We help people protect what’s important to them and save for a comfortable future. We offer a wide range of insurance and savings products 2016 was a successful year despite challenging market conditions
customers in 2016 – a £3.7 billion increase on last year
Employee engagement has increased by four percentage points, and is above the financial services average1
Our global businesses are either at or above the upper quartile for customer advocacy compared to our competitors2 7.5m Registered users on our global digital platforms up 97% from 3.8 million in 2015 £450bn Assets under management‡ an increase of £59 billion on last year
We want to be a 320 year old disruptor, benefitting from the strength of our past while leading the way in digital innovation
VIEW MORE – To access supplementary digital content, simply open a QR app on your mobile device and scan the QR code. Please note that the link is provided for ease of reference only and the information in the link does not form part of the 2016 annual report and accounts.
Strategic report 02 Chairman’s statement 06 Group Chief Executive Officer’s interview 10 Key performance indicators 12 The horizon 16 Business model 18 Our strategy 30 Our people 38 Market review 54 Digital review 58 Corporate responsibility 64 Chief Financial Officer’s review 68 Risk and risk management
Other information 277 Performance review 315 Shareholder information 348 Glossary 353 Shareholder services
We have tremendous advantages as a Company: a clear strategy, a wellrespected brand, strong values and outstanding technical skills. And more than that, we have the energy and drive to make the most of them.
OUR cOmmUnITy AnD cUsTOmERs We believe in acting sustainably and responsibly, which supports our strategy and aligns with our values. We aim to reduce our impact on the environment, and increase our support to our communities and charity partners.
In 2016 we launched our three year partnership with the British Red Cross to help communities across the world prepare for, and respond to, disasters, through skills-sharing, innovation and fundraising. The Aviva Community Fund continued to make a difference to the causes that are important to our people, customers and stakeholders.
DIvIDEnD The Board proposes a final dividend of 15.88 pence per share (2015: 14.05 pence per share). This is a 13% increase and reflects the Board’s confidence in the Group’s prospects.
Read more about the net asset value and profit after tax in the CFO review on pages 64-67 1 Prior period comparatives have been restated. Refer to Note 1 on page 154 for further information.
Aviva plc Annual report and accounts 2016 chairman’s statement k E
Our values are edgy, challenging and thought-provoking. We Care More, Kill Complexity, Never Rest and Create Legacy.
5,000+ Visible LGBT Allies across six locations, showing that it’s important to spend energy being yourself, not hiding it. We also recently launched our Aviva Pride and Allies group in Toronto, Canada
Bisexual and Transgender (LGBT) network, Aviva Pride, launched its Allies Programme in 2016, so that everyone can show how important LGBT colleagues are to our success. Our photo shows our people celebrating diversity at Dublin Pride in June 2016.
L I V I N G L E G E N D S A W A R D S
Of our people believe Aviva is a place where people from diverse backgrounds can succeed (up 11 percentage points from 2015)
We’re taking a leadership position in digital insurance and this is our future. In the UK, all of our customer systems now talk to each other. That’s no mean feat and gives us a big advantage in how we serve customers in a simple and transparent way.
MW The numbers speak for themselves. Aviva is building a track record of delivery and growth. For the third year in a row we have grown operating profits, up 12% and further strengthened the balance sheet. Fund management delivered a break-out year with strong positive net flows and profits up 30%. UK Life and GI grew profits by 7% and 10% respectively, and Canada grew by 26%.
There were plenty of highlights during the year. We delivered the integration benefits of Friends Life a year ahead of schedule and secured run rate synergies of £270 million - in excess of our £225 million target. We also acquired RBC General Insurance which will increase our scale and broaden our distribution in Canada. And in Hong Kong we’re reinventing insurance for the digital age with our new joint venture with Hillhouse Capital, a leading investment management firm, and Tencent, the world’s fourth largest internet company. Together we’re going to disrupt the market.
Over the past three years we have transformed Aviva. We have fixed the balance sheet and turned around the operating performance. As we now enter the growth phase of our transformation, we have a clear strategy to deliver that growth. And we are going to accelerate how we deliver that strategy. We’ll do so by recognising that strategy alone is just not enough. To go faster and further, we need the right culture, the right way of doing things. Our values aren’t optional or incidental. They crystallise how we are going to leave behind anything that holds us back, by killing complexity and making sure the customer is at the heart of our thinking.
We have two enviable advantages: our brand and customer base. But to become the successful digital disruptor that we want to be, we need much more than excellent insurance and finance people. We also need data scientists, innovators, entrepreneurs and start-up magicians.
Whatever their background, our digital people have a real passion for delivering excellent customer experience and are choosing to be part of an organisation that is disrupting its industry.
In 2017, we announced that we are bringing together our UK insurance businesses – life insurance, general insurance and health insurance – under Andy Briggs, who becomes CEO UK Insurance1. We have also strengthened our international focus, with Maurice Tulloch becoming CEO International
We will keep transforming our business for the digital age, to make it simple and convenient for our customers. To do this, we will continue to transform our culture. We’ve made great strides. 78% of our people believe, understand and agree with our strategy. But I want us to have the mentality and agility of a start-up combined with the prudence, risk management and discipline of an established business. With the right culture, we can fundamentally change the world of insurance.
To our people, I say thank you. You’ve achieved a tremendous amount. But I’m relying on you to do a whole lot more. 2017 is going to be a year of change – exciting, innovative change.
And to our customers, I say thank you for putting your trust in us. You are the reason we’re in business. We are here to help you defy uncertainty in this uncertain world.
mark Wilson Group Chief Executive Officer operating profit‡2 up 12% to £3,010m (2015: £2,688 million1)
Being a True Customer Composite means we can build deeper relationships with customers. MyAviva gives us the right tool to deliver what they expect, a simple and effortless digital experience – whatever they’re buying. Nothing is more annoying than being asked the same questions again and again. Our customers want us to save them time as well as money. So our plan is to ask customers questions – once. With the right systems in place, we can use data more intelligently, to offer a pre-underwritten and pre-approved quote. It’s a fundamentally different way of thinking. Customers are more likely to buy additional products with us because we know them better and can meet their needs better. What’s our long-term goal? To go from Ask it Once to Ask it Never – so customers don’t have to answer any questions at all.
` Build and deepen engagement with our customers by increasing registrations on MyAviva
` Continue to reallocate capital to focus on what we do best and drive higher returns
` Further develop our leaders across Aviva through greater innovation, agility and accountability
For our key metrics, we have: ` Increased operating profit‡ by 12%1 to £3,010 million2. Operating earnings per share‡ increased 3%1 to 51.1p2
` Increased total dividend per share by 12% to 23.30 pence
` Delivered a strong Solvency II capital position with a Solvency II cover ratio‡ of 189%3 up 9ppts
For the acquisition of Friends Life, we have: ` Delivered the integration benefits a year ahead of schedule
` Secured run rate synergies of £270 million – in excess of our £225 million target
` Agreed a new digital insurance joint venture in Hong Kong with Hillhouse and Tencent
Not Everywhere: ` Sold our Ireland Health business and announced the sale of Antarius in France
` Diversified and strengthened distribution with the RBC General Insurance acquisition in Canada
` Launched the GROW portal to help our people develop new skills
` Supported 1,600 community projects 1 Prior period comparatives have been restated. Refer to note 1 on page 154 for further information. 2 The adverse impact of the change in the Ogden rate of £475 million is an exceptional item and therefore not recognised within operating profit. Please refer to the CFO review on pages 64-65 for further information.
Our Net Promoter Score® (NPS) measures the likelihood of a customer recommending Aviva. Our 2016 relationship survey scores have improved slightly compared to 2015, with seven of our 12 markets2 (58%) measured being ahead of the competition. Our overall global Net Promoter Score® improved by three points to +13 and is in line with our competitors. There is still more to do and we are committed to putting customers first and improving their experience.
We are carbon neutral. We’ve reduced the level of carbon emissions (CO2e) from our day-today operations by 46% since 2010.
In the UK alone we installed solar panels to generate renewable electricity, replaced over 250,000 lightbulbs with LED equivalents and reduced water consumption per tap in our bathrooms and kitchens by 80% during 2016. CO2e data includes emissions from our buildings, business travel, water and waste to landfill.
Long-term target Carbon emissions reduction target of 50% by 2020 and 70% by 2030
We use a range of financial and non-financial metrics to measure our performance, financial strength, customer advocacy, employee engagement and impact on society1
Overall, operating profit‡ increased 12% to £3,010 million which includes an additional quarter’s contribution from Friends Life, six months results from RBC General Insurance acquired in July 2016 and a favourable foreign exchange impact of £141 million. This excludes the impact of the change in the Ogden discount rate of £475 million, which is treated as an exceptional non-operating item.
The combined operating ratio (COR)‡ is a measure of general insurance underwriting profit. The lower the COR is below 100%, the more profitable we are. COR is 101.1% including the impact of the change in the Ogden discount rate. Excluding the Ogden rate change, COR increased 0.6 percentage points to 95.2%, reflecting the new HomeServe partnership agreement and the Flood Re Levy in the UK, partly offset by better weather experience and claims cost saving initiatives.
Sustainable cash remittances‡ from our businesses are a key financial priority. The increase in cash remittances included £250 million from the Friends Life integration and a contribution of £130 million from our Canadian business. This was partly offset by lower remittances from UK General Insurance, as cash was used to fund an increase in the internal reinsurance arrangement.
1 2015 numbers include Friends Life from 10 April 2015. 2014 numbers are Aviva stand-alone.
3 Restated to reflect a new methodology used to measure employee engagement in 2016.
Our strategic framework responds to and anticipates the seven long-term trends which will impact our industry over the next few years. We acknowledge the risks they present but aim to turn these trends into opportunities for future growth.
Banking app logins a day during 2015 in the UK – up 50% on the previous year 11m Source: Way we Bank Now, BBA, June 2016
Number of vehicles in use globally with built-in telematics by 2025 430m Source: Navigant Research Newsroom, October 2016
Government influence is reducing as the role of ‘communities’ of mutual interests and connected networks, both virtual and local, increases
For more information on our role in society, see pages 58-61.
Daily active Facebook users on average 1.23bn Source: facebook.com, stats, December 2016
Changing climate and extreme weather events will have a significant impact on both society and business
For more information on our response to climate change, see pages 58-61.
For more information on how we allocate capital, see pages 28-29.
People will live longer and be healthier. Markets will be driven increasingly by attitudes and needs as family structures evolve
Active Fitbit users as at 31 December 2016 23.2m Source: Fitbit, press release, January 2017
Our goal at Aviva Investors is to use our international reach and expertise to solve our clients’ problems, most notably with the AIMS range of funds. These are totally focused on meeting customers’ needs – that’s especially important in an uncertain world. Aviva Investors CEO, Euan Munro, thinks Aviva Investors is the one to watch in 2017 –
C A R I N G A B O U T O U R C U S T O M E R S
C U S T O M E R - F I R S T A D V I C E I N S I N G A P O R E
In Singapore, lions are considered auspicious. So when a business opens, the way to get it off to a great start is to have a lion dance. We think Aviva
Financial Advisers, launched in August 2016, can be pretty auspicious too for our customers. Our service promotes independence and customer-first advice on a wide range of insurance and investment services to meet their needs.
We have a distinctive approach. It defines and differentiates us. It helps us meet our customers’ needs…
Our strategic framework focuses on the things that really matter and puts the customer at the heart of everything we do. It provides clear direction across all our markets for how we run our business
We put Digital First. This is how we will capitalise on being a True Customer Composite.
WHY IT’S IMPORTANT Operating as a True Customer Composite means we can help our customers protect what’s important to them and save for a comfortable future. We understand that customers have a wide range of insurance, protection and savings needs, and can find it challenging to manage them all.
Furthermore, True Customer Composite means valuing and rewarding customers for making the choice to have a deeper, more loyal relationship with us.
In the past, although the financial benefits of our composite model were clear (such as lower capital requirements through diversifying our risk), the operational benefits were more elusive. Very few customers held more than one Aviva product because our business was distributed almost solely through intermediaries.
If customers are not relying on intermediaries to analyse their needs and recommend a suitable package of products, they could find themselves managing multiple products from different providers. This is not what customers tell us they want: what they want is a simple way to meet their insurance and savings needs.
By the end of 2016, we had a total of 7.5 million customers registered on our global digital platforms compared to 3.8 million at the start of the year.
We have also been making progress on True Customer Composite in other areas. In Singapore we launched Aviva Financial Advisers, a fully-owned financial advisory firm providing customers with financial solutions across life, health, general insurance and investments.
In the UK, we announced a new partnership with TSB, distributing our ‘Pick and Protect’ modular home insurance both digitally and through TSB branches. ‘Pick and Protect’ breaks down traditional home insurance, allowing TSB customers the flexibility to tailor cover for their own insurance needs.
In Italy, we have seen strong sales via our bank and IFA partners of our hybrid savings product, generating €660 million of premiums to outpace the market in 2016. This provides customers with an efficient medium/ long-term investment solution with lower volatility and the option of life and illness protection.
In Spain we launched an online service for our life protection customers to encourage healthy living, physical activity and nutrition.
Of course, our aim is always to get it right for our customers. But sometimes we don’t. Our objective is to fix any issues as quickly as possible, so that we restore the level of service our customers rightly expect.
GOOD THINKING Aviva’s global brand strategy “Good Thinking” supports our True Customer Composite and Digital First ambitions by placing the customer firmly at the heart of our business. The essence of the idea is “everything we do is full of good thinking for you”.
WHAT WE PLAN TO DO NEXT As part of “Good Thinking”, we will continue to develop new propositions for customers in the UK, including home insurance and services for small and medium-sized enterprises. We will extend MyAviva to more countries, as part of our Digital First strategy, which includes creating a common approach to customerfacing digital developments.
To accelerate our strategy for growth and provide a simple, more convenient and better value service to our customers, we are bringing together our UK insurance businesses - life insurance, general insurance and health insurance – all under one roof.
We aim to broaden our offering of accident and health products across several Aviva markets. This will be underpinned by our Digital First strategy which is the key to unlocking the benefits of the True Customer Composite.
Likely to consider Aviva for other products, compared to 52% of non-digital customers 1 GfK Annual Relationship Survey, 2016. The Net Promoter Score® (NPS) is a measure of the likelihood to recommend (brand) to a friend or colleague.
M A K I N G D I G I T A L E A S Y F O R E V E R Y O N E
W E C H A T , Y O U S A V E
In China, WeChat, a leading messaging platform, is part of people’s everyday lives and is used by 850 million people. With our partner COFCO, we’ve set up a savings account available on WeChat called
Aviva #Uncut is a great way to help build a culture in which we have open, transparent, challenging conversations and do better for our customers. One of our senior managers is filmed answering any question without any warning and streamed live to our people. It’s a great way to ask burning questions
Digital remains crucial to our True Customer Composite strategy. We put Digital First because our customers are increasingly choosing this as their preferred way to deal with us.
Digital First helps make being a True Customer Composite central to a new relationship with customers. It builds on our understanding of how customers want to use our products in a digital world.
Our Digital Garages in London, Singapore and Canada act as catalysts for digital innovation, where creative minds from across Aviva and the industry collaborate to turn innovative ideas into real products and services for our customers.
We also look to find and apply new ways of doing business, and we are working in partnership with a range of new and existing players in the digital space.
Our Digital Garages act as catalysts for digital innovation – turning innovative ideas into real products #Aviva2016
Chris Wei / Executive Chairman, Asia & FPI and Global Chairman, Aviva Digital
Let’s face it, business is full of jargon and confusing words. We already Kill Complexity through our jargon buster on www.aviva.co.uk. Now we’ve gone one step further, with Amazon’s voice-activated assistant, Alexa, providing people with more than 300 insurance terms and their definitions. We’re the first UK insurer to deliver a Skill for Alexa and it’s a new way for our customers to interact with us. So if you don’t know your no claims discount from your accidental damage cover, just ask Alexa!
Online satisfaction tool shows three quarters are very happy with their online experience
Aviva Ventures investment £100m We’ve committed to a total investment of up to £100 million through Aviva Ventures by 2020
We want to reinvent insurance for the digital age; to make it as simple, convenient and accessible as possible for our customers, and challenge traditional distribution, selling and marketing methods. Our new joint venture in Hong Kong aims to do just that. Our partners, Hillhouse and Tencent, have tremendous investment and digital expertise. Together we want to shake up the Hong Kong insurance market, which currently relies on expensive intermediaries, by offering a superior digital solution so that insurance fits with our customers’ lives and meets their needs.
Aviva Ventures is our corporate venture capital fund. It looks for cutting edge tech start-ups that can help shape the future of insurance and invests in them. In 2016 it went global. First came London, then Canada, and finally Singapore. We have partnered with businesses like Cocoon (above) – which uses smart tech to deliver next generation home security. We’ve also announced partnerships with Opun, AppyParking and Founders Factory.
We want to be a 320 year old disruptor. Our aim is to deliver outstanding customer service in a simpler and more cost-effective way – through digital channels. To achieve this, we are bringing together our experts and encouraging them to break the insurance industry’s traditional way of doing things. To help our teams collaborate, focus on customers’ needs, think bigger and work differently, we’ve created dedicated digital spaces. Aviva Canada recently opened their Digital Garage in Toronto, joining our Garages in London and Singapore and spaces in our offices in Paris, Warsaw, Bristol and Norwich.
Scan to see Mark Wilson talking about our portfolio of businesses
But Not Everywhere is also about capital allocation – something we see as a competitive sport at Aviva. We allocate capital to the markets, businesses and products that offer the most attractive returns, looking at it through three lenses: strategic, financial and execution.
NOT EVERYWHERE IN PRACTICE We completed the acquisition of RBC General Insurance in Canada. It strengthened our market position, increasing profit and providing consumers with improved choice about how they access insurance solutions.
We focus on delivering our strategic ambitions and providing solutions to meet our customers’ needs
It’s about being clear what not to do, so we can focus and invest in what we do best
Can we deliver it? We ensure outcomes can be delivered with a high degree of confidence and that the risks are manageable and understood
To disrupt insurance, we must transform our culture. with the right culture, Aviva will be agile, innovative and visionary. we will delight and serve our customers brilliantly.
We employ around 29,500 people globally and are particularly proud to support the regional economies in our home market, where we employ more than 16,000 people across the UK.
OUR STRATeGY Our global people strategy sets out how we will accelerate our performance from the inside out. We will: � Focus on our customers by connecting the day-to-day activities of our people with our purpose; � Give our people the freedom to act in line with our values, particularly paying attention to Kill Complexity; � Make leadership a way of life so all our people contribute to delivering our strategy, think independently and inspire high performance; � Create an inclusive and diverse environment so that everyone can be themselves; and
GROW is our new online learning and career portal, which we piloted in Canada. It brings together the tools and resources people need to do their jobs, develop their career and ultimately fulfil their potential. It features details of secondments and job opportunities across the world, essential learning and skills pathways for our people in underwriting and claims. We’ve had almost 11,000 hits since its launch in September 2016. In 2017, we’ll add user-generated content and map out more skills pathways for our people. GROW will also be available on all devices, including mobiles, to make it accessible and convenient.
Our people are more positive than last year on a wide range of areas, but there’s more we can do #Aviva2016
We will develop outstanding digital capability and agile work practices to disrupt the industry, encourage creative problem-solving, speed and flexibility, with a philosophy of test and learn.
Leadership We will reinvent the way we identify, select, develop and motivate leaders to inspire our people to create breakthroughs for our customers and foster an inclusive work environment.
Agile communications We launched Aviva #Uncut in 2016, where our senior leaders are streamed live on a weekly basis answering any question, from anyone, anywhere about anything.
KILL COMPLEXIT Y We can list our priorities on one hand, picking a few things to do brilliantly. We make the call with the right information. We join forces and build it once.
NEVER REST We fail fast and learn fast, testing and learning at pace. We embrace digital. We are dissatisfied with the way things are done now. We challenge ourselves to learn about the cutting edge and harness it. We get it done at pace.
Becoming a more inclusive and diverse organisation is a business imperative. Jan Gooding, our Global Inclusion Director, also chair of LGBT equality charity Stonewall, is leading the agenda. In 2016, gender diversity was a big focus for us. Mark Wilson, Group CEO, was the first FTSE 100 CEO to sign up to the Executive Committee commitment outlined by the 30% Club - a commitment for 30% of our Group Executive to be women by 2020. We want to achieve inclusion through leadership, developing leaders and visible role models across Aviva who embody and exemplify inclusive diversity. For example, we’ve launched our Accelerating Leadership from the
We will hardwire inclusion into everything we do to allow our people to do their best work
CREATE LEGACY: Damian Cross, UKGI, for helping our flood customers and his work with the Department for Environment, Food and Rural Affairs
As we focus on our growth and digital agenda, employees shared strong alignment on how we achieve this – with 57% requesting simpler systems and processes and 41% requesting greater collaboration and cross team working. Action planning is taking place at a global level and in every large team to address this alongside responding to the local feedback and results.
However, we recognise there is more to do to transform our culture and this is a focus in 2017.
HEALTH AND WELLBEING We help our people blend the demands of work and home through initiatives like our new maternity policy in Asia and time off for parents when their children start school. We’re also transforming the workplace. In Poland, we are piloting a new office environment as well as the opportunity to work flexibly up to four days a week.
OUR PLANS FOR 2017 Culture, leadership and developing digital capabilities are high priorities for us as we transform our business. We have mapped out how we will accelerate Aviva’s transformation into a company that puts the customers at the centre of everything we do and in which our people can deliver in an innovative and simple way.
� Socio-economic mobility: making sure that development and growth are open to all regardless of social background.
5,000 visible lesbian, gay, bisexual and transgender (LGBT) Allies in the UK, and we are establishing it in Ireland and Canada. The Aviva Pride Allies programme has significantly raised the profile of Aviva Pride and issues still affecting the LGBT community.
Knowing about natural disasters in advance can be a matter of life and death – and certainly means you’re better prepared to withstand them. Our
We’ve all got busy lifestyles – so it’s often hard to make sure you eat well and exercise properly. Our online service for our life protection customers in Spain provides a wealth of information on getting healthy and staying healthy –
The UK is our home market – and the third largest in the world. We have 15 million customers and a compelling competitive advantage as a True Customer Composite. We are investing and growing in the UK.
Our health business is a leading provider of private medical insurance, winning health insurer of the year at the Health Insurance Awards for the seventh year running in 2016.
AB Digital will help us deliver the benefits of the composite model for our customers. We have moved our UK motor insurance business from being mainly via brokers towards a digital platform. We’re already writing close to £1 billion of digital business through brands like Quotemehappy. But we can do more
And because we have a whole variety of information about them we can easily and conveniently pre-populate quotes for other products and services too.
Secondly, putting Digital First gives us the means to create new propositions for customers, not least by linking up different services. For instance, we are linking up
Andy Briggs / Chief Executive Officer, UK Insurance1 Subject to regulatory approval.
health and wellness services to our protection products. Customers want to stay healthy and we can help them do so.
Life ahead of plan, ahead of schedule, with greater run rate synergies than we originally said.
We see decent growth over the next decade. The fundamental drivers for our business – an ageing population, digital and auto-enrolment – are all the same.
We’ll also continue to innovate for customers, for instance by protecting them against new threats such as cyber security which is increasingly important in this digital age.
AB Our purpose is to help people Defy Uncertainty – and to be there for customers in uncertain times. And the world got a whole lot more uncertain in 2016. We have a real opportunity and responsibility to help our customers look to the future with confidence.
Gill’s niece told her about equity release – a lifetime mortgage on her home – and recommended Aviva. We were delighted to help.
Equity release has given Gill a whole new freedom. She’s bought a new car so it’s easier to get out and about and enjoy life and she’s having some essential repairs done to the roof of her home. Gill said that “equity release has dramatically changed my life for the better”.
We have competitive advantages through the strength of our balance sheet, cost efficiencies, and being a composite with a strong brand.
In Ireland, we continue to grow our annuity and long-term savings business, progressing towards being the provider of choice, winning the “Innovation in Pensions” award for the third year running at the Irish Pension Awards.
We are also a leading supplier of services to the corporate marketplace. We offer pensions, protection, flexible benefits packages and bulk annuity propositions to both large and small companies, having the largest bundled workplace (defined contribution pensions) business4 (£61 billion assets) in the UK.
FINANCIAL PERFORMANCE During the year, UK and Ireland Life operating profit increased by 7% to £1,555 million (2015: £1,455 million5). In the UK, operating profit has increased to £1,523 million (2015: £1,431 million5), benefiting from an additional quarter of contribution from Friends Life and integration synergies. Growth in protection, long-term savings and individual annuities was partly offset by lower bulk purchase annuity (BPA) volumes and investment in digital. Ireland operating profit has increased to £32 million (2015: £24 million) as we continue to grow market share.
Financial advice Launched Aviva Financial Advice Service - our new retirement focused in-house advice service.
UK and Ireland Life VNB increased by 11% to £695 million (2015: £625 million). UK Life VNB increased to £671 million (2015: £609 million). UK VNB has benefitted from an additional quarter of Friends along with continued momentum in long-term savings, increased volumes in individual protection and individual annuities, partly offset by lower sales of BPAs.
Welcome Friends customers Transferring the Friends Life customers’ policies to the Aviva brand and welcoming them to the wide range of Aviva services and products.
Help businesses de-risk To support business customers wishing to reduce defined benefit (DB) pension risk from their balance sheets, we will build up and broaden our existing DB de-risking and bulk annuity capability.
1 Association of British Insurers (ABI) 9 months to end Q3 2016.
3 Equity Release Council and ABI. 4 PRA returns and Aviva analysis. 5 Prior period comparatives have been restated.
Market leading We’ve been independently voted the “Insurer of the Year” for the third year in a row – recognising our work to improve customer outcomes and be the partner of choice for intermediaries.
We want to help our customers Defy Uncertainty – not least our small business customers. We want to make things as simple and convenient as possible for them – so they can concentrate on making their business a success. So by putting Digital First we’ve got rid of all the small print and have made what’s covered as clear as possible. We’ve also protected customers against innocent underinsurance – so they’re far more likely to receive the right payment on their claim when they need it. And in another industry first, our Disclosure Guarantee means customers applying online can easily meet their obligations under the new UK Insurance Act by answering a few simple questions. Just three examples of how we take care of business – so our business customers can take care of theirs.
OVERVIEW We provide propositions to consumers, small, medium-sized enterprises (SMEs) and large businesses, with a wide range of insurance products. We have a market share of 10.9%1 in the UK and 12.3%2 in Ireland. Customers are able to access our multi-distribution footprint; digitally direct or via aggregators; over the phone; through our broker and partner relationships; or via our strategic partners.
FINANCIAL PERFORMANCE Excluding the exceptional charge associated with the change in the Ogden discount rate, UK and Ireland general insurance and health operating profit increased 10% to £471 million (2015: £430 million). Our UK underwriting result increased to £232 million (2015: £154 million), reflecting improvements in underlying performance and lower absolute weather costs. Investment return was lower mainly due to reductions in the internal loan.
In UK Health, operating profit increased to £31 million (2015: £21 million).
Electrical fires are the biggest cause of fire in the workplace, causing significant disruption. In fact, 70% of businesses that suffer from a fire do not reopen. That’s why we equip our risk consultants with thermographic cameras to help businesses protect employees from injury, property from damage and reduce unscheduled interruptions to normal trading. Thermal imaging allows then to identify any ‘hot spots’ in electrical installations, machinery and equipment, as well as issues with light fittings, water leaks and condensation. White areas denote increased temperatures that could be dangerous and therefore require further investigation.
Grow our business and deepen customer relationships by expanding our propositions in targeted markets such as Lifestyle, Home, Digital SME and Corporate Multinational.
Further digitise our interactions with customers and intermediaries across all areas of our business.
1 Verdict Financial Services 2016. 2 Central Bank of Ireland Insurance
used to fund an increase in the internal reinsurance arrangement. Our operating expenses reduced to £665 million (2015: £697 million), despite a £23 million new Flood Re Levy.
MARKET CONTEXT AND CHALLENGES Market conditions have remained competitive across our entire product range, and we expect that to continue.
We’re also reducing the number of variations of our personal lines products from 800 to 40. To keep it simple, we’re publishing guides to explain how an insurance premium is calculated and offering specialist training programmes to help our customer-facing teams recognise the needs of vulnerable customers.
International Aviva has simplified and strengthened its international focus, bringing together its insurance operations in Canada, Ireland1, France, Spain, Italy, Poland, Turkey and India1 under Maurice Tulloch, who has become CEO International Insurance
In Europe we are focusing on building leadership positions in specific segments, such as SMEs in France, Italy, Ireland and Poland. We also chose our product and customer segments carefully – and focus on areas where we can win, in line with the Group’s strategic objective of being Not Everywhere. We need to capitalise on our composite potential by offering tailored, integrated and innovative solutions to our customers.
In general insurance, we have further opportunities to improve performance and build scale in our markets.
We’re working closely with our intermediaries. In Poland, we offer a fully digital sales tool with over 90% of agents adopting it in a couple of months. We launched new ways to use social media for our agents in Poland and France and redesigned websites for agents in France, Italy and Poland.
We’re also building and enhancing our digital capabilities in France, Italy, Poland
In Canada, we have opened a Digital Garage, a new space designed to help to drive spontaneous conversations, ignite innovation and bring Digital First to life through digital, web and mobile.
MT We’re working tirelessly so customers win in an insurance market undergoing major change. We will continue to focus on transforming our businesses, to be a low cost customerfocused insurance business that puts Digital First, and reduces complexity for our customers. We have the right products in the right markets and the right people and skills to deliver our strategy.
OVERVIEW We are Canada’s second largest general insurer providing a range of personal and commercial lines products to over 2.9 million customers. We have a 10.6%1 market share and a top five position in all major provinces.
Cash remittances of £130 million were paid in 2016. In 2015, Canada retained its dividend within the business as a result of the RBC GI acquisition.
Operating expenses increased to £396 million (2015: £298 million) mainly driven by the RBC acquisition and the impact of foreign exchange movements.
MARKET CONTEXT AND CHALLENGES Insurer merger and acquisition activity has been significant over the past five years. The top five insurers currently represent around half of the overall market. This is
In our opinion, further regulatory and product reforms are necessary in the Ontario auto market to drive both costs and fraud out of the system. A panel of Canadian insurers proposed to shift the regulators’ focus from rate regulation to market conduct. We support the steps taken by the Government so far and will continue to work with them to help customers.
Successfully moved Ontario direct business from a legacy system to the new Guidewire personal lines platform. The new platform is a more automated policy management and billing system.
Invest further in our digital businesses to produce innovative digital customer experiences and propositions for our customers and broker partnerships.
FINANCIAL PERFORMANCE France delivered resilient results, despite strong headwinds in the market.
Total operating profit was £481 million (2015: £449 million), an increase of 7% but a 5% decrease in constant currency driven by increased investment in the business and weather events. Cash remittances were £185 million (2015: £252 million). Operating expenses increased due to investment required for growing and reorganising the business.
The combined operating ratio increased by 1.2 percentage points to 96.9% as a result of weather events in the first half of the year.
Our general insurance and health premiums grew by 5%1 to £1,673 million (2015: £1,410 million), a significant achievement in markets that have been either flat or reducing over the year. Our combined operating ratio marginally increased to 95.8% (2015: 95.4%) with underlying results remaining strong.
Cash remittances of £449 million were broadly stable compared to prior year (2015: £431 million).
In addition, Aviva Investors France entered into a new agreement with
MARKET CONTEXT AND CHALLENGES France is a mature and stable market with a large and well-developed insurance sector. The combination of hardening market conditions due to persistent low interest rates, lower demand for equity linked products and increased financial regulations contributed to a challenging environment. To respond to this, we reorganised our business and renewed our strategy to be aligned around our key customer segments, such as SMEs.
FINANCIAL PERFORMANCE Total operating profit was £205 million (2015: £165 million), up 10%1 with growth in both life and general insurance. Cash remittances improved to £76 million (2015: £45 million). Operating expenses increased due to investment supporting business growth. VNB improved to £124 million (2015: £79 million), with growth in all product lines including over 30% growth in sales of unit-linked versus a market that contracted by over 30%. The combined operating ratio of 92.7% (2015: 94.3%) improved by 1.6 percentage points as a result of pricing actions.
2.2m Increase in registrated users on our digital platforms across France, Poland, Italy and Turkey and introduced a suite of additional services and features for our customers and distributors.
Successfully launched a fully digital tool in Poland to facilitate sales processes of our agents. We also developed social media tools for agents in Poland and France and new agency websites in Italy and France.
1 On a constant currency basis. 2 Bank of Lithuania. 3 Pension Monitoring Center, Turkey.
OVERVIEW We provide life and pensions products to 1.1 million customers. We have strong bancassurance relationships, and operate a growing retail business.
FINANCIAL PERFORMANCE Operating profit of £107 million (2015: £92 million) was resilient despite increased pressure on savings margins from the low interest rates. VNB was higher at £42 million (2015: £31 million).
CW It’s been a year of transition for us as we reinvested into our businesses to make up for the discontinuance of the DBS bancassurance agreement at the end of 2015. By the end of the year, we were already seeing solid progress in our shift towards financial advisory and digital.
In China we’ve made real progress in developing the agency model. And in Indonesia we’re developing new distribution channels with our partner, Astra International.
Launched FuBaoBao in China which allows friends and family to celebrate key milestones in a child’s life by contributing to a savings plan for them via a social media payment platform, WeChat.
Agreed a new digital insurance joint venture in Hong Kong with Hillhouse Capital Group, a leading investment management firm, and Tencent Holdings Limited, the world’s fourth largest internet company.
CW Our future is in our hands. So we have to focus on delivering what we said we’d deliver. Having said that, it’s a volatile time in global geopolitics and that can have an impact on currency and interest rates.
FINANCIAL PERFORMANCE Life operating profit decreased to £241 million (2015: £244 million) which was driven by the discontinuance of the bancassurance agreement with DBS and continuous investment to support business growth across Asia particularly in distribution, digital and analytics capabilities. These investments together with the additional quarter of FPI impacted operating expenses which increased to £177 million (2015: £141 million).
The general insurance and health business reported a £13 million loss as a result of higher claims experience from the Singapore Health business.
No dividends were remitted to the Group during the financial year (2015: £21 million) as we continued to reallocate capital to support growth initiatives in the region.
In this rapidly evolving and highly competitive market, where distribution and technologies revolutionise at an ever faster pace, our challenge is to deliver truly unique customer propositions that help to solve our clients’ problems, and to continually improve our propositions to keep ahead.
Make the most of Group digital solutions and capabilities to deliver seamless customer and distributor experiences while improving efficiency.
Strengthen and build Generate value by strengthening our distribution platforms and building affinity models.
In a world of low interest rates and Solvency II, we provide the solutions for the Group to achieve the returns it needs. We offer winning solutions to the Group and external investors alike.
We Never Rest in scanning the horizon for new investment ideas. We’ve also made real progress in Killing Complexity. We’ve reduced the number of funds we offer without diluting our focus on delivering client outcomes. We demonstrate Care More through building world class controls and being responsible investors – engaging with companies on governance and sustainability.
We’re also Creating Legacy by building a winning culture. We’re much more outward facing now and delivering what clients need.
EM Brexit is a challenge for the whole of the UK. In fact, in the immediate aftermath of the Brexit vote, we temporarily suspended dealing in one of our daily priced commerical property funds, along with many of our competitors. While suspension was a last resort, we took this action to protect the interests of our customers and to avoid a
Aviva Investors We are a global investment management business, with £345 billion assets under management, focused on outcomeoriented solutions
MARKET CONTEXT AND CHALLENGES The last 12 months highlighted the unpredictability of markets, with political events having a sizeable impact. That is set to continue, while the era of easy returns in most asset classes – fuelled by central bank policy – is finally coming to an end.
We have to meet these challenges head on. With volatility returning to markets, it will be clear which asset managers are able to deliver good outcomes for customers, and those that can’t. For Aviva Investors, it is imperative we can prove our value to society and what we do to support economic growth and development.
OVERVIEW We are Aviva’s global asset management business with expertise in real estate, fixed income, equity, multi-asset and alternative investments. We currently invest £345 billion on behalf of our customers, spanning major markets. This gives us the size and scale to successfully seek out opportunities that will deliver specific investor outcomes.
Aviva Investors Multi-Strategy (AIMS) assets under management have continued to grow to £9.0 billion (2015: £3.0 billion). Working closely with UK Life, origination of infrastructure assets has increased by 16% to £3.3 billion. Overall net flows have continued to improve to £1.0 billion and the externalisation of the business is progressing with 32% of revenue coming from external clients.
Added to our range of outcome-oriented funds with launch of Global Equity Endurance and AIMS Fixed Income funds.
Look at further opportunities to form strategic partnerships in key overseas markets
We are focused on designing innovative and easy-to-understand solutions which meet our customers’ needs.
Customers buy products from us direct, through intermediaries and via our partnerships. We want to grow our direct business through UK Digital across the full range of our products. And regardless of how customers buy, we want to offer them the ease and convenience of managing their product online.
In 2016, the focus was on putting all of our customer information onto a single database so our customers can see all their products and services in one place. By the end of 2016, we had more than 95% of our customers on one database, giving us a single view of our customers.
Customers can now do much more on online, from changing their details, managing their investments and viewing their documents.
Redesign web Rolling out a beautifully simple new online experience across devices that is easier for customers to use and for us to maintain.
Invest in data Data is the lifeblood of our great Digital experience – we will continue to invest in the core IT infrastructure and people expertise.
CW In a year, we’ve achieved a lot. We have significantly improved the customer experience by fixing the basics and laying the foundations for disruptive innovation in 2017.
We’ve listened to our customers and fixed their pain points. They can now do much more on online, from changing their details, managing their investments and viewing their documents. We’re making it effortless for them.
We’ve already made progress, but there’s much more we can do.
The savings gap between low and high income families in the UK has grown 25% year-on-year to £62,790 in winter 2016/7. We want to help close it. Our Save Smarter Campaign challenges people to understand how they can save and live on their predicted pensions – and features informative but fun films. Take a look now at www.avivasavesmarter.co.uk.
Good ancestors do the right thing. Good ancestors make responsible, sustainable choices, and those decisions are judged over the long term
C R E A T I N G A S U S T A I N A B L E F U T U R E
The United Nations Sustainable Development Goals (SDGs) in 2015 represent a milestone in our efforts to create sustainable future. But we will only create legacy if we deliver them. We have set out ways to create incentives so that business invests and act sustainably. Our Group Chief Executive, Mark Wilson, spoke twice at United Nations events in 2016, making the case for benchmarks and sustainability league tables for business. We think what gets measured gets managed. We’re making progress but there’s a long way to go.
We all know the devastation a flood can cause – and then people can find it difficult to get affordable insurance. To help, the UK insurance industry launched a scheme called Flood Re in April 2016.
Flood Re will provide affordable home insurance to many of the estimated 350,000 of UK households at high risk of flooding, funded by an insurance levy.
In February 2016 we launched a group wide three year strategic partnership with the British Red Cross. We are investing in global disaster response and resilience, sharing our risk management expertise to help communities to be better informed, prepared, and therefore more resilient if disaster strikes. We are using our digital skills with our global mapathon and British Red Cross psychosocial training is helping us look after our customers even better in times of crisis.
Since issuing our first fire insurance policy over 320 years ago, we have never been afraid to help tackle the big issues. With current challenges such as ageing populations and climate change, our ambition needs to be bigger than at any time in our history. That is why we are using our bright ideas for the good of our customers, our communities and the world.
PUTTING CUSTOMERS FIRST Our approach always starts with the customer and to build trust we must always do the right thing for them. An example of this is the simplification of our products and services to ensure they meet our customers’ needs. In the UK, we have done this through the launch of MyAviva and in Aviva Singapore we now accept paperless death claims, reducing pay-out times from 60+ days to just three, helping to support customers when they really need it. In Poland, we talked to our customers about improving our standard communications and are rewriting them to remove any insurance jargon. We know that we are not always perfect and any complaints and feedback we receive are taken seriously and investigated thoroughly. This commitment is reflected in the customer business standard all our markets abide by (see the policies section of aviva.com/cr).
SUPPORTING COMMUNITIES In 2016, we used our expertise to give hundreds of organisations across our markets the support they need to make a difference in their local communities through the Aviva Community Fund. In 2016, we increased
I’m proud of what we’ve achieved in 2016 and am focused on ensuring we continue to build a bright and sustainable future for Aviva and our customers #Aviva2016
Our online Aviva Community Fund (ACF) shows our values of Create Legacy and Care More in action. Anyone can nominate and vote for inspirational projects in their local communities, with the winners getting funding and support. The ACF is now operating in six of our markets across the world. We’re delighted to support so many wonderful causes. The Happy Community Service in Hong Kong (above) was one of ten projects that won funding to help strengthen different aspects of local community life. Now young families in the Kwun Tong District can enjoy free family activities, helping to support their community – thanks to ACF.
Strengthening local communities Replicate the Aviva Community Fund in more markets and target 2.5 million beneficiaries and 200,000 hours of volunteering by 2020.
Customers We respect the rights of our customers by treating them fairly and ensuring their data is managed in an ethical, lawful and responsible way.
Governance We have a set of Policies, Business Standards and internal procedures which support delivery of our commitment to human rights.
Reporting We are committed to ensuring that we adequately report human rights performance according to suitable benchmarks and frameworks for financial services.
Grievance mechanisms Customers or other external stakeholders can report human rights concerns to the Group Corporate Responsibility Directorate (CR.team@aviva.com) or to Right Call (rightcall@expolink.co.uk).
In 2016 we have continued to implement the requirements of our human rights policy across the business. Additionally, as required by the UK Modern Slavery Act, we have taken steps to ensure slavery and human trafficking are not taking place in our business or supply chain.
This included risk assessing our UK suppliers, and updating supplier contract templates, our supplier code of behaviour and our business ethics code, to ensure all employees understand the role they play. We also engaged suppliers to understand their risk of modern slavery and provided training to our procurement function on this topic. For our complete modern slavery statement please see aviva.com/cr.
OUR GLOBAL COMMITMENT TO HUMAN RIGHTS COVERS: Storms during the winter of 2015/2016 had a terrible impact in parts of the North of England and the Scottish Borders. Storm Desmond saw the UK’s record for rainfall in a 24 hour period smashed and thousands of homes flooded. Aviva had over 250 claims in Carlisle alone. We were on the ground as quickly as possible to sort things out for our customers and help them access the flood resilience grants they needed. Reinstating our customers’ homes was our top priority but we’ve also made sure their homes are more resilient, so if there’s another flood they’ll be better protected. It was a moment of truth when we showed we Care More about our customers.
Our carbon footprint boundaries show the scope of the data we monitor and the emissions we offset. We report on Greenhouse Gas (GHG) emission sources on a carbon dioxide emissions equivalents basis (CO2e) as required under the Companies Act 2006 (Strategic Report and Directors’ Reports) 2013 Regulations. We also refer to the GHG Protocol Corporate Accounting and Reporting Standard, and emission factors from the UK Government’s GHG Conversion Factors for Company Reporting 2016.
* This includes Friends Life business operations for the whole of 2015. ** 2016 Assurance provided by PricewaterhouseCoopers LLP in the Independent Limited
Assurance Report to the Directors of Aviva plc in the Annual Report and Accounts *** Carbon offsetting through the acquisition and surrender of emissions units on the voluntary market.
USING DORMANT MONEY FOR GOOD Sometimes people lose track of their investments. Despite companies’ efforts to trace the owner and re-unite them with their funds, it is not always possible. Aviva has contributed our bright ideas and people to the Dormant Assets Commission to help it recommend ways for ‘dormant’ or lost funds to go to charity, whilst protecting the rights of owners to reclaim their funds at any time.
CHAMPIONING RESPONSIBLE INVESTMENT Aviva is committed to responsible investment, using our influence to support more sustainable businesses and ultimately a more sustainable economy and society. Aviva Investors is a proud founding signatory to the UN Principles for Responsible Investment. For over two decades we have focused on good stewardship, taking considered voting action and actively engaging with our holdings. We use our environmental, social and governance (ESG) insight to make better longer term investment decisions. We recognise the challenges of financing action on the Sustainable Development Goals and the particular urgency to take
Mark Wilson / Group CEO, Aviva action on climate change. We actively engage with policymakers to help unlock capital markets to deliver on these priorities.
OVERVIEW Aviva has delivered another year of progress in 2016. We have grown operating profit, significantly strengthened Solvency II capital surplus and increased cash remittances. Reflecting these financial results and in view of our confidence in the outlook for Aviva, the Board of Directors has proposed a 12% increase in our total shareholder dividend in 2016 to 23.30p.
Operating profit1 increased 12% to £3,010 million (2015: £2,688 million2). Growth in operating profit was underpinned by strong performances from UK and Ireland General Insurance, Canada and Aviva Investors, while UK Life benefitted from a full-year contribution from Friends Life and improved cost efficiency from realised integration synergies. After incorporating an increase in weighted average shares on issue arising from the Friends Life acquisition, operating EPS1 increased 3% to 51.1p (2015: 49.7p2).
Operating profit excludes the impact of the reduction in the Ogden discount rate (£475 million, 2015: nil). The Lord Chancellor’s and subsequent Chancellor of the Exchequer’s statements confirm that a consultation will be launched in the coming weeks that will allow the Government to consider the methodology for setting the discount rate. This gives rise to uncertainty with respect to the ultimate level of claims payable and we believe the volatility in our operating profit arising from the “catch up” impact on prior year claims coupled with the potential impact from a subsequent adjustment to the discount rate in 2017 or 2018 would provide a distorted view of the Group’s year to year financial performance. Our target of paying a progressive dividend with a dividend payout ratio of 50% of operating EPS for 2017 remains, and we have maintained the alignment of our dividend trajectory and operating EPS by
` Operating profit‡1 increased 12%2 to £3,010 million. We target mid-single digit increase in operating earnings per share‡ over the medium term
` Cash remittances‡ to Group - increased 20% to £1,805 million. Between 2016-2018 we will deliver £7 billion of cash remittances
1 2016 and 2015 exclude the impact from an outward quota share reinsurance agreement written in 2015 and completed in 2016 in Aviva Insurance Limited (AIL).
2 Prior period comparatives have been restated. Refer to Note 1 on page 154 for further information.
IFRS profit after tax was £859 million in 2016, down from £1,097 million2 in 2015. This includes a £380 million after-tax charge due to the reduction in the Ogden discount rate. Integration and restructure costs declined to £212 million (2015: £379 million) but remained elevated as we completed the Friends Life and RBCI integrations. Investment variances were £(381) million (2015: £(170) million). Net asset value per share rose 6% to 414p (2015: 390p2) as operating profits, foreign exchange gains and increase in IAS 19 pension surplus offset the Ogden charge, negative investment variances and higher amortisation expenses.
(2015: £519 million). These were partially offset by a modest reduction in legacy profits to £332 million (2015: £341 million) and a 51% reduction in income from other to £151 million (2015: £310 million). In Ireland, life insurance operating profit increased 33% to £32 million.
One of our values is to Create Legacy. That includes making sure our people are fit to tackle the challenges of today – and tomorrow. That’s why our Finance Future Talent programme is so important. It’s about making sure our best people in our Global Finance, Risk and Internal Audit teams are developed, engaged, retained and equipped for senior leadership roles. It’s pretty intensive; two years of four six month assignments that build experience, skills and networks across a variety of finance and control teams. They are supported by a senior mentor and external executive coaches. It’s a great opportunity – and helps Aviva make the most of our own opportunities.
5 2016 comparatives have been rebased for the reduction in the internal loan.
` investment return variances on long term business of £379 million (2015: £14 million)
Further details can be found in the “Reconciliation of group operating profit to profit for the year” in the consolidated financial statements.
Favourable foreign exchange movements of £945 million (2015: £(325) million) is due to the weakening of sterling, particularly compared to the euro and Canadian dollar.
Other net equity movements of £309 million (2015: £(113) million) includes the remeasurement of pension schemes (£242 million, 2015: £(142) million).
and general insurance. In 2016, we acquired RBCI, increasing the scale of our Canadian business and strengthening our distribution. We also established partnerships with Homeserve and TSB to expand our UK General Insurance business. We will continue to consider bolt-on acquisitions and distribution partnerships that grow operating profit and strengthen our position in core markets.
Be real about how things are going tHe aViVa aPPROacH tO gOOD
actively look for lessons and share * Number of shares as at 31 December 2016: 4,062 million (31 December 2015: 4,048 million).
Aviva plc Annual report and accounts 2016 chief Financial Officer’s review continued
Risk management is key to Aviva’s success. We accept the risks inherent to our core business lines of life, accident & health, and general insurance and asset management. We diversify these risks through our scale, geographic spread, the variety of the products and services we offer and the channels through which we sell them.
Our Governance Includes risk policies and business standards, risk oversight committees (see below) and roles and responsibilities. Line management in the business is accountable for risk management which, together with the risk function and internal audit, form our ‘three lines of defence’ of risk management. The roles and responsibilities of the Governance, Audit and Risk Committees and Disclosure, Asset Liability and Operational Risk management committees in the oversight of risk management and internal control is set out in the Directors’ and corporate governance report.
This includes qualitative statements on the risks that we select for reward, the risks we accept but seek to minimise and the risks we seek to avoid or transfer, as well as quantitative expressions (risk appetite statements) of the level of risk we can support (e.g. the amount of capital we are prepared to put at risk). The table below sets out our preference for those risks arising from our business model. Where our inherent risk exposure exceeds our risk preference, we seek to reduce our residual risk exposure through management actions, such as reinsurance, investment hedges and enhanced operational controls. We prefer those risks which we believe we understand well and have the expertise to manage so we can generate superior returns.
Risks customers transfer to us ` Life insurance risk includes longevity risk (annuitants living longer than we expect), mortality risk (customers with life protection), critical illness risk, expense risk (the amount it costs us to administer policies) and persistency risk (customers lapsing or surrendering their policies).
` General insurance (GI) risk is the risk arising from loss events (fire, flooding, windstorms, accidents etc).
` Credit risks (actual defaults and market expectation of defaults) create uncertainty in our ability to offer a minimum investment return on our investments.
` Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form.
` Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment.
` Asset management risk is the risk of customers redeeming funds, not investing with us, or switching funds, resulting in reduced fee income.
3 The most critical residual operational risks to which the Group is exposed are aligned to the Group’s Major Control Improvement Topics, set out in the Audit Committee Report in the Annual Report and Accounts.
Uncertain interest rate environment – if current low interest rates continue for a prolonged period it will adversely affect the return we earn on our investments, as well as the attractiveness of the returns we can offer to new customers.
` Over the last few years we have taken significant steps to reduce the sensitivity of our balance sheet to interest rates. Our exposure to interest rates movements is mitigated by investing in fixed interest securities which closely match the interest rate sensitivity of our liabilities. Actions taken include close asset liability matching, reducing sales of products with guarantees (in particular in Italy and France), shifting our sales towards protection and unit-linked products.
` Since the US election there has been a shift in sentiment on the limitations of loose monetary policy in favour of fiscal stimulus to support growth, resulting in a rebound in the record low long term interest rates experienced after the UK-EU referendum. While it remains likely UK and Eurozone interest rates will remain low for some time to come, there is a risk that a rapid increase in rates could result in a collapse in bond prices and widening spreads.
People living longer – Medical advances and healthier life styles contribute to an increase in life expectancy of our annuitants and thus future payments over their lifetime may be in excess of the amounts we currently expect.
` We monitor our own experience carefully and analyse external population data to identify emerging trends. Detailed analysis of the factors that influence mortality informs our pricing and reserving policies. We add qualitative medical expert inputs to our statistical analysis and analyse factors influencing mortality and trends in mortality by cause of death. Aviva’s Staff Pension Scheme hedges its longevity risk covering approximately £5 billion of pensioner in payment liabilities. In 2016 we started to use longevity reinsurance for bulk purchase annuities and Aviva guaranteed annuity options. We continue to evaluate emerging reinsurance market solutions.
Climate change – potentially resulting in higher than expected weather-related claims (including business continuity claims) and inaccurate pricing of general insurance risk, as well as adverse secondary impacts on economic growth and investment markets.
` Global average temperatures in 2016 were the hottest on record. Despite the UNFCCC Paris agreement, the current trend of increasing CO2 emissions is expected to continue with global temperatures likely to exceed pre-industrial levels by at least 2oC and weather events (floods, droughts, windstorms) increasing in frequency and severity.
` Aviva’s strategy is focused on transformation into a digital leader by taking a bold and enterprise-wide approach to digital and automation. In July 2014, Aviva announced its strategic anchors and embarked on a digital strategy leveraging the building blocks of predictive analytics, automation and digital sales channels. We are currently integrating data analytics into our operations, enabling new means of underwriting, personalised customer propositions and operational efficiency. For further information on our digital strategy see pages 26-27 and 54-55.
` There is expected to be a five-fold growth in digital data between now and 2020. Big data is becoming a critical driver of competitive advantage for insurers. Artificial intelligence and robotic automation are likely to increasingly transform the efficiency of insurance operations such as underwriting and claims.
` We actively engage with governments and regulators in the development of public policy and regulation. We do this to understand how public policy may change and to help ensure better outcomes for our stakeholders, including customers. The Group’s multi-channel distribution and product strategy and geographic diversification underpin the Group’s adaptability to public policy risk, and often provides a hedge to the risk. For example, since the end of compulsory annuitisation in 2015 we have compensated for falling sales of individual annuities by increasing sales of other life and pension products including bulk purchase annuities.
` We are not complacent. We continue to invest significantly in IT Security, introducing additional automated controls to protect our data, detect and prevent cyber-attacks. In addition to implementing secure development practices we employ our own “white hat” hackers to regularly test our IT security defences. We undertake regular activities with our people to promote awareness of cyber and data security, including: employee phishing exercises, computer based training and more regular communications about specific threats as they are identified.
` We listen to our customers to ensure we meet their needs. For information on how we are mitigating this risk through execution of our strategy, focused on Digital First, see pages 26-27, and True Customer Composite, see pages 20-23, with further examples provided in the market review section on pages 38-53.
REFRESHING THE BOARD During the year Claudia Arney and Keith Williams joined the Board as Non-Executive Directors and Scott Wheway stepped down on 31 December 2016 after nine years’ service on the Board. I would like to thank Scott for his significant contribution to the Group over this time. As we moved into 2017 we announced that Sir Malcolm Williamson and Bob Stein would not seek re-election at the 2017 Annual General Meeting (AGM) and that Glyn Barker will become Senior Independent Director. Following the announcement of the half year results in August 2017, it is intended that Glyn will step down as Chair of the Audit Committee (but remain as a member), with Keith Williams assuming this role, subject to regulatory approval.
Dear Shareholder I am pleased to present this year’s directors’ and corporate governance report
The Board is accountable for setting and leading our culture and, along with the Group Executive, for ensuring the correct tone from the top. Our culture is reflected in our values: Care More; Never Rest; Kill Complexity; and Create Legacy, and through certain initiatives and our remuneration structures, we ensure these guide the organisation and are reflected in our decision making.
GovErnancE structurE To drive forward our True Customer Composite strategy, we have combined the UK Insurance businesses1 to provide a single interface to our UK customers. We have also appointed an Aviva plc nonexecutive director to the boards of Aviva Life Holdings UK Limited, Aviva Investors Holdings Limited and Aviva UK Digital Limited to strengthen the link between the Board and key operating companies.
We continue to progress towards greater diversity on the Board and throughout the Company. The Board is supportive of the Lord Davies report and Hampton-Alexander review target for women to represent 33% of boards by 2020; at the date of this report women represent 23% of the Board membership and 36% of the Group Executive. Following the Board changes effective from the 2017 AGM, women will represent 27% of the Board membership. We actively support women advancing into senior roles, as evidenced by our participation in initiatives such as the Future Board Scheme and the 30% club.
Executive Non-Executive Group Executive *Individual Directors may fall into one or more categories 1 Subject to regulatory approval.
Tenure: 4 years 2 months. Appointed to the Board as a Non-Executive Director in January 2013, as Senior Independent Director in May 2013, and as Chairman in April 2015 Qualifications: MA, Law (Cambridge); Qualified Solicitor Skills and Experience: Sir Adrian is an experienced chairman with extensive leadership skills and a wealth of knowledge of the financial services industry, government affairs and regulatory matters. His diverse skill-set and strategic awareness facilitate open discussion and challenge in the Boardroom.
Additionally, his position as chairman of the Association of British Insurers (ABI) gives him a unique perspective of the UK insurance and regulatory environment. External Appointments: Chairman of the ABI and on the Board of Trustees of the NSPCC. Andy is also the Government’s Business Champion for Older Workers.
Tenure: 4 years 3 months. Appointed to the Board in December 2012 and as Group Chief Executive Officer (CEO) in January 2013 Qualifications: MSc Management Studies (Waikato University) Skills and Experience: Mark is an inspirational CEO with exceptional business acumen and he has extensive experience of leading major international insurance companies, in both mature and growth markets.
Mark is a champion for sustainable business and is a key commentator on the role of business in society, particularly in creating sustainable, long-term investment. He is also an advocate of championing consumer interests, particularly in the motor insurance industry. External Appointments: N/A
Tenure: 2 years 11 months. Appointed to the Board and as Chief Financial Officer in April 2014 Qualifications: BA Economics (Swarthmore College); Juris Doctor (University of Chicago Law School) Skills and Experience: Tom’s financial expertise and strategic decision-making skills play a fundamental role in driving Aviva’s strategy and he has continued to deliver Aviva’s investment thesis of cash flow plus growth.
Prior to joining Aviva, Tom worked primarily as an investment banker and has held senior positions in highly respected US firms, including Blackstone Advisory Partners LP, where he was responsible for successfully driving Blackstone’s business advising banks, insurers and other financial institutions globally on mergers and acquisitions and financial restructuring. External Appointments: N/A
Tenure: 1 year 1 month. Appointed to the Board in February 2016 Qualifications: MBA (INSEAD) Skills and Experience: Claudia brings a broad range of skills to the Board, notably, extensive expertise of building digital businesses, strategy formulation, business transformation and customer strategy. Additionally, as Chair of the Governance Committee, Claudia brings challenge and a fresh perspective to customer, conduct and governance issues.
Patricia is also a recipient of the Australian Centenary Medal for service to Australian society through the finance industry. External Appointments: Chairman of the Commonwealth Superannuation Corporation, a nonexecutive director of Macquarie Group Limited and Macquarie Bank Limited. She is an ambassador for the Australian Indigenous Education Foundation.
Nationality: British Committee membership: Audit Committee, Governance Committee, Nomination Committee, Remuneration Committee
Tenure: 1 year 11 months. Appointed to the Board and as Senior Independent Director in April 2015 Qualifications: Fellow of the Institute of Bankers Skills and Experience: Sir Malcolm brings over 50 years’ leadership experience in the insurance and banking sectors and an in-depth knowledge of the UK life insurance market to the Board. His comprehensive understanding of the regulated financial services environment and thought leadership facilitates constructive challenge in the Boardroom and assists him with his duties in his role as a non-executive director.
Sir Malcolm has been vital in overseeing the successful integration of the Friends Life business, having previously been Chairman of the Friends Life Board. External Appointments: Chairman of Cass Business School’s Strategy and Development Board, the Board of Trustees of Youth Business International Limited, the Governing Council of the Centre for the Study of Financial Innovation and NewDay Group Limited.
Formerly, Glyn was vice chairman of PricewaterhouseCoopers LLP (PwC) with responsibility for leading the strategy and business development for Europe, the Middle East, Africa and India region. External Appointments: Chairman of Irwin Mitchell, and Interserve plc, and a non-executive director of Berkeley Group Holdings plc and Transocean Limited.
Scott Wheway retired from the Board as at 31 December 2016.
Tenure: 1 year 8 months. Appointed to the Board in June 2015 Qualifications: BSc, Business and Economics (Universidad Autonomo de Madrid) Skills and Experience: Belén has a wealth of government and regulatory experience and possesses a detailed knowledge of the financial services industry, particularly, insurance and European regulation, which is valuable in the Board’s decision-making process. In addition to her non-executive director experience in financial services and other regulated industries, as a former Spanish civil servant, Belén has held senior positions at the Spanish Treasury and represented the Spanish Government at the Organisation for Economic Co-operation and Development and serves on various EU Committees. External Appointments: Independent non-executive director of Banco Santander.
Tenure: 3 years 6 months. Appointed to the Board in September 2013 Qualifications: MBA, (Harvard) Skills and Experience: Michael has a detailed understanding of the financial services sector and extensive experience of advising companies on, and in implementing transformation programmes.
Nationality: American Committee membership: Audit Committee, Nomination Committee, Remuneration Committee, Risk Committee
His background as a former global managing partner for actuarial services at Ernst & Young and in the various leadership roles he held in the firm’s actuarial and insurance practice allow him to effectively challenge and determine the risks facing the Group and the successful execution of its strategy. He brings to the Board a deep and broad knowledge of the global life insurance industry and of dealing with regulators internationally. External Appointments: Non-executive director of Assurant, Inc. (US speciality insurance), director of Resolution Life Holdings, Inc. and a trustee emeritus of the Board of Trustees of the US Actuarial Foundation.
Nationality: Australian Committee membership: Risk Committee (Chair), Audit Committee, Nomination Committee
Tenure: 7 years 2 months. Appointed to the Board in January 2010 Qualifications: Fellow of the Financial Services Institute of Australia Skills and Experience: Michael brings to the Board his comprehensive knowledge and experience of the financial services industry, broad strategic insight and a deep knowledge of the Company and its businesses. He brings continuity to the Board and his experience at Aviva makes him well placed in determining the nature and extent of the potential risks in achieving the Company’s strategic objectives.
Michael’s long career and leadership positions in the banking and insurance industries, in both executive and nonexecutive roles across Europe, Asia and Australia, enable his constructive challenge to discussion in the Boardroom and also in maintaining sound risk management and internal controls. External Appointments: Non-executive director of Macquarie Group Ltd, Macquarie Bank Ltd, Washington H Soul Pattinson Pty and Company Ltd (investment) and Rugby World Cup Limited. Michael is also chairman of The George Institute for Global Health.
She has significant experience of managing legal risk in connection with corporate acquisitions and disposals, partnerships, joint ventures and agency relations, financial transactions and litigation.
This report sets out the role and activities of the Board and explains how the Group is governed.
THE UK CORPORATE GOVERNANCE CODE As a UK premium listed company, Aviva has adopted a governance structure based on the principles of the UK Corporate Governance Code (the Code). The 2016 version of the Code applies to financial periods beginning on or after 17 June 2016, however the Company felt it was best practice to adopt the 2016 Code early. Further details of how the Company has applied the Code principles and complied with its provisions, are set out in this report and the directors’ remuneration report.
THE DIRECTORS Biographical details of current directors are set out in their biographies on pages 76 to 79, and details of those directors seeking election/re-election are contained within the Notice of the 2017 Annual General Meeting (Notice of AGM) and on the Company’s website.
Scott Wheway retired on 31 December 2016, after serving nine years on the Board. In 2017 we announced that Sir Malcolm Williamson and Bob Stein would not seek re-election at the 2017 Annual General Meeting (AGM). Glyn Barker will become Senior Independent Director (SID), and following announcement of the half year results in August 2017 will step down as Chair of the Audit Committee (but remain as a member), with Keith Williams becoming the Audit Committee Chair, subject to regulatory approval.
Board diversity The diversity charts in the Chairman’s Governance Letter show that we have a Board with a sound balance of skills and experience. The Nomination Committee report sets out the Board’s approach to diversity, which is not just limited to gender but diversity in its widest sense.
The skills matrix will continue to support our approach to succession planning in the future, providing an objective assessment of the Board’s skills and experience, and what additional elements may be required to support the Company’s strategic objectives. This will make any future search process more focused and ensure the continuing strategic context in all Board appointments.
Group strategy and business plans – 35% Sets the Group’s strategy against which performance is monitored, and assesses progress against the business plan.
Oversight of risk and risk management – 16% Sets the Group’s risk appetite and risk management framework, and monitors compliance with internal controls and business standards.
Significant transactions and expenditure – 6% Considers, reviews and approves updates on transactions and expenditure.
` Reviewed and constructively challenged reports from the Group Chief Executive Officer (Group CEO) and Chief Financial Officer (CFO) containing updates on the Group’s financial performance; any proposed significant transactions; changes in senior management; regulatory developments; and the control environment, together with progress against the Group Plan and the Group’s strategy
` Held an annual two-day Board strategy meeting in June 2016, and a further meeting in November 2016, to review and agree the Group’s strategy
` Regularly discussed topical issues as they became prevalent; during 2016 two Board meetings were called to assess the Group’s position with regard to Brexit
Corporate governance ` Reviewed regular updates from its committees and management on legislation and proposed consultations that may affect the Company’s legal and regulatory obligations, including proposals to reform Corporate Governance
` Received assurance that governance structures remained appropriate for the businesses and the global markets in which we operate, while supporting the overall strategy and culture
` Approved the redemption of its 8.25% capital securities which were redeemed on 1 December 2016, the voluntary delisting of its American Depositary Shares (ADS) from the New York Stock Exchange, and the deregistration of the ADS and the underlying ordinary shares under the US Securities Exchange Act 1934 (the Exchange Act), to move to a ‘Level 1’ sponsored programme
Financial reporting and controls, capital structure and dividend policy ` Reviewed the Company’s financial performance, financial results, and dividend payments
` Undertook an internal evaluation of the Board’s effectiveness, the effectiveness of each committee and individual directors. Further details are included later in this report
Director appointments are made by the Board and are subject to a formal, rigorous, and transparent process and to the appropriate regulatory approvals. The Nomination Committee report sets out the steps taken to identify and appoint new NEDs, which includes consideration of diversity criteria. Executive director appointments follow the executive succession planning process that ensures there is a pipeline of executive talent available. All Board appointments are also subject to continued satisfactory performance following the Board’s annual effectiveness review, and the Company’s articles of association, which prescribe that all serving directors will retire and stand for election or re-election at each AGM. The NEDs also assist management in the development of the Company’s strategy, which is set by the Board, so it is important that they have experience of strategy formulation, business planning and transformation. To be effective, it is the
Board’s view that the majority of our NEDs should have a sound understanding of the financial services industry so as to be able to evaluate the information they receive and for them to provide appropriate challenge. The majority of the NEDs at the date of this report have this experience.
Independent advice All directors have access to the advice and services of the Group Company Secretary and directors wishing to do so in furtherance of their duties may take independent professional advice at the Company’s expense. No such requests were made during 2016.
Board regarding the remuneration policy of the Group and, in compliance with policy, recommending the remuneration packages of the Chairman, the Executive Directors and other members of the
THE CHAIRMAN AND GROUP CHIEF EXECUTIVE OFFICER Consistent with the Board Terms of Reference, and separately the Senior Insurance Managers Regime (SIMR), role profiles are in place for the Chairman and the Group Chief Executive Officer (Group CEO) which set out the duties of each role; the Chairman’s priority is to lead the Board and ensure its effectiveness and the Group CEO’s priority is the management of the Group. The Board has delegated the day-to-day running of the Group to the Group CEO within certain limits, above which matters must be escalated to the Board for determination.
The Chairman ensures all new directors receive a comprehensive induction programme over a number of months, tailored to their particular needs. Elements of the programme are detailed in the Training and Development section to the left. All new directors receive induction materials, which include: the current strategic and operational plan; recent Board and committee minutes and meeting packs; organisation structure charts; role profiles; a history of the Group; and relevant policies, procedures and governance material. Any knowledge or skill enhancements identified during the director’s regulatory application process, are also addressed through their induction programme. Claudia Arney and Keith Williams commenced induction programmes following their appointment and during the year Belén Romana García completed her programme.
BOARD CALENDAR During 2016, 12 Board meetings were held, of which nine were scheduled meetings and three were additional meetings called at short notice. In addition, the Board delegated responsibility for certain items to specially created Board committees, which met nine times.
The Group Company Secretary assisted the Chairman of the Board and committee chairs in planning for each meeting and ensuring that Board and committee members received information and papers in a timely manner. Members of senior management regularly attend Board meetings to present items of business.
The Board visits different business units whenever it can and during 2016, two Board meetings were held at Aviva offices in Singapore and Norwich. This gave the Board the opportunity to meet the senior management teams and to gain a deeper understanding of the operations and performance of each of the businesses. The Board also held two strategy meetings offsite in the UK to set, and monitor progress against, the Group’s strategy. During 2016 significant progress was made on our Digital First strategy, and in support of this the Board held two additional offsite sessions to meet with the leadership
The Audit, Governance and Risk Committees will continue to consider the opportunities and risks associated with each business area and the Remuneration Committee will assess any consequential impact on reward decisions. The Board will maintain oversight and challenge management in its execution of the 2017-2019 plan. As the culture programme progresses, the Board will remain close to the annual all-employee survey results, ‘Voice of Aviva’. Succession planning and continued development of the talent pipeline will continue to be a focus for the Board and Nomination Committee.
Non-executive directors Glyn Barker 12/12 10/10 – 4/4 – 7/7 Patricia Cross2 12/12 8/10 – 4/4 5/5 – Belén Romana García 12/12 – 6/6 4/4 – 7/7 Michael Hawker 12/12 10/10 – 4/4 – 7/7 Michael Mire 12/12 – 6/6 4/4 5/5 7/7 Bob Stein7 12/12 10/10 – 4/4 5/5 7/7 Scott Wheway3 11/12 – 6/6 4/4 – 7/7 Sir Malcolm Williamson6, 7 12/12 9/10 6/6 4/4 5/5 – Claudia Arney4 10/11 – 3/3 3/3 2/2 – Keith Williams5 5/5 3/3 3/3 – – –
1 During the year there were 12 Board meetings, of which nine were scheduled meetings, and three were called at short notice. 2 Patricia Cross missed two Audit Committee meetings on 19 February 2016 and 29 March 2016 respectively due to personal commitments. 3 Scott Wheway missed one Board meeting which was called at short notice on 30 September 2016 due to a personal commitment. Scott retired as a NED, as
` Continue to operate to a high level, work effectively and demonstrate full commitment to their respective duties. The review found that directors are able to participate fully in and effectively challenge discussion, facilitated by the Chairman’s positive leadership and the culture of openness that permeates the Board.
` New board reporting templates continue to be embedded with training provided across the Group to establish best practice reporting and inform good decision making. There has been a noted improvement in the quality of information presented to the Board, allowing more time for discussion and debate. This will continue to be a focus going forward.
` In order to support the Board’s commitment to having a strong and appropriate membership which is diverse in terms of skills, experience, background and gender, the role of the Nomination Committee has been further strengthened and the Board skills matrix has been enhanced by broadening its oversight of executive succession.
` This remains a continual focus as evidenced, at Board level, by the appointments of Claudia Arney and Keith Williams in 2016. A dedicated IT Advisor to the Board was also retained in order to provide further independent insight and expertise in the execution of the Company’s Digital First strategy. The Nomination Committee gave particular focus during the year to executive succession and contingency planning.
` Customer experience, product design, customer outcome and brand identity have been a focus of the Governance Committee’s discussions and the Committee has received management update reports at each meeting. Going forward, and given the importance of this area, it is intended that the strategic direction of the customer experience will be a matter for the Board as a whole, with oversight of compliance with this policy and any associated management actions being the responsibility of the Governance Committee.
Output Recommendations considered by the Board and each committee and an action plan for areas of focus was agreed. These will be assessed in 2017.
2016 Process * Independent Board Evaluation (IBE) is an external Board evaluation facilitator. IBE have no other connection with Aviva.
FRAMEWORKS FOR RISK MANAGEMENT AND INTERNAL CONTROL The Board is responsible for promoting the long-term success of the Company for the benefit of shareholders, as well as taking account of other stakeholders including employees and customers. This includes ensuring that an appropriate system of risk governance is in place throughout the Group. To discharge this responsibility, the Board has established frameworks for risk management and internal control using a ‘three lines of defence’ model and reserves for itself the setting of the Group’s risk appetite. Further details are contained on pages 68 to 71.
In-depth monitoring of the establishment and operation of prudent and effective controls in order to assess and manage risks associated with the Group’s operations is delegated to the Audit,
The frameworks for risk management and internal control play a key role in the management of risks that may impact the fulfilment of the Board’s objectives. They are designed to identify and manage, rather than eliminate, the risk of Aviva failing to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or losses. These frameworks were in place for the financial year under review and up to the date of this report. They are regularly reviewed by the Board and comply with the Financial Reporting Council’s (FRC) updated guidance on Risk Management, Internal Controls and Related Financial and Business Reporting.
A Major Control Improvement Topic programme is also in place, designed to focus attention on enhancing our control environment around six focus areas identified by management. Further information can be found in the Audit Committee report on page 94.
The Operational Risk Committee is chaired by the CRO. It supports the first line owners of key operations and franchise risks in the discharge of their responsibilities in relation to operational risk management.
SECOND LINE As the business responds to changing market conditions and customer needs, the Risk Management function regularly monitors the appropriateness of the Company’s risk policies and the RMF to ensure they remain up to date.
THIRD LINE The third line of defence is Internal Audit. Further information can be found in the Three Lines of Defence section opposite, and within the Audit Committee report on page 94.
ASSESSMENT OF EFFECTIVENESS To support an assessment of the effectiveness of the Group’s governance, internal control and risk management requirements, the chief executive officer of each business unit must certify that: � there are sound risk management and internal control systems, which are effective and fit for purpose in place across the business; and
� no material gaps exist in the RMF as it applies to their Business Unit.
Any material risks not previously identified, control weaknesses or non-compliance with the Group’s risk policies and business standards or local delegations of authority, must be highlighted as part of this process. This is supplemented by investigations carried out at Group level and a Group CEO and CRO certification for Aviva plc.
The effectiveness assessment also draws on the regular cycle of assurance activity carried out during the year, as well as the results of the certification process. For 2016, this has been enhanced by the Group’s Integrated Assurance Implementation programme (IAI), which has helped integrate the results of identification of operational risks and assurance activity across the three lines of defence. Certification process results and details of key failings or weaknesses are reported to the Audit Committee and the Board annually to enable them to carry out an effectiveness assessment.
COMMUNICATION WITH SHAREHOLDERS The Company places considerable importance on communication with shareholders. The directors have an ongoing dialogue and a programme of meetings with institutional investors, fund managers and analysts which are managed by the Company’s Investor Relations function. The Chairman met a number of the Company’s major shareholders during 2016. At these meetings a range of issues are discussed including strategy, financial performance, management, remuneration and governance, within the constraints of information already made public, to understand any issues of concern. Shareholders’ views are regularly shared with the Board through the Group CEO’s and CFO’s reports and periodic briefings from the corporate brokers, especially around report publications. The SID was available to meet with major investors to discuss any concerns that could not be resolved through normal channels.
There is a dedicated email address aviva.shareholders@aviva.com, for shareholders to ask questions on the business of the AGM.
A presentation on the Group’s performance will be given at the AGM and made available on the Company’s website after the meeting at www.aviva.com/agm.
Works closely with the Risk Committee and is responsible for assisting the Board in discharging its responsibilities for the integrity of the Company’s financial statements, the effectiveness of the system of internal financial controls and for monitoring the effectiveness, performance and objectivity of the internal and external auditors.
During 2016, we welcomed Claudia Arney and Keith Williams to the Committee. Scott Wheway retired from the Committee and the Board on 31 December 2016. I am grateful to all members for their support and dedication during the year.
Q What is the main function of the Nomination Committee and how has the Committee’s role developed during the year?
Recently, the Committee’s remit has evolved with respect to the people agenda. Responsibility for talent development for the wider Group has been transferred from the Governance Committee and now sits with the Committee to align with the role it plays in the succession of senior executives. We believe this gives a more holistic approach to talent development throughout the Company, from succession planning at the most senior level to ensuring a future talent pipeline. The Committee’s Terms of Reference have been updated to reflect this.
Keith Williams 01/08/2016 <1 * Chair ** Retired on 31 December 2016 *** Will retire from the conclusion of the 2017
I am confident we have the appropriate balance of skills and experience on the Board
Williamson and Bob Stein) will stand for election/re-election at the 2017 Annual General Meeting (AGM).
Myself and the Group Chief Executive Officer (Group CEO) are active members of the FTSE 100 30% Club and are committed to improving diversity at senior levels. In November 2016, we launched our female ‘Accelerating Leadership from the Inside Out’ programme, to give participants the opportunity to build the skills and organisational awareness needed to be successful in broader and more complex roles. This investment has helped the development of a strong pipeline of talent within the Group.
AM We will continue to retain our focus on succession planning and developing our people, while ensuring that our Board and senior management team remain diverse in the widest sense.
JUNE 2016 Claudia appointed as a member of the Remuneration and
Evaluation and annual assessment – 14% Reviews the results of the annual Board and committee performance evaluation and undertakes an assessment of directors’ independence, conflicts of interest, time commitment, effectiveness and overall contribution.
Board composition and diversity – 33% Evaluates and monitors the balance of skills, knowledge, experience and diversity of the Board, taking into account the Company’s risk profile and strategy. Leads on searches for suitable Board members when appropriate.
Succession planning and Board pipeline – 53% Monitors the development and succession plans for senior executives and identifies suitable talent for appointment to the Board.
Board composition and diversity ` Reviewed the composition of the Board and in particular, whether the Board required additional skills and experience which would complement those of the existing members and the Company’s risk profile and strategy
` Engaged in a thorough search and interview process with the intention to strengthen the composition of the Board with additional NEDs. The Committee identified and endorsed the appointments of Claudia Arney in February 2016 and Keith Williams in August 2016
` Considered plans for succession for each Group Executive member, including talent development below Group Executive level
2016 has been a year of market uncertainty with Brexit, the national election in America and the start of elections across Europe, which will continue in 2017. The Committee’s agenda has evolved in line with the external environment to ensure the Group is well equipped to manage risk and retain a strong capital and liquidity position.
On 1 January 2017, we welcomed Claudia Arney to the Committee following Scott Wheway’s retirement on 31 December 2016. Bob Stein will retire from the Committee at the conclusion of the 2017 Annual General Meeting. I would like to thank Scott and Bob for their excellent contributions.
MH Brexit and the geopolitical risks more generally, the global economic outlook, and the low interest rate environment, have been a major focus during 2016. The Committee assessed and continues to monitor the impact of these on the Group’s asset mix and investment return. In light of these challenges focus continued on the Group’s capital resilience, balance sheet strength and liquidity, as well as concentrations of risk and diversification.
Scott Wheway** 14/05/2015 1 * Chair ** Retired on 31 December 2016 *** Will retire from the conclusion of the 2017
Q How does the Committee monitor the Company’s adoption of, and compliance with, SII?
MH SII remains in focus as it moves to business as usual, as we ensure that it is satisfying the governance requirements with regards to the internal model and that it feeds into the business strategy, planning and wider decisions. The Committee also reviewed and approved SII risk appetites, both overarching and by risk type. The Committee receives regular updates on the Group’s SII capital position against the projected risk appetite, on the resilience of the SII capital position through stress and scenario testing, and contingent management actions identified in the G-SII Group Recovery Plan.
Q How does the Committee assess the risk culture in the organisation?
MH Focus will continue on plans in preparation for Brexit as more information becomes known. We expect financial markets to remain volatile with diverging monetary policy between the US and Europe, and further national elections in Europe. The resilience of the Group’s balance sheet to market shocks, the Group’s hedging strategy and contingency plans, will continue to be reviewed.
The Committee will also focus on diversifying further the asset mix. It will manage the risks inherent in moving the Company into the digital age and to a True Customer Composite, specifically with regard to IT infrastructure, durability, and security, against an ever changing cyber threat environment.
In March 2016 the Committee reviewed a detailed analysis outlining the risks that Brexit would pose for the Group. An update followed from management on contingency plans to address operational and financial market impacts in the event of a leave vote. This included a scenario analysis of a mediumsevere financial market reaction to a leave vote. Following the referendum, the Committee assessed management plans and the progress in managing the operational impacts that would arise in the event of a ‘hard-Brexit’, with particular emphasis on the loss of passporting rights. Whilst uncertainty continues into 2017, the Group and its subsidiaries are capitalised appropriately, and the regulated structure limits any operational impact. The Committee continues to be provided with regular updates from the CRO, enabling it to monitor the potential impacts of Brexit.
Risk Appetite, Risk Management, and Risk Reporting – 17% Reviews and robustly assesses the design and effectiveness of the risk management framework, and recommends updated risk appetites to the Board. It also ensures risk management is considered when setting the Company’s remuneration policy.
Regulatory, Governance and Internal Audit – 21% Reviews developments in the prudential regulatory environment, the Group’s external risk and capital disclosures, and assesses internal control.
Group Capital and Liquidity, Financial Plan, and Stress Testing ` Approved the 2016 Group Capital and Liquidity Plan and subsequent updates
Solvency II ` Undertook reviews of components of the key internal model, reviewed changes to the model, and reviewed independent internal model validation reports and associated assurance provided by the External Auditor
` Reviewed risk identification reports, ensured material quantifiable risks were captured by the internal model, and that material non-quantifiable risks were managed appropriately
` Approved for recommendation to the Board updates to the SII Business Standards
` Monitored the risk of cyber security, the progress against mitigating cyber risks, and reviewed the results of simulation cyber security attacks against the Group
Regulatory, Governance and Internal Audit ` Monitored an internal audit review of the Group’s outsourcing control framework
` Reviewed the adequacy and quality of the Risk Management function
The Committee acts independently of management and works closely with the Governance, Remuneration and Risk Committees. There is cross-membership between each committee which provides a better understanding and more efficient communication of each committee’s work.
The review highlighted that the Committee’s structure and delegation from, and reporting to the Board, were all appropriate. Areas that were identified for improvement were discussed with the Committee and included the duplication of papers between the Committee, the Risk Committee, and the Board, and the need for clearer and more concise summaries in papers. The Committee’s workplan for 2017 will address these areas.
whole, are fair, balanced and understandable in line with the UK Corporate Governance Code (the Code).
Following the review in respect of 2016, a recommendation was made to the Board, which confirmed that I, as Committee Chair fulfilled each of the requirements for relevant financial experience and competence in accounting and auditing as did Bob Stein, Sir Malcolm Williamson and Keith Williams. Patricia Cross and Michael Hawker have confirmed they meet the Code requirement for recent and relevant financial experience. All Committee members, other than Patricia Cross, also met the US requirements to be an audit committee financial expert. The Committee as a whole has competence relevant to both the insurance and financial services industry.
Q How does the Committee monitor the control environment across the Group?
The Committee reviews and approves the bi-annual Internal Audit Plan and conducts an annual review of the Internal Audit function to assess its effectiveness and to satisfy itself that the quality, experience and expertise of the Internal
Solvency II (SII) disclosures ` Following the introduction of SII, the Committee has reviewed the proposed approach to the SII reporting structure and approved the judgements and disclosure options.
Key issues and judgements ` Challenged estimates and judgements for International Financial Reporting Standards (IFRS) and SII reporting bases. IFRS judgements covered goodwill and intangible assets, restructuring provisions and reserving for insurance contracts, including the impact of Brexit on property growth assumptions and the valuation of unquoted investments. SII judgements focused on the valuation of own funds and capital.
Friends Life integration ` Considered the impact on the internal control environment of the increased scale and complexity of the enlarged Group following the acquisition of Friends Life. The Committee reviewed specific reports from Internal Audit to assess and monitor the effectiveness of integration planning.
` Approved IFRS and SII key issues and judgements. For the UK Life business the Committee assessed the assumptions in respect of credit default, mortality, expenses and persistency. GI reserving issues were based around best estimate reserves and the level of margin for uncertainty to be retained, in particular the increased reserves, following changes to the ‘Ogden rate’ on bodily injury claims.
MCITs ` The Committee led the oversight of the overall progress of the MCIT programme, receiving regular reports from management, particularly on the Fraud MCIT, of which the Committee has ownership.
` Reviewed the development of the Group Solvency and Financial Condition Report (SFCR) and the Regulatory Supervisory Report (RSR) that will be filed for the first time by 1 July 2017. The Committee also provided input to the development of Quantitative Reporting Templates (QRT) submitted to the regulator.
An annual review of the Auditor was undertaken through completion of a questionnaire by the Committee, senior management, and members of the Group’s finance community. Following review of output from questionnaires, the Committee concluded that PwC continued to perform effectively and is recommended to shareholders for reappointment at the 2017 AGM.
The Standard distinguishes between (i) those services where an independent view is required and services that should be performed by the Auditor (such as statutory and non-statutory audit and assurance work); (ii) prohibited services where the independence of the Auditor could be threatened and the Auditor must not be used; and (iii) other non-audit services where the Auditor may be used which include non-recurring internal controls and risk management reviews (excluding outsourcing of internal audit work), advice on financial reporting and regulatory matters, due diligence on acquisitions and disposals project assurance and advice.
In line with the Standard, the Committee satisfied itself that for all non-audit engagements, robust controls were in place through a quarterly review process for audit related and non-audit services provided, to ensure that PwC’s objectivity and independence were safeguarded, and concluded that it was in the interests of the Company to purchase these services from PwC due to their specific expertise. Further details are provided in note 12 of the financial statements.
` Risk management function and adoption of the three lines of defence Risk Management Framework
Internal Audit – 24% Approves and monitors the application of the Internal Audit Charter and Business Standard, reviews control issues identified by Internal Audit and assesses the effectiveness of the Internal Audit function.
Financial Statements and accounting policies ` Considered and continued to monitor the impact of the acquisition of the General Insurance (GI) business of the Royal Bank of Canada, which completed on 1 July 2016, on the 2016 half year and full year results
` Reviewed the Chief Financial Officer’s reports which included the IFRS and SII key issues and judgements; changes to financial reporting disclosure requirements; and policies for materiality and unadjusted differences
` Reviewed the Group Risk Actuary’s report on significant issues related to technical provisions of SII and IFRS
` Monitored compliance with the External Auditor Business Standard on a quarterly basis
` Reviewed reports from the External Auditor with regard to: the 2016 Audit Plan and progress against plan and reports on the audit of the 2016 half and full year results including key assumptions used and outcomes of the audit
` Assessed the performance of the Internal Audit function and concluded it was performing well, was sufficiently resourced and had demonstrated continued improvement
` Reviewed and approved the Internal Audit Plan in July and November 2016
` Assessed the independence of the Chief Audit Officer (CAO) and concluded that this had been maintained and was satisfied that his annual performance related bonus was unconnected to the Group’s financial performance
` Oversaw the MCIT programme and monitored and challenged progress by management to address the Fraud Management MCIT
This year Keith Williams and I joined the Committee. Scott Wheway, who had been a director of Aviva plc since December 2007, and Chair of the Governance Committee since February 2014, retired from the Committee and the Aviva Board on 31 December 2016. More recently we announced that Sir Malcolm Williamson would not seek re-election at the 2017 Annual General Meeting. I am grateful to all members of the Committee for their support and contribution during 2016 but wish to express particular thanks to Sir Malcolm for his contribution and to Scott for his dedication and excellent leadership of the Committee. The members of the Committee are shown in the table below and details of members’ attendance at Committee meetings during the year are shown in the table in the directors’ and corporate governance report on page 84.
Q As the new Chair of the Committee, describe its role and how it has evolved since its creation.
CA The role of the Committee is to help the Board drive consistency across the Aviva Group in respect of governance and regulatory matters to ensure alignment with the Company’s culture, values and strategic priorities. The Committee has traditionally overseen governance, conduct, reputation, financial crime and corporate responsibility matters on behalf of the Board and has evolved to also have oversight of the conduct agenda of the UK Digital (UKD) business. The remit of the Committee is reviewed annually given the constantly changing external environment and recently the Committee’s Terms of Reference were amended to reflect the move of the people agenda to the Nomination Committee. In addition, given the importance of the customer agenda this will be considered by both the Committee and the Board going forward. It is intended that the strategic direction of the customer experience will be a matter for the Board as a whole, with oversight of the customer policy and any associated management actions being the responsibility of the Committee. The Board is confident that this gives the Committee the correct focus and, in line with our annual cycle, the Committee’s responsibilities will be reviewed again in 2017.
Governance Principles (the Principles) have been rolled out. How do you think these have been received?
Aviva’s strategy and the Committee has a central role in ensuring that they remain there Claudia Arney (CA) / Governance
information about the work undertaken on the Principles can be found in the case study below.
Q How has the Committee’s oversight of conduct risk been exercised during the year?
CA The oversight of conduct risk has remained a primary focus of the
The Group’s BUs have an ongoing programme to continually reassess their conduct risk performance and conduct risk framework and the Committee has continued to actively review this. During 2016 the chief executive officers from a number of BUs presented their detailed plans for conduct risk management to the Committee.
Customers are at the heart of Aviva’s strategy and the Committee has a central role in ensuring that they remain there.
` Embedding procedures across the Group to assist with adherence to the Principles. The use of technology including the on-going enhancement of the Group internal governance site and the development of a nonexecutive director (NED) Resource Centre have helped support adherence to the Principles
Customer and conduct risk – 24% Reviews the Group’s risk profile and risk management control framework as it relates to conduct, reputation and the Group’s overall culture and values.
Approves the Business Ethics Code, reviews the Group’s policies on diversity and employees and monitors talent development programmes and the culture agenda. This area has also been considered extensively by the Aviva Board.
UK Digital – 11% Provides governance and conduct oversight over UKD.
` Several BU chief executive officers attended meetings and presented to assist the Committee in overseeing the embedding of the conduct risk framework across the Group. This included Aviva UK Life, UK General Insurance, UK Health, Aviva India, Aviva Asia, Aviva Ireland and Aviva Investors
` Received and considered reports detailing on-going and possible reputational, brand and franchise risks, including media and public policy issues
Corporate responsibility ` Continued to provide guidance and direction on the corporate responsibility agenda and monitored compliance with the Group’s CR strategy
` Monitored external developments and monitored the Group’s mandatory reporting requirements
` Reviewed the Group’s annual corporate responsibility reporting and the Group’s Corporate Responsibility, Environment and Climate Change Business Standard
Governance ` Considered regular updates from the Group Company Secretary on governance matters, legal and litigation risks which had the potential to impact the reputation of the Group
` Reviewed and considered the talent development programmes for leadership across the Group
Regulatory and financial crime ` Regularly reviewed regulatory updates from the Group Compliance Director
` Reviewed and constructively challenged management’s view of emerging and potential financial crime risks and any actions required in response
` Monitored the Group’s relationship and interaction with the FCA and other regulatory bodies and monitored the actions taken in respect of regulatory developments
The directors submit their annual report and accounts for Aviva plc, together with the consolidated financial statements of the Aviva group of companies, for the year ended 31 December 2016.
� Increasing diversity and inclusion for details of our policy on employment of disabled persons
Our policy on hedging The hedging policy is disclosed in note 57 and details of likely future developments are set out in the strategic report.
Related party transactions Related party transactions are disclosed in note 59 which is incorporated into this report by reference.
Dividends Dividends for ordinary shareholders of Aviva plc are as follows: � Paid interim dividend of 7.42 pence per ordinary share (2015: 6.75 pence)
Subject to shareholder approval at the 2017 AGM, the final dividend for 2016 will become due and payable on 17 May 2017 to all holders of ordinary shares on the Register of Members at the close of business on 7 April 2017 (payment date approximately five business days later for holders of the Company’s American Depositary Shares (ADS)).
Share class and listing All the Company’s shares in issue are fully paid up and the ordinary and preference shares have a Premium and Standard listing respectively on the London Stock Exchange. On 1 December 2016, the Company announced that it had resolved to voluntarily delist its ADS from the New York Stock Exchange and to terminate the registration of its ADS and the underlying ordinary shares under the Securities Exchange Act and to continue its ADS programme as a ‘Level 1’ sponsored programme, which will enable investors to trade ADS in the US over-the-counter market. The last day of trading on the NYSE was 22 December 2016 and the Company expects the deregistration of its ADS and the underlying ordinary shares to become effective on 22 March 2017. Details of the Company’s share capital and shares under option at 31 December 2016 and shares issued during the year are given in notes 30 to 33.
� issued preference share capital totalled 200,000,000 shares of £1 each
Rights and obligations attaching to the Company’s ordinary shares and preference shares Rights and obligations together with the powers of the Company’s directors are set out in the Company’s articles of association (the Articles), copies of which can be obtained from Companies House and the Company’s website at www.aviva.com/articles, or by writing to the Group Company Secretary. The powers of the Company’s directors are subject to relevant legislation and, in certain circumstances (including in relation to the issue or buying back by the Company of its shares), are subject to authority being given to the directors by shareholders in general meeting. At the 2017 AGM, shareholders will be asked to renew the directors’ authority to allot new securities. Details are contained in the Notice of 2017 Annual General Meeting (Notice of AGM).
Restrictions on transfer of securities With the exception of restrictions on the transfer of ordinary shares under the Company’s employee share incentive plans, whilst the shares are subject to the plan rules, there are no restrictions on the voting rights attaching to the Company’s ordinary shares or the transfer of securities in the Company.
Significant agreements – change of control There are a number of agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid, such as commercial contracts and joint venture agreements. None are considered to be significant in terms of their potential impact on the business of the Group as a whole. All of the Company’s employee share incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro-rata reduction as may be applicable under the rules of the employee share incentive plans.
Authority to purchase own shares At the Company’s 2016 AGM, shareholders renewed the Company’s authorities to make market purchases of up to 404 million ordinary shares, up to 100 million 8¾% preference shares and up to 100 million 83⁄8% preference shares. These authorities were not used during the year or up to the date of this report. At the 2017 AGM, shareholders will be asked to renew these authorities for another year and the resolution relating to ordinary shares will once again propose a maximum aggregate number of ordinary shares which the Company can purchase of less than 10% of the issued ordinary share capital. Details are contained in the Notice of AGM. The Company held no treasury shares during the year or up to the date of this report.
Disclosure and Transparency Rule 5 (DTR) – major shareholders The table below shows the holdings of major shareholders in the Company’s issued ordinary share capital in accordance with the DTRs as at 31 December 2016 and 7 March 2017.
Financial instruments Group companies use financial instruments to manage certain types of risks, including those relating to credit, foreign currency exchange, cash flow, liquidity, interest rates, and equity and property prices. Details of the objectives and management of these instruments are contained in the risk and capital management section, the shareholder information section and in note 56 on risk management.
Political donations At the 2016 AGM, shareholders passed a resolution, on a precautionary basis, to authorise the Company and its subsidiaries to make political donations and/or incur political expenditure (as such terms are defined in sections 362 to 379 of the Companies Act 2006), in each case in amounts not exceeding £100,000 in aggregate. As the authority granted will expire at the 2017 AGM, renewal of this authority will be sought at this year’s AGM up to a total aggregate limit of £100,000. Further details are available in the Notice of AGM. It is not the policy of the Company to make donations to European Union (EU) political organisations or to incur any other political expenditure. However, definitions of political donations and political expenditure used in the Companies Act 2006 are broad in nature and this authority is sought to ensure that any activities undertaken throughout the Group, which could otherwise be construed to fall within these provisions, can be undertaken without inadvertently infringing the rules. Aviva did not make any political donations during 2016.
Articles of association Unless expressly stated to the contrary in the Articles, the Company’s Articles may only be amended by special resolution of the shareholders. The Company’s current articles were adopted on 29 April 2015.
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the strategic report. The performance review includes the risk and capital management section. In addition, the financial statements sections include notes on the Group’s borrowings (note 49); its contingent liabilities and other risk factors (note 52); its capital management
(note 54); management of its risks including market, credit and liquidity risk (note 56); and derivative financial instruments (note 57).
The assessment of the Group’s prospects by the directors covers the three years to 2019 and is underpinned by management’s three year 2017-2019 business plan which includes projections of the Group’s capital, liquidity and solvency.
� an extensive verification process is undertaken to ensure factual accuracy
� Board members receive drafts of the annual report and accounts for their review and input. This includes the opportunity to discuss the drafts with both management and the External Auditor, and challenging the disclosures where appropriate.
Directors’ responsibilities The directors are responsible for preparing the annual report and accounts, the directors’ remuneration report and the financial statements in accordance with applicable law and regulations.
� prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business.
The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s and the Company’s position and performance, business model and strategy.
The percentage outcomes achieved for those targets do not alone determine the bonus decisions for our EDs. The Committee also undertakes a structured assessment of performance in relation to risk, the experience of our customers and the engagement of our employees. Performance versus these non-financial modifiers is outlined in table 2. The Committee considers the management of risk, and focus on customers and employees, to be critical to the long-term wealth creation and sustainability of Aviva. The final step in the annual bonus decision is the assessment of the individual’s performance in their role. For our senior leaders this covers their effectiveness in articulating the Group’s strategy and the planning and execution of key initiatives. It also involves considerations of how they have focused on our customers, encouraged collaboration, lived our values, managed risk and demonstrated effectiveness as a leader. This is aimed at ensuring reward outcomes are aligned to value and the interests of our shareholders.
2016 annual bonus Performance at Group level against the financial targets in our bonus scorecard was strong again in 2016. Our strategic performance target of online customer registrations was also surpassed for the year with active digital registrations globally increasing by over 100% during 2016. The Committee has also made its annual assessment of the modifier factors, referred to above, in determining the overall bonus scorecard outcome.
Through the year, we have continued to focus on the risk and control environment and to take this into consideration when taking reward decisions. In 2016, all but one of the business units and functions within the Group were assessed as on or above target against their overall goal in relation to risk and compliance outcomes. No adjustment was considered warranted at a Group level but appropriate annual bonus adjustments were made in the market concerned.
The percentage change in Group CEO pay for 2016 versus other UK based employees is reported in table 9.
priorities for 2017 The key priorities we identified for last year remain largely unchanged for 2017.
In 2017, we are increasing our focus on Aviva’s diversity agenda, which we see as being integral to our core values of Care More and Create Legacy. For example, as a Committee we take a ‘gender pay gap’ lens into account in our hiring, pay review and incentive award processes. This approach is followed at all levels throughout the Group and we will be commencing formal gender pay gap reporting under the UK Government’s mandatory regime later this year.
In 2018, we will be seeking approval for a new Remuneration Policy, as we are required to do every three years and our approach will be to commence formal engagement with key shareholders and stakeholders. We encourage constructive input and invite a broad range of comments as we develop and adapt our Policy in the lead up to the vote next year.
Remuneration philosophy The key principles of our approach to executive remuneration are: OUR REMUNER ATION FR AMEWORK AT A GL ANCE
Recognise the leaders who achieve the required business results through living Aviva’s values and behaviours.
Salary Overview of Policy (approved in 2015) ` Set by reference to relevant pay data, levels of increase for the broader UK employee population and individual and business performance
Remuneration in respect of 2016 ` Group CEO: 91% of maximum (£1,837,108)
Application of Policy in 2017 ` Payments determined on a scorecard split: 75% Group financial and 25% strategic measure
Overview of Policy (approved in 2015) ` Maximum of 350% of salary
` Subject to performance (TSR and ROE) and two year post vest holding
Remuneration in respect of 2016 ` 2014 LTIP vested at 41.3% overall
Application of Policy in 2017 ` Group CEO: 300% of salary
Deferred element – delivered in shares (2/3 of total bonus for 3 years)
17% of total package 11% of total package 50% of total package 22% of total package
This section of the report sets out how Aviva has implemented its Remuneration Policy for EDs during the course of 2016, and how the approved Policy will be implemented for 2017. This is in accordance with the requirements of the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended).
The Group Chairman attended all meetings of the Committee. The Group General Counsel and Company Secretary acted as secretary to the Committee. The Chairman of the Committee reported to subsequent meetings of the Board on the Committee’s work and the Board received a copy of the agenda and the minutes of each meeting of the Committee.
The Committee received assistance in considering executive remuneration from: � the Group Chairman; � the Group CEO; � the Chief People Officer; � the Group Reward Director; � the Chief Accounting Officer; � the Chief Capital & Investments Officer; � the Chief Executive Officer – Aviva Investors; � the Chief Audit Officer; � the CFO; � the Remuneration Committee Chair of Aviva Investors; � the Reward Director, Aviva Investors; � the Group Chief Risk Officer; and � the Director of Global Finance & Chief Planning and Performance Officer.
These people attended meetings by invitation during the year. 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 who were appointed by the Committee. They are a member of the Remuneration Consultants’ Group and adhere to its
Code of Conduct. The Group received advice on remuneration matters, taxation and other consulting services (including advice in relation to Solvency II (SII)) during the year. In addition Tapestry Compliance LLP, appointed by the Company, provided advice on share incentive plan related matters, including on senior executive remuneration matters and views on shareholder perspectives.
During the year, Deloitte LLP were paid fees totalling £131,600, and Tapestry Compliance LLP were paid fees totalling £3,715 for their advice to the Company on these matters during the year. Fees were charged on a time plus expenses basis.
COMMITTEE PERFORMANCE AND EFFECTIVENESS The Committee undertakes a rigorous review of its effectiveness on an annual basis, which for the 2016 year was conducted alongside the evaluations of the Board and other committees by way of an internal questionnaire, completed by every Committee member. Further details on how this has been carried out are contained in the directors’ and corporate governance report.
Governance, regulatory issues and reporting policy – 33% Works with the Risk Committee to ensure that risk and risk appetite are considered in setting the Remuneration Policy and reflected appropriately in pay outcomes.
Obtains information about remuneration in other companies to act as one of many reference points considered.
Selects, appoints and determines the terms of reference for independent remuneration consultants, to advise on Remuneration Policy and levels of remuneration.
Reviews and determines the remuneration of the Board Chairman and the terms of employment and remuneration of individual EDs and members of the GE, including any specific recruitment or severance terms.
Reviews and recommends to management the level and structure of senior management remuneration.
Share plan operation and performance testing – 11% Exercises the Board’s powers in relation to the operation of all employee share and incentive plans and exercise all the Board’s powers in relation to the operation of all employee share and incentive plans.
Governance, regulatory issues and reporting policy ` Engaged external advisors to conduct a high level review of the remuneration framework and its alignment with Aviva’s strategic goals. This was a preliminary exercise in preparation for a new Remuneration Policy for shareholders to consider at the 2018 AGM.
` Actively engaged with our regulators to continuously review the remuneration approach to ensure alignment with evolving regulatory requirements.
` Received regular updates and briefings from management and the external advisors, on topics such as developments in governance, disclosure practices and regulatory changes.
Bonus target setting ` Reviewed the Annual Bonus Plan targets for 2016 and 2017. This included an assessment of financial targets, and non-financial modifiers which consider; risk, strategic ambition, employee engagement and customer metrics.
Senior management objectives and pay decisions ` Benchmarked, reviewed and set salaries for the EDs and GE members from 1 April 2016.
` Reviewed and approved the key individual objectives for 2016 for each member of the GE.
` Reviewed and approved the principles for implementing any new carried interest plans within Aviva Investors.
` Reviewed and approved the performance achieved for 2013 LTIP awards, and reviewed interim testing on the subsisting 2014 and 2015 LTIP awards.
` Ongoing review of Group share plans including the approval of a new all employee global matching share plan.
Notes 1 Basic salary received during 2016. 2 The benefits disclosure includes the cost, where relevant, of private medical insurance, life insurance, accommodation, travel and car benefits. In the case of Mark and Andy this also includes benefits resulting from the UK HMRC tax-advantaged Save As You Earn (SAYE) plan, and for Andy the UK HMRC tax-advantaged (share incentive plan) All Employee Share Ownership Plan (AESOP), in which they participate on the same basis as all eligible employees. All numbers disclosed include the tax charged on the benefits, where applicable. The year on year increase in the value of Mark’s benefits results mainly from higher death in service (life insurance) costs, and a change during 2015 in the administration of Aviva’s shared car service for senior executives. The actual car service arrangements provided to Mark were unchanged in 2015 and 2016. For Tom, his 2015 benefits included expenditure in terms of his relocation from the US to the UK, which were not incurred in 2016.
3 Bonus payable in respect of the financial year including any deferred element at face value at date of award. The deferred element is made under the Aviva Annual Bonus Plan 2011 (ABP).
6 For Andy, his 2015 values only relate to his services to Aviva from 29 April 2015, whereas 2016 represents a full year.
In determining the bonus awards, the Committee took into account the wider performance of Aviva and the experience of shareholders during the year, and is satisfied that the bonus awards above are fair in the light of those considerations. One-third of the bonus award for all EDs will be delivered in cash, with two-thirds being deferred into shares for three years.
Malus and Clawback As part of the annual pay review process, the Committee has considered whether any recovery or withholding under the malus and clawback provisions of Aviva’s incentive plans is required by any current circumstances. No incidents are currently subject to action under Aviva’s malus and clawback policy.
Employee Employee engagement. Employee engagement up four percentage points to 74%, with significant improvements within our UK Life, global functions, French, Irish and Aviva Investors businesses. Engagement among former Friends Life colleagues was up 11% versus 2015.
Under the ABP, this outcome can be modified by the performance on the employee, customer and risk and controls modifiers. Typically, adjustments (if made) would be in the range of +/- 15% but for major risk or controls or customer issues (e.g. concerning conduct) a considerably greater adjustment could be made.
For 2016, an adjustment of 5% has been decided in relation to the modifier factors, to recognise the significant year-on-year improvement in employee engagement.
` Significant progress on Digital ambition: 15 million of our customers consolidated onto a single database and rapidly scaling up the number of users on MyAviva, with registrations more than doubling to five million at the end of 2016.
` Improved employee engagement, up by four percentage points to 74%.
` Delivery of FLG integration synergies ahead of the 2017 target.
` Completed the acquisition of RBC General Insurance in Canada, providing a 15 year distribution agreement and supporting independent broker channels.
` Focus within Global Life on automating and improving underwriting to enhance customers’ on-boarding experience. Review of global reinsurance strategy to extract better value through a more centralised approach to negotiation.
` Improved understanding of risks and controls through roll out and embedding of the operational risk control and management framework.
Bonus as a % of basic salary: 130% Bonus as a % of max opportunity: 87%
3 2015 AND 2016 PERFORMANCE AGAINST BONUS SCOREC ARD FOR ED BONUSES
Given the timing of the appointment dates of our EDs, Mark and Tom are the only EDs who will receive shares under the 2014 LTIP. As indicated in the table below, 41.3% of the award will vest in March 2017.
AWARDS MADE DURING THE FINANCIAL YEAR Share and option awards granted to EDs during the year are set out in table 5.
Andy Briggs 29 Mar 2016 LTIP 225% £1,556,714 20% 100% 31 Dec 2018 21 Mar 2021
Notes 1 ABP and LTIP awards have been granted as share awards. LTIP is a conditional right to receive shares based on a three-year performance period, with an additional two-year holding period. ABP represents the portion of the 2015 bonus deferred into shares for three years. SAYE awards are savings-related options normally exercisable during the six-month period following the end of the relevant 3 or 5 year savings contract. AESOP includes partnership, matching and dividend share awards which vest after three years. Further details are provided at tables 13 and 15.
Percentage of shares in award that vests based on achievement of ROE targets
7 TSR VEST ING SCHEDULE FOR THE 2016 LT IP AWARD
Percentage of shares in award that vests based on achievement of TSR targets
� The emoluments he received in respect of these directorships for the 2016 financial year were £105,207 and €90,000.
PAYMENTS FOR LOSS OF OFFICE (AUDITED INFORMATION) There were no payments for loss of office made during the year.
2 The prior year total has been recalculated to show the directors that continued in office during all or part of the current year and excludes remuneration of directors that left in the prior year.
3 Claudia Arney was appointed to the Board on 8 February 2016 and Keith Williams was appointed to the Board on 1 August 2016. 4 Scott Wheway acts as non-executive chairman to Aviva Insurance Limited and was appointed on 13 April 2015. The emoluments he received in respect of this directorship for the 2016 financial year was £105,000. Scott Wheway stepped down from the Board effective 31 December 2016.
The total amount paid in fees to NEDs in 2016 was £1,702,000, which is within the limits set in the Company’s Articles of Association, as previously approved by shareholders.
PERCENTAGE CHANGE IN REMUNERATION OF GROUP CEO The table below sets out the increase in the basic salary, bonus and benefits of the Group CEO and that of the wider workforce. The UK employee workforce was chosen as a suitable comparator group, as all EDs are based in the UK (albeit with global responsibilities), and pay changes across the Group vary widely depending on local market conditions.
Note The higher bonus outcomes seen for UK-based employees reflects the stronger performance of the major UK businesses compared to that seen in 2015. The change in the CEO’s benefits from £65,000 in 2015 to £99,000 in 2016 includes higher death in service (life insurance) costs, and a change during 2015 in the administration of Aviva’s shared car service for senior executives. The actual car service arrangements provided to Mark were unchanged in 2015 and 2016.
RELATIVE IMPORTANCE OF SPEND ON PAY The table below outlines adjusted operating profit before tax attributable to shareholders’ profits after integration and restructuring costs, dividends paid to shareholders and buybacks compared to overall spend on pay (in total and per capita). The measure of profit has been chosen as a straightforward measure reflecting the performance of the Company, showing both gross income, and also taking into account integration and restructuring costs.
Notes 1 Operating profit has been restated to exclude amortisation and impairment of acquired value of in-force business, which is now shown as a non-operating item. 2 Operating profit before tax attributable to shareholders’ profits for continuing operations after integration and restructuring costs. 3 The total cost of ordinary dividends paid to shareholders. 4 There were no share buybacks in 2014, 2015 or 2016.
EXTERNAL BOARD APPOINTMENTS Tom Stoddard is a Trustee of Trout Unlimited (a non-profit conservation organisation). Andy Briggs is the Chairman of the Association of British Insurers, on the Board of Trustees of the NSPCC and the Government’s Business Champion for Older Workers.
2 Awards granted under the Aviva LTIP which vest only if the performance conditions are achieved. 3 Awards arising through the ABP and CFO award in the case of Tom. Under this plan, some of the earned bonuses are paid in the form of conditional shares and deferred for three years. The transfer of the shares to the director at the end of the period is not subject to the attainment of performance conditions but the shares can be forfeited if the ED leaves service before the end of the period. For Andy Briggs this figure also includes matching shares under the AESOP, which vest after three years providing the ED does not leave service and the related partnership shares are not withdrawn from the AESOP trust.
4 Savings-related options (without performance conditions) over shares granted under the SAYE plan. 5 Based on the closing middle-market price of an ordinary share of the Company on 30 December 2016 of 486.4 pence. The closing middle-market price of an ordinary share of the Company during the year ranged from 346.2 pence to 500 pence.
There were no changes to the EDs interests in Aviva shares during the period 1 January 2017 to 7 March 2017, with the exception of Andy Briggs’ continued participation in the AESOP.
15 LT IP, ABP, CFO AWARD AND OP TIONS OVER AVIVA SHARES (AUDITED INFORMATION)
Aviva Chief Financial Officer Award 2014 145,383 — 51,5278 — 98,232 564.50 424.50 Jul 15 – Jul 17
4 For the 2013 and 2014 LTIP grant, the TSR comparator group consisted of the following companies: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, FLG, Legal & General, Met Life, Old Mutual, Prudential, RSA Insurance Group, Standard Life and Zurich Financial. For the 2015 and 2016 LTIP grant, the TSR comparator group consisted of the following companies: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, Legal & General, MetLife, NN Group, Old Mutual, Prudential, RSA Insurance Group, Standard Life and Zurich Financial.
5 The performance periods for these awards begin at the commencement of the financial year in which the award is granted and run for a three-year period. 6 Any unexercised options will lapse at the end of the exercise period. 7 Options are not subject to performance conditions. The option price was fixed by reference to a three day average closing middle-market price of an ordinary share of the Company, prior to invitation date, with a discount of 20% as permitted under the SAYE plan. Options granted under the SAYE are normally exercisable during the six-month period following the end of the relevant (3 or 5 year) savings contract.
Dilution Awards granted under Aviva employee share plans are generally met by issuing new shares as agreed by the Board. Shares are still held in employee trusts, details of which are set out in note 32.
Salary ` Group CEO – £1,034,635 per annum. ` CFO – £712,000 per annum. ` CEO UK – £730,000 per annum.
Bonus ` Three financial metrics (reduced from five). ` One strategic Digital First metric, focusing on two elements; active customer registrations and digital sales. ` For the financial element, a quality of earnings assessment will be undertaken by the
` Personal performance during the year will be taken into account.
` 30% IFRS Adjusted Earnings per Share ` 30% Operating Capital Generation
` TSR comparator group remains unchanged from prior year and is detailed on page 113. ` ROE is calculated as the IFRS profit after tax and non-controlling interest, excluding the impact of amortisation of acquired value of in force business, investment variances, pension scheme income/charge and economic assumption changes, over average IFRS equity (excluding pension scheme net surplus/deficit), attributable to the ordinary shareholders of the Company.
1 As highlighted on page 104, any impact of the Ogden rate change will be taken against the incentive targets for 2017. The above are based on pre-Ogden rate change targets, which the Committee will review and will fully disclose in the 2017 DRR.
Role Fee from 1 April 2017 Fee from 1 April 2016
There is no maximum increase within the Policy. However, basic salary increases take account of the average basic salary increase awarded to UK employees. Different levels of increase may be agreed in certain circumstances at the Committee’s discretion, such as: ` An increase in job scope and responsibility
Awards are subject to malus and clawback. Details of when these may be applied are set out in the notes below.
` 50% vest based on relative Total Shareholder Return (TSR) against a comparator group
` Actual targets for ROE and the appropriate TSR comparator group are agreed by the Committee annually and disclosed in the annual remuneration report section.
Benefits To provide EDs with a suitable but reasonable package of benefits as part of a competitive remuneration package. This involves both core executive benefits, and the opportunity to participate in flexible benefits programmes offered by the Company (via salary sacrifice).
The Committee would pay 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, risk, employee and customer measures. Achievement against individual strategic objectives is also taken into account.
The clawback period runs for two years from the date of vesting (or from the date of payment in the case of annual bonus awards). Clawback was introduced in 2015 so applies to the annual bonus from 2015 (paid March 2016) and the LTIP awards granted in 2015 and any future awards.
APPROACH TO RECRUITMENT REMUNERATION On hiring a new ED, the Committee would align the proposed remuneration package with our Remuneration Policy.
annual bonus opportunity and 350% of basic salary as the face value of a LTIP grant). All other elements of remuneration will also be in line with the Policy set out above. Should the Company have any prior commitments outside of this Policy in respect of an employee promoted internally to an ED
Potential earnings by pay element Potential earnings by pay element Potential earnings by pay element
• The value of the LTIP and deferred element of the annual bonus assumes a constant share price and does not include additional shares awarded in lieu of dividends, that may have been accrued during the vesting period.
EMPLOYMENT CONTRACTS AND LETTERS OF APPOINTMENT ED employment contracts and NED letters of appointment are available for inspection at the Company’s registered office during normal hours of business, and at the place of the Company’s 2017 AGM from 10.45am on 10 May 2017 until the close of the meeting.
CONSIDERATION OF WIDER EMPLOYEE PAY AND SHAREHOLDER VIEWS When determining the Remuneration Policy and arrangements for our EDs, the Committee considers: � Pay and employment conditions elsewhere in the Group to ensure that pay structures are suitably aligned and that levels of remuneration remain appropriate. The Committee reviews levels of basic salary increases for other employees and executives based in the UK. It reviews changes in overall bonus pool funding and long-term incentive grants. The Committee does not directly consult with employees on pay issues but it does consider feedback from sources including the employee opinion survey. The Committee also takes into account information provided by the people function and external advisers
� Its ongoing dialogue with shareholders. It seeks shareholder views and takes them into account when any significant changes are being proposed to remuneration arrangements and when formulating and implementing Remuneration Policy. For example, during 2014 and continuing in 2015, the Committee has had detailed engagement with our largest shareholders to discuss amendments to targets for existing LTIP awards and 2015 annual bonus plan following the acquisition of FLG
21 REMUNER ATION POLIC Y FOR NON -EXECUTIVE DIREC TORS – OVERVIEW
22 NoN -ExEcutivE DirEc tors’ kEy tErms of appoiNtmENt provision policy period In line with the requirement of the UK Corporate Governance Code, all NEDs, including the Chairman, are subject to annual re-election by shareholders at each AGM.
termination By the director or the Company at their discretion without compensation upon giving one month’s written notice for NEDs and three months’ written notice for the Chairman of the Company.
Sir Adrian Montague N 14 January 2013 AGM 2017 Sir Malcolm Williamson A G N R 29 April 2015 AGM 2017 Claudia Arney G N R R 8 February 2016 AGM 2017 Glyn Barker A N R 27 February 2012 AGM 2017 Patricia Cross A N R 1 December 2013 AGM 2017 Belén Romana García G N R 26 June 2015 AGM 2017 Michael Hawker A N R 1 January 2010 AGM 2017 Michael Mire G N R R 12 September 2013 AGM 2017 Bob Stein A N R R 28 January 2013 AGM 2017 Keith Williams A G N 1 August 2016 AGM 2017 key A Audit Committee member R Remuneration Committee member G Governance Committee member R Risk Committee member N Nomination Committee member Denotes chair of committee
Separate opinion in relation to IFRSs as issued by the IASB As explained in the Accounting policies to the financial statements, the Group, in addition to applying IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the financial statements comply with IFRSs as issued by the IASB.
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law.
The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).
The work to address the valuation of the UK Life (including Friends Life) insurance contract liabilities included the following procedures: • We tested on a sample basis the underlying data to source documentation. • Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices.
In addition to the procedures above, in respect of the annuitant mortality assumptions: • We understood and tested the governance process in place to determine the annuitant mortality methodology and assumptions. • We 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.
• We compared the mortality assumptions selected by UK Life (including Friends Life) against those used by their peers.
Our opinion In our opinion, Aviva plc’s Group financial statements and company financial statements (the ‘financial statements’): • give a true and fair view of the state of the Group’s and of the company’s affairs as at 31 December 2016 and of the Group’s and the parent company’s profit and cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European
• We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.
• We tested the key judgements and controls over the preparation of the manually calculated components of the liability. We focused on the consistency in treatment and methodology period-on-period, across life insurance funds and with reference to recognised actuarial practice.
• Further testing was also conducted on the Annuitant Mortality, Credit Default and Expense assumptions as set out below.
Based on the work performed, we consider that the assumptions used to be in line with recognised market practices and, where appropriate, industry peers.
Annuitant Mortality Assumptions Annuitant mortality assumptions require a high degree of judgement due to the number of factors which may influence mortality experience. The differing factors which affect the assumptions are underlying mortality experience (in the portfolio), industry and management views on the future rate of mortality improvements and external factors arising from developments in the annuity market.
In respect of the credit default assumptions : • We understood and tested the governance process in place to determine the credit default risk methodology and assumptions. • We tested the methodology and credit risk pricing models used for commercial and equity release mortgages by management to derive the assumptions with reference to relevant rules and actuarial guidance, and by applying our industry knowledge and experience.
• We 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, including assessing the appropriateness of a service fee approach to allowance for internal service company arrangements.
Based on the work performed, we consider the assumptions for expense risk to be appropriate.
• Our actuarial specialist team members performed independent reprojections on selected classes of business, particularly focusing on the largest and most uncertain reserves. For these classes we compared our re-projected claims reserves to those booked by management, and sought to understand any significant differences.
• We tested the operation of data integrity and change management controls for the models.
Valuation of non-life insurance contract liabilities Refer to page 95 (Audit Committee Report), page 136 (Accounting policies) and page 211 (notes)
Life). • Structured bond-type investments (France Life). • Collateralised loan obligations and non-recourse loans
Rationale for benchmark applied In determining our materiality, we considered financial metrics which we believed to be relevant, and concluded, consistent with last year, that operating profit before tax and after the deduction of integration and restructuring costs was the most relevant benchmark. Operating profit presents a longer-term assessment of the performance of the entity which is more in line with the operations and time horizons of an insurer where insurance contracts and customer relationships span over multiple years. We believe that it is appropriate to deduct integration and restructuring costs as Aviva incur a base level of restructuring costs, even outside times of significant restructuring.
Based on the work performed we consider the non-life insurance contract liabilities to be appropriately valued.
Valuation of finite lived intangible assets relating to the Friends Life Group Limited acquisition Refer to page 95 (Audit Committee Report), page 136 (Accounting policies) and page 178 (notes)
For the finite lived intangible assets we performed the following procedures: • We agreed data to underlying documentation on a sample basis. • Understood and tested the governance process in place to determine the finite lived intangible assets, including testing the associated financial reporting control framework.
Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £5 million (2015: £5 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Other required reporting Consistency of other information and compliance with applicable requirements Companies Act 2006 reporting
• The directors’ explanation on page 103 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • Information in the Annual Report is: – Materially inconsistent with the information in the audited financial statements; or – Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group and company acquired in the course of performing our audit; or – Otherwise misleading.
• The section of the Annual Report on page 97, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: • The directors’ confirmation on page 103 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity.
Directors’ remuneration Directors’ remuneration report – Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Directors’ Responsibilities Statement set out on page 103, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
(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 Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS. In addition to fulfilling their legal obligation to comply with IFRS as adopted by the EU, the Group and the Company have also complied with IFRS as issued by the IASB applicable at 31 December 2016. 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.
Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are stated in pounds sterling, which is the Company’s functional and presentational currency. Unless otherwise noted, the amounts shown in these financial statements are in millions of pounds sterling (£m). The separate financial statements of the Company are on pages 268 to 276.
These amendments provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. The amendments to IAS 16 and IAS 38 prohibit the use of revenue-based depreciation for property, plant and equipment and significantly limit the use of revenue-based amortisation for intangible assets.
(iii) Narrow scope amendments to IFRS10, IFRS 12 and IAS 28 – Applying the Consolidation Exception
Standards, interpretations and amendments to published standards that are not yet effective and have not been adopted early by the Group The following new standards, amendments to existing standards have been issued, are not yet effective and have not been adopted early by the Group: (i) Narrow scope amendments to IAS 12 – Recognition of Deferred Tax Assets for Unrealised Losses
In July 2014, the IASB published IFRS 9 Financial Instruments which will replace IAS 39 Financial Instruments: Recognition and Measurement. The standard incorporates new classification and measurements 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 Group is eligible to apply the deferral approach under the amendments to IFRS 4. The impact of the adoption of IFRS 9 on the Group’s consolidated financial statements will, to a large extent, have to take into account the interaction with the forthcoming insurance contracts standard. 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.
(vii) Annual Improvements to IFRSs 2014-2016 These improvements consist of amendments to three IFRSs including IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates. The amendments clarify existing guidance. The adoption of these amendments is not expected to have a significant impact on the Group’s consolidated financial statements. The amendments to IFRS 1 and IAS 28 are effective for annual reporting periods beginning on or after 1 January 2018; the amendment to IFRS 12 for annual reporting periods beginning on or after 1 January 2017. These amendments have not yet been endorsed by the EU.
(B) Operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, short-term realised and unrealised investment gains and losses are treated as non-operating items. The Group focuses instead on operating profit, a non-GAAP financial performance measure, that incorporates an expected return on investments supporting its long-term and non-longterm businesses.
Comparative figures have been restated for adjustments as detailed in note 1.
New standards, interpretations and amendments to published standards that have been adopted by the Group The Group has adopted the following amendments to standards which became effective for the annual reporting period beginning on 1 January 2016.
The adoption of these amendments has no impact for the Group’s consolidated financial statements.
The amendments to IAS 27 allow investments in subsidiaries to be accounted for using the equity method within the Company’s financial statements. The Company has not elected to use the equity method in its separate financial statements.
Initiative and are intended to assist entities in applying judgement in considering presentation and disclosure requirements. The amendments clarify guidance in IAS 1 Presentation of Financial Statements on materiality and aggregation, the presentation of subtotals, the order of the notes to financial statements and the disclosure of accounting policies. The adoption of these amendments has no impact on the Group’s consolidated financial statements.
(ii) Amendments to IAS 7 – Disclosure initiative The amendments to IAS 7, Statement of Cash Flows, which form part of the IASB’s Disclosure Initiative, require disclosure of the movements in liabilities arising from financing activities with cash and non-cash changes presented separately. The adoption of this amendment is not expected to have an impact on the consolidated financial statements as the Group already voluntarily discloses this information in note 49. The amendment is effective from 1 January 2017 and has not yet been endorsed by EU.
(iii) IFRS 15, Revenue from Contracts with Customers IFRS 15 will replace IAS 18 Revenue and establishes a principle based five-step model to be applied to all contracts with customers, except for insurance contracts, financial instruments and lease contracts. IFRS 15 also includes enhanced disclosure requirements. The impact of the adoption of the new standard is being assessed by the Group. This standard applies to annual reporting periods beginning on or after 1 January 2018 and has been endorsed by the EU.
In June 2016, the IASB issued amendments to IFRS 2 Share-based Payment. The amendments clarify that the fair value of a cash-settled share-based payment is determined on a basis that is consistent with that used for equitysettled share-based payments. The amendments also clarify the classification of share-based payments settled net of withholding tax as well as the accounting consequences resulting from a modification of share-based payments from cash-settled to equity-settled. The adoption of these amendments is not expected to have a significant impact on the Group’s consolidated financial statements. The amendments are effective from 1 January 2018 and have not yet been endorsed by the EU.
Operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment
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 non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see accounting policy O below). Acquisition-related costs are expensed as incurred.
returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. Further details of this analysis and the assumptions used are given in notes 8 and 9.
The determination of a cash generating unit’s recoverable value is based on the discounted value of expected future profits of each business. Significant estimates include forecast cash flow, new business growth rates and discount rates.
The Group uses a number of estimates when calculating its pension obligations, including mortality assumptions, discount rates and inflation rates
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries are consolidated from the date the Group obtains control and are excluded from consolidation from the date the Group loses
Other than investments in investment vehicles which are carried at fair value through profit or loss, investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in accounting policy O, the cost includes goodwill recognised on acquisition. The Group’s share of their post-acquisition profits or losses is recognised in the income statement and its share of postacquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence or joint control over the investment.
If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value.
A gain or loss on a financial investment is only realised on disposal or transfer, and is the difference between the proceeds received, net of transaction costs, and its original cost or amortised cost, as appropriate.
Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions. Gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement.
Translation differences on debt securities and other monetary financial assets measured at fair value and designated as held at fair value through profit or loss (FVTPL) (see accounting policy T) are included in foreign exchange gains and losses in the income statement. For monetary financial assets designated as available for sale (AFS), translation differences are calculated as if they were carried at amortised cost and so are recognised in the income statement, while foreign exchange differences arising from fair value gains and losses are recognised in other comprehensive income and included in the investment valuation reserve within equity. Translation differences on non-monetary items, such as equities which are designated as FVTPL, are reported as part of the fair value gain or loss, whereas such differences on AFS equities are included in the investment valuation reserve.
Accounting policies continued of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
General insurance and health claims incurred include all losses occurring during the year, whether reported or not, related handling costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years.
The assets’ residual values, useful lives and method of depreciation are reviewed regularly, and at least at each financial year end, and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property
If the aggregate carrying value of liabilities for a particular participating business fund is in excess of the aggregate carrying value of its assets, then the difference is held as a negative unallocated divisible surplus balance, subject to recoverability from margins in that fund’s participating business. Any excess of this difference over the recoverable amount is charged to net income in the reporting period.
(N) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance
Impairment testing For impairment testing, goodwill and intangible assets with indefinite useful lives have been allocated to cash-generating units. The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 16. Any impairments are charged as expenses in the income statement.
Impairment The Group reviews the carrying value of its AFS investments on a regular basis. If the carrying value of an AFS investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. The following policies are used to determine the level of any impairment, some of which involve considerable judgement: AFS debt securities: An AFS debt security is impaired if there is objective evidence that a loss event has occurred which has impaired the expected cash flows, i.e. where all amounts due according to the contractual terms of the security are not considered collectible. An impairment charge, measured as the difference between the security’s fair value and amortised cost, is recognised when the issuer is known to be either in default or in financial difficulty. Determining when an issuer is in financial difficulty requires the use of judgement, and we consider a number of factors including industry risk factors, financial condition, liquidity position and near-term prospects of the issuer, credit rating declines and a breach of contract. A decline in fair value below amortised cost due to changes in risk-free interest rates does not necessarily represent objective evidence of a loss event.
Reversals of impairments on any of these assets are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor’s credit rating), and are not recognised in respect of equity instruments.
Derivative contracts may be traded on an exchange or overthe -counter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, caps and floors. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. Many OTC transactions are contracted and documented under International Swaps and Derivatives Association (ISDA) master agreements or their equivalent, which are designed to provide legally enforceable set-off in the event of default, reducing the Group’s exposure to credit risk.
(Q) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, as assessed by qualified external valuers or by local qualified staff of the Group. Changes in fair values are recorded in the income statement in net investment income.
In general, the other than trading category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group acquires with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see accounting policy U below). The AFS category is used where the relevant long-term business liability (including shareholders’ funds) is passively managed, as well as in certain fund management and non-insurance operations.
Other receivables and payables are initially recognised at cost, being fair value. Subsequent to initial measurement they are measured at amortised cost.
Group’s legal or constructive obligation is limited to the amount it agrees to contribute to a fund and there is no obligation to pay further contributions if the fund does not hold sufficient assets to pay benefits. A defined benefit pension plan is a pension plan that is not a defined contribution plan and typically defines the amount of pension benefit that an employee will receive on retirement.
Equity compensation plans The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’ Remuneration Report and in note 31.
At each reporting date, we review loans carried at amortised cost for objective evidence that they are impaired and uncollectable, either at the level of an individual security or collectively within a group of loans with similar credit risk characteristics. To the extent that a loan is uncollectable, it is written down as impaired to its recoverable amount, measured as the present value of expected future cash flows discounted at the original effective interest rate of the loan, taking into account the fair value of the underlying collateral through an impairment provision account. Subsequent recoveries in excess of the loan’s written-down carrying value are credited to the income statement.
(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 nonparticipating 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.
(AB) Employee benefits Pension obligations The Group operates a number of pension schemes, whose members receive benefits on either a defined benefit or defined contribution basis. Under a defined contribution plan, the
Remeasurements of defined benefit plans comprise actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions, the return on plan assets (excluding net interest) and the effect of the asset ceiling (if any). The Group recognises remeasurements immediately in other comprehensive income and does not reclassify them to the income statement in subsequent periods.
Service costs comprising current service costs, past service costs, gains and losses on curtailments and net interest expense/(income) are charged or credited to the income statement.
Shares purchased by employee share trusts to fund these awards are shown as deduction from shareholders’ equity at their weighted average cost.
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 postretirement 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 and tier 1 notes is credited directly in equity.
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 operating profit has been calculated after charging policyholder tax.
(AG) Earnings per share Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of ordinary shares after deducting treasury shares.
(AH) Operations held for sale Assets and liabilities held for disposal as part of operations which are held for sale are shown separately in the consolidated statement of financial position. Operations held for sale are recorded at the lower of their carrying amount and their fair value less the estimated selling costs.
Consolidated income statement For the year ended 31 December 2016 £m
Net earned premiums H 22,868 18,924 Fee and commission income I&J 1,962 1,797 Net investment income K 30,257 2,825 Share of profit after tax of joint ventures and associates 216 180 (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 3b (11) 2
Earnings per share AG & 14 Basic (pence per share) 15.3p 23.1p Diluted (pence per share) 15.1p 22.8p 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
Reconciliation of Group operating profit to profit for the year For the year ended 31 December 2016 £m £m
Life business 2,642 2,442 General insurance and health 833 765 Fund management 138 106 Other: Other operations (94) (84) Corporate centre (184) (180) Group debt costs and other interest (325) (361)
Dividends and appropriations — — — — — — (724) — (724) — (724) Non-controlling interests share of dividends declared in the year — — — — — — — — — (142) (142) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — 1 — — 1 — 1 Capital contributions from non-controlling interests — — — — — — — — — 5 5 Changes in non-controlling interests in subsidiaries — — — — — — — — — (1) (1) Treasury shares held by subsidiary companies — — — — (27) — — — (27) — (27) Reserves credit for equity compensation plans — — — — — 40 — — 40 — 40 Shares issued under equity compensation plans 3 — 13 — 6 (35) 19 — 6 — 6 Aggregate tax effect – shareholder tax — — — — — — 15 — 15 — 15 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 8 379 14 Short-term fluctuation in return on investments on non-long-term business 9a (518) (84) Economic assumption changes on general insurance and health business 9a (242) (100) Impairment of goodwill, associates and joint ventures and other amounts expensed 16a, 19a — (22) Amortisation and impairment of intangibles (175) (155) Amortisation and impairment of acquired value of in-force business 17, 18 (540) (498) (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 3b (11) 2 Other2 (498) (53)
Profit before tax attributable to shareholders’ profits 1,193 1,413 Tax on operating profit 14a(i) (706) (603) Tax on other activities 14a(i) 372 287 (334) (316)
Consolidated statement of changes in equity For the year ended 31 December 2016
Profit for the year — — — — — — 936 — 936 161 1,097 Other comprehensive income — — — — — (316) (142) — (458) (45) (503) Total comprehensive income for the year — — — — — (316) 794 — 478 116 594 Issue of share capital – acquisition of Friends
2 Refer to note 36 for further details of balances included in Other reserves. 3 Includes Friends Life’s Step-up Tier one Insurance Capital Securities (‘STICS’) issuances classified as equity instruments within non-controlling interests at the date of acquisition. 4 On 29 May 2015, notification was given that the Group would redeem the 2005 STICS issuance. At that date the instrument was reclassified as a financial liability. The instrument was redeemed on 1 July 2015, £272 million represents the fair value of instruments recognised on acquisition, made up of the £268 million outstanding principal redeemed on 1 July 2015 and £4 million amortised subsequent to the reclassification and included within finance costs in the income statement.
Assets Goodwill O & 16 2,045 1,955 Acquired value of in-force business and intangible assets O & 17 5,468 5,731 Interests in, and loans to, joint ventures D & 18 1,604 1,590 Interests in, and loans to, associates D & 19 481 329 Property and equipment P & 20 487 449 Investment property Q & 21 10,768 11,301 Loans V & 23 24,784 22,433 Financial investments S, T, U & 26 299,835 274,217 Reinsurance assets N & 43 26,343 20,918 Deferred tax assets AC & 46 180 131 Current tax assets 119 114 Receivables 27 7,794 6,875 Deferred acquisition costs and other assets X & 28 5,893 5,018 Prepayments and accrued income X & 28c 2,882 3,094 Cash and cash equivalents Y & 55d 38,708 33,676 Assets of operations classified as held for sale AH & 3c 13,028 —
Equity attributable to shareholders of Aviva plc 17,003 16,002 Direct capital instrument and tier 1 notes 34 1,123 1,123
Cash flows from operating activities1 Cash generated from operating activities 55a 5,394 5,197 Tax paid (647) (442)
Cash and cash equivalents at 31 December 55d 38,405 33,170 1 Cash flows from operating activities include interest received of £5,642 million (2015: £5,251 million) and dividends received of £2,536 million (2015: £2,353 million). 2 In 2015 this included redemption of 2005 STICS of £268 million. 3 Dividends paid to non-controlling interests of subsidiaries included £7 million in 2015 relating to the 2003 STICS which were reclassified from non-controlling interests to the direct capital instrument and tier 1 notes in October 2015.
Consolidated statement of cash flows For the year ended 31 December 2016
Under the agreement, Aviva paid RBC Insurance £345 million (CAD$598 million) on 1 July 2016, the date on which the general insurance company became a wholly owned subsidiary of the Group and was renamed Aviva General Insurance Company. A further c.£29 million (CAD$50 million) commission is payable over three years as part of a deferred consideration agreement.
For cash flow purposes, the amounts included within the Group’s consolidated statement of cash flows related to this acquisition are as follows: £m
1 – Prior period adjustments During 2016, UK Life reviewed its accounting and modelling for annual management charge rebates relating to unit-linked investment contracts. It was concluded that an associated liability should be released partly offset by a reduction in deferred acquisition costs in accordance with IFRS. This has been presented as a prior year adjustment and has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in closing equity at 31 December 2015 of £38 million. The impact on the consolidated income statement, statement of financial position and equity are shown in the tables below. There is no impact on the consolidated statement of cash flows.
Operating profit before tax attributable to shareholders’ profits 2,665 23 2,688
Total expenses (22,556) 23 (22,533) Effect analysed as: Fee and commission expense (3,347) 23 (3,324)
Total assets 387,874 (43) 387,831 Effect analysed as: Deferred acquisition costs and other assets 5,061 (43) 5,018
As a result of this adjustment, comparative information in note 4 Segmental information, note 6 Details of expenses, note 13 Tax, note 14 Earnings per Share, note 22 Fair value methodology, note 28 Deferred acquisition costs, other assets, prepayments and accrued income, note 37 Retained earnings, note 39 Contract liabilities and associated reinsurance, note 41 Liability for investment contracts, note 46 Tax assets and liabilities and lines within note 55 Statement of cash flows (with no change to total cash generated from operating activities) have been restated.
Notes to the consolidated financial statements continued 3 – Subsidiaries 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 details of businesses held for sale at the year end and subsequent events.
The following table summarises the consideration for the acquisition, the fair value of the assets acquired, liabilities assumed and resulting allocation to goodwill: Fair Value £m
Liabilities Insurance liabilities 825 Deferred tax liabilities 49 Payables and other financial liabilities 3 Other liabilities 16
Fair value and accounting policy adjustments The adjustments arising on acquisition were in respect of the following: • Recognition of identifiable intangible assets at fair value and related deferred tax liability; and • Elimination of deferred acquisition costs.
Intangible assets Within intangible assets of £210 million, £190 million relate to RBC Insurance’s distribution network and RBC’s customer relationships, the value of which is based on the multi-period excess earnings method. The useful lives of the access to the distribution network and value of the customer relationships have been assessed as 15 years and 10 years, respectively. These will be amortised over these periods, along with the corresponding release of the applicable deferred tax liability, in accordance with the Group’s accounting policies.
(ii) Other acquisitions On 29 April 2016, Aviva plc completed the acquisition of an additional 23% share in Aviva Life Insurance Company India Limited (‘Aviva India’) from its partner Dabur invest Corp (a part of the Dabur Group) which brings the Group’s holding to 49%. As the Group continues to have significant influence, Aviva India continues to be equity accounted as an associate (see note 19).
(b) Disposal and remeasurement of subsidiaries, joint ventures and associates The (loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises: Ireland – health (8) — Turkey – long-term business — 1 Other small operations (3) 1
Notes to the consolidated financial statements continued 3 – Subsidiaries continued (ii) Antarius On 9 February 2017, Aviva announced the sale of its entire 50% shareholding in Antarius to Sogecap, a subsidiary of Société Générale, for a consideration of approximately £425 million (€500 million), payable in cash upon completion. Antarius is currently owned jointly by Aviva and Crédit du Nord, a separate subsidiary of Société Générale. This agreement follows Crédit du Nord’s decision in 2015 to exercise its option to purchase Aviva’s shareholding in Antarius. All regulatory approvals for the transaction have been received with completion expected on 1 April 2017.
Profit and loss In the period 1 July 2016 to 31 December 2016, the acquired general insurance company contributed net earned premiums of £239 million and a profit before tax attributable to shareholders of £4 million, including £17 million of integration and restructuring costs, to the consolidated results of the Group.
(c) Assets and liabilities of operations classified as held for sale The assets and liabilities of operations classified as held for sale as at 31 December 2016 are as follows: Assets Goodwill, AVIF and other intangibles 12 — Investment property 48 — Loans 75 — Financial investments 10,706 — Reinsurance assets 411 — Other assets 1,521 — Cash and cash equivalents 255 —