the year arising from equity compensation plans was as follows: £m
Strategic report Governance IFRS financial statements Other information 34 – Group’s share plans continued (e) Fair value of options and awards granted after 7 November 2002 The weighted average fair values of options and awards granted during the year, estimated by using the Binomial option pricing model and Monte Carlo Simulation model, were £0.64 and £1.96 (2019: £0.50 and £3.86) respectively.
(i) Share options The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2020 2019
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. 1,126,489 options granted after 7 November 2002 were exercised during the year (2019: 7,340,420).
(ii) Share awards The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions: Weighted average assumption 2020 2019
35 – Treasury shares The following table summarises information about treasury shares at 31 December 2020: Number £m Number £m
Shares held by employee trusts 1,737,038 6 1,714,288 7 Shares held by subsidiary companies — — — —
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 2020, they had an aggregate nominal value of £434,260 (2019: £428,572) and a market value of £5,648,848 (2019: £7,177,724). The trustees have waived their rights to dividends on the shares held in the trusts.
(b) Shares held by subsidiary companies At 31 December 2020, the balance of shares held by subsidiary companies of nil shares (2019: nil shares) had an aggregate nominal value of £0 (2019: £nil) and a market value of £0 (2019: £nil).
At the end of 2020, the fair value of Aviva plc’s preference share capital was £303.6 million (2019: £299 million).
The DCI was issued on 25 November 2004. The DCI had no fixed redemption date however, on 23 June 2020 notification was given that the Group would redeem the DCI at its principal amount together with accrued interest to (but excluding) 27 July 2020. The 27 July 2020 being the first optional call date for the DCI. On the notification date the instrument was reclassified as a financial liability of £499 million, representing its fair value at that date. The resulting difference of £1 million has been charged to retained earnings. On 27 July 2020, the instrument was redeemed in full at a cost of £500 million.
Balance at 1 January 2019 1,122 27 40 (466) 120 (279) Arising in the year through other comprehensive income: Fair value gains — 3 39 — — 42 Fair value gains transferred to profit on disposals — — (19) — — (19) Share of other comprehensive income of joint ventures and associates — — 22 — — 22 Foreign exchange rate movements (318) — — 138 — 138 Aggregate tax effect – shareholders’ tax 10 (1) (4) — — (5)
Total other comprehensive income for the year (308) 2 38 138 — 178 Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — — Reserves credit for equity compensation plans — — — — 62 62 Shares issued under equity compensation plans — — — — (62) (62) Balance at 31 December 2019 814 29 78 (328) 120 (101) Arising in the year through other comprehensive income: Fair value gains — 3 22 — — 25 Fair value gains transferred to profit on disposals — — (7) — — (7) Share of other comprehensive income of joint ventures and associates — — 17 — — 17 Foreign exchange rate movements 230 — — (129) — (129) Aggregate tax effect – shareholders’ tax (9) (1) (2) — — (3) Total other comprehensive income for the year 221 2 30 (129) — (97) Transfer to profit on disposal of subsidiaries, joint ventures and associates (173) — — — — — Reserves credit for equity compensation plans — — — — 37 37 Shares issued under equity compensation plans — — — — (51) (51) Balance at 31 December 2020 862 31 108 (457) 106 (212)
39 – Retained earnings This note analyses the movements in the consolidated retained earnings during the year.
Balance at 1 January 5,065 4,523 Adjustment at 1 January 2019 for adoption of IFRS 16 — (110) Balance at 1 January restated 5,065 4,413 Profit for the year attributable to equity shareholders 2,798 2,548 Remeasurements of pension schemes1 (note 51) (150) (867) Dividends and appropriations (note 16) (280) (1,244) Net shares issued under equity compensation plans 46 55 Effect of changes in non-controlling interests in existing subsidiaries 7 — Forfeited dividend income2 2 4 Change in equity accounted option — 22 Reclassification of DCI and tier 1 notes to financial liabilities (note 37) 1 21 Aggregate tax effect (21) 113
Strategic report Governance IFRS financial statements Other information 40 – Non-controlling interests This note gives details of the Group’s non-controlling interests and shows the movements during the year.
Equity shares in subsidiaries 261 273 Share of earnings 479 441 Share of other reserves 16 13
Balance at 1 January 977 966 Profit for the year attributable to non-controlling interests 112 115 Foreign exchange rate movements 34 (39) Total comprehensive income attributable to non-controlling interests 146 76 Non-controlling interests share of dividends declared in the year (30) (63) Disposals of non-controlling interests in subsidiaries (26) — Changes in non-controlling interests in subsidiaries (61) (2)
(370,665) 11,037 (359,628) (361,633) 10,376 (351,257) Outstanding claims provisions (2,643) 87 (2,556) (2,187) 93 (2,094) (373,308) 11,124 (362,184) (363,820) 10,469 (353,351) General insurance and health Outstanding claims provisions (9,017) 794 (8,223) (8,831) 683 (8,148) Provisions for claims incurred but not reported (3,367) 1,139 (2,228) (2,672) 1,004 (1,668)
Less: Liabilities classified as held for sale 15,591 (18) 15,573 9,011 (75) 8,936
Strategic report Governance IFRS financial statements Other information 41 – Contract liabilities and associated reinsurance continued (b) Change in contract liabilities, net of reinsurance, recognised as an expense The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown on the income statement (note 7), to the change in insurance liabilities recognised as an expense in the relevant movement tables in the following notes. 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, 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 insurance liabilities (note 42(b)(iii)) 7,336 (1,458) 5,878 Change in provision for outstanding claims 471 (22) 449 7,807 (1,480) 6,327 General insurance and health Change in insurance liabilities (note 42(c)(iv) and 46(c)(ii)) 852 (259) 593 Change in provision arising from liability adequacy tests (12) — (12) Less: Unwind of discount (11) 8 (3) 829 (251) 578 Total change in insurance liabilities 8,636 (1,731) 6,905 Less: Change in insurance liabilities from discontinued operations (515) 250 (265) Total change in insurance liabilities from continued operations (note 7) 8,121 (1,481) 6,640 £m Reinsurance £m Net £m
Long-term business Change in insurance liabilities (note 42(b)(iii)) 6,600 (1,030) 5,570 Change in provision for outstanding claims 4 (8) (4)
220 (84) 136 Total change in insurance liabilities 6,824 (1,122) 5,702 Less: Change in insurance liabilities from discontinued operations (390) 358 (32)
Long-term business Participating insurance liabilities 44,725 47,344 Unit-linked non-participating insurance liabilities 14,061 14,707 Other non-participating insurance liabilities 76,623 69,131 135,409 131,182 Outstanding claims provisions 2,643 2,187
At 31 December 2020 this liability is £8 million (2019: £nil) for life operations.
Carrying amount at 1 January 131,182 125,829 Liabilities in respect of new business 8,982 6,988 Expected change in existing business (6,293) (6,452) Variance between actual and expected experience (378) 3,212 Impact of operating assumption changes (783) (961) Impact of economic assumption changes 5,531 3,766 Other movements recognised as an expense1 277 47 Change in liability recognised as an expense (note 41(b)) 7,336 6,600 Effect of portfolio transfers, acquisitions and disposals2 (4,707) — Foreign exchange rate movements 1,510 (1,775) Other movements3 88 528
Carrying amount at 31 December 135,409 131,182 1 Other movements recognised as an expense during 2020 relate primarily to recognition of additional reserves related to with-profits legacy guarantees. Additional contributions from a special bonus distribution to with-profits policyholders and provisions for legacy unclaimed assets broadly offset by model changes in UK Life, Ireland and Singapore. The movement in 2019 relates to: a special bonus distribution to with-profits policyholders and model changes in UK Life; the reclassification of health liabilities in Singapore; and methodology changes in Ireland.
UK; • Variance between actual and expected experience of £(0.4) billion, which was mainly due to lower than expected equity returns in the UK,
Motor 4,678 1,298 5,976 4,836 1,115 5,951 Property 2,117 430 2,547 1,823 155 1,978 Liability 1,940 1,440 3,380 1,864 1,277 3,141 Creditor 2 1 3 5 6 11 Other 280 198 478 303 119 422
The gross outstanding claims provision before discounting was £12,546 million (2019: £11,801 million). Details of the range of discount rates used along with other material assumptions are available (see note 43(b)).
(iv) Movements in general insurance and health claims liabilities The following changes have occurred in the general insurance and health claims liabilities during the year: £m
Claims payments made in the period, net of recoveries (6,130) (6,765) Unwind of discounting 11 14
Carrying amount at 31 December 12,384 11,503 1 The movement during 2020 relates to the disposal of the Singapore business.
Key elements of the development of prior accident year general insurance and health net provisions during 2019 were: • £134 million release from the UK due to favourable claims experience in personal and commercial motor partly offset by a strengthening in commercial property and a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (for further details see note 43); • £58 million release from Canada primarily due to favourable claims experience on personal and commercial motor and large reinsurance recoverable on two catastrophe events from August 2018 in personal and commercial property lines; and
Gross cumulative claim payments At end of accident year (3,420) (3,055) (3,068) (3,102) (2,991) (3,534) (3,517) (3,769) (3,617) (3,240) One year later (4,765) (4,373) (4,476) (4,295) (4,285) (4,972) (4,952) (5,239) (4,986) Two years later (5,150) (4,812) (4,916) (4,681) (4,710) (5,435) (5,388) (5,681) Three years later (5,457) (5,118) (5,221) (4,974) (4,997) (5,781) (5,699) Four years later (5,712) (5,376) (5,467) (5,244) (5,198) (6,020) Five years later (5,864) (5,556) (5,645) (5,406) (5,364) Six years later (5,978) (5,635) (5,739) (5,507) Seven years later (6,032) (5,718) (5,785) Eight years later (6,078) (5,756) Nine years later (6,101)
Estimate of gross ultimate claims At end of accident year 6,428 6,201 6,122 5,896 5,851 6,947 6,894 7,185 6,979 6,896 One year later 6,330 6,028 6,039 5,833 5,930 6,931 6,796 7,175 6,935 Two years later 6,315 6,002 6,029 5,865 5,912 6,864 6,756 7,220 Three years later 6,292 5,952 6,067 5,842 5,814 6,817 6,751 Four years later 6,262 6,002 6,034 5,772 5,785 6,836 Five years later 6,265 5,979 5,996 5,756 5,760 Six years later 6,265 5,910 5,956 5,735 Seven years later 6,223 5,902 5,950 Eight years later 6,205 5,895 Nine years later 6,213
Estimate of gross ultimate claims 6,213 5,895 5,950 5,735 5,760 6,836 6,751 7,220 6,935 6,896 Cumulative payments (6,101) (5,756) (5,785) (5,507) (5,364) (6,020) (5,699) (5,681) (4,986) (3,240)
Net cumulative claim payments At end of accident year (3,300) (2,925) (2,905) (2,972) (2,867) (3,309) (3,483) (3,718) (3,565) (3,090) One year later (4,578) (4,166) (4,240) (4,079) (4,061) (4,591) (4,843) (5,117) (4,873) Two years later (4,963) (4,575) (4,649) (4,432) (4,452) (5,012) (5,255) (5,514) Three years later (5,263) (4,870) (4,918) (4,720) (4,725) (5,329) (5,560) Four years later (5,485) (5,110) (5,159) (4,973) (4,919) (5,564) Five years later (5,626) (5,289) (5,324) (5,132) (5,085) Six years later (5,740) (5,371) (5,417) (5,222) Seven years later (5,798) (5,439) (5,459) Eight years later (5,842) (5,488) Nine years later (5,868)
Estimate of net ultimate claims 5,961 5,607 5,612 5,449 5,469 6,335 6,560 6,983 6,729 6,378 Cumulative payments (5,868) (5,488) (5,459) (5,222) (5,085) (5,564) (5,560) (5,514) (4,873) (3,090) 990 93 119 153 227 384 771 1,000 1,469 1,856 3,288 10,350 Effect of discounting (89) 1 (1) 2 — — — — — — — (87) Present value 901 94 118 155 227 384 771 1,000 1,469 1,856 3,288 10,263 Cumulative effect of foreign exchange movements — 1 5 7 17 59 (4) (9) (2) 16 — 90 Effect of acquisitions 3 5 7 7 15 30 31 — — — — 98 Present value recognised in the
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 more than 10 years ago. The undiscounted claim provisions, net of reinsurance, in respect of this business at 31 December 2020 were £87 million (2019: £88 million). The movement in asbestos and environmental pollution liabilities in the year reflects a reduction of £11 million due to favourable claims development, claim payments net of reinsurance recoveries and foreign exchange movements.
43 – Insurance liabilities methodology and assumptions (a) Long-term business The main method used for the actuarial valuation of long-term insurance liabilities is the gross premium method which involves the discounting of projected future cash flows. The cash flows are calculated using the contractual premiums payable together with explicit assumptions for investment returns, discount rates, inflation, mortality, morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience with an allowance for prudence.
The methodology and assumptions described below relate to the UK and France insurance businesses only.
For unit-linked and some unitised with-profits business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows using prudent assumptions and on the assumption that future premiums cease, unless it is more onerous to assume that they continue.
Discount rates Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by making a deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. For equity release assets, the risk allowances are consistent with those used in the fair value asset methodology (see note 24). A further margin for risk is then deducted for all asset classes.
Assurances Life conventional non-profit 0.5% 0.5% to 2.1% Pensions conventional non-profit 0.5% 0.6% to 1.6%
Annuities Conventional immediate and deferred annuities 0.5% to 1.5% 0.9% to 2.3%
Non-unit reserves on unit-linked business Life 0.4% 0.9% Pensions 0.5% 1.1%
The valuation discount rates are after a reduction for risk, but before allowance for investment expenses. For annuity business, the allowance for risk comprises long-term assumptions on a prudent basis 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 (including overseas government bonds and structured finance assets), mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets), and equity release equated to 46 bps, 35 bps, and 118 bps respectively at 31 December 2020 (2019: 45 bps – 47 bps, 31 bps – 35 bps, and 124 bps respectively).
For the largest portfolio of pensions annuity business, the underlying mortality assumptions for males are 105.2% of PMA08 HAMWP adjusted (2019: 105.4% of PMA08 HAMWP adjusted) with base year 2008; for females the underlying mortality assumptions are 102.7% of PFA08 HAMWP adjusted (2019: 99.5% of PFA08 HAMWP adjusted) with base year 2008.
Improvements are based on ‘CMI_2019 (S=7.25) Advanced with adjustments’ (2019: ‘CMI_2018 (S=7.25) Advanced with adjustments’) with a long-term improvement rate of 1.5% (2019: 1.75%) for males and 1.5% (2019: 1.5%) for females, both with an additional improvement for prudence of 0.5% (2019: 0.5%) to all future annual improvement adjustments. The CMI_2019 tables have been adjusted by adding 0.25% (2019: 0.25%) and 0.35% (2019: 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_2019 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). The tapering approach is unchanged from that used at 2019. In addition, on a significant proportion of individual annuity business, 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.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities methodology and assumptions continued (a) Long-term business continued With-profits business The Group’s UK with-profits funds are evaluated by reference to FRS 27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. This uses an approach of calculating the realistic liabilities for the contracts. The realistic liabilities include the with-profits benefit reserve (WPBR), and an additional provision for the expected cost of any guarantees and options in excess of the WPBR.
Future regular bonuses Annual bonus assumptions for 2021 have been set consistently with the year-end 2020 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 43 – Insurance liabilities methodology and assumptions continued (a) Long-term business continued (ii) France The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.
H_AVDBS, F_AVDBS, Life assurances 0% to 4.5% 0% to 4.5% H_SSDBS, F_SSDBS Annuities 0% to 1.5% 0% to 1.5% TGF05/TGH05
Reinsured London Market business 0.0% to 1.5% 0.8% to 2.2% 9 years 9 years Latent claims 0.0% to 1.2% 0.8% to 2.2% 9 to 11 years 10 to 12 years Structured settlements -0.4% to 2.3% -0.2% to 2.7% 11 to 35 years 11 to 35 years
The discount rate that has been applied to latent claims reserves, structured settlements and reinsured London Market business is based on the swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 9 and 11 years depending on the geographical region.
At 31 December 2020, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £130 million (2019: £120 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business.
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 considers the latest available market information and studies and how these might impact Aviva’s liabilities.
44 – Liabilities for investment contracts This note analyses our gross liabilities for investment contracts by type of product and describes the calculation of these liabilities.
(b) Group practice Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer and are therefore treated as financial instruments under IFRS.
Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology for long-term business liabilities (see note 43). 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 the IFRS 17 insurance standard, which is expected to apply to annual reporting periods beginning on or after 1 January 2023.
For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 30 and the deferred income liability is shown in note 54.
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 2020 of £7.0 billion is due to higher bond and gilt values as a result of lower interest rates and increases in US and Japanese equity markets; partially offset by decreases in UK and European equity performance. In addition more UK pension policies have remained in force due to increased pensions freedoms.
Strategic report Governance IFRS financial statements Other information 45 – Financial guarantees and options This note details the financial guarantees and options inherent in some of our insurance and investment contracts.
As a part of their operating activities, various Group companies have provided guarantees and options, including investment return guarantees, on certain long-term insurance and fund management products.
(i) Guaranteed annuity options The Group’s UK non-profit funds have written contracts which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. Provision for these guarantees do not materially differ from a provision based on a market-consistent stochastic model, and amounts to £76 million at 31 December 2020 (2019: £82 million).
The material guarantees and options relating to this provision are: (i) Maturity value and death benefit guarantees Significant conventional and unitised with-profits business have minimum maturity (and in some cases death benefit) values reflecting the sum assured plus declared annual bonus. 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 retail price index (RPI) or consumer price index (CPI).
(iii) Guaranteed annuity options The Group’s UK with-profits funds have written individual and group pension contracts which contain GAOs, where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities.
(iv) Guaranteed minimum pension 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.
(c) Ireland Guaranteed annuity options and guaranteed maturity values As in the UK, the Group’s with-profits liabilities in Ireland are measured on a realistic basis, including realistic liabilities for guarantees and options. Guarantees and options in Ireland include GAOs, minimum maturity values on conventional with-profits business, guaranteed minimum bonus rates on unitised with profits business, and a ‘no MVR’ guarantee that may apply at certain policy anniversaries.
Strategic report Governance IFRS financial statements Other information 45 – Financial guarantees and options continued (d) France Guaranteed surrender value guaranteed minimum bonuses and options Aviva France has written a number of contracts with a guaranteed surrender value and guaranteed minimum bonuses. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, ‘Provision pour Aléas Financiers’ (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at full year 2020 (2019: no PAF was established).
Non-AFER contracts with guaranteed surrender values had liabilities of £11 billion at 31 December 2020 (2019: £11 billion) and all guaranteed annual bonus rates are between 0% and 4.5% (2019: 0% to 4.5%). For non-AFER business the accounting income return exceeded guaranteed bonus rates in 2020 (2019: the accounting income return exceeded guaranteed bonus rates).
(e) Italy Guaranteed investment returns and guaranteed surrender values The Group has written contracts containing guaranteed investment returns and guaranteed surrender values in Italy. Traditional profit-sharing 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. New business has a minimum guaranteed return of 0% applicable at certain policy anniversaries. 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 and IFRS 4.
Long-term business Insurance contracts 7,176 6,369 Participating investment contracts 1 1 Non-participating investment contracts1 3,860 4,006
Total 13,338 12,356 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.
Of the above total, £12,048 million (2019: £10,943 million) is expected to be recovered more than one year after this statement of financial position.
Carrying amount at 1 January 10,376 9,846 Assets in respect of new business 1,539 954 Expected change in existing business assets (335) (185) Variance between actual and expected experience 763 274 Impact of non-economic assumption changes (150) (175) Impact of economic assumption changes 503 193 Other movements recognised as an expense1 (998) (37)
Change in assets2 1,322 1,024 Effect of portfolio transfers, acquisitions and disposals3 (731) — Foreign exchange rate movements 63 (73) Other movements4 7 (421)
3 Movements in 2020 relate to the disposals of the FPI, Hong Kong and Singapore businesses. 4 Other movements in 2019 included £(427) million of negative reinsurance assets in the UK which were reclassified form insurance liabilities to reinsurance assets following a review of the presentation of negative reinsurance assets.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the year (see note 47), together with the impact of movements in related liabilities and other non-financial assets.
Carrying amount at 1 January 1,687 1,611 Impact of changes in assumptions 81 73 Reinsurers’ share of claim losses and expenses
Reinsurers’ share of incurred claim losses and expenses 478 291 Less: Reinsurance recoveries received on claims
Reinsurance recoveries received in the year (308) (280) Unwind of discounting 8 10
The impact of COVID-19 on reinsurers’ share of incurred claim losses is estimated as £255 million. Further information on the impact of COVID-19 on general insurance and health liabilities and associated reinsurance can be found within note 59.
Strategic report Governance IFRS financial statements Other information 47 – Effect of changes in assumptions and estimates during the year This note analyses the impact of changes in estimates and assumptions from 2019 to 2020, on liabilities for insurance and investment contracts, and related assets and liabilities, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and acquired value of in-force business and does not allow for offsetting movements in the value of backing financial assets.
Assumptions Long-term insurance business Interest rates (3,831) (2,978) Expenses 111 (47) Persistency rates (31) (124) Mortality and morbidity for assurance contracts 81 (38) Mortality for annuity contracts 384 830 Tax and other assumptions 14 9 Long-term investment business Expenses 3 — General insurance and health business Change in discount rate assumptions (104) (54)
The impact of expense assumption changes on long-term business relates to the UK and Ireland, where reserves have decreased by £111 million following a review of recent experience including the expense allocations.
The impact of persistency assumption changes on long-term business relates to the UK where reserves have increased by £31 million following a review of recent experience on protection business.
The impact of change in mortality and morbidity assumptions for assurance contracts relates primarily to Singapore where prior to disposal there was a reduction in reserves of £86 million following a review of recent experience. In addition, there has been a £40 million strengthening of reserves in the UK as a result of COVID-19 partially offset by a £32 million reduction in reserves following a review of recent experience (not related to COVID-19).
In 2019 the impact of mortality for annuitant contracts on long-term business related primarily to a reduction in reserves of £799 million in the UK comprising: • Updates to base mortality to reflect recent experience for individual annuities of £81 million; • Updates to the rate of mortality improvements for individual annuities, including CMI 2018 and a change in smoothing parameter, of £410 million; • Refinements to modelling of bulk purchase annuities together with a change to base mortality, improvements and a change in smoothing parameter, of £231 million; • Refinements to modelling of enhanced annuities of £58 million; and • Other less significant movements of £19 million.
In the general insurance and health business, a negative impact of £(104) million (2019: £(54) million negative) has arisen primarily as a result of a decrease in the interest rates used to discount claim reserves for both periodic payment orders (PPOs) and latent claims.
Carrying amount at 1 January 9,597 5,949 Change in participating fund assets 2,925 9,411 Change in participating fund liabilities (1,244) (5,426) Other movements1 8 — Change in liability recognised as an expense 1,689 3,985 Effect of portfolio transfers, acquisition and disposals2 (730) — Foreign exchange rate movements 414 (337)
Long-term business technical provisions and other insurance items 2,523 1,752 Deferred acquisition costs (211) (198) Unrealised gains on investments (3,354) (2,875) Pensions and other post-retirement obligations (477) (425) Unused losses and tax credits 121 103 Subsidiaries, associates and joint ventures (19) (13) Intangibles and additional value of in-force long-term business (397) (413) Provisions and other temporary differences 53 76
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 entities 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 £920 million (2019: £1,270 million) to carry forward against future taxable income of the necessary category in the companies concerned. Of these, trading losses of £11 million (2019: £38 million) will expire within the next 20 years. The remaining losses have no expiry date.
There are no temporary differences in respect of unremitted overseas retained earnings for which deferred tax liabilities have not been recognised at 31 December 2020 (2019: £nil).
50 – 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 Other provisions primarily include amounts set aside throughout the Group relating to product governance rectification and staff entitlements.
At 1 January 29 700 729 64 577 641 Additional provisions 24 127 151 2 302 304 Provisions released during the period — (53) (53) — (57) (57) Charge to income statement 24 74 98 2 245 247 Utilised during the year (5) (200) (205) (37) (118) (155) Disposal of subsidiaries — (11) (11) — — — Foreign exchange rate movements — 2 2 — (4) (4)
Of the total restructuring and other provisions, £175 million (2019: £569 million) is expected to be settled more than one year after the statement of financial position date.
Surpluses included in other assets (note 31) 2,780 — — 2,780 2,746 — — 2,746 Deficits included in provisions (note 50) (488) (182) (76) (746) (491) (202) (77) (770)
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 Aviva Staff Pension Scheme (ASPS) via a reduction to future employer contributions for defined contribution members, which could theoretically be paid from the surplus funds in the ASPS. In the RAC (2003) Pension Scheme and Friends Provident Pension Scheme (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.
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued (a) Introduction continued A funding actuarial valuation of each of the defined benefit schemes is carried out at least every three years for the benefit of scheme trustees and members. Actuarial reports have been submitted for each scheme within this period, using appropriate methods for the respective countries on local funding bases.
(i) Movements in the scheme surpluses and deficits Movements in the pension schemes’ surpluses and deficits comprise: Fair Value of Scheme Assets £m
Remeasurements: Actual return on these assets 1,746 — 1,746 Less: Interest income on scheme assets (350) — (350) Return on scheme assets excluding amounts in interest income 1,396 — 1,396 Losses from change in financial assumptions — (1,769) (1,769) Gains from change in demographic assumptions — 43 43 Experience gains — 182 182 Total recognised in other comprehensive income 1,396 (1,544) (148)
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued (b) IAS 19 disclosures continued
Remeasurements: Actual return on these assets 1,141 — 1,141 Less: Interest income on scheme assets (479) — (479) Return on scheme assets excluding amounts in interest income 662 — 662 Losses from change in financial assumptions — (1,824) (1,824) Gains from change in financial assumptions — 165 165 Experience gains — 130 130
Employer contributions 215 — 215 Plan participant contributions 4 (4) — Benefits paid (612) 612 — Administrative expenses paid from scheme assets1 (19) 19 — Foreign exchange rate movements (44) 55 11
Net IAS 19 surplus in the schemes at 31 December 18,768 (16,792) 1,976 1 Administrative expenses are expensed as incurred. 2 Net interest income of £96 million has been credited to investment income and net interest expense of £23 million has been charged to finance costs (see note 8).
The present value of unfunded post-retirement benefit obligations included in the table above is £120 million at 31 December 2020 (2019: £118 million).
The remeasurements recognised are also a result of falling interest rates over the period; as well as an update to the corporate bond portfolio used to derive the discount rate, which reduces the liabilities under IAS 19. The impact of the change in corporate bond portfolio used to derive the discount rate is recognised as a gain from change in financial assumptions within other comprehensive income.