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 242 to 252.
(ii) IFRS 9, Financial Instruments (Company only) In July 2014, the IASB published IFRS 9, Financial Instruments which replaced IAS 39 Financial Instruments: Recognition and Measurement. The standard incorporates new classification and measurement requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39, and new hedge accounting requirements. Under IFRS 9, all financial assets will be measured at either amortised cost or fair value. The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. The standard retains most of IAS 39’s requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the fair value changes attributable to own credit is to be recognised in other comprehensive income instead of the income statement. The hedge accounting requirements are more closely aligned with risk management practices and follow a more principle based approach.
The Group has however been required to apply the additional disclosure requirements of IFRS 9 which are set out in note 53 and note 59.
Although the Group has opted to defer adoption of IFRS 9 as its activities are predominantly related to insurance, the Company is not eligible to apply this deferral option and IFRS 9 was effective for the Company from 1 January 2019. The adoption of IFRS 9 has not had a significant impact on the Company.
(iii) IFRS 15, Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. This standard applies to annual reporting periods beginning on or after 1 January 2018 and has been endorsed by the EU. This standard replaces IAS 18 Revenue.
• Insurance contracts (IFRS 4) • Financial instruments (IAS 39/IFRS 9) • Leases (IAS 17)
• (J) Other fee and commission income – updated to clarify that all other fee and commission income is recognised over time as the services are provided.
The retrospective impact of the adoption of IFRS 15 on prior reporting periods is not material to the Group, and prior period comparative figures have not been restated as a result. The adoption of IFRS 15 does not have a significant impact on the Group’s consolidated financial statements.
The following amendments to existing standards and IFRIC interpretations have been issued, and are effective from 1 January 2018 or earlier, and do not have an impact on the Group’s consolidated financial statements as the clarifications are consistent with our existing interpretation.
(vii) IFRIC 22, Foreign Currency Transactions and Advance Consideration In December 2016, the IASB published IFRIC 22 Foreign Currency Transactions and Advance Consideration. The standard is effective for annual reporting beginning on or after 1 January 2018 and has been endorsed by the EU.
Standards, interpretations and amendments to published standards that are not yet effective and have not been adopted early by the Group or the Company The following new standards and amendments to existing standards have been issued, are not yet effective and have not been adopted early by the Group: (i) IFRS 17, Insurance Contracts In May 2017, the IASB published IFRS 17 Insurance Contracts, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 that was issued in 2005. IFRS 17 applies to all types of insurance contracts as well as to certain guarantees and financial instruments with discretionary participation features. In contrast to the requirements in IFRS 4, which are largely based on grandfathering of previous local accounting policies, IFRS 17 provides a comprehensive and consistent approach to insurance contracts. The core of IFRS 17 is the general model, supplemented by a specific adaption for contracts with direct participation features (the variable fee approach) and a simplified approach (the premium allocation approach) mainly for short-duration contracts.
The impact of the adoption of IFRS 16 on the Group has been assessed. The Group has chosen to adopt the modified retrospective approach on transition permitted by IFRS 16. It is expected that the adoption of the standard will result in a reduction of retained earnings of between £120m and £140m at 1 January 2019. This arises from the value of right of use assets brought onto the balance sheet being lower than the value of lease liabilities due to the different rates of run-off. The gross impact on assets/liabilities is expected to be less than £500m. The impact on profit before tax and group adjusted operating profit is not expected to be material. This standard is applied to annual reporting periods beginning on or after 1 January 2019 and has been endorsed by the EU.
Group adjusted operating profit is presented before and after integration and restructuring costs. These costs are only reported to the extent that they are significant, and not otherwise absorbed within operating costs.
The Audit Committee reviews the reasonableness of judgements and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the Committee in the year are included within the Audit Committee Report on page 58.
AVIF is recognised, amortised and tested for impairment by reference to the present value of estimated future profits. Other intangible assets are recognised and tested for impairment using an income approach method. Significant estimates include forecast cash flows, discount rates and determination of useful lives.
Where quoted market prices are not available, valuation techniques are used to value financial instruments and investment property. These include broker quotes and models using both observable and unobservable market inputs. The valuation techniques involve judgement with regard to the valuation models used and the inputs to these models can lead to a range of plausible valuation for financial investments.
During the year management reassessed the critical estimates previously provided and, based on their assessment of qualitative and quantitative risk factors, resolved that an additional critical estimate should be added to cover the valuation of a specific UK Life provision.
Transactions with non-controlling interests that lead to changes in the ownership interests in a subsidiary but do not result in a loss of control are treated as equity transactions.
As part of their investment strategy, long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary.
(E) Foreign currency translation Income statements and cash flows of foreign entities are translated into the Group’s presentation currency at average exchange rates for the year while their statements of financial position are translated at the year-end exchange rates. Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures, and of borrowings and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income and taken to the currency translation reserve within equity. On disposal of a foreign entity, such exchange differences are transferred out of this reserve and are recognised in the income statement as part of the gain or loss on sale. The cumulative translation differences were deemed to be zero at the transition date to IFRS.
(F) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. This presumes that the transaction takes place in the principal (or most advantageous) market under current market conditions. Fair value is a market-based measure and in the absence of observable market prices in an active market, it is measured using the assumptions that market participants would use when pricing the asset or liability.
As noted in accounting policy A, insurance contracts and participating investment contracts in general continue to be measured and accounted for under existing accounting practices at the later of the date of transition to IFRS (‘grandfathered’) or the date of the acquisition of the entity, in accordance with IFRS 4. IFRS accounting for insurance contracts in UK companies was grandfathered at the date of transition to IFRS and determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers (subsequently withdrawn by the ABI in 2015).
Liability adequacy At each reporting date, an assessment is made of whether the recognised long-term business provisions are adequate, using current estimates of future cash flows. If that assessment shows that the carrying amount of the liabilities (less related assets) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up an additional provision in the statement of financial position.
Strategic report Governance IFRS financial statements Other information explicit allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 43(b).
Provisions for latent claims and claims that are settled on an annuity type basis such as structured settlements are discounted, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims and the nature of the liabilities. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is described in note 43(b). Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts. Where material, anticipated recoveries are disclosed under receivables and not deducted from outstanding claims provisions.
Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance and investment contract liabilities. This includes balances in respect of investment contracts which are legally reinsurance contracts but do not meet the definition of a reinsurance contract under IFRS. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying contract liabilities, outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
(O) Goodwill, AVIF and intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired
Strategic report Governance IFRS financial statements Other information subsidiary, associate or joint venture at the date of acquisition. Goodwill arising on the Group’s investments in subsidiaries is shown as a separate asset, while that on associates and joint ventures is included within the carrying value of those investments.
Where negative goodwill arises on an acquisition, this is recognised immediately in the consolidated income statement.
(S) Derecognition and offset of financial assets and financial liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: • The rights to receive cash flows from the asset have expired; • The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or
Changes in the fair value of securities classified as AFS are recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity. When securities classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement with a corresponding movement through other comprehensive income.
All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item
Interest rate futures, forwards and options contracts Interest rate futures are exchange-traded instruments and represent commitments to purchase or sell a designated security or money market instrument at a specified future date and price. Interest rate forward agreements are OTC contracts in which two parties agree on an interest rate and other terms that will become a reference point in determining, in concert with an agreed notional principal amount, a net payment to be made by one party to the other, depending upon what rate prevails at a future point in time. Interest rate options, which consist primarily of caps and floors, are interest rate protection instruments that involve the potential obligation of the seller to pay the buyer an interest rate differential in exchange for a premium paid by the buyer. This differential represents the difference between current rate and an agreed rate applied to a notional amount. Exposure to gain or loss on all interest rate contracts will increase or decrease over their respective lives as interest rates fluctuate. Certain contracts, known as swaptions, contain features which can act as swaps or options.
However, for the majority of mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch that would otherwise arise from using different measurement bases for these three items. The fair values of these mortgages are estimated using
Plan assets exclude unpaid contributions due from Group entities to the schemes, and any non-transferrable financial instruments issued by a Group entity and held by the schemes. If the fair value of plan assets exceeds the present value of the defined benefit obligation, the resultant asset is limited to the asset ceiling defined as present value of economic benefits available in the form of future refunds from the plan or reductions in contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group.
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.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future profits will be available.
Current and deferred tax relating to items recognised in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity respectively. Deferred tax related to fair value re-measurement of available for sale investments, pensions and other post-retirement obligations and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on the direct capital instrument and tier 1 notes is credited directly in equity.
Current and deferred tax includes amounts provided in respect of uncertain tax positions, where management expects it is more likely than not that an economic outflow will occur as a result of examination by a relevant tax authority. Provisions reflect management’s best estimate of the ultimate liability based on their interpretation of tax law, precedent and guidance, informed by external tax advice as necessary. The final amounts of tax due may ultimately differ from management’s best estimate at the balance sheet date. Changes in facts and circumstances underlying these provisions are reassessed at each balance sheet date, and the provisions are re-measured as required to reflect current information.
(AD) Borrowings Borrowings are classified as being for either core structural or operational purposes. They are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, most borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. All borrowing costs are expensed as they are incurred except where they are directly attributable to the acquisition or construction of property and equipment as described in accounting policy P.
Consolidated income statement For the year ended 31 December 2018 £m
Gross written premiums 28,659 27,606 Premiums ceded to reinsurers (2,326) (2,229)
Premiums written net of reinsurance 26,333 25,377 Net change in provision for unearned premiums (81) (153) Net earned premiums H 26,252 25,224 Fee and commission income I & J 2,180 2,187 Net investment (expense)/income K (10,847) 22,066 Share of profit after tax of joint ventures and associates 112 41 Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 4(a) 102 135
Tax credit/(expense) AC & 14 35 (728) Less: tax attributable to policyholders’ returns 14(d) (477) 371 Tax attributable to shareholders’ profits 14(d) (442) (357)
Fair value gains/(losses) 38 57 (7) Fair value gains transferred to profit on disposals 38 (78) (2)
Share of other comprehensive (loss)/income of joint ventures and associates 38 (10) 6 Foreign exchange rate movements 38, 40 5 68 Aggregate tax effect – shareholder tax on items that may be reclassified subsequently to income statement 14(b) 8 5
Attributable to: Equity holders of Aviva plc 1,310 1,523 Non-controlling interests 124 192
Reconciliation of Group adjusted operating profit to profit for the year For the year ended 31 December 2018 £m
Group adjusted operating profit before tax attributable to shareholders’ profits Life business1 2,999 2,852 General insurance and health1 704 704 Fund management 146 164 Other: Other operations1 (237) (143) Corporate centre (216) (184) Group debt costs and other interest (280) (325)
Integration and restructuring costs 7 — (141) Group adjusted operating profit before tax attributable to shareholders’ profits after integration and restructuring
Profit before tax attributable to shareholders’ profits 2,129 2,003 Tax on operating profit 15(a)(i) (647) (639) Tax on other activities 15(a)(i) 205 282 (442) (357)
Reconciliation of Group adjusted operating profit to profit for the year continued Group adjusted operating profit can be further analysed into the following segments (details of segments can be found in note 5): Year ended 31 December 2018
United Kingdom1 1,728 447 — — 2,175 Canada — 46 — — 46 France 425 104 — (29) 500 Poland 156 21 — 6 183 Italy, Ireland, Spain and Other 292 98 — (14) 376 Asia 235 (8) (4) (32) 191 Aviva Investors 1 — 168 32 201 Other Group activities 15 (4) — (106) (95)
Total 3,068 1 Non-insurance businesses in the UK previously included within ‘Other operations’, such as the savings business, have been reclassified to long-term business and general insurance and health segments as this presentation is consistent with how the business is managed. See note 1 for further details. The impact of this change was to reduce long-term business operating profit by £80 million (2017: £30 million) and increase general insurance and health operating profit by £4 million (2017: £4 million).
Balance at 31 December 1,003 200 10,195 (14) 1,141 (274) 4,918 731 17,900 1,235 19,135 1 Capital reserves consist of share premium of £1,207 million, a capital redemption reserve of £14 million and a merger reserve of £8,974 million. 2 On 25 May 2017, the Group announced a share buy-back of ordinary shares for an aggregate purchase price of up to £300 million. On completion in 2017 of this buy-back, £300 million of shares had been purchased and shares with a nominal value of £14 million have been cancelled, giving rise to a capital redemption reserve of an equivalent amount. See note 32 for further details of the shares purchased in buy-back. 3 On 28 September 2017, notification was given that the Group would redeem the $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into sterling on that date. The resulting foreign exchange loss of £92 million has been charged to retained earnings.
Assets Goodwill O & 17 1,872 1,876 Acquired value of in-force business and intangible assets O & 18 3,201 3,455 Interests in, and loans to, joint ventures D & 19 1,214 1,221 Interests in, and loans to, associates D & 20 304 421 Property and equipment P & 21 548 509 Investment property Q & 22 11,482 10,797 Loans V & 24 28,785 27,857 Financial investments S, T, U & 27 297,585 311,082 Reinsurance assets N & 46 11,755 13,492 Deferred tax assets AC & 49 185 144 Current tax assets 76 94 Receivables 28 8,879 8,285 Deferred acquisition costs X & 29 2,965 2,906 Pension surpluses and other assets X & 30 3,341 3,468 Prepayments and accrued income X & 30(b) 2,947 2,860 Cash and cash equivalents Y & 58(d) 46,484 43,347 Assets of operations classified as held for sale AH & 4(c) 8,855 10,871
Share premium 32(b) 1,214 1,207 Capital redemption reserve 32(b) 44 14 Merger reserve D & 37 8,974 8,974 10,232 10,195 Treasury shares 34 (15) (14) Currency translation reserve 38 1,122 1,141 Other reserves 38 (279) (274) Retained earnings 39 4,523 4,918 Equity attributable to shareholders of Aviva plc 16,758 17,169 Direct capital instrument and tier 1 notes 36 731 731
Cash flows from financing activities Proceeds from issue of ordinary shares 8 12 Shares purchased in buy-back 32 (600) (300) Treasury shares purchased for employee trusts (4) — New borrowings drawn down, net of expenses 3,148 1,320 Repayment of borrowings2 (4,181) (1,904) Net repayment of borrowings 52(e) (1,033) (584) Interest paid on borrowings (551) (610) Preference dividends paid 16 (17) (17) Ordinary dividends paid 16 (1,128) (983) Forfeited dividend income 4 — Coupon payments on direct capital instrument and tier 1 notes 16 (44) (81) Capital contributions from non-controlling interests of subsidiaries 40 3 36 Dividends paid to non-controlling interests of subsidiaries 40 (90) (103) Other3 (13) — Total net cash used in financing activities (3,465) (2,630)
Total net increase in cash and cash equivalents 2,930 4,916 Cash and cash equivalents at 1 January 43,587 38,405
Cash and cash equivalents at 31 December 58(d) 46,609 43,587 1 Cash flows from operating activities include interest received of £5,093 million (2017: £5,302 million) and dividends received of £4,648 million (2017: £2,606 million). 2 Repayment of borrowings includes the redemption of €500 million 6.875% subordinated notes and $575 million 7.875% undated subordinated notes in full at first call dates and the maturity of €350 million 0.100% senior notes. 3 Includes £10 million related to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs (see note 35) and a £3 million donation of forfeited dividend income to a charitable foundation.
Strategic report Governance IFRS financial statements Other information 1 – Presentation changes During 2018, non-insurance business in the UK which was previously reported within the Other products and services segment, such as the savings business, are now reported within the long-term business or general insurance and health segments, as appropriate, as this is more reflective of the Group’s operating segments and consistent with how the businesses are managed. Comparative information in the products and services segmental note 5(b) has been restated to reflect this change. This resulted in a loss before tax of £80 million (2017: £30 million) and profit before tax of £4 million (2017: £4 million) being transferred from the Other products and services segment to the longterm business and general insurance and health segments respectively. The corresponding net assets amount is £55 million (2017: £140 million). This change has no impact on the Group’s adjusted operating profit, profit before tax, net assets or on the operating segmental disclosures in note 5(a).
2 – Exchange rates The Group’s principal overseas operations during the year were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into sterling at the average rates for the year, and the assets and liabilities have been translated at the year end rates as follows: Eurozone Average rate (€1 equals) £0.88 £0.88 Year end rate (€1 equals) £0.90 £0.89 Canada Average rate ($CAD1 equals) £0.58 £0.60 Year end rate ($CAD1 equals) £0.57 £0.59 Poland Average rate (PLN1 equals) £0.21 £0.21 Year end rate (PLN1 equals) £0.21 £0.21
Strategic report Governance IFRS financial statements Other information 3 – Subsidiaries, joint ventures and associates – acquisitions This note provides details of the acquisitions of subsidiaries, joint ventures and associates that the Group has made during the year.
(i) Wealthify On 8 February 2018, Aviva acquired a majority shareholding in Wealthify Group Limited, the holding company of Wealthify, for a cash consideration of £17 million. The investment is part of Aviva’s strategy to build customer loyalty by providing customers with a wide range of insurance and investment services, all managed through the convenience and simplicity of Aviva’s digital hub, MyAviva.
The following table summarises the consideration for the acquisition, the fair value of the assets acquired, liabilities assumed and resulting allocation to goodwill.
Assets Acquired value of in-force business and intangible assets 96 Property and equipment 3 Investment property 424 Financial investments 3,207 Reinsurance assets 502 Receivables 33 Tax assets 3 Cash and cash equivalents 354
In the period 1 June 2018 to 31 December 2018, the profits of the acquired Friends First company have contributed net earned premiums and fees and commission income of £68 million and a loss before tax attributable to shareholders of £0.4 million.
Disposals 113 237 Held for sale remeasurements (13) (125) Remeasurements due to change in control status 2 23
(b) Disposals of subsidiaries, joint ventures and associates The following businesses were disposed of in 2018: Italy – Avipop (i)
Assets Goodwill, acquired value of in-force business and intangible assets 439 213 652 Investments 376 457 833 Receivables and other financial assets 17 4 21 Reinsurance assets 75 6 81 Deferred acquisition costs 15 — 15 Prepayments and accrued income — 6 6 Cash and cash equivalents 42 18 60
Total assets 964 704 1,668 Liabilities Gross insurance liabilities 376 381 757 Payables and other financial liabilities 2 19 21 Tax liabilities 143 48 191 Other liabilities 6 21 27
Total liabilities 527 469 996 Net assets 437 235 672 Non-controlling interests before disposal (213) (128) (341)
Net consideration 232 185 417 Reserves recycled to the income statement 16 (14) 2
Profit on disposal 24 64 88 Other small disposals (iii) 25 Total profit on disposal 113
(iii) Other On 19 January 2018, Aviva announced that it had completed the sale of its entire 49% shareholding in its joint venture in Taiwan, First Aviva Life (Aviva Taiwan) to Aviva’s joint venture partner, First Financial Holding Company Limited (FFH) for cash consideration of $1. The transaction resulted in a gain of £7 million arising from reserves recycled to the Income Statement. Remeasurement losses arising from the classification of Aviva Taiwan as held for sale were recognised in 2017.
The remaining balance of £9 million loss primarily relates to other currency translation reserve recycling adjustments.
(iv) Disposals of other investments In the second half of 2018, Aviva France disposed of its investments in the asset management company Primonial Real Estate Investment Management and the breakdown assistance company Opteven. The realised gains on disposal of these investments recognised in net investment income was €107 million (approximately £94 million).
(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 2018 are as follows: Assets Goodwill, acquired value of in-force and other intangibles 660 1,467 Property and equipment 5 5 Loans — 6 Financial investments 7,251 8,306 Reinsurance assets 45 123 Other assets 206 225 Cash and cash equivalents 688 739 Total assets 8,855 10,871
Liabilities Gross insurance liabilities 121 914 Gross liability for investment contracts 8,341 8,663 Unallocated divisible surplus — 19 Other liabilities 59 277
(i) FPI On 19 July 2017, Aviva announced the sale of FPI to RL360 Holding Company Limited, a subsidiary of International Financial Group Limited, for a total consideration of £340 million. The conditions defined in IFRS 5 for a subsidiary to be classified as held for sale include the presumption that the sale will be completed within 12 months of the date of reclassification. The transaction remains subject to regulatory approvals and is now expected to complete in the first half of 2019. As such, the subsidiary continues to be classified as held for sale and has been remeasured at fair value based on the expected sale price less costs to sell, calculated as £334 million. This resulted in a total loss on remeasurement of £118 million in 2017, and an additional remeasurement loss of £13 million in 2018 (see note 18). The goodwill attributable to FPI was fully impaired in 2017 (see note 17). The business remains a consolidated subsidiary of Aviva at the balance sheet date.
(d) Remeasurements due to change in control status On 13 February 2018, Aviva announced that it has completed the transaction to develop a digital insurance joint venture in Hong Kong (Blue) with Hillhouse Capital Group (Hillhouse) and Tencent Holdings Limited (Tencent). The joint venture commenced operating under its new corporate structure during the first half of 2018. The transaction included the sale of 60% of the shareholding in Aviva Life Insurance Company Limited (Aviva Hong Kong) for cash consideration of HKD 301 million (approximately £29 million). The transaction resulted in a remeasurement gain of £2 million mainly arising through the recycling of reserves to the income statement and, additionally, a loss of £4 million in equity in accordance with IFRS 10 as Aviva has retained control of certain activities under the sale agreement.
(e) Significant restrictions In certain jurisdictions the ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local corporate or insurance laws and regulations and solvency requirements. There are no protective rights of non-controlling interests which significantly restrict the Group’s ability to access or use the assets and settle the liabilities of the Group.
United Kingdom The United Kingdom comprises two operating segments – Life and General Insurance. The principal activities of our UK Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business. UK General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers’ liability and professional indemnity liability) and medical expenses.
France The principal activities of our operations in France are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals, with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines insurance products through agents and a direct insurer.
Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in ‘Other Group activities’, along with central core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our internal reinsurance and digital broker operations and the Group’s interest in Wealthify (see note 3) are also included in this segment, as are the elimination entries for certain inter-segment transactions.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued Measurement basis The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are subject to normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of: (i) profit or loss from operations before tax attributable to shareholders (ii) profit or loss from operations before tax attributable to shareholders, adjusted for items outside the segment management’s control, including investment market performance and fiscal policy changes.
Gross written premiums 7,302 4,504 3,047 5,584 616 6,504 1,102 — — 28,659 Premiums ceded to reinsurers (1,666) (317) (119) (77) (12) (113) (20) — (2) (2,326) Internal reinsurance revenue — 6 — — — (2) (7) — 3 — Premiums written net of reinsurance 5,636 4,193 2,928 5,507 604 6,389 1,075 — 1 26,333 Net change in provision for unearned premiums 14 (87) 27 (38) 7 9 (13) — — (81) Net earned premiums 5,650 4,106 2,955 5,469 611 6,398 1,062 — 1 26,252 Fee and commission income 939 122 24 313 94 113 202 368 5 2,180 6,589 4,228 2,979 5,782 705 6,511 1,264 368 6 28,432 Net investment (expense)/income (6,693) 16 51 (2,302) (73) (1,111) (286) 37 (486) (10,847) Inter-segment revenue — — — — — — — 259 — 259 Share of profit of joint ventures and associates 78 — 1 9 — 10 14 — — 112 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — — — 89 (5) 27 (9) 102 Segmental income1 (26) 4,244 3,031 3,489 632 5,499 987 691 (489) 18,058 Claims and benefits paid, net of recoveries from reinsurers (10,184) (2,731) (1,989) (4,659) (356) (2,595) (570) — (58) (23,142) Change in insurance liabilities, net of reinsurance 6,184 351 (133) 557 148 (872) (40) — 51 6,246 Change in investment contract provisions 7,540 — — 27 — (2,249) 42 (39) — 5,321 Change in unallocated divisible surplus 270 — — 1,754 12 1,063 138 — — 3,237 Fee and commission expense (741) (1,225) (791) (484) (146) (343) (199) (33) 569 (3,393) Other expenses (1,687) (220) (182) (256) (106) (188) (272) (449) (483) (3,843) Inter-segment expenses (232) (5) (6) (1) (6) (7) — — (2) (259) Finance costs (157) (1) (5) (1) — (5) (3) — (401) (573) Segmental expenses 993 (3,831) (3,106) (3,063) (454) (5,196) (904) (521) (324) (16,406) Profit/(loss) before tax 967 413 (75) 426 178 303 83 170 (813) 1,652 Tax attributable to policyholders’ returns 469 — — — — 1 7 — — 477 Profit/(loss) before tax attributable to shareholders’
Integration and restructuring costs — — — — — — — — — — Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 1,909 415 47 511 199 301 262 151 (679) 3,116 1 Total reported income, excluding inter-segment revenue, includes £4,412 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written. 2 Canada adjusted operating profit includes £1 million relating to non-insurance activities. 3 Aviva Investors adjusted operating profit includes £1 million profit relating to Aviva Investors Pooled Pensions business. 4 Other Group activities include Group Reinsurance and net expenses of £99 million associated with supporting the development of the Group’s digital business written through its UK insurance intermediary which places business primarily on behalf of UK General Insurance. 5 Other includes a movement in the discount rate used for estimating lump sum payments in settlement of bodily injury claims which resulted in a gain of £190 million (see note 43(b)), a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First (see note 3), a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirement to equalise members’ benefits for the effects of Guaranteed Minimum Pension (see note 51(b)) and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs (see note 35).
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2017
Net earned premiums 5,341 4,015 2,944 5,637 586 5,792 884 — 25 25,224 Fee and commission income 906 121 24 316 83 141 193 407 (4) 2,187 6,247 4,136 2,968 5,953 669 5,933 1,077 407 21 27,411 Net investment income 16,202 138 86 2,613 292 811 1,465 136 323 22,066 Inter-segment revenue — — — — — — — 239 — 239 Share of profit/(loss) of joint ventures and associates 72 — — 14 — 12 (57) — — 41 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — 216 16 28 (118) — (7) 135
2 Aviva Investors adjusted operating profit includes £1 million profit relating to the Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance and net expenses of £48 million associated with supporting the development of the Group’s digital business written through its UK insurance intermediary which places business primarily on behalf of UK General Insurance.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (a) (iii) Segmental statement of financial position as at 31 December 2018
Goodwill 663 924 82 — 27 125 51 — — 1,872 Acquired value of in-force business and intangible assets 2,424 154 220 98 72 96 25 5 107 3,201 Interests in, and loans to, joint ventures and associates 859 — 8 117 — 55 479 — — 1,518 Property and equipment 71 29 50 258 4 5 5 4 122 548 Investment property 6,124 436 — 3,595 — 807 — 616 (96) 11,482 Loans 27,619 — 164 710 — 255 37 — — 28,785 Financial investments 169,221 3,627 4,696 71,903 3,423 32,842 5,422 343 6,108 297,585 Deferred acquisition costs 1,361 489 367 354 124 259 11 — — 2,965 Other assets 38,240 5,311 1,225 8,355 304 4,840 525 1,267 13,600 73,667 Assets of operations classified as held for sale — — — — — — 8,855 — — 8,855 Total assets 246,582 10,970 6,812 85,390 3,954 39,284 15,410 2,235 19,841 430,478 Insurance liabilities
Gross liabilities for investment contracts 123,406 — — 54,159 4 23,874 — 1,025 — 202,468 Unallocated divisible surplus 2,244 — — 3,518 55 (78) 210 — — 5,949 Net asset value attributable to unitholders 25 — — 2,427 — — — — 15,673 18,125 External borrowings 1,660 10 — — — 46 — — 7,704 9,420 Other liabilities, including inter-segment liabilities 13,667 (255) 1,011 5,350 230 944 801 589 1,126 23,463 Liabilities of operations classified as held for sale — — — — — — 8,521 — — 8,521 Total liabilities 235,397 6,789 5,983 82,733 3,466 37,842 13,692 1,614 24,507 412,023 Total equity 18,455 Total equity and liabilities 430,478
Insurance liabilities Long-term business and outstanding claims provisions1 100,183 5,360 3,449 17,213 3,275 10,110 4,056 — 11 143,657 Unearned premiums 228 2,003 1,578 458 119 520 74 — — 4,980 Other insurance liabilities1 — 13 — — — — — — — 13
Gross liabilities for investment contracts 130,890 — — 53,529 2 18,335 — 1,230 — 203,986 Unallocated divisible surplus 2,514 — — 5,239 68 922 339 — — 9,082 Net asset value attributable to unitholders 57 — — 2,472 — — — — 15,798 18,327 External borrowings 1,566 — — 1 — 70 — — 8,649 10,286 Other liabilities, including inter-segment liabilities 14,234 (294) 971 4,927 253 869 618 392 1,376 23,346 Liabilities of operations classified as held for sale — — — — — 1,021 8,852 — — 9,873 Total liabilities 249,672 7,082 5,998 83,839 3,717 31,847 13,939 1,622 25,834 423,550
Total equity and liabilities 442,685 1 Following a review, 2017 comparative amounts have been amended, with a reclassification of £244 million made from ‘Other insurance liabilities’ to ‘Long-term business and outstanding claims provisions’ in order to align with note 42(a).
(b) Further analysis by products and services The Group’s results can be further analysed by products and services which comprise long-term business, general insurance and health, fund management and other activities. Non-insurance businesses in the UK previously included within ‘Other’, such as the savings business, have been reclassified to the long-term business or general insurance and health segments, as appropriate, as this presentation is consistent with how the business is managed (see note 1 for further details). Results for the year ended 31 December 2017 have been restated accordingly.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued Long-term business Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business. Long-term business also includes our share of the other life and related business written in our associates and joint ventures, as well as lifetime mortgage business written in the UK.
3 General insurance and health business segment includes gross written premiums of £879 million relating to health business. The remaining business relates to property and liability insurance. 4 Other includes net expenses of £99 million associated with supporting the development of the Group’s digital business written through its UK insurance intermediary which places business primarily on behalf of UK General
Gross written premiums2 17,083 10,523 — — 27,606 Premiums ceded to reinsurers (1,741) (488) — — (2,229) Premiums written net of reinsurance 15,342 10,035 — — 25,377 Net change in provision for unearned premiums — (153) — — (153)
Goodwill 722 1,083 — 67 1,872 Acquired value of in-force business and intangible assets 2,688 403 5 105 3,201 Interests in, and loans to, joint ventures and associates 1,502 8 — 8 1,518 Property and equipment 260 147 4 137 548 Investment property 10,995 584 — (97) 11,482 Loans 28,620 165 — — 28,785 Financial investments 280,130 11,279 66 6,110 297,585 Deferred acquisition costs 1,877 1,088 — — 2,965 Other assets 49,316 9,243 1,117 13,991 73,667 Assets of operations classified as held for sale 8,855 — — — 8,855 Total assets 384,965 24,000 1,192 20,321 430,478 Gross insurance liabilities 127,709 16,368 — — 144,077 Gross liabilities for investment contracts 202,468 — — — 202,468 Unallocated divisible surplus 5,949 — — — 5,949 Net asset value attributable to unitholders 2,451 — — 15,674 18,125 External borrowings 1,706 10 — 7,704 9,420 Other liabilities, including inter-segment liabilities 19,124 1,373 574 2,392 23,463 Liabilities of operations classified as held for sale 8,521 — — — 8,521 Total liabilities 367,928 17,751 574 25,770 412,023 Total equity 18,455 Total equity and liabilities 430,478 1 Non-insurance business in the UK previously included within ‘Other’, such as the savings business, have been reclassified to the long-term business and general insurance and health segments as this presentation is consistent with how the business is managed. See note 1 for further details.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (b) (iv) Segmental statement of financial position – products and services as at 31 December 2017 – restated1
Goodwill 720 1,084 3 69 1,876 Acquired value of in-force business and intangible assets 2,922 439 4 90 3,455 Interests in, and loans to, joint ventures and associates 1,617 9 — 16 1,642 Property and equipment 240 136 4 129 509 Investment property 10,392 499 — (94) 10,797 Loans 27,671 186 — — 27,857 Financial investments 290,840 11,934 54 8,254 311,082 Deferred acquisition costs 1,804 1,100 2 — 2,906 Other assets 49,118 9,283 905 12,384 71,690 Assets of operations classified as held for sale 10,552 319 — — 10,871 Total assets 395,876 24,989 972 20,848 442,685
Gross insurance liabilities 131,987 16,663 — — 148,650 Gross liabilities for investment contracts 203,986 — — — 203,986 Unallocated divisible surplus 9,082 — — — 9,082 Net asset value attributable to unitholders 2,529 — — 15,798 18,327 External borrowings 1,601 — — 8,685 10,286 Other liabilities, including inter-segment liabilities 18,828 1,413 376 2,729 23,346 Liabilities of operations classified as held for sale 9,694 179 — — 9,873
Total equity and liabilities 442,685 1 Non-insurance business in the UK previously included within ‘Other’, such as the savings business, have been reclassified to the long-term business and general insurance and health segments as this presentation is consistent with how the business is managed. See note 1 for further details.
Gross written premiums Long-term: Insurance contracts 11,064 11,192 Participating investment contracts 7,076 5,891
General insurance and health 10,519 10,523 28,659 27,606 Less: premiums ceded to reinsurers (2,326) (2,229) Gross change in provision for unearned premiums (note 42(c)(iv)) (98) (158) Reinsurers’ share of change in provision for unearned premiums (note 46(c)(iii)) 17 5 Net change in provision for unearned premiums (81) (153)
Fee and commission income Fee income from investment contract business 1,059 1,062 Fund management fee income 527 512 Other fee income 405 422 Reinsurance commissions receivable 26 33 Other commission income 164 161 Net change in deferred revenue (1) (3) 2,180 2,187
From financial instruments designated as trading and other than trading 5,051 4,994 From AFS investments and financial instruments at amortised cost 54 42 5,105 5,036 Dividend income 4,649 2,542 Other income from investments designated as trading
(804) (75) (1,726) 436 Other income from investments designated as other than trading
(Losses)/gains arising in the year (19,919) 13,153 Losses recognised now realised (7,278) (6,198)
Gains recognised in prior periods as unrealised in equity 78 2
Strategic report Governance IFRS financial statements Other information 7 – Details of expenses This note gives further detail on the items appearing in the expenses section of the consolidated income statement.
Insurance contracts 12,163 13,547 Participating investment contracts 6,117 5,694 Non-participating investment contracts 8 20
Claims and benefits paid to policyholders on general insurance and health business 6,913 6,647 25,201 25,908 Less: Claim recoveries from reinsurers
Claims and benefits paid, net of recoveries from reinsurers 23,142 24,113
Change in insurance liabilities Change in insurance liabilities (note 41(b)) (6,415) 623 Change in reinsurance asset for insurance provisions (note 41(b)) 169 451
Change in investment contract provisions Investment income allocated to investment contracts (6,128) 9,899 Other changes in provisions
Commission expenses for insurance and participating investment contracts 2,678 2,776 Change in deferred acquisition costs for insurance and participating investment contracts (183) (182) Deferrable costs for non-participating investment contracts 32 33 Other acquisition costs 996 958 Change in deferred acquisition costs for non-participating investment contracts 84 (206)
Impairments Net impairment on loans 1 2 Net impairment on financial investments — — Net impairment on receivables and other financial assets 9 4 Net impairment on non-financial assets — 1
The Group has kept under review the allowance in our long-term assumptions for future property prices and rental income for the possible adverse impact of the decision for the UK to leave the European Union. This allowance has been determined in line with previous periods and is £395 million as at 31 December 2018, an increase of £109 million from 31 December 2017.
The ten year mid-price swap rates as at the start of the period are set out in the table below: For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risk (assessed on a best estimate basis); this includes an adjustment for credit risk on all eurozone sovereign debt. Where such securities are classified as held for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
Strategic report Governance IFRS financial statements Other information 10 – Non-life business: short-term fluctuations in return on investments Group adjusted operating profit for non-life business is based on an expected long-term investment return over the period. Any variance between the total investment return (including realised and unrealised gains) and the expected return over the period is disclosed separately outside Group adjusted operating profit, in short-term fluctuations. The long-term investment return and economic assumption changes for our non-life business is described in more detail below.
Short-term fluctuations in investment return (see (b) below) (476) (345) Economic assumption changes (see (g) below) 1 (7)
(b) The long-term investment return and short-term fluctuation are as follows: Non-life business 2018 £m
Analysed between: Long-term investment return, reported within operating profit 380 370 Short-term fluctuation in investment return, reported outside operating profit General insurance and health (315) (57) Other operations1 (161) (288)
The long-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated long-term return for other investments (including debt securities) is the actual income receivable for the year. Actual income and long-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the long-term return reflects assets backing non-life business held in Group centre investments.
The short-term fluctuation of a £476 million loss during 2018 was primarily due to adverse market conditions across most of our major markets. This resulted in losses on fixed interest income securities driven by interest rate increases and widening credit spreads plus significant falls in equities and other adverse market movements on Group centre holdings.
Strategic report Governance IFRS financial statements Other information 10 – Non-life business: short-term fluctuations in return on investments continued (d) The total assets supporting the general insurance and health business, which contribute towards the long-term return, are: £m
Debt securities 9,271 10,054 Equity securities 866 772 Investment properties 584 499 Cash and cash equivalents 1,294 1,115 Other1 2,349 2,498
Total assets supporting non-life business 15,176 15,623 1 Includes the internal loan to Group from UK Insurance. 2 Represents assets backing non-life business in Group centre investments, including the centre hedging programme.
The long-term rates of return on equities and investment properties have been calculated by reference to the ten-year mid-price swap rate for an AA-rated bank in the relevant currency plus a risk premium. The underlying reference rates and risk premiums for the United Kingdom and Eurozone are shown in note 9.
(e) The table below compares the actual return on investments attributable to the non-life business, after deducting investment management expenses and charges, with the aggregate long-term return over a five-year period.
(f) The table below shows the sensitivity of the Group’s adjusted non-life business Group adjusted operating profit before tax to changes in the long-term rates of return: Movement in investment return for By Change in 2018 £m
(g) The economic assumption changes of £1 million (2017: £7 million adverse) arise as a result of a slight increases in interest rates used to value claims reserves for periodic payment orders (PPOs) and latent claims.
As explained in accounting policy L, provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the duration of the expected settlement of the claims. The discount rate is set at the start of the accounting period, with any change in rates between the start and end of the accounting period being reflected below Group adjusted operating profit as an economic assumption change. The range of discount rates used is disclosed in note 42.
Acquisition costs 565 526 Claims handling expenses 161 164 Central costs and sharesave schemes 76 100 Other operating expenses (note 7) 1,172 1,115 Integration and restructuring costs — 37 Total staff costs 1,974 1,942 12 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration Report in the ‘Corporate governance’ section of this report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2018 was £10 million (2017: £12 million). Employer contributions to pensions for executive directors for qualifying periods were £165,373 (2017: £50,336). The aggregate net value of share awards granted to the directors in the period was £10.2 million (2017: £10.6 million). The net value has been calculated by reference to the closing middle market price of an ordinary share at the date of grant. During the year, no share options were exercised by directors (2017: no share options).
Fees payable to PwC LLP and its associates for the statutory audit of the Aviva Group and Company financial statements 1.9 2.6 Fees payable to PwC LLP and its associates for other services
Audit of Group subsidiaries 13.4 14.1 Additional fees related to the prior year audit of Group subsidiaries 0.4 0.9
Total audit fees 15.7 17.6 Audit related assurance 4.7 4.7 Other assurance services 0.9 2.2
Fees payable to BDO LLP and its associates for the statutory audit of Group subsidiaries in Poland 0.2 —
Fees payable to PwC LLP, BDO LLP and their associates for services to Group companies 22.5 25.3 Fees payable to PwC LLP and its associates for Group occupational pensions scheme audits 0.3 0.3
Audit related assurance comprises services in relation to statutory and regulatory filings. These include fees for the audit of the Group’s Solvency II regulatory returns for 2018, services for the audit of other regulatory returns of the Group’s subsidiaries and review of interim financial information under the Listing Rules of the UK Listing Authority. Total audit fees (excluding additional fees relating to the prior year audits of Group subsidiaries) and audit-related assurance fees were £20.0 million (2017: £21.5 million).
The 2018 fees for other non-audit services of £1.0 million include a number of individually smaller services.
Current tax For the period 559 651 Prior period adjustments (49) (46)
Deferred tax Origination and reversal of temporary differences (531) 134 Changes in tax rates or tax laws (13) (8) Write (back) of deferred tax assets (1) (3)
(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Ireland and Singapore life insurance policyholder returns is included in the tax charge. The tax credit attributable to policyholder returns included in the credit above is £477 million (2017: charge of £371 million).
Long-term business technical provisions and other insurance items 907 37 Deferred acquisition costs 3 (2) Unrealised (losses) on investments (1,453) (33) Pensions and other post-retirement obligations 2 19 Unused losses and tax credits 7 19 Subsidiaries, associates and joint ventures (7) (4) Intangibles and additional value of in-force long-term business (64) (85) Provisions and other temporary differences 60 172 Total deferred tax (credited)/charged to income statement (545) 123
Deferred tax In respect of pensions and other post-retirement obligations 16 42 In respect of fair value (losses) on owner-occupied properties — (2) In respect of unrealised (losses) on investments (7) (9)
Tax calculated at standard UK corporation tax rate of 19.00% (2017: 19.25%) 405 (91) 314 386 71 457 Reconciling items
Total tax (credited)/charged to income statement 442 (477) (35) 357 371 728
Profit before tax attributable to shareholders’ profits 3,116 (987) 2,129 3,068 (1,065) 2,003 Tax attributable to shareholders’ profit (647) 205 (442) (639) 282 (357)
(net of tax) (36) — (36) (65) — (65) Profit attributable to ordinary shareholders 2,316 (801) 1,515 2,213 (798) 1,415
Net of tax, NCI, preference dividends and DCI1 £m Per share p
Group adjusted operating profit attributable to ordinary shareholders 3,116 2,316 58.4 3,068 2,213 54.8 Integration and restructuring costs — — — (141) (111) (2.8) Group adjusted operating profit attributable to ordinary shareholders after integration and restructuring costs 3,116 2,316 58.4 2,927 2,102 52.0 Adjusting items: Investment variances and economic assumption changes (197) (198) (5.0) 34 86 2.1 Non-life business: Short-term fluctuation in return on investments (476) (378) (9.6) (345) (250) (6.3) General insurance and health business: Economic assumption changes 1 (1) — (7) (6) (0.1) Impairment of goodwill, joint ventures, associates and other amounts expensed (13) (13) (0.3) (49) (49) (1.2) Amortisation and impairment of intangibles (209) (172) (4.3) (197) (151) (3.7) Amortisation and impairment of acquired value of in-force business (426) (371) (9.4) (495) (430) (10.6) Profit on disposal and remeasurement of subsidiaries, joint ventures and associates 102 102 2.6 135 113 2.8 Other2 231 230 5.8 — — —
Profit attributable to ordinary shareholders 2,129 1,515 38.2 2,003 1,415 35.0 1 DCI includes the direct capital instrument and tier 1 notes. 2 Other includes a movement in the discount rate used for estimating lump sum payments in the settlement of bodily injury claims which resulted in a gain of £190 million (see note 43(b)), a provision release of £78 million relating to the sale of Aviva USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First (see note 3), a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirement to equalise members’ benefits for the effects of Guaranteed Minimum Pension (see note 51(b)) and a charge of £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs (see note 35).
(iii) The calculation of basic earnings per share uses a weighted average of 3,963 million (2017: 4,041 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2018 was 3,902 million (2017: 4,013 million) and 3,899 million (2017: 4,010 million) excluding treasury shares.
(iv) On 1 May 2018 Aviva announced a share buy-back of ordinary shares for an aggregate purchase price of up to £600 million (2017: £300 million), which was carried out in full during the period from 1 May 2018 to 17 September 2018. The number of shares in issue has reduced by 119 million as at 31 December 2018 in respect of shares acquired and cancelled under the buy-back programme. Net of new shares issued during the period, the number of shares in issue reduced by 110 million (2017: 49 million).
Diluted group adjusted operating profit per share 2,316 4,010 57.8 2,213 4,089 54.1 16 – Dividends and appropriations This note analyses the total dividends and other appropriations paid during the year. The table below does not include the final dividend proposed after the year end because it is not accrued in these financial statements.
Subsequent to 31 December 2018, the directors proposed a final dividend for 2018 of 20.75 pence per ordinary share (2017: 19.00 pence), amounting to £810 million (2017: £764 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 30 May 2019 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2019.
Accumulated impairment At 1 January (168) (247) Impairment charges (13) (10) Disposals 63 96 Foreign exchange rate movements (1) (7) At 31 December (119) (168)
Goodwill from acquisitions and additions in 2018 arose from the acquisition of Wealthify. Goodwill from acquisitions and additions in 2017 arose on the acquisition of VietinBank’s 50% shareholding in VietinBank Aviva Life Insurance Company Limited (Aviva Vietnam) which resulted in Aviva Vietnam becoming a wholly owned subsidiary of the Group. Negative goodwill of £36 million arose from the purchase of Friends First and was recognised immediately in the income statement (see note 3).
United Kingdom – long-term business 663 663 — — 663 663 United Kingdom – general insurance and health 924 924 — — 924 924 Canada 82 84 — — 82 84 France – long-term business — — 56 55 56 55 Poland 27 29 7 7 34 36 Italy – general insurance and health 26 29 — — 26 29 Italy – long-term business — 8 — — — 8 Ireland – general insurance and health 99 98 — — 99 98 Spain – long-term business — 25 — 190 — 215 Asia 51 52 — — 51 52
Long-term business Value in use has been calculated based on a shareholder value of the business calculated in accordance with Solvency II principles, adjusted where Solvency II does not represent a best estimate of shareholders’ interests. The principal adjustments relate to the exclusion of the benefit of transitional measures on technical provisions and the volatility adjustment under Solvency II, modification of the Solvency II risk margin to an economic view and removal of restrictions on contract boundaries or business scope.
Strategic report Governance IFRS financial statements Other information 17 – Goodwill continued The present value of expected profits arising from future new business may be included within the shareholder value and is calculated on an adjusted Solvency II basis, using profit projections based on the most recent three year business plans approved by management. These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, mortality, morbidity and persistency.
Management’s impairment review in relation to the goodwill allocated to the Asian operating segment indicated the need to write down a balance of £3 million as a result of the current and forecast financial performance of the related cash generating units.
At 31 December 2017 2,620 2,697 1,966 380 7,663 Additions and transfers 67 30 153 (57) 193 Disposals — — (488) (189) (677) Foreign exchange rate movements 5 (1) (8) — (4) At 31 December 2018 2,692 2,726 1,623 134 7,175 Accumulated amortisation At 1 January 2017 (870) (583) (504) (57) (2,014) Amortisation for the year (206) (262) (186) — (654) Disposals and transfers 28 7 146 — 181 Foreign exchange rate movements (12) — — — (12) At 31 December 2017 (1,060) (838) (544) (57) (2,499) Amortisation for the year (183) (243) (209) — (635) Disposals and transfers — — 48 57 105 Foreign exchange rate movements (4) — 2 — (2) At 31 December 2018 (1,247) (1,081) (703) — (3,031) Accumulated Impairment At 1 January 2017 (19) (24) (81) (68) (192) Impairment losses charged to expenses (8) (110) (7) — (125) Disposals — — 43 — 43 Foreign exchange rate movements — — (1) (3) (4)
(a) Acquired value of in-force business AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total AVIF of £2,916 million, £2,904 million (2017: £2,142 million) is expected to be recovered more than one year after the statement of financial position date. In 2018, the additions relate to the acquisition of Friends First (see note 3).
In 2018, an impairment charge of £13 million (2017: £110 million) was recognised in relation to the AVIF on non-participating investment contracts relating to FPI, to write down the AVIF balance to its recoverable amount as explained in note 17(b). In addition, in 2017 £8 million of AVIF on insurance contracts in relation to the book of business reinsured by FPI to Aviva Re Limited was considered to be nonrecoverable and was written-off.
The amortisation charge for 2018 is £209 million (2017: £186 million). No Impairment losses arose in 2018 (2017: £7 million) on intangible assets with finite lives.
(c) Intangible assets with indefinite useful lives Intangible assets with indefinite useful lives primarily comprise the value of distribution channel Union Financière de France Banque in France where the existing life of the asset supports this classification. Impairment testing of these intangible assets is covered in note 17(b). No impairment has been recognised in 2018.
At 1 January 57 1,164 1,221 92 1,512 1,604 Share of results before tax — 99 99 — 99 99 Share of tax — (3) (3) — (3) (3)
Additions and disposals during the year relate mainly to the Group’s holdings in property management undertakings. £20 million of the additions relate to a capital injection into the new Hong Kong JV as detailed below.
In 2017, reclassification to subsidiary reflects changes in the Group’s holdings in its Poland and Vietnam undertakings.
The Group’s share of total comprehensive income related to joint venture entities is £81 million (2017: £88 million).
Property management undertakings — 797 797 — 820 820 Long-term business undertakings 46 363 409 57 335 392 General insurance and health undertakings — 8 8 — 9 9
(iii) No joint ventures are considered to be material from a Group perspective (2017: none). The Group’s principal joint ventures are as follows: Proportion of ownership interest
(iv) The joint ventures have no significant contingent liabilities to which the Group is exposed. The Group has commitments to provide funding to property management joint ventures of £13 million (2017: £6 million).
At 1 January — 421 421 65 416 481 Share of results before tax — 22 22 — 22 22 Share of tax — (1) (1) — (5) (5) Share of results after tax — 21 21 — 17 17 Impairment — — — (65) — (65)
Aviva Life Insurance Company India Limited Life insurance India 49.00% 49.00% SCPI Ufifrance Immobilier Property Management France 20.40% 20.40% SCPI Logipierre 1 Property Management France 44.46% 44.46% Lend Lease JEM Partners Fund Limited Investment holding Singapore 22.50% 22.50% AI UK Commercial Real Estate Debt Fund1 Property Management UK 17.16% 15.90%
1 The Group has significant influence over AI UK Commercial Real Estate Debt Fund so it is therefore accounted for as an associate.
A principal property management associate SCPI Selectipierre 2 was disposed of externally to the Group during 2018. The proportion of ownership interest in 2017 was 28.67%.
On 5 November 2018, Aviva Investors exited its partnership arrangement in Encore+, a pan-European commercial property fund, with LaSalle Investment Management, as detailed in note 4(b)(iii). As a result, the Group’s 4.8% shareholding in Encore+ has been reclassified from associates to financial investments as the Group no longer has significant influence.
Strategic report Governance IFRS financial statements Other information 21 – Property and equipment This note analyses our property and equipment, which are primarily properties occupied by Group companies.
Strategic report Governance IFRS financial statements Other information 22 – Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation.
At 31 December 9,601 1,881 11,482 9,147 1,650 10,797 1 A review of part leasehold/part freehold properties held by the Group has resulted in the reclassification of £82m from freehold to leasehold properties in 2018.
Strategic report Governance IFRS financial statements Other information 23 – Fair value methodology continued The majority of the Group’s assets and liabilities measured at fair value are based on quoted market information or observable market data. Of the total assets and liabilities measured at fair value 17.7% (2017: 15.7%) of assets and 3.4% (2017: 3.2%) of liabilities are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.
Debt securities 273 169,413 Equity securities — 82,338 Loans 2,460 26,271 Receivables 5,849 3,041 Cash and cash equivalents 13,246 33,926 Accrued income and Interest 193 2,217 Other financial assets 10 52,802 Total 22,031 370,008 1 Instruments within this category include financial assets that meet the definition of held for trading, financial assets that are managed and evaluated on a fair value basis, and instruments with contractual terms that do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
There has been a £7 million decrease in the fair value of SPPI instruments, and a £23,645 million decrease in the fair value of non-SPPI instruments during the reporting period.
Strategic report Governance IFRS financial statements Other information 23 – Fair value methodology continued (d) Fair value hierarchy analysis An analysis of assets and liabilities measured at amortised cost and fair value categorised by fair value hierarchy is given below.
Recurring fair value measurements Investment property (note 22) — — 11,482 11,482 — 11,482 Loans (note 24(a)) — 518 25,008 25,526 3,259 28,785 Financial investments measured at fair value (note 27(a))
Financial liabilities of operations classified as held for sale 5,241 — 3,100 8,341 — 8,341 Total 135,773 4,618 4,884 145,275 8,195 153,470 1 In addition to the balances in this table, included within reinsurance assets in the statement of financial position and note 41 are £4,009 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
Total 140,304 5,107 4,857 150,268 9,106 159,374 1 In addition to the balances in this table, included within reinsurance assets in the statement of financial position and note 41 are £6,094 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets
Over-the-counter derivatives are valued using broker quotes or models such as option pricing models, simulation models or a combination of models. The inputs for these models include a range of factors which are deemed to be observable, including current market and contractual prices for underlying instruments, period to maturity, correlations, yield curves and volatility of the underlying instruments.
Opening balance at 1 January 2018 10,797 23,949 15,137 776 2,863 2,093 — (13) (358) (1,180) (3,306) Total net gains/(losses) recognised in the income statement1 376 (530) (363) (102) (69) (73) — — (136) (81) 74 Purchases 1,185 3,451 3,175 189 1,761 201 (108) — (59) — (95) Issuances — 200 — — — — — — — — — Disposals (927) (2,065) (1,221) (544) (554) (191) 108 (12) 20 36 189 Transfers into Level 3 — — 1,242 95 77 20 — — — — (20) Transfers out of Level 3 — — (503) (2) — (58) — — — — 58 Reclassification to held for sale — — — — — — — — — — — Foreign exchange rate movements 51 3 111 2 29 — — — (1) — — Balance at 31 December 2018 11,482 25,008 17,578 414 4,107 1,992 — (25) (534) (1,225) (3,100) 1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.
Balance at 31 December 2017 10,797 23,949 15,137 776 2,863 2,093 — (13) (358) (1,180) (3,306) 1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals.
Royal Institution of Chartered Surveyors, and using estimates during the intervening period. Outside the UK, valuations are produced by external qualified professional appraisers in the countries concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break options taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. The uplift and discount rates are derived from rates implied by recent market transactions on similar properties. These inputs are deemed unobservable.
(ii) Loans • Commercial mortgage loans and Primary Healthcare loans held by our UK Life business are valued using a Portfolio Credit Risk Model.
This model calculates a Credit Risk Adjusted Value for each loan. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 65 bps to 195 bps.
• Equity release mortgage loans held by our UK Life business are valued using an internal model, with fair value initially being equal to the transaction price. The value of these loans is dependent on the expected term of the mortgage and the forecast property value at the end of the term, and is calculated by adjusting future cash flows for credit risk and discounting using a yield curve plus an allowance for illiquidity. At 31 December 2018 the illiquidity premium used in the discount rate was 210 bps. The mortgages have a no negative equity guarantee (‘NNEG’) such that the cost of any potential shortfall between the value of the loan and the realised value of the property, at the end of the term, is recognised by a deduction to the value of the loan. Property valuations at the reporting date are obtained by taking the most recent valuation for the property and indexing using market observable regional house price indices. NNEG is calculated using base property growth rates reduced for the cost of potential dilapidations, using a stochastic model. In addition, a cost of capital charge is applied to reflect the variability in these cashflows. The base property growth rate assumption is RPI +0.75% which equates to a long-term average growth rate of 4.3% pa. After applying the cost of capital charge, dilapidations and the stochastic distribution, the effective net long-term growth rate equates to 0.6% pa.
• Debt securities held by our French business and by our UK and Asia businesses which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.
(v) Property Funds • Property funds are valued based on external valuation reports received from fund managers.
(vi) Financial assets of operations classified as held for sale • Financial assets of operations classified as held for sale are held by our Asia business and consist primarily of discretionary managed funds of £1.4 billion (2017: £1.6 billion) and debt securities which are not traded in an active market and have been valued using third party or counterparty valuations of £0.4 billion (2017: £0.4 billion). These assets are included within the relevant asset category within the sensitivity table below.
The table below shows the sensitivity of the fair value of Level 3 assets and liabilities at 31 December 2018 to changes in unobservable inputs to a reasonable alternative: Sensitivities 2018 Fair value £bn Most significant unobservable input Reasonable alternative
Investment property 11.6 Equivalent rental yields +/- 5-10% 0.9 (0.9) Loans Commercial mortgage loans and Primary Healthcare loans 11.5 Illiquidity premium +/- 20 bps 0.2 (0.2) Equity release mortgage loans 9.7 Base property growth rate +/- 10% 0.5 (0.5) Current property market values +/- 10% 0.3 (0.4) Infrastructure and Private Finance Initiative (PFI) loans 3.4 Illiquidity premium +/- 25 bps1 0.1 (0.1) Other 0.4 Illiquidity premium +/- 25 bps1 — — Debt securities Structured bond-type and non-standard debt products 6.6 Market spread (credit, liquidity and other) +/- 25 bps 0.1 (0.1) Privately placed notes 1.6 Credit spreads +/- 25 bps1 0.1 — Other debt securities 9.8 Credit and liquidity spreads +/- 20-25 bps 0.4 (0.4) Equity securities 0.3 Market spread (credit, liquidity and other) +/- 25 bps — — Other investments Property Funds 0.8 Market multiples applied to net asset values +/- 15-20% 0.1 (0.1) Other investments (including derivatives) 4.9 Market multiples applied to net asset values +/- 10-40%2 0.7 (0.6) Liabilities Non-participating investment contract liabilities (3.1) Fair value of the underlying unit funds +/- 20-25% 0.4 (0.4) Borrowings (1.2) Illiquidity premium +/- 50 bps — — Other liabilities (including derivatives) (0.6) Independent valuation vs counterparty N/A — — Total Level 3 investments 55.7 3.8 (3.7) 1 On discount spreads. 2 Dependent on investment category.
The above table demonstrates the effect of a change in one unobservable input while other assumptions remain unchanged. In reality, there may be a correlation between the unobservable inputs and other factors. It should also be noted that some of these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.
Strategic report Governance IFRS financial statements Other information 23 – Fair value methodology continued (h) Assets and liabilities not carried at fair value for which fair value is disclosed The table below shows the fair value and fair value hierarchy for those assets and liabilities not carried at fair value.
Assets and liabilities not carried at fair value Loans 24(b) 3,465 — 1,280 2,124 3,404 Borrowings 52(a) 9,106 9,779 205 374 10,358
Strategic report Governance IFRS financial statements Other information 24 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
(a) Carrying amounts The carrying amounts of loans at 31 December 2018 and 2017 were as follows: At fair value through profit or loss other than trading £m
Non-securitised mortgage loans include £7.3 billion (2017: £6.8 billion) of residential equity release mortgages, £7.3 billion (2017: £7.6 billion) of commercial mortgages and £2.8 billion (2017: £3.4 billion) relating to UK primary healthcare and PFI businesses. The healthcare and PFI mortgage loans are secured against General Practitioner premises, other primary health-related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not government-guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.
Loans at amortised cost The fair value of these loans at 31 December 2018 was £3,205 million (2017: £3,404 million).
Amortised Cost £m Impairment £m Carrying Value £m Amortised Cost £m Impairment £m Carrying Value £m
Policy loans 769 — 769 792 — 792 Loans to banks 1,620 — 1,620 1,970 — 1,970 Non-securitised mortgage loans 9 (9) — 9 (9) — Loans to brokers and other intermediaries 164 — 164 180 — 180 Other loans 707 (1) 706 523 — 523 Total 3,269 (10) 3,259 3,474 (9) 3,465
The movements in the impairment provisions on these loans for the years ended 31 December 2018 and 2017 were as follows: £m
At 1 January (9) (7) Increase during the year (1) (2)
Strategic report Governance IFRS financial statements Other information 24 – Loans continued (c) Collateral Loans to banks include cash collateral received under stock lending arrangements (see note 61 for further discussion regarding these collateral positions). The obligation to repay this collateral is included in payables and other financial liabilities (note 53).
AER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. In addition, Group companies have invested £239 million (2017: £231 million) in loan notes issued by the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated statement of financial position.
Securitised mortgage loans (note 24) and loan notes issued 2,437 (1,464) 2,463 (1,411) Other securitisation assets/(liabilities) 266 (1,239) 265 (1,317)
Total loan notes issued, as above 1,464 1,411 Less: Loan notes held by Group companies (239) (231)
Strategic report Governance IFRS financial statements Other information 26 – Interests in structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. The Group has interests in both consolidated and unconsolidated structured entities as described below. The Group holds redeemable shares or units in investment vehicles, which consist of: • Debt securities comprising securitisation vehicles that Aviva does not originate. These investments are comprised of a variety of debt instruments, including asset-backed securities and other structured securities. • Investment funds which include: hedge funds, liquidity funds, private equity funds, unit trusts, mutual funds and Private Finance
(a) Interests in consolidated structured entities The Group has determined that where it has control over investment vehicles, these investments are consolidated structured entities. As at 31 December 2018 the Group has granted loans to consolidated PLPs for a total of £84 million (2017: £82 million). The purpose of these loans is to assist the consolidated PLPs to purchase or construct properties. The Group has also provided support, without having a contractual obligation to do so, to certain consolidated PLPs via letters of support amounting to £51 million (2017: £72 million). The Group has no commitments to provide funding to consolidated structured entities (2017: £nil).
The Group has also given support to five special purpose securitisation companies (the ERF companies) that are consolidated structured entities. As set out in note 25, at the inception of the securitisation vehicles, the UK subsidiary, Aviva Equity Release UK Limited (AER), has granted subordinated loan facilities to some of the ERF companies. AER receives various fees in return for the services provided to the entities. AER receives cash management fees based on the outstanding loan balance at the start of each quarter for the administration of the loan note liabilities. AER receives portfolio administration fees as compensation for managing the mortgage assets. Refer to note 25 for details of securitised mortgages and related assets as at 31 December 2018.
As at 31 December 2018, a summary of the Group’s interest in unconsolidated structured entities is as follows: £m1
Structured debt securities2 — — 3,434 — 3,434 — — 3,482 — 3,482 Other investments and equity securities 797 217 47,663 — 48,677 820 326 47,609 — 48,755
Analysed as: Unit trust and other investment vehicles — — 45,212 — 45,212 — — 45,666 — 45,666 PLPs and property funds 797 217 1,975 — 2,989 820 326 1,435 — 2,581 Other (Including other funds and equity securities) — — 476 — 476 — — 508 — 508
The Group’s maximum exposure to loss related to the interests in unconsolidated structured entities is £59.0 billion (2017: £57.5 billion).
In relation to risk management, disclosures on debt securities and investment vehicles are given in note 59(b)(ii) ‘Risk management’. In relation to other guarantees and commitments that the Group provides in the course of its business, please refer to note 55(f) ‘Contingent liabilities and other risk factors’.
Specialised investment vehicles: 3,541 6 3,877 12 Analysed as: OEICs 944 1 1,177 3 PLPs 2,597 5 2,666 9 SICAVs — — 34 — Total 11,014 44 13,288 79 1 Investment funds relate primarily to the Group’s Polish pension funds.
Strategic report Governance IFRS financial statements Other information 27 – Financial investments This note analyses our financial investments by type and shows their cost and fair value. These will change from one period to the next as a result of new business written, claims paid and market movements.
Fixed maturity securities Debt securities UK government — 27,665 — 27,665 — 30,242 — 30,242 UK local authorities — 191 — 191 — 19 — 19 Non-UK government (note 27(d)) — 52,799 1,287 54,086 — 51,399 1,342 52,741 Corporate bonds
Other investments Unit trusts and other investment vehicles — 45,211 1 45,212 — 45,665 1 45,666 Derivative financial instruments (note 60) 4,994 — — 4,994 5,507 — — 5,507 Deposits with credit institutions — 155 — 155 — 161 — 161 Minority holdings in property management undertakings — 1,975 — 1,975 — 1,435 — 1,435 Other investments – long-term — 475 — 475 — 507 — 507 Other investments – short-term — 1 — 1 — 1 — 1
Fixed maturity securities — (397) — (397) — (1,140) — (1,140) Equity securities — (210) — (210) — (195) — (195) Other investments — (6,644) — (6,644) (8) (6,963) — (6,971)
Banks, trusts and insurance companies to Industrial miscellaneous and all other. There is no impact on total Equity securities.
Of the above total, £144,001 million (2017: £154,835 million) is due to be recovered in more than one year after the statement of financial position date.
Fixed maturity securities 162,254 15,784 (8,352) 169,686 162,092 20,244 (6,388) 175,948 Equity securities 80,917 7,763 (6,342) 82,338 75,060 16,819 (1,716) 90,163 Other investments
These are further analysed as follows: At fair value through profit or loss 286,959 35,274 (19,079) 303,154 273,087 52,891 (8,326) 317,652 Available for sale 1,602 85 (5) 1,682 1,635 102 (1) 1,736
The Group receives collateral in order to reduce the credit risk of these arrangements, either in the form of securities or cash. See note 61 for further discussion regarding collateral positions held by the Group.
(ii) Other arrangements In carrying on its bulk purchase annuity business, the Group’s UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits. At 31 December 2018, £2,313 million (2017: £2,402 million) of financial investments were restricted in this way.
Austria 10 5 572 550 167 127 749 682 Belgium 27 22 863 967 268 314 1,158 1,303 France 128 133 13,992 13,454 2,036 2,093 16,156 15,680 Germany 126 127 1,685 1,437 490 615 2,301 2,179 Ireland 3 3 840 679 138 84 981 766 Italy 177 183 9,526 8,223 772 823 10,475 9,229 Netherlands 32 43 605 88 340 322 977 453 Poland 749 845 687 790 538 598 1,974 2,233 Portugal 23 2 135 136 — — 158 138 Spain 84 87 514 314 94 233 692 634 European Supranational debt 151 213 1,733 1,841 1,759 1,777 3,643 3,831 Other European countries 245 176 1,426 2,104 639 917 2,310 3,197
Strategic report Governance IFRS financial statements Other information 27 – Financial investments continued (e) Exposure to worldwide banks – debt securities Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)
Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.2 billion (2017: £5.4 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (33%), US (23%), French (12%) and Dutch (10%) banks.
Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £13.9 billion (2017: £14.6 billion). The majority of the exposure (86%) is in senior debt. Participating funds are the most exposed to French (22%), UK (12%), Dutch (12%) and US (12%) banks.
Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.2 billion (2017: £5.4 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (33%), US (23%), French (12%) and Dutch (10%) banks.
Expected to be recovered in less than one year 8,855 8,278 Expected to be recovered in more than one year 35 45 8,890 8,323
29 – Deferred acquisition costs (a) Deferred acquisition costs – carrying amount The carrying amount of deferred acquisition costs was as follows: £m
Deferred acquisition costs (DAC) on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year. Of the above total, £1,879 million (2017: £1,521 million) is expected to be recovered in more than one year after the statement of financial position date. For long-term business where amortisation of the DAC balance depends on projected profits, the amount expected to be recovered is estimated and actual experience will differ.
Surpluses in the staff pension schemes (note 51(a)) 3,256 3,399 Other assets 85 71
Surpluses in the staff pension schemes and £1 million (2017: £9 million) of other assets are recoverable more than one year after the statement of financial position date.
Loans 9 8 Debt securities 29,472 30,987 Equity securities 67,152 74,110 Reinsurance assets 4,099 6,103 Cash and cash equivalents 14,455 12,000 Units trusts and other investment vehicles 41,954 42,368 Other 8,043 7,059
The reinsurance assets balance in the table above includes £4,009 million (2017: £6,094 million) of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
Strategic report Governance IFRS financial statements Other information 32 – Ordinary share capital This note gives details of Aviva plc’s ordinary share capital and shows the movements during the year.
(a) Details of the Company’s ordinary share capital are as follows: The allotted, called up and fully paid share capital of the Company at 31 December 2018 was: 3,902,352,211 (2017: 4,012,682,691) ordinary shares of 25 pence each 975 1,003
At the 2018 Annual General Meeting, the Company was authorised to allot up to a further maximum nominal amount of: • £668,883,564 of which £334,441,782 can be in connection with an offer by way of a rights issue • £100 million of new ordinary shares in relation to any issue of Solvency II compliant capital instruments
On 18 September 2018, the Company announced that it had successfully completed the share buy-back programme (the 2018 programme) which was notified to the market on 1 May 2018. As a result of the 2018 programme, Aviva acquired 119,491,188 shares at an average price of £5.0213 per share. These shares with a nominal value of £30 million were bought back and subsequently cancelled during the year, giving rise to a capital redemption reserve of an equivalent amount as required by the Companies Act 2006. The aggregate consideration paid was £600 million which is reflected in retained earnings (see note 39).
(iv) Aviva recruitment and retention share plan awards These are conditional awards granted under the Aviva Recruitment and Retention Share Award plan (RRSAP) in relation to the recruitment or retention of senior managers excluding executive directors. The awards vest in tranches on various dates and vesting is conditional upon the participant being employed by the Group on the vesting date and not having served notice of resignation. Some awards can be subject to performance conditions. If a participant’s employment is terminated due to resignation or dismissal, any tranche of the award which has vested within the 12 months prior to the termination date will be subject to clawback and any unvested tranches of the award will lapse in full.
The comparative figures as at 31 December 2017 were: Range of exercise prices
(ii) Share awards At 31 December 2018, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva long-term incentive plan 2011 Number of shares Year of vesting
(i) Share options The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2018 2017
Cost debited to shareholders’ funds At 1 January 295,906 1 1,127,473 1 Acquired in the year 765,582 4 236,585 1 Distributed in the year (605,502) (3) (1,068,152) (1)
The shares are owned by employee share trusts with an undertaking to satisfy awards of shares in the Company under the Company’s share plans and schemes. Details of the features of the plans can be found in the directors’ remuneration report and/or in note 33.
At the 2015 Annual General Meeting, the Company was authorised to allot sterling new preference shares, as defined in the Company’s articles of association, up to a maximum nominal value of £500 million.
Strategic report Governance IFRS financial statements Other information 36 – Direct capital instrument and tier 1 notes
Notional amount 2018 £m 5.9021% £500 million direct capital instrument – Issued November 2004 500 500 6.875% £210 million STICS – Issued November 2003 231 231
The Step-up Tier one Insurance Capital Securities (‘STICS’) were issued on 21 November 2003 by Friends Life Holdings plc, substituted as issuer by Aviva plc on 1 October 2015. The STICS are irrevocably guaranteed on a subordinated basis by Aviva Life & Pensions UK Limited. Prior to the Part VII transfer of the Friends Life business into UK Life on 1 October 2017 the guarantor for the STICS was Friends Life Limited. The STICS have no fixed redemption date but the Company may, at its sole option, redeem the instrument (in whole or in part) on 21 November 2019, or on the coupon payment date falling on successive fifth anniversaries from this date. For each coupon period beginning 21 November 2019, the STICS will bear interest reset every five years at the rate per annum which is the aggregate of 2.97% and the Gross Redemption Yield of the Benchmark Gilt.
The Company has the option to defer coupon payments on the DCI and the STICS on any relevant payment date.
In relation to the DCI, deferred coupons shall only be satisfied should the Company exercise its sole option to redeem the instruments.
37 – Merger reserve Prior to 1 January 2004, certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account.
The balance of the merger reserve at 31 December 2018 is £8,974 million (2017: £8,974 million).
Balance at 31 December 2017 1,141 26 65 (476) 111 (274) Arising in the year through other comprehensive income: Fair value gains — 1 57 — — 58 Fair value gains transferred to profit on disposals — — (78) — — (78) Share of other comprehensive income of joint ventures and associates — — (10) — — (10) Foreign exchange rate movements1 27 — — (27) — (27) Aggregate tax effect – shareholders’ tax 1 — 7 — — 7 Total other comprehensive income for the year 28 1 (24) (27) — (50) Fair value gains transferred to retained earnings on disposals — — — — — — Transfer to profit on disposal of subsidiaries, joint ventures and associates (40) — (1) 37 — 36 Changes in non-controlling interests in subsidiaries (7) — — — — — Reserves credit for equity compensation plans — — — — 64 64 Shares issued under equity compensation plans — — — — (55) (55) Balance at 31 December 2018 1,122 27 40 (466) 120 (279) 1 Foreign exchange rate movements recorded in the consolidated statement of comprehensive income of £5 million (2017: £68 million) relate to the currency translation reserve of £27 million (2017: £125 million), the hedging instrument reserve of £(27) million (2017: £(100) million) and non-controlling interests (refer to note 40) of £5 million (2017: £43 million).
Balance at 1 January 1,235 1,425 Profit for the year attributable to non-controlling interests 119 149 Foreign exchange rate movements 5 43 Total comprehensive income attributable to non-controlling interests 124 192 Capital contributions from non-controlling interests 3 36 Non-controlling interests share of dividends declared in the year (90) (103) Changes in non-controlling interests in subsidiaries1 (306) (315)
(a) Carrying amount The following is a summary of the contract liabilities and related reinsurance assets as at 31 December.
Long-term business Insurance liabilities (125,829) 5,836 (119,993) (130,972) 5,469 (125,503) Liabilities for participating investment contracts (90,455) 1 (90,454) (87,654) 2 (87,652) Liabilities for non-participating investment contracts (120,354) 4,009 (116,345) (124,995) 6,094 (118,901)
General insurance and health Outstanding claims provisions (9,046) 789 (8,257) (8,964) 845 (8,119) Provisions for claims incurred but not reported (2,360) 822 (1,538) (2,837) 884 (1,953)
Long-term business Change in insurance liabilities (note 42(b)(iii)) (6,284) 61 (6,223) Change in provision for outstanding claims 190 (11) 179 (6,094) 50 (6,044) General insurance and health Change in insurance liabilities (note 42(c)(iii) and 46(c)(ii))1 (313) 111 (202) Less: Unwind of discount (8) 8 — (321) 119 (202) Total change in insurance liabilities (note 7) (6,415) 169 (6,246) 1 Includes £(190) million in the UK General Insurance and health business relating to a change in the discount rate used for estimating lump sum payments in the settlement of bodily injury claims.
(a) Carrying amount Insurance liabilities (gross of reinsurance) at 31 December comprised: £m
Long-term business Participating insurance liabilities 40,840 49,928 Unit-linked non-participating insurance liabilities 14,480 16,040 Other non-participating insurance liabilities 70,509 65,004 125,829 130,972 Outstanding claims provisions 2,001 1,798
Material judgement is required in calculating the liabilities and is exercised particularly through the choice of assumptions where discretion is permitted. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates, mortality and morbidity rates. Where discount rate assumptions are based on current market yields on fixed interest securities, allowance is made for default risk implicit in the yields on the underlying assets.
A description of the main methodology and most material valuation assumptions can be found in note 43.
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued (iii) Movements The following movements have occurred in the gross long-term business liabilities during the year: £m
Carrying amount at 31 December 125,829 130,972 1 Other movements during 2017 and 2018 primarily relate to a special bonus distribution to with-profits policyholders in the UK. 2 The movement during 2018 includes the acquisition of Friends First in Ireland offset by the disposal of Spain and Avipop in Italy. The movement during 2017 primarily relates to the disposal of Antarius in France and a major share of the business in Spain offset by the consolidation of the Poland and Vietnam joint ventures. 3 Other movements during 2018 include the reclassification in France from insurance to participating investment contracts (£(56) million).
(c) General insurance and health liabilities (i) Business description The Group underwrites general insurance and health business in a number of countries as follows: • In the UK, providing individual and corporate customers with a wide range of insurance products • In Canada, providing a range of personal and commercial lines products • In Europe and Asia, providing a range of general insurance and health products
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued The table below shows the total general insurance and health liabilities split by outstanding claim provisions and provision for claims incurred but not reported (IBNR provisions), gross of reinsurance, by major line of business.
Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held: Discount rate Mean term of liabilities
Reinsured London Market business 1.0% to 2.9% 0.7% to 2.6% 10 years 9 years Latent claims 1.0% to 2.6% 0.7% to 1.9% 11 to 18 years 8 to 17 years Structured settlements 1.0% to 3.0% 0.5% to 3.0% 9 to 37 years 7 to 39 years
The gross outstanding claims provision before discounting was £10,955 million (2017: £11,346 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
(iii) Movements in general insurance and health claims liabilities The following changes have occurred in the general insurance and health claims liabilities during the year: £m
Changes in claims reserve recognised as an expense (note 41(b)) (313) 73 Effect of portfolio transfers, acquisitions and disposals2 (29) 3 Foreign exchange rate movements (53) 16
Carrying amount at 31 December 11,406 11,801 1 Shown gross of reinsurance. The impact of reinsurance was £23 million, resulting in a net impact of £1 million as per note 47. 2 The movement during 2018 relates to the disposal of Avipop in Italy.
(iv) Movements in general insurance and health unearned premiums The following changes have occurred in the liabilities for unearned premiums (UPR) during the year: £m
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued (v) Analysis of general insurance and health claims development The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the accident years 2009 to 2018. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year, while the lower section of the tables shows the original estimated ultimate cost of claims and how these original estimates have increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.
• £79 million release from Europe (including Ireland) mainly due to continued favourable development in France and Italy
Gross of reinsurance Before the effect of reinsurance, the loss development table is: Accident year
At end of accident year (3,780) (3,502) (3,420) (3,055) (3,068) (3,102) (2,991) (3,534) (3,517) (3,769) One year later (5,464) (5,466) (4,765) (4,373) (4,476) (4,295) (4,285) (4,972) (4,952) Two years later (6,102) (5,875) (5,150) (4,812) (4,916) (4,681) (4,710) (5,435) Three years later (6,393) (6,163) (5,457) (5,118) (5,221) (4,974) (4,997) Four years later (6,672) (6,405) (5,712) (5,376) (5,467) (5,244) Five years later (6,836) (6,564) (5,864) (5,556) (5,645) Six years later (6,958) (6,649) (5,978) (5,635) Seven years later (7,043) (6,690) (6,032) Eight years later (7,078) (6,718) Nine years later (7,100)
Estimate of gross ultimate claims 7,227 6,877 6,223 5,910 5,996 5, 772 5,814 6,864 6,796 7,185 Cumulative payments (7,100) (6,718) (6,032) (5,635) (5,645) (5,244) (4,997) (5,435) (4,952) (3,769)
2,388 127 159 191 275 351 528 817 1,429 1,844 3,416 11,525 Effect of discounting (411) (14) (25) (2) — (1) — — — — — (453) Present value 1,977 113 134 189 275 350 528 817 1,429 1,844 3,416 11,072 Cumulative effect of foreign exchange movements — — (1) 2 6 12 31 101 (7) (12) — 132 Effect of acquisitions 11 (1) 2 12 15 17 38 57 51 — — 202 Present value recognised in the
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities continued Net of reinsurance After the effect of reinsurance, the loss development table is: Accident year
Net cumulative claim payments At end of accident year (3,650) (3,386) (3,300) (2,925) (2,905) (2,972) (2,867) (3,309) (3,483) (3,718) One year later (5,286) (5,242) (4,578) (4,166) (4,240) (4,079) (4,061) (4,591) (4,843) Two years later (5,885) (5,637) (4,963) (4,575) (4,649) (4,432) (4,452) (5,012) Three years later (6,177) (5,905) (5,263) (4,870) (4,918) (4,720) (4,725) Four years later (6,410) (6,137) (5,485) (5,110) (5,159) (4,973) Five years later (6,568) (6,278) (5,626) (5,289) (5,324) Six years later (6,657) (6,361) (5,740) (5,371) Seven years later (6,708) (6,411) (5,798) Eight years later (6,744) (6,440) Nine years later (6,771)
Estimate of net ultimate claims At end of accident year 7,115 6,650 6,202 5,941 5,838 5,613 5,548 6,489 6,714 6,997 One year later 7,067 6,751 6,103 5,765 5,745 5,575 5,635 6,458 6,591 Two years later 7,036 6,685 6,095 5,728 5,752 5,591 5,608 6,377 Three years later 6,978 6,644 6,077 5,683 5,733 5,559 5,517 Four years later 6,940 6,634 6,034 5,717 5,689 5,490 Five years later 6,977 6,614 6,005 5,680 5,653 Six years later 6,908 6,624 6,003 5,631 Seven years later 6,897 6,615 5,967 Eight years later 6,896 6,590 Nine years later 6,901
Estimate of net ultimate claims 6,901 6,590 5,967 5,631 5,653 5,490 5,517 6,377 6,591 6,997 Cumulative payments (6,771) (6,440) (5,798) (5,371) (5,324) (4,973) (4,725) (5,012) (4,843) (3,718)
907 130 150 169 260 329 517 792 1,365 1,748 3,279 9,646 Effect of discounting (157) (12) (21) 3 — 4 — — — — — (183) Present value 750 118 129 172 260 333 517 792 1,365 1,748 3,279 9,463 Cumulative effect of foreign exchange movements — — (1) 1 6 11 30 99 (6) (12) — 128 Effect of acquisitions 12 (1) 2 12 15 17 39 57 51 — — 204 Present value recognised in the
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities methodology and assumptions (a) Long-term business The main method used for the actuarial valuation of long-term insurance liabilities is the gross premium method which involves the discounting of projected future cash flows. The cash flows are calculated using the contractual premiums payable together with explicit assumptions for investment returns, discount rates, inflation, mortality, morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience with an allowance for prudence.
Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates (Gross of investment expenses) 2018 2017
Annuities Conventional immediate and deferred annuities 1.2% to 3.0% 1.0% to 2.8%
Income Protection Active lives 1.1% to 2.6% 1.0% to 2.5% Claims in payment (level and index linked) 1.3% to 1.6% 1.0% to 1.5%
The valuation discount rates are after a reduction for risk, but before allowance for investment expenses. For conventional immediate annuity business, the allowance for risk comprises long-term assumptions on a prudent basis for defaults or (in the case of equity release assets) expected losses arising from the No-Negative-Equity Guarantee. These allowances vary by asset category and for some asset classes by rating.
The risk allowances made for corporate bonds, mortgages (including healthcare mortgages, commercial mortgages and infrastructure assets), and equity release equated to 50 bps, 39-41 bps, and 112 bps respectively at 31 December 2018 (2017: 47-48 bps, 33- 40 bps, and 102 bps respectively).
Pure endowments and deferred annuities before vesting AM00/AF00 adjusted AM00/AF00 adjusted Annuities in payment Pensions business and general annuity business PMA08 HAMWP/PFA08 HAMWP
For the largest portfolio of pensions annuity business, the underlying mortality assumptions for males are 105.8% of PMA08 HAMWP adjusted (2017: 104.0% of PCMA00 adjusted) with base year 2008; for females the underlying mortality assumptions are 99.0% of PFA08 HAMWP adjusted (2017: 94.5% of PCFA00 adjusted) with base year 2008.
Improvements are based on ‘CMI_2017 (S=7.5) Advanced with adjustments’ (2017: ‘CMI_2016 (S=7.5) Advanced with adjustments’) with a long-term improvement rate of 1.75% (2017: 1.75%) for males and 1.5% (2017: 1.5%) for females, both with an additional improvement for prudence of 0.5% (2017: 0.5%) to all future annual improvement adjustments. The CMI_2017 tables have been adjusted by adding 0.25% (2017: 0.25%) and 0.35% (2017: 0.35%) to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the annuitant population relative to the general population on which CMI_2017 is based), and uses the advanced parameters to taper the long-term improvement rates to zero between ages 90 and 115 (the ‘core’ parameters taper the longterm improvement rates to zero between ages 85 and 110). In addition, on a significant proportion of individual annuity business, yearspecific adjustments are made to allow for potential selection effects due to the development of the Enhanced Annuity market and covering possible selection effects from pension freedom reforms.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities methodology and assumptions continued Future regular bonuses Annual bonus assumptions for 2019 have been set consistently with the year-end 2018 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.
(ii) France The majority of reserves arise from single premium savings products and are based on the accumulated fund values, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. For traditional business, the net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables.
H_AVDBS,F_AVDBS Life assurances 0% to 4.5% 0% to 4.5% H_SSDBS, F_SSDBS Annuities 0% to 2% 0% to 2% TGF05/TGH05
The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range. The following explicit assumptions are made which could materially impact the level of booked net reserves:
Interest rates used to discount latent claim liabilities and structured settlements The discount rates used in determining our latent claim liabilities and structured settlements are based on the swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of claims. The range of discount rates used (for further details see note 42(c)(ii)) depends on the duration of the claim and the reporting date. At 31 December 2018, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £104 million (2017: £110 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business.
Lump sum payments in settlement of bodily injury claims that are decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes. Following the announcement by the Ministry of Justice on 27 February 2017 to decrease the Ogden rate from 2.75% to -0.75%, balance sheet reserves have been calculated using a rate of -0.75%. On 20 March 2018, the Government announced that it will introduce the Civil Liability Bill (the Bill), which includes provisions to amend the discount rate. In December 2018 the Bill became an Act of Parliament, meaning that a new Ogden discount rate will be set by the Lord Chancellor in 2019.
Strategic report Governance IFRS financial statements Other information 44 – Liabilities for investment contracts This note analyses our gross liabilities for investment contracts by type of product and describes the calculation of these liabilities.
(a) Carrying amount The liabilities for investment contracts (gross of reinsurance) at 31 December comprised: £m
Long-term business Liabilities for participating investment contracts 90,455 87,654 Liabilities for non-participating investment contracts 120,354 124,995
Less: Amounts classified as held for sale (8,341) (8,663) 202,468 203,986
(c) Movements in the year The following movements have occurred in the gross provisions for investment contracts in the year: (i) Participating investment contracts £m
and to a reclassification from non-participating investment contracts to participating investment contracts in the UK (£853m).
Strategic report Governance IFRS financial statements Other information 44 – Liabilities for investment contracts continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
Carrying amount at 1 January 124,995 114,531 Liabilities in respect of new business 4,869 4,484 Expected change in existing business (5,509) (4,427) Variance between actual and expected experience (5,539) 10,115 Impact of operating assumption changes (10) 2 Impact of economic assumption changes (81) (1) Other movements recognised as an expense 6 10 Change in liability (6,264) 10,183 Effect of portfolio transfers, acquisitions and disposals1 2,494 (4) Foreign exchange rate movements 133 277 Other movements2 (1,004) 8
Carrying amount at 31 December 120,354 124,995 1 The movement during 2018 relates to the acquisition of Friends First in Ireland. The movement during 2017 relates to the disposal of Antarius in France. 2 The movement during 2018 relates to the reclassification in France from non- participating investment contracts to participating investment contracts (£(151)m) and to a reclassification from non-participating investment contracts to participating investment contracts in the UK (£(853)m).
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience in 2018 of £(5.5) billion is primarily driven by the impact of negative equity returns in the UK and Ireland.
45 – Financial guarantees and options This note details the financial guarantees and options inherent in some of our insurance and investment contracts.
(a) UK non-profit business The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, which are based on the UK regulatory requirements (grandfathered under IFRS 4), prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business.
(i) Guaranteed annuity options The Group’s UK non-profit funds have written contracts which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. Provision for these guarantees do not materially differ from a provision based on a market-consistent stochastic model, and amounts to £87 million at 31 December 2018 (2017: £100 million).
The material guarantees and options relating to this provision are: (i) Maturity value and death benefit guarantees Significant conventional and unitised with-profits business have minimum maturity (and in some cases death benefit) values reflecting the sum assured plus declared annual bonus. In addition, maturity value guarantees are offered on certain unit-linked products. For some unitised with-profits life contracts the amount paid after the fifth policy anniversary is guaranteed to be at least as high as the premium paid increased in line with the rise in RPI or CPI.
Realistic liabilities for GAOs in the UK with-profits funds were £1,644 million at 31 December 2018 (2017: £2,186 million). With the exception of the with-profits sub-fund supported by the RIEESA, movements in the realistic liabilities in the with-profits funds are offset by a corresponding movement in the unallocated divisible surplus, with no net impact on IFRS profit. Realistic liabilities for GAOs in the withprofits sub-fund supported by the RIEESA were £155 million at 31 December 2018 (2017: £206 million).
(c) Overseas life businesses In addition to guarantees written in the Group’s UK businesses, our overseas businesses have also written contracts containing guarantees and options. Details of the significant guarantees and options provided by overseas life businesses are set out below.
(i) France Guaranteed surrender value, guaranteed minimum bonuses and options Aviva France has written a number of contracts with a guaranteed surrender value and guaranteed minimum bonuses. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, ‘Provision pour Aléas Financiers’ (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at full year 2018 (2017: no PAF was established).
Non-AFER contracts with guaranteed surrender values had liabilities of £11 billion at 31 December 2018 (2017: £11 billion) and all guaranteed annual bonus rates are between 0% and 4.5% (2017: 0% to 4.5%). For non-AFER business the accounting income return exceeded guaranteed bonus rates in 2018 (2017: the accounting income return exceeded guaranteed bonus rates).
(a) Carrying amount The reinsurance assets at 31 December comprised: £m
Long-term business Insurance contracts 5,836 5,469 Participating investment contracts 1 2 Non-participating investment contracts1 4,009 6,094 9,935 11,629 General insurance and health Outstanding claims provisions 789 845 Provisions for claims incurred but not reported 822 884 1,611 1,729 Provisions for unearned premiums 254 257 1,865 1,986 11,800 13,615 Less: Amounts classified as held for sale (45) (123)
Of the above total, £10,800 million (2017: £12,302 million) is expected to be recovered more than one year after this statement of financial position.
Strategic report Governance IFRS financial statements Other information 46 – Reinsurance assets continued (c) Movements The following movements have occurred in the reinsurance assets during the year: (i) Long-term business liabilities £m
Carrying amount at 1 January 11,565 24,554 Assets in respect of new business 1,766 1,004 Expected change in existing business assets (22) (786) Variance between actual and expected experience 431 2,264 Impact of non-economic assumption changes (460) (634) Impact of economic assumption changes 21 94 Other movements1 (3,877) (14,529)
Carrying amount at 31 December 9,846 11,565 1 The movement during 2018 includes £3,840 million of reinsurance assets being reclassified as collective investments in unit-linked funds following the restructure of a reinsurance treaty in UK Life. This is a continuation of activity undertaken in 2017 (£14,353 million). 2 Change in assets does not reconcile with values in note 41(b) due to the inclusion of reinsurance assets classified as non-participating investment contracts where, for such contracts, deposit accounting is applied on the income statement. 3 The movement during 2018 primarily relates to the acquisition of Friends First in Ireland. The movement during 2017 primarily relates to the disposal of Antarius in France.
Strategic report Governance IFRS financial statements Other information 46 – Reinsurance assets continued (ii) General insurance and health claims liabilities
Carrying amount at 1 January 1,729 1,885 Impact of changes in assumptions (22) (15) Reinsurers’ share of claim losses and expenses
Reinsurers’ share of incurred claim losses and expenses 216 194 Less: Reinsurance recoveries received on claims
Incurred in current year (54) (32) Incurred in prior years (259) (293)
Carrying amount at 1 January 257 250 Premiums ceded to reinsurers in the year 392 489 Less: Reinsurers’ share of premiums earned during the year (375) (484) Changes in reinsurance asset recognised as income 17 5 Reinsurers’ share of portfolio transfers and acquisitions1 (21) — Foreign exchange rate movements 1 2
Carrying amount at 31 December 254 257 1 The movement during 2018 relates to the proportion of Avipop sold by Italy GI that was ceded to reinsurers.
The impact of interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where an increase in the valuation interest rate in response to widening of credit spreads, has decreased liabilities.
The impact of mortality for annuitant contracts on long-term business relates primarily to the UK. In 2018, there has been a reduction in reserves due to longevity assumptions and modelling which include: updates to mortality to reflect recent experience including the 2008 series tables for individual annuities of £345 million, updates to the rate of mortality improvements including CMI 2017 of £251 million, refinements to modelling of bulk purchase annuities together with a change to base mortality and improvements of £132 million and other less significant movements of £24 million. In Ireland and Singapore there was a slight reduction in the reserves of £28 million following a review of recent experience.
In 2017 the impact of mortality for annuitant contracts on long-term business relates primarily to the UK. This resulted in a reduction in reserves due to recognition of benefits from changes in longevity assumptions including: the impact of completing our review of the allowance for anti-selection risk of £170 million, updates reflecting our recent experience of £200 million, updates to the rate of historic and future mortality improvements, including the adoption of CMI 2016, of £340 million, and other less significant movements of £31 million. In Ireland there was a reduction of £38 million following a review of recent experience.
The amount of UDS at 31 December 2018 has decreased to £5.9 billion (2017: £9.1 billion). The decrease is mainly due to adverse market movements in Europe with credit spreads widening and a reduction in equity markets.
49 – Tax assets and liabilities This note analyses the tax assets and liabilities that appear in the statement of financial position and explains the movements in these balances in the year.
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £24 million and £9 million (2017: £19 million and £14 million), respectively.
Deferred tax assets 185 146 Deferred tax liabilities (1,885) (2,562) Net deferred tax liability (1,700) (2,416)
Strategic report Governance IFRS financial statements Other information 49 – Tax assets and liabilities continued (ii) The net deferred tax liability arises on the following items: £m
Long-term business technical provisions and other insurance items 663 1,582 Deferred acquisition costs (199) (199) Unrealised gains on investments (1,430) (2,899) Pensions and other post-retirement obligations (499) (502) Unused losses and tax credits 147 166 Subsidiaries, associates and joint ventures (9) (16) Intangibles and additional value of in-force long-term business (475) (721) Provisions and other temporary differences 102 173
The Group has unrecognised gross tax losses (excluding capital losses) and other temporary differences of £798 million (2017: £787 million) to carry forward against future taxable income of the necessary category in the companies concerned. Of these, trading losses of £34 million will expire within the next 20 years. The remaining losses have no expiry date.
There are no temporary differences in respect of unremitted overseas retained earnings for which deferred tax liabilities have not been recognised at 31 December 2018 (2017: £nil).
Strategic report Governance IFRS financial statements Other information 50 – Pension deficits and other provisions This note details the non-insurance provisions that the Group holds, and shows the movements in these during the year.
Total IAS 19 obligations to main staff pension schemes (note 51(a)) 693 764 Deficits in other staff pension schemes 65 64
At 1 January 92 515 607 111 501 612 Additional provisions 1 269 270 31 161 192 Provisions released during the period — (128) (128) (1) (37) (38) Change due to discounting — — — 2 — 2 Charge to income statement 1 141 142 32 124 156 Utilised during the year (29) (89) (118) (53) (98) (151) Acquisition/(disposal) of subsidiaries — 5 5 — (3) (3) Foreign exchange rate movements — 5 5 2 (9) (7)
Of the total restructuring and other provisions, £402 million (2017: £182 million) is expected to be settled more than one year after the statement of financial position date.
Other provisions have increased during the period under review mainly due to an increase of £175 million in respect of a product governance provision in the UK, which is in addition to the £75 million provision set aside at 31 December 2017. This provision relates to a historical issue with over 90% of cases identified being pre-2002 and is limited to advised sales by Friends Provident, where a number of external defined benefit pension arrangements transferred into Friends Provident pension arrangements. We are in the final stages of completing a thorough and detailed review of the suitability of the advice given, and we will ensure that no affected customers are financially disadvantaged. The valuation of this provision involves a high degree of judgement and estimation uncertainty due to the time that has elapsed since the advice was given. The issue does not affect any other part of our business. The Group has notified its professional indemnity insurers and intends to make a claim on its insurance to mitigate the financial impact. This impact on other provisions has been partially offset by a £78 million release of a provision related to the sale of Aviva USA in 2013.
Net IAS 19 surpluses/(deficits) in the schemes 2,813 (175) (75) 2,563 2,920 (189) (96) 2,635
This note relates to the defined benefit pension schemes included in the table above. There are a number of smaller schemes that are also measured under IAS 19. These are included as a total within Deficits in other staff pension schemes (see note 50). Similarly, while the charges to the income statement for the main schemes are shown in section (b)(i) below, the total charges for all pension schemes are disclosed in section (d) below.
(i) UK schemes In the UK, the Group operates three main pension schemes, the Aviva Staff Pension Scheme (ASPS), the smaller RAC (2003) Pension Scheme which was retained after the sale of RAC Limited in September 2011 and the Friends Provident Pension Scheme (FPPS) which was acquired as part of the Friends Life acquisition in 2015. As the defined benefit section of the UK schemes are now closed to both new members and future accrual, existing deferred members in active service and new entrants participate in the defined contribution section of the ASPS. The UK schemes operate within the UK pensions’ regulatory framework.
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued (b) IAS 19 disclosures Disclosures under IAS 19 for the material defined benefit schemes in the UK, Ireland and Canada, are given below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
£m 2018 Net IAS 19 surplus in the schemes at 1 January 18,678 (16,043) 2,635 Past service costs – amendments1 — (63) (63) Administrative expenses2 — (19) (19) Total pension cost charged to net operating expenses — (82) (82) Net interest credited/(charged) to investment income/(finance costs)3 442 (375) 67 Total recognised in income 442 (457) (15)
The present value of unfunded post-retirement benefit obligations included in the table above is £115 million at 31 December 2018 (2017: £129 million).
Net IAS 19 surplus in the schemes at 1 January 19,694 (17,347) 2,347 Past service costs – amendments — (1) (1) Administrative expenses1 — (18) (18)
(2017: £5,386 million). 2 As at 31 December 2018, the FPPS’s cash and other balances include an insurance policy of £620 million (2017: £630 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group’s IAS 19 scheme assets.
Bonds Fixed interest 3,569 3,193 6,762 4,334 3,162 7,496 Index-linked 10,278 424 10,702 11,627 409 12,036
(2017: £5,386 million). 2 As at 31 December 2018, the FPPS’s cash and other balances includes an insurance policy of £620 million (2017: £630 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group’s IAS 19 scheme assets.
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued Financial assumptions The main financial assumptions used to calculate scheme liabilities under IAS 19 are: UK Ireland Canada
Inflation rate1 3.3%/2.2% 3.2%/2.1% 1.6% 1.7% 2.0% 2.0% General salary increases2 5.1% 5.0% 3.1% 3.2% 2.5% 2.5% Pension increases3 3.3%/2.2% 3.2%/2.1% 0.4% 0.4% 1.25% 1.25% Deferred pension increases3 3.3%/2.2% 3.2%/2.1% 1.6% 1.7% — — Discount rate4, 5 2.7%/
Basis of discount rate AA-rated corporate bonds AA-rated corporate bonds AA-rated corporate bonds 1 For the UK schemes, assumptions provided for RPI/CPI. In the UK, the assumptions for the ASPS and RAC schemes are the single rates for RPI/CPI; for FPPS, relevant RPI/CPI swap curves are used, which are broadly equivalent to these single rates. 2 In the UK, the only remaining linkage between pension benefits and general salary increases is in respect of a small amount of Guaranteed Minimum Pension benefits, in line with National Average Earnings. 3 For the UK schemes, assumptions provided for RPI/CPI. In the UK, the assumptions for the ASPS and RAC schemes are single rates for RPI/CPI; for FPPS, relevant RPI/CPI swap curves are used, which are broadly equivalent to these single rates. The assumptions are also adjusted to reflect the relevant caps/floors and the inflation volatility. 4 To calculate scheme liabilities in the UK, a single discount rate is used in ASPS/RAC, whereas in FPPS, separate discount rates are used for the defined benefit obligation for pensioners and deferred. 5 For the Irish schemes, a discount rate of 1.8% and 1.9% is used for AISPF and FFPS respectively, reflecting the differences in the duration of the liabilities between the two schemes.
– RAC SAPS, including allowances for future improvement 65 87.1 89.0 89.0 90.6 (22.1) (24.0) (24.0) (25.6)
Ireland – AISPF 89% PNA00 with allowance for future improvements 61 88.6 92.0 91.5 94.8 (27.6) (31.0) (30.5) (33.8)
Sensitivity analysis Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivity analysis below has been determined by changing the respective assumptions whilst holding all other assumptions constant. The following table summarises how the defined benefit obligation would have increased/(decreased) as a result of the change in the respective assumptions: Impact on present value of defined benefit obligation
Impact on present value of defined benefit obligation at 31 December 2018 (2,502) 3,317 2,275 (1,788) 536 Impact on present value of defined benefit obligation at 31 December 2017 (2,680) 3,576 2,526 (1,929) 565 1 The effect of assuming all members in the schemes were one year younger.
(iv) Risk management and asset allocation strategy As noted above, the long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long-term, and to maximise returns consistent with an acceptable level of risk so as to control the longterm costs of these schemes. To meet these objectives, the schemes’ assets are invested in a portfolio, consisting primarily of debt securities as detailed in section (b)(ii). The investment strategy will continue to evolve over time and is expected to match the liability profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched to interest rate risk relative to the funding bases.
(v) Funding Formal actuarial valuations normally take place every three years and where there is a deficit, the Group and the trustees would agree a deficit recovery plan. The assumptions adopted for triennial actuarial valuations are determined by the trustees and agreed with the Group and are normally more prudent than the assumptions adopted for IAS19 purposes, which are best estimate.
For the ASPS, following the latest formal actuarial valuation (with an effective date of 31 March 2015) a schedule of contributions was agreed with the trustees, even though the ASPS was fully funded on its technical provisions basis consistent with the requirements of the UK pension regulations. The ASPS is currently undergoing a triennial actuarial valuation as at 31 March 2018.
Total employer contributions for all schemes in 2019 are currently expected to be £0.2 billion.
(c) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest in and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their risk appetite and their retirement plans. Members of this section contribute at least 2% of their pensionable salaries, and depending on the percentage chosen, the Group contributes up to a maximum 14%, together with the cost of the death-in-service benefits. These contribution rates remained unchanged until June 2017. From 1 July 2017, for every 1% additional employee contribution, the Group will contribute an additional 0.1% employer contribution. The amount recognised as an expense for defined contribution schemes is shown in section (d) below.
Continuing operations UK defined benefit schemes 22 22 Overseas defined benefit schemes 1 1 Total defined benefit schemes (note 11(b)) 23 23 UK defined contribution schemes 143 121 Overseas defined contribution schemes 20 25
52 – Borrowings Our borrowings are classified as either core structural borrowings, which are included within the Group’s capital employed, or operational borrowings drawn by operating subsidiaries. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.
(ii) The contractual maturity dates of undiscounted cash flows for these borrowings are: Principal £m Interest £m Total £m Principal £m Interest £m Total £m
All the above borrowings are stated at amortised cost, except for the loan notes issued in connection with the UK lifetime mortgage business of £1,225 million (2017: £1,180 million). These loan notes are carried at fair value, their values are modelled on risk-adjusted cash flows for defaults discounted at a risk-free rate plus a market-determined liquidity premium, and are therefore classified as ‘Level 3’ in the fair value hierarchy. The risk allowances are consistent with those used in the fair value asset methodology, as described in note 23. These have been designated at fair value through profit and loss in order to present the relevant mortgages, borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch.
The securitised mortgage loan notes are at various fixed, floating and index-linked rates. Further details about these notes are given in note 25.
Within one year 257 49 306 174 52 226 1 to 5 years 535 185 720 547 202 749 5 to 10 years 555 163 718 548 178 726 10 to 15 years 180 142 322 325 140 465 Over 15 years 136 154 290 208 144 352
(ii) Senior notes All senior notes are at fixed rates and their total fair value at 31 December 2018 was £1,113 million (2017: £756 million).
(iii) Commercial paper The commercial paper consists of £251 million issued by the Company (2017: £668 million) and is considered core structural funding. The fair value of the commercial paper is considered to be the same as its carrying value and all issuances are repayable within one year.
As explained in accounting policy D, the UK long-term business policyholder funds have invested in a number of property funds and structures (the ‘Property Funds’), some of which have raised external debt, secured on the relevant Property Fund’s property portfolio. The lenders are only entitled to obtain payment of interest and principal to the extent there are sufficient resources in the relevant Property Fund and they have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £61 million (2017: £61 million) included in the table above relate to Property Funds.
Other non-recourse loans primarily include external debt raised by special purpose vehicles in the UK long-term business. The lenders have no recourse whatsoever to the shareholders’ funds of any companies in the Group. The outstanding balance of these loans at 31 December 2018 was £52 million (2017: £58 million).
(v) Securitised mortgage loan notes Loan notes have been issued by special purpose securitisation companies in the UK. Details are given in note 25.
New borrowings drawn down, excluding commercial paper, net of expenses 649 126 775 — 55 55 Repayment of borrowings, excluding commercial paper1 (1,178) (211) (1,389) (488) (151) (639) Movement in commercial paper2 (419) — (419) — — —
Net cash outflow (948) (85) (1,033) (488) (96) (584) Foreign exchange rate movements 42 6 48 104 (17) 87 Borrowings reclassified/(loans repaid) for non-cash consideration — 65 65 484 (13) 471 Fair value movements — 89 89 — 108 108 Amortisation of discounts and other non-cash items (35) — (35) (37) (16) (53) Movements in debt held by Group companies3 — — — — (38) (38)
Payables arising out of direct insurance 1,374 1,276 Payables arising out of reinsurance operations 464 304 Deposits and advances received from reinsurers 129 129 Bank overdrafts (see below) 563 499 Derivative liabilities (note 60) 5,571 5,766 Amounts due to brokers for investment purchases 240 112 Obligations for repayment of cash collateral received 6,714 6,817 Other financial liabilities 1,853 1,598 Total 16,908 16,501
Expected to be settled within one year 10,800 11,460 Expected to be settled in more than one year 6,108 5,041
Strategic report Governance IFRS financial statements Other information 54 – Other liabilities This note analyses our other liabilities at the end of the year.
Expected to be settled within one year 2,451 2,276 Expected to be settled in more than one year 625 550 3,076 2,826 55 – Contingent liabilities and other risk factors This note sets out the main areas of uncertainty over the calculation of our liabilities.
(d) Regulatory compliance The Group’s insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the Group’s UK subsidiaries are dual regulated (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation) while others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group’s regulators outside the UK typically have similar powers, but in some cases they also operate a system of ‘prior product approval’.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2017: £nil). Notes 19 and 20 set out the commitments the Group has to its joint ventures and associates.
Within 1 year 294 317 Later than 1 year and not later than 5 years 921 980 Later than 5 years 1,430 1,408
Within 1 year 94 101 Later than 1 year and not later than 5 years 321 339 Later than 5 years 313 413 728 853
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases 33 44
In arriving at the shareholder position, the following adjustments are typically made to the regulatory Solvency II own funds: • The contribution to the Group’s own funds of the most material fully ring fenced with-profits funds of £2.6 billion at 31 December 2018
• Pro forma adjustments are made if the Solvency II shareholder cover ratio does not fully reflect the effect of transactions or capital actions that are known as at each reporting date. Such adjustments may be required in respect of planned acquisitions and disposals, group reorganisations and adjustments to the Solvency II valuation basis arising from changes to the underlying regulations or updated interpretations provided by EIOPA. The 31 December 2018 Solvency II own funds include two pro forma adjustments to reflect known or highly likely events that could materially impact the Group’s solvency position post 31 December 2018. These pro forma adjustments relate to the disposal of FPI (£0.1 billion reduction in own funds) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£nil impact on own funds as at 31 December 2018). The 31 December 2017 Solvency II own funds included the pro forma impact of the disposals of FPI (£0.1 billion reduction in own funds) and Avipop in Italy (£0.1 billion increase in own funds).
Management also considers a capital employed metric prepared on an IFRS basis in managing capital and measuring business unit performance. The total capital employed comprises of similar items to Solvency II own funds but measured in accordance with IFRS and includes senior debt. In particular, analysis of return on equity calculated based on the capital employed has been used as one of the inputs to management’s decision making process for capital allocation purposes.
Capital is a primary consideration across a wide range of business activities, including product development, pricing, business planning, merger and acquisition transactions and asset and liability management. A Capital Management Standard, applicable Group-wide, sets out minimum standards and guidelines over responsibility for capital management including considerations for capital management decisions and requirements for management information, capital monitoring, reporting, forecasting, planning and overall governance. 1 Own funds is capital available to cover the Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) under Solvency II.
• Allocate capital rigorously to support value adding growth and repatriate excess capital where appropriate • Declare dividends with reference to factors including growth in cash flow and earnings
(b) IFRS basis The table below shows how our capital is deployed by market and how that capital is funded.
United Kingdom1 10,266 11,493 France 2,885 2,704 Poland 319 352 Italy 686 954 Other Europe 380 422 Europe 4,270 4,432 Asia 1,691 1,558 16,227 17,483
Fund management 545 520 Corporate and other business1,2,3 5,412 5,169 Total capital employed 26,154 27,775 Financed by Equity shareholders’ funds 16,558 16,969 Non-controlling interests 966 1,235 Direct capital instrument and tier 1 notes 731 731 Preference shares 200 200 Subordinated debt4 6,335 7,221 Senior debt 1,364 1,419 Total capital employed5 26,154 27,775 1 Non-insurance operations relating to the UK have been reclassified to their respective market segments to better reflect the management of the underlying businesses consistent with the segmental analysis shown in note 5. 2 Capital employed for United Kingdom General Insurance excludes c.£0.9 billion (2017: c.£0.9 billion) of goodwill which does not support the general insurance business for capital purposes and is included in Corporate and other business. 3 Corporate and other business includes centrally held tangible net assets, the main UK staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance Limited. 4 Subordinated debt excludes amounts held by Group companies of £5 million (2017: £9 million). 5 Goodwill, AVIF and other intangibles are maintained within the capital base. Goodwill includes goodwill in subsidiaries of £1,872 million (2017: £1,876 million), goodwill in joint ventures of £13 million (2017: £17 million) and goodwill in associates of £nil (2017: £nil). AVIF and other intangibles comprise £3,201 million (2017: £3,455 million) of intangibles in subsidiaries, £33 million (2017: £40 million) of intangibles in joint ventures and £nil (2017: £nil) of intangibles in associates, net of deferred tax liabilities of £(475) million (2017: £(721) million) and the non-controlling interest share of intangibles of £(31) million (2017: £(254) million).
On 1 May 2018, the Group announced a share buy-back of ordinary shares, which was completed for an aggregate purchase price of £600 million. Shares totalling 119,491,188 (2017: 57,724,500 shares) were purchased and subsequently cancelled bringing the total cancelled under the programme to 177,215,688 shares, completing the share buy-back programme for an aggregate price of £900 million.
Solvency II surplus at the Group level represents the excess of eligible Solvency II own funds over the Group’s solvency capital requirements calculated in accordance with Solvency II requirements. The Group maintained capital in excess of the solvency capital requirement (SCR) at all times during 2018. Further information on the Group’s Solvency II position, including details of available capital resources and solvency surplus, determined using the shareholder view of Solvency II, can be found in the Other information section. This information is estimated and is therefore subject to change. It is also unaudited.
In addition, non-EEA businesses including Canada, Hong Kong and Singapore, are subject to the locally applicable capital requirements in the jurisdictions in which they operate.
Profit before tax 1,652 2,374 Adjustments for: Share of profits of joint ventures and associates (112) (41) Dividends received from joint ventures and associates 43 51 (Profit)/loss on sale of: Investment property (69) (30) Property and equipment 1 — Subsidiaries, joint ventures and associates (102) (135) Investments (6,434) (6,711)
(6,604) (6,876) Fair value (gains)/losses on: 27,691 (7,356) Depreciation of property and equipment 40 35 Equity compensation plans, equity settled expense 64 77 Impairment and expensing of: Goodwill on subsidiaries 13 2 Financial investments, loans and other assets 10 6 Acquired value of in-force business and intangibles — 15 Non-financial assets — 7
Premium/discount on debt securities 587 720 Premium/discount on borrowings (35) (53) Premium/discount on non-participating investment contracts 243 262 Financial instruments 16 26 Acquired value of in-force business and intangibles 392 392 1,203 1,347 Change in unallocated divisible surplus (3,237) (294) Interest expense on borrowings 551 610 Net finance income on pension schemes (67) (63) Foreign currency exchange (gains)/losses (164) 61
Cash proceeds from disposal of subsidiaries, joint ventures and associates 441 861 Less: Net cash and cash equivalents divested with subsidiaries (60) (910) Total cash flow on disposals 381 (49)
Cash and cash equivalents (excluding bank overdrafts) 47,172 44,086 Less: Assets classified as held for sale (688) (739) 46,484 43,347 59 – Risk management This note sets out the major risks our businesses and our shareholders face and describes the Group’s approach to managing these. It also gives sensitivity analysis around the major economic and non-economic assumptions that can cause volatility in the Group’s earnings and capital position.
(a) Risk management framework The risk management framework in Aviva forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing.
A regular top-down key risk identification and assessment process is carried out by the risk function. This includes the consideration of emerging risks and is supported by deeper thematic reviews. This process is replicated at the business unit level. The risk assessment processes are used to generate risk reports which are shared with the relevant risk committees.
Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Governance Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital and liquidity at Group and in the business units.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued Risk appetites, requiring management action if breached, are also set for interest rate and foreign exchange risk (calculated on the basis of the Solvency II solvency capital requirement), and liquidity risk (based on stressing forecast central liquid assets and cash inflows and outflows over a specified time horizon). For other risk types the Group sets Solvency II capital tolerances. The Group’s position against risk appetite and capital tolerances is monitored and reported to the Board on a regular basis. Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva has a risk preference that we will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee, which focuses on business and financial risks, and the Operational Risk Committee which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units.
Further information on the types and management of specific risk types is given in sections (b) to (j) below.
The credit quality of the underlying debt securities within investment vehicles is managed by the safeguards built into the investment mandates for these funds which determine the funds’ risk profiles. At the Group level, we also monitor the asset quality of unit trusts and other investment vehicles against Group set limits.
(vi) Securities finance The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by collateralisation and minimum counterparty credit quality requirements.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued (vii) Derivative credit exposures The Group is exposed to counterparty credit risk through derivative trades. This risk is generally mitigated through holding collateral for most trades. Residual exposures are captured within the Group’s credit management framework.
(viii) Unit-linked business In unit-linked business the policyholder bears the direct market risk and credit risk on investment assets in the unit funds and the shareholders’ exposure to credit risk is limited to the extent of the income arising from asset management charges based on the value of assets in the fund.
Where assets have been classed as ‘past due and impaired’, an analysis is made of the risk of default and a decision is made whether to seek to mitigate the risk. There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.
The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group Capital is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements.
As at 31 December 2018, no material derivative contracts had been entered into to mitigate the effects of changes in property prices. Exposure to property risk on equity release mortgages from sustained underperformance in the UK House Price Index (HPI) is mitigated by capping loan to value on origination at low levels and regularly monitoring the performance of the mortgage portfolio.
Sensitivity to changes in property prices is given in section (j) Risk and capital management, below.
Profit before tax on General Insurance and Health Insurance business is generally a mixture of insurance, expense and investment returns. The asset portfolio is invested primarily in fixed income securities and the reduction in interest rates over the last decade has reduced the investment component of profit, although in 2018 there was a small partial reversal in this long term trend. The portfolio investment yield and average total invested assets in our general insurance and health business are set out in the table below.
Average assets £m 2016 2.47% 14,369 2017 2.07% 14,770 2018 2.28% 14,651 1 Before realised and unrealised gains and losses and investment expenses
A 10% change in sterling to euro/Canada$ (CAD$) average foreign exchange rates applied to translate foreign currency profits would have had the following impact on profit before tax, including resulting gains and losses on foreign exchange hedges.
10% increase in sterling/euro rate £m 10% decrease in sterling/euro rate £m 10% increase in sterling/CAD$
Impact on profit before tax 31 December 2018 (60) 85 8 (9) Impact on profit before tax 31 December 2017 (78) 95 6 (7)
(vi) Derivatives risk Derivatives are used by a number of the businesses. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. Activity is overseen by the Group Capital and Group Risk teams, which monitor exposure levels and approve large or complex transactions.
Maturity analyses The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets held to meet them. A maturity analysis of the contractual amounts payable for borrowings and non-hedge derivatives is given in notes 52 and 60, respectively. Contractual obligations under operating leases and capital commitments are given in note 56.
(i) Analysis of maturity of insurance and investment contract liabilities For non-linked insurance business, the following table shows the gross liability at 31 December 2018 and 2017 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts.
Long-term business Insurance contracts – non-linked 106,622 8,421 25,940 40,548 31,713 Investment contracts – non-linked 75,158 5,547 19,199 28,572 21,840 Linked business 156,859 15,559 23,901 52,656 64,743 General insurance and health 16,368 6,859 6,758 2,217 534 Total contract liabilities 355,007 36,386 75,798 123,993 118,830
Embedded derivatives The Group is exposed to the risk of changes in policyholder behaviour due to the exercise of options, guarantees and other product features embedded in its long-term savings products. These product features offer policyholders varying degrees of guaranteed benefits at maturity or on early surrender, along with options to convert their benefits into different products on pre-agreed terms. The extent of the impact of these embedded derivatives differs considerably between business units and exposes Aviva to changes in policyholder behaviour in the exercise of options as well as market risk.
The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a Group-wide catastrophe reinsurance programme to protect against catastrophe losses exceeding a 1 in 200 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 200 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers’ liability and public liability business written prior to 31 December 2000.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued The increasing importance to our strategy of digital interaction with our customers and advanced data analytics, the conduct, data protection and financial crime agenda of the European institutions, the FCA and other regulators, as well as the increasing cyber security threat, as evidenced by continuing instances of high profile cyber security breaches for other corporates in the UK and elsewhere, mean that the Group’s inherent risk exposure to risks such as data theft, conduct regulatory breaches (including financial crime) and customer service interruption due to IT systems failure increased in 2018 and is expected to continue to increase into the future. The risk of customer service interruption is increased by the age and complexity of the Group’s IT infrastructure, which at times during the first half of 2018 resulted in disruption to continuous service to our customers, while our UK long-term savings business also experienced some functionality issues during its update of its platform capability. During 2018 we have continued to take action to reduce our residual exposure to these risks and improve our operational resilience through our conduct risk management framework, financial crime risk mitigation programme and significant investment in upgrading our IT infrastructure (including migrations to a new data centre infrastructure provider and to the Cloud) and IT Security Transformation programme, and by ensuring appropriate consideration of IT infrastructure and security risks in developing our digital strategy, and will continue to do so into the future.
(iv) Sensitivity test results Illustrative results of sensitivity testing for long-term business, general insurance and health business and the fund management and noninsurance business are set out below. For each sensitivity test the impact of a reasonably possible change in a single factor is shown, with other assumptions left unchanged.
Insurance participating (75) 35 (15) (105) 70 (20) (5) (5) Insurance non-participating (975) 1,130 (695) (125) 105 (210) (115) (865) Investment participating (40) 40 (10) (15) (15) (15) — — Investment non-participating — — — 10 (25) (20) — — Assets backing life shareholders’ funds (95) 105 (25) 20 (20) — — — Total (1,185) 1,310 (745) (215) 115 (265) (120) (870)
Insurance participating (75) 35 (15) (105) 70 (20) (5) (5) Insurance non-participating (975) 1,130 (695) (125) 105 (210) (115) (865) Investment participating (40) 40 (10) (15) (15) (15) — — Investment non-participating — — — 10 (25) (20) — — Assets backing life shareholders’ funds (145) 150 (25) 25 (25) — — — Total (1,235) 1,355 (745) (210) 110 (265) (120) (870)
Insurance participating (45) 25 (15) (20) (40) (25) (5) (10) Insurance non-participating (475) 485 (790) (135) 115 (215) (105) (905) Investment participating — 10 (5) (5) — (15) — — Investment non-participating — (10) (5) 10 (10) (30) — — Assets backing life shareholders’ funds (90) 115 (25) 20 (20) — — —
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued General insurance and health business sensitivities as at 31 December 2018 31 December 2018 Impact on profit before tax £m Interest rates
Equity/ property 31 December 2017 Impact on shareholders’ equity before tax £m Interest rates
Net investment hedges To reduce its exposure to foreign currency risk, the Group has designated a portion of its euro denominated debt as hedge instruments to hedge a net investment in its European subsidiaries. No material disposals are expected prior to the maturity of the euro denominated debt and the hedge effectiveness is prospectively expected to remain between 80% and 125%. The carrying value of the debt at 31 December 2018 was £2,468 million (2017: £2,885 million) and its fair value at that date was £2,515 million (2017: £3,202 million).
Foreign exchange losses of £27 million (2017: loss of £98 million) on translation of the debt to sterling at the statement of financial position date in respect of the effective portion have been recognised in the hedging instruments reserve in shareholders’ equity. A gain of £4 million (2017: loss of £13 million) has been recognised in the income statement due to the termination of a net investment hedge.
(i) The Group’s non-hedge derivatives at 31 December 2018 and 2017 were as follows: Contract/ notional amount £m
The Group’s derivative risk management policies are outlined in note 59.
Within 1 year 1,224 1,071 Between 1 and 2 years 512 597 Between 2 and 3 years 445 503 Between 3 and 4 years 384 404 Between 4 and 5 years 301 328 After 5 years 3,359 3,461 6,225 6,364
Financial assets Derivative financial assets 3,978 — 3,978 (2,831) (657) (186) 304 Loans to banks and repurchase arrangements 1,923 — 1,923 — (300) (1,614) 9 Total financial assets 5,901 — 5,901 (2,831) (957) (1,800) 313
Financial assets Derivative financial assets 4,605 — 4,605 (3,162) (830) (291) 322 Loans to banks and repurchase arrangements 2,524 — 2,524 — — (2,502) 22
Derivative assets are recognised as ‘Derivative financial instruments’ in note 27(a), while fair value liabilities are recognised as ‘Derivative liabilities’ in note 53. £1,016 million (2017: £902 million) of derivative assets and £870 million (2017: £976 million) of derivative liabilities are not subject to master netting agreements and are therefore excluded from the table above.
Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by group companies on equivalent terms to those available to all employees of the Group. In 2018, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.
Associates and joint ventures The Group has ongoing interests in the following operations that are classified as joint ventures or associates. Further details of those operations that were most significant in 2018 are set out in notes 19 and 20 to the financial statements.
Strategic report Governance IFRS financial statements Other information 64 – Related Undertakings The Companies Act 2006 requires disclosure of certain information about the Group’s related undertakings which is set out in this note. Related undertakings comprise subsidiaries, joint ventures, associates and other significant holdings. Significant holdings are where the Group either has a shareholding greater than or equal to 20% of the nominal value of any share class, or a book value greater than 20% of the Group’s assets.
The Group’s related undertakings along with the country of incorporation, the registered address, the classes of shares held and the effective percentage of equity owned at 31 December 2018 are disclosed below.
The direct related undertakings of the Company as at 31 December 2018 are listed below: Name of undertaking Country of incorporation Registered address Share class1 % held
The indirect related undertakings of the Company as at 31 December 2018 are listed below: Company name Share Class1 % held
Parnasse Square Invest Ordinary Shares 99 Bermuda Canon’s Court, 22 Victoria Street, Hamilton, HM 12
Aviva Re Limited Ordinary Shares 100 Trinity Hall, 43 Cedar Avenue, Hamilton HM 12 Lend Lease JEM Partners Fund Limited Ordinary Shares 23
Canada 10 Aviva Way, Suite 100, Markham On L6G 0G1 9543864 Canada Inc. Common Shares 100 Aviva Canada Inc. Voting Interest 100 Aviva General Insurance Company Common Shares 100 Aviva Insurance Company of Canada Common Shares 100 Aviva Warranty Services Inc. Common Shares 100 Elite Insurance Company Common Shares 100 Insurance Agent Service Inc. Common Shares 100 National Home Warranty Group Inc. Common Shares 100 OIS Ontario Insurance Service Limited Common Shares 100 Pilot Insurance Company Common Shares 100 S&Y Insurance Company Common Shares 100 Scottish & York Insurance Co. Limited Common Shares 100 Traders General Insurance Company Common Shares 100 Wayfarer Insurance Brokers Limited Common Shares 100 100 King Street West, Suite 4900, Toronto On M5X 2A2
Aviva Investors Canada Inc. Common Shares 100 100, 10325 Bonaventure Drive S.E., Calgary T2J 7E4
A-Win Insurance Ltd. Ordinary Shares 100 328 Mill Street, Unit 11, Beaverton L0K 1A0 Bay-Mill Specialty Insurance Adjusters Inc. Common Shares 100 480 University Avenue, Suite 800, Toronto On M5G 1V2
Aviva-Cofco Yi Li Asset Management Co Ltd2 Ordinary Shares 21 Czech Republic 5/482, Ve Svahu, Prague 4, 14700 AIEREF Renewable Energy s.r.o. Ordinary Shares 99 France 3 Boulevard Saint Martin Aviva Impact Investing France Ordinary Shares 100 128 Boulevard Raspail, 75006, Paris UFF Oblicontext 2021-A (UFFo21A) FCP 98 UFF Oblicontext 2023 A (UFFo23A) FCP 98 UFF Obligations 3-5 A FCP 88 13 Rue du Moulin Bailly, 92270, Bois Colombes 11 Rue De L’Echelle Ordinary Shares 100 Agents 3A Ordinary Shares 50 Aviva Assurances, Société Anonyme d’Assurances Incendie, Accidents et Risques Divers
Company name Share Class1 % held Afer Patrimoine FCP 100 Afer-Flore FCP 98 Afer-Sfer SICAV 100 Aviva Actions Croissance FCP 100 Aviva Actions Euro FCP 98 Aviva Actions Europe ISR FCP 100 Aviva Actions France FCP 79 Aviva Amerique FCP 97 Aviva Asie FCP 100 Aviva Convertibles SICAV 98 Aviva Conviction Opportunites FCP 100 Aviva Conviction Patrimoine FCP 100 Aviva Developpement SICAV 99 Aviva Diversifié SICAV 94 Aviva Eur Corp Senior Debts FCT 100 Aviva Europe SICAV 96 Aviva Flexible (AVIFLEX) FPS 100 Aviva Flexible Emergents A FCP FCP 100 Aviva France Opportunites FCP 83 Aviva Grdes Marq A C. FCP 99 Aviva Interoblig FCP 100 Aviva Investors Actions Euro FCP 83 Aviva Investors Alpha Taux A FCP 100 Aviva Investors Alpha Yield FCP 92 Aviva Investors Britannia (D) SICAV 98 Aviva Investors Conviction FCP 100 Aviva Investors Euro Aggregate FCP 76 Aviva Investors Euro Com R E D FCP 100 Aviva Investors Euro Crédit Bonds 1-3 FCP 77 Aviva Investors Japan FCP 95 Aviva Investors Portefeuille FCP 100 Aviva Investors Reference Div FCP 100 Aviva Investors Repo (avirepo) FCP 100 Aviva Investors Selection FCP 100 Aviva Investors Valeurs FCP 100 Aviva Investors Valeurs Europe FCP 74 Aviva Investors Yield Curve Abs Rt R FCP 100 Aviva Monetaire Isr (A) FCP 98 Aviva Multigestion FCP 100 Aviva Oblig International SICAV 90 Aviva Oblirea SICAV 97 Aviva Patrimoine SICAV 98 Aviva Performance FCP 100 Aviva Rebond FCP 88 Aviva Rendement Europe SICAV 95 Aviva Selection Opportunites FCP 99 Aviva Selection Patrimoine FCP 100 Aviva Signatures Europe FCP 100 Aviva Structure Index 1 C. FCP 100 Aviva Structure Index 2 FCP 100 Aviva Structure Index 4 C. FIPS 100 Aviva Structure Index3 FPS 100 Aviva Small & Mid Caps Euro ISR FCP 100 Aviva Valeurs Francaises SICAV 98 Aviva Valeurs Immobilieres SICAV 79 Aviva Valorisation Opportunite FCP 99 Aviva Valorisation Patrimoine FCP 100 FPE Aviva Eur Corp Senior Db2 Mutual Fund 31 FPE Aviva Small & Midcap ASAM FCP 100 UFF Cap Defensif FCP 97 UFF Eu-Val 0-100 A C. FCP 98 UFF Obligations 5-7 A FCP 99 UFF Rendement Diversifie A FCP 100 24-26 Rue De La Pépinière, 75008, Paris 100 Courcelles Ordinary Shares 100 AFER Immo Ordinary Shares 100 AFER Immo 2 Ordinary Shares 100 Aviva Commerce Europe Ordinary Shares 65 Aviva Immo Selection Ordinary Shares 99 Aviva Investors Real Estate France S.A. Ordinary Shares 100 Aviva Investors Real Estate France SGP Ordinary Shares 100 Aviva Patrimoine Immobilier Ordinary Shares 93 Logiprime Europe Ordinary A Shares 98 Primotel Europe Ordinary Shares 99 SCI La Coupole Des Halles Ordinary Shares 98 SCI Pergola Ordinary Shares 100 Société Civile Immobilière Thomas Edison Ordinary Shares 50 Société Civile Immobilière Pleyel R2 Ordinary Shares 50 Sapphire Ile de France SCI Ordinary Euro 1 Each Shares 100 Afer Avenir Senior SICAV 100 Aviva Investors Commercial Real Estate Debt Fun FCP 68 Aviva Investors Inflation Euro Hd FCP 50
Company name Share Class1 % held Aviva Investors Monétaire FCP 55 Aviva Investors Valorisation FCP 100 Aviva Japan FCP 100 Aviva Messine 5 FCP 100 Aviva Performance Divers.Fcp FCP 100 Aviva Valeurs Responsable A FCP 100 32, Avenue d’Iéna, 75116 Paris Aviva Capital Planete (Avicapa) FCP 100 CGP Entrepreneurs Ordinary Shares 74 Myria Asset Management Ordinary Shares 74 UFF Selection Alpha-A (Ufselaa) FCP 98 UFF Actions France-Aeur (UFFacfa) FCP 99 UFF Allocation Optimum FCP 99 UFF Cap Diversifie (UCAPDIV) FCP 51 UFF Capital Planete A (Aviufcp) FCP 98 UFF Croissance Pme A (Ucapcro) FCP 100 UFF Emergence-A (UFFemga) FCP 99 UFF Europe Opportunites-Aeur (UFFgeua) FCP 99 UFF Euro Valeur A FCP 100 UFF Global Allocation A FCP 100 UFF Global Foncieres-A (Ufgf70A) FCP 98 UFF Global Multi-Strategie-A (Ufglmsa) FCP 99 UFF Global Obligations-A (Ufgf30A) FCP 97 UFF Global Reactif-A (Ufgf10A) FCP 95 UFF Liberty-A (UFFliba) FCP 100 UFF Selection Premium A (Uavfran) FCP 98 Ufifrance Gestion Ordinary Shares 74 Ufifrance Patrimoine Ordinary Shares 74 UFF Privilège A FCP 29 Union Financière de France Banque Ordinary Shares 74 36 Rue De Naples 75008 Paris Cybele Am – Bellatrix-C (THIPATC) SICAV 78 Cybele Am Betelgeuse (BETGUSV) SICAV 92 Ufifrance Immobilier Ordinary Shares 20 37 Avenue des Champs Elysées, 75008, Paris Cybele Europe Israel Croissance (FRAISCR) SICAV 85 Société Française de Gestion et d’Investissement Ordinary B Shares 67 Sirius SICAV 98 41 Rue Capitaine Guynemer, 92400, Courbevoie Logipierre 1 Ordinary Shares 44 47 Rue du Faubourg Saint-Honoré, 75008, Paris
Epargne Actuelle Ordinary Shares 100 Newco 3 Ordinary Shares 100 Newco 5 Ordinary Shares 100 Société Civile Immobilière Carpe Diem Ordinary Shares 50 Societe Civile Immobiliere Charles Hermite Ordinary Shares 56 Societe Civile Immobiliere Montaigne Ordinary Shares 92 Zelmis Ordinary Shares 100 80 Avenue De L’Europe, 92270 Bois-Colombes Aviva France Ordinary Shares 100 Aviva Solutions Ordinary Shares 100 Croissance Pierre II Ordinary Shares 100 Groupement D’Interet Economique du Groupe Aviva France
Company name Share Class1 % held Aviva Couv Actions C. FCP 100 91-93 Boulevard Pasteur, 75015, Paris SCI Campus Medicis St Denis Ordinary Shares 30 SCI Campus Rimbaud St Denis Ordinary Shares 30 Tour Majunga – La Défense 9, 6 place de la Pyramide
AXA Premiere Categorie SICAV 85 9 Rue Newton, 75116 Paris Pretons Ensemble FPS 50 14 Rue Bergère, 75009 Paris Afer Actions PME FCP 100 Aviva Perspective 2021-2025 FCP 100 Aviva Perspective 2026-2030 FCP 100 Aviva Perspective 2031-2035 FCP 100 Aviva Perspective 2036-2040 FCP 100 24 Rue de la Pépinière, 75008 Paris Aviva Valeurs Responsables FCP 100 3 Rue Alexandre Fleming France 92260
Eschenheimer Anlage 1, 60316, Frankfurt Reschop Carré Hattingen GmbH Ordinary Shares 95 Reschop Carré Marketing GmbH Ordinary Shares 100 Max-Planck-Strasse, 3,85609 AschheimDornach
ASF German Retail GmbH & Co. KG Ordinary Shares 98 German Retail Investment Properties Sarl Ordinary Shares 98 German Retail I GmbH Ordinary Shares 98 German Retail II GmbH Ordinary Shares 98 German Retail IV GmbH Ordinary Shares 98 German Retail IX GmbH Ordinary Shares 98 German Retail V GmbH Ordinary Shares 98 German Retail VII GmbH Ordinary Shares 98 German Retail VIII GmbH Ordinary Shares 98 Speditionstraße 23, 40221 Düsseldorf Projektgesellschaft Hafenspitze mbH Ordinary Shares 94 Guernsey Dorey Court Admiral Park, St Peter Port, Guernsey, GY1 2HT
PT Astra Aviva Life2 Ordinary Shares 50 Ireland 25/28 North Wall Quay, Dublin CGWM Select Affinity Fund OEIC 23
Company name Share Class1 % held CGWM Select Global Affinity Fund OEIC 60 CGWM Select Global Diversity Fund OEIC 39 CGWM Select Global Opportunity Fund OEIC 51 CGWM Select Opportunity Fund OEIC 42 Anna Livia Properties Limited Ordinary Shares 100 Aviva Investors Euro Liquidity Fund ICVC 81 Aviva Investors Sterling Government Liquidity Fund
Aviva Investors Sterling Liquidity Fund Aviva Investors Sterling Liquidity Plus Fund
FPPE Fund Public Limited Company Shares Of No Par Value Shares, 1 Subscriber Euro €1 Shares
FPPE – Private Equity Private Equity 100 Guild House, Guild Street, IFRS, Dublin 1 Aviva Irl Merrion Exempt Trust – Managed Fund Unit Trust 37 One Park Place, Hatch Street, Dublin 2 Area Life International Assurance dac A Shares, B Shares 100 Aviva Direct Ireland Limited Ordinary Shares 100 Aviva Driving School Ireland Limited Ordinary Shares 100 Aviva Group Ireland Limited Ordinary Shares 100 Aviva Group Services Ireland Limited Aviva Insurance Ireland Designated Activity Company
Aviva Life Services Ireland Limited Ordinary Shares 92 Aviva Trustee Company Ireland Designated Activity Company
Legal & General ICAV – L&G Multi-Index EUR V Fund OEIC 95 Legal & General ICAV – L&G Multi-Index EUR IV Fund
Ashtown Management Company Limited Ordinary Shares 50 Atrium Nominees Limited Ordinary Shares 100 Friends First Life Assurance Company DAC (Friends First)
Friends First US Property Company Limited Ordinary Shares 100 Isle of Man Royal Court, Castletown, IM9 1RA Friends Provident International Limited Ordinary B Shares, Ordinary
Friends Provident International Services Limited Ordinary Shares 100 Italy Piazzetta Guastalla 1, 20122, Milan Banca Network Investimenti SPA Ordinary Shares 25 Via Scarsellini 14, 20161, Milan Aviva Italia Holding S.p.A Ordinary Shares 100 Aviva Italia S.p.A Ordinary Shares 100 Aviva Italia Servizi Scarl Ordinary Shares 36 Aviva Life SPA Ordinary Shares 100 Aviva SPA Ordinary Shares 51
1 Fitzroy Place Jersey Unit Trust2 Unit Trust 50 2 Fitzroy Place Jersey Unit Trust2 Unit Trust 50 Le Masurier House, La Rue Le Masurier, St Helier, JE2 4YE
Aviva Investors Asian Equity Income Fund SICAV 99 Aviva Investors CELLs Danone Sarl SICAV 100 Aviva Investors Investment Solutions Emerging Markets Debt Fund
Aviva Investors European Corporate Bond Fund SICAV 65 Aviva Investors European Equity Fund SICAV 62 Aviva Investors European Equity Income Fund SICAV 100 Aviva Investors European Infrastructure Debt Str FIAR 22 Aviva Investors European Real Estate Securities Fund
Aviva Investors UK Equity Focus Fund SICAV 91 Aviva Investors US Equity Income Fund SICAV 70 Centaurus CER (Aviva Investors) Sarl Ordinary Shares 100 Hexagone S.à r.l. Ordinary Shares 100 Sapphire Ile de France 1 S.à.r.l. Ordinary Shares 100 Sapphire Ile de France 2 S.à r.l. Ordinary Shares 100 Victor Hugo 1 S.à r.l. Ordinary Each Eur 25 Shares 100 3 Rue des Labours, L-1912 Haspa Trendkonzept FCP 40 42 Rue de la Vallée, L-2661 World Investment Opportunities Funds – China Performance Fund 47 Avenue John F Kennedy Goodman European Business Park Fund (Lux) S.àr.l.
Ordinary Shares 100 49 Avenue J.F. Kennedy, L-1855 AXA World Funds II – North American Equities SICAV 20 BMO Global Equity Market Neutral V10 Fund SICAV 52 BMO Global Total Return Bond Fund SICAV 66 6 Rue du Fort Bourbon, L-1249 German Retail Associate Property Fund FCP-SIF FCP 98 German Retail III GmbH Ordinary Shares 98 Sachsenfonds GmbH Ordinary Shares 98 9 Rue du Fort Bourbon, L-1249 EPI NU Sarl Ordinary Shares 100 Boulevard Konrad Adenauer Deutsche European Property Fund Ordinary Shares 20 Xtrackers II Eurozone Government Bond 15-30 UCITS ETF
c/o CACEIS BANK Lux, 5, Allée Scheffer, L-2520 PI EMU EQUITY-XEURND (PIEMUXE) OEIC 22 Tikehau Italy Retail Fund Ii Scsp-Area12 FCP 31 28-32, Place de la Gare, L-1616 Luxembourg Ver Capital Credit Partners IV SICAV – SIF SICAV 22 Ver Capital Credit VI – Sub Fund A SICAV 43 Ver Capital Credit VI – Sub Fund B SICAV 43 Jupiter Asset Management Ltd., 70 Victoria Street, The Zig Zag Building
Professional Advisory Holdings Ltd. Ordinary A Shares 92 Professional Investment Advisory Services Pte Ltd Ordinary A Shares 92 6 Temasek Boulevard, #29-00, Suntec Tower 4, 038986
Company name Share Class1 % held Aviva Asia Pte Ltd Ordinary Shares 100 Aviva Financial Advisers Pte. Ltd Ordinary Shares 100 Aviva Global Services (Management Services) Private Ltd.
Eólica Almatret S.L. Ordinary Shares 45 Nanclares de Oca, numero 1-B Spain 28022
Building a Future (Newham Schools) Limited Ordinary Shares 100 Mill NU Properties Limited Ordinary A Shares 100 NU Developments (Brighton) Limited Ordinary Shares 100 NU Local Care Centres (Bradford) Limited Ordinary Shares 100 NU Local Care Centres (Chichester No.1) Limited Ordinary Shares 100 NU Local Care Centres (Chichester No.2) Limited Ordinary Shares 100 NU Local Care Centres (Chichester No.3) Limited Ordinary Shares 100 NU Local Care Centres (Chichester No.4) Limited Ordinary Shares 100 NU Local Care Centres (Chichester No.5) Limited Ordinary Shares 100 NU Local Care Centres (Chichester No.6) Limited Ordinary Shares 100 NU Local Care Centres (Farnham) Limited Ordinary Shares 100 Centrium 1, Griffiths Way St Albans, United Kingdom, AL1 2RD
Polaris U.K. Limited Ordinary Shares 39 5 Lister Hill, Horsforth, Leeds, LS18 5AZ Aspire Financial Management Limited Ordinary Shares 47 Living in Retirement Limited Ordinary Shares 47 Sinfonia Asset Management Limited Ordinary Shares 47 Tenet Business Solutions Limited Ordinary Shares 47 Tenet Client Services Limited Tenet Financial Services Limited
Company name Share Class1 % held Architas Multi-Manager Diversified Protector 80 OEIC 35 50 Stratton Street, London, W1J 8LL Lazard Multicap UK Income Fund OEIC 49 7 Lochside View, Edinburgh, EH12 9DH Origo Services Limited Ordinary Shares 22 7 Newgate Street, EC1A 7NX AXA Ethical Distribution Fund OEIC 32 AXA Rosenberg American OEIC 83 AXA Rosenberg Asia Pacific Ex Japan OEIC 93 AXA Rosenberg Global OEIC 86 AXA Rosenberg Japan OEIC 93 8 Surrey Street, Norwich, Norfolk, NR1 3NG Aviva Central Services UK Limited Ordinary Shares 100 Aviva Consumer Products UK Limited Ordinary Shares 100 Aviva Health UK Limited Ordinary Shares 100 Aviva Insurance UK Limited Ordinary Shares 100 Aviva UKGI Investments Limited Ordinary Shares 100 Gresham Insurance Company Limited Ordinary Shares 100 Healthcare Purchasing Alliance Limited2 Ordinary A Shares 50 London and Edinburgh Insurance Company Limited
Freetricity Southeast Limited Ordinary Shares 100 c/o Anesco Limited, The Green Easter Park, Benyon Road , Reading, RG7 2PQ
IQUO Limited Ordinary A Shares 67 Exchange House, Primrose Street, EC2A 2HS BMO European Growth & Income Fund SICAV 79 BMO MM Navigator Balanced Fund F&C European Capital Partners
London and Manchester Group Limited Ordinary Shares 100 Premier Mortgage Service Limited Ordinary Shares 100 SB Loan Administration Limited Ordinary Shares 100 Sesame Bankhall Group Limited Ordinary Shares 100 Sesame Bankhall Valuation Services Limited Ordinary A Shares 75 Sesame General Insurance Services Limited Ordinary Shares 100 Sesame Limited Ordinary Shares 100 Sesame Regulatory Services Limited Ordinary Shares 100 Sesame Services Limited Ordinary A Shares 100 Suntrust Limited Ordinary Shares 100 Undershaft FAL Limited Ordinary Shares 100 Undershaft FPLLA Limited Ordinary Shares 100 Undershaft SLPM Limited Ordinary Shares 100 Wealth Limited Ordinary Shares 100 St Helen’s, 1 Undershaft, London, EC3P 3DQ 1 Fitzroy Place Limited Partnership2 Limited Partnership 50 10-11 GNS Limited Ordinary Shares 100 11-12 Hanover Square LP2 Limited Partnership 50 11-12 Hanover Square Nominee 1 Limited2 Ordinary Shares 50 11-12 Hanover Square Nominee 2 Limited2 Ordinary Shares 50 130 Fenchurch Street LP2 Limited Partnership 50 130 Fenchurch Street Nominee 1 Limited2 Ordinary Shares 50 130 Fenchurch Street Nominee 2 Limited2 Ordinary Shares 50 1-5 Lowndes Square Management Company Limited
Aviva Investors 40 60 Global Equity Index Fund ACS 100 Aviva Investors 50 50 Global Equity Index Fund ACS 100 Aviva Investors 60 40 Global Equity Index Fund ACS 100
100 Aviva Investors Japan Equity Fund ACS 100 Aviva Investors Japan Equity MoM 1 Fund OEIC 73 Aviva Investors Japanese Equity Index Fund ACS 100 Aviva Investors London Limited Ordinary Shares 100 Aviva Investors Managed High Income Fund OEIC 63 Aviva Investors Money Market VNAV Fund ACS 100 Aviva Investors Multi-Asset 40 85 Shares Index Fund
100 Aviva Investors Pensions Limited Ordinary Shares 100 Aviva Investors Polish Retail GP Limited Ordinary Shares 100 Aviva Investors Polish Retail Limited Partnership Limited Partnership 100 Aviva Investors Pre-Annuity Fixed Interest Fund ACS 100 Aviva Investors Private Equity Programme 2008 Partnership
Company name Share Class1 % held Aviva Investors Realm Infrastructure No.2 Limited Ordinary Shares 100 Aviva Investors Realm Infrastructure No.3 Limited Ordinary Shares 100 Aviva Investors Realm Infrastructure No.4A Limited Ordinary Shares 100 Aviva Investors Realm Infrastructure No.4B Limited Ordinary Shares 100 Aviva Investors Social Housing GP Limited Ordinary Shares 100 Aviva Investors Social Housing Limited Company Limited by
Aviva Investors Stewardship UK Equity Fund ACS 100 Aviva Investors Stewardship UK Equity Income Fund
Aviva Investors UK Equity Alpha Fund ACS 100 Aviva Investors UK Equity Income Fund ACS 100 Aviva Investors UK Equity Income Fund OEIC 51 Aviva Investors UK Equity Index Fund ACS 100 Aviva Investors UK Equity MoM 1 Fund OEIC 87 Aviva Investors UK Fund Services Limited Ordinary Shares 100 Aviva Investors UK Funds Limited Ordinary Shares 100 Aviva Investors UK Gilts All Stocks Index Fund ACS 100 Aviva Investors UK Gilts Over 15 Years Index Fund Aviva Investors UK Gilts Upto 5 Years Index Fund
100 Aviva Investors UK Index Tracking Fund OEIC 68 Aviva Investors UK Nominees Limited Ordinary Shares 100 Aviva Investors UK Opportunities Fund OEIC 95 Aviva Investors US Equity Index Fund ACS 100 Aviva Investors US Large Cap Equity Fund ACS 100 Aviva Overseas Holdings Limited Ordinary Shares 100 Aviva Public Private Finance Limited Ordinary Shares 100 Aviva Special PFI GP Limited Ordinary Shares 100 Aviva Special PFI LP Limited Partnership 95 Aviva Staff Pension Trustee Limited Ordinary Shares 100 Aviva UK Digital Limited Ordinary Shares 100 Aviva UKLAP De-risking Limited Ordinary Shares 100 Axcess 10 Management Company Limited Limited By Guarantee 100 Barratt House LP2 Limited Partnership 50 Barratt House Nominee 1 Limited2 Ordinary Shares 50 Barratt House Nominee 2 Limited2 Ordinary Shares 50 Barwell Business Park Nominee Limited Ordinary Shares 100 BIOMASS UK NO. 3 Limited Ordinary A Shares
Biomass UK NO.1 LLP Limited Liability Partnership 100 Biomass UK No.2 Limited ‘A Shares
COW Real Estate Investment Limited Partnership Limited Partnership 100 COW Real Estate Investment Nominee Limited Ordinary Shares 100 EES Operations 1 Limited Ordinary Shares 100
Gobafoss General Partner Limited Ordinary Shares 100 Gobafoss Partnership Nominee No 1 Ltd Ordinary Shares 100 Hemel Hempstead Estate Management Limited Ordinary Shares 100 Hillswood Management Limited Hooton Bio Power Limited
Igloo Regeneration (Butcher Street) Limited2 Ordinary Shares 50 Igloo Regeneration (General Partner) Limited2 Ordinary Shares 50 Igloo Regeneration (Nominee) Limited2 Ordinary Shares 50 Igloo Regeneration Developments (General Partner) Limited2
Porth Teigr Management Company Limited2 Ordinary Shares 50 Property Management Company (Croydon) Ltd Ordinary Shares 100 Quantum Property Partnership2 Limited Partnership 50 Quarryvale One Limited Ordinary Shares 100 Quarryvale Three Limited Ordinary Shares 100 Renewable Clean Energy Limited Ordinary Shares 100 Rugby Radio Station (General Partner) Limited2 Ordinary B Shares 50 Rugby Radio Station (Nominee) Limited2 Ordinary Shares 50 Rugby Radio Station Limited Partnership2 Limited Partnership 50 SE11 PEP Limited Ordinary Shares 100 Serviced Offices UK (Services) Limited2 Ordinary Shares 50 Serviced Offices UK GP Limited2 Ordinary Shares 50 Serviced Offices UK Limited Partnership2 Limited Partnership 50 Serviced Offices UK Nominee Limited2 Ordinary Shares 50 Solar Clean Energy Limited Ordinary Shares 100 Southgate General Partner Limited Ordinary A Shares 50
Company name Share Class1 % held Southgate Limited Partnership Limited Partnership 50 Southgate LP (Nominee 1) Limited Ordinary Shares 50 Southgate LP (Nominee 2) Limited Ordinary Shares 50 Stonebridge Cross Management Company Limited Limited by Guarantee 100 Stonebridge Cross Management Limited Limited By Guarantee 100 SUE Developments Limited Partnership2 Limited Partnership 50 SUE GP LLP2 Ordinary Shares 50 SUE GP Nominee Limited2 Ordinary Shares 50 Sunrise Renewables (Barry) Limited Ordinary Shares 100 Swan Valley Management Limited Ordinary Shares 100 The Designer Retail Outlet Centres (General Partner) Limited
Aviva Life Services UK Limited Ordinary Shares 100 Aviva Pension Trustees UK Limited Ordinary Shares 100 Aviva Trustees UK Limited Ordinary Shares 100 Aviva Wrap UK Limited Ordinary Shares 100 CGNU Life Assurance Limited Ordinary Shares 100 Friends Provident Pension Scheme Trustees Limited
Artemis UK Special Situations Fund Unit Trust 22 Liontrust Fund Partners LLP, 2 Savoy Court London WC2R 0EZ
Liontrust Sustainable Future Global Growth Fund OEIC 54 Liontrust Sustainable Future Absolute Growth Fund
Liontrust UK Ethical Fund OEIC 72 Liontrust Sustainable Future Managed Fund OEIC 76 1 London Wall Place, London, UK Schroder QEP US Core Fund Unit Trust 40 BlackRock Pensions, 33 King William Street
Undrly Aquila Cnt CcyH Glb Eq108010 2L OEIC 65 c/o Harper MacLeod Llp The Cadoro, 45 Gordon Street United Kingdom G1 3PE
Brockloch Rig Windfarm Limited Ordinary Shares 49 Crystal Rig III Limited Ordinary Shares 49 Old Bourchiers Hall New Road Aldham, Essex United Kingdom C06 3QU
County Broadband Holdings Limited A Ordinary Shares Shares B Ordinary Shares 2nd Floor, 64-65 Vincent Square United Kingdom SW1P 2NU
Fred. Olsen CBH Limited Ordinary Shares 49 Midlands House 4 Rock Road Keynsham, England United Kingdom BS31 1BL
Aviva Investors Americas LLC Sole Member 100 2222 Grand Avenue, Des Moines IA 50312
Aviva Investors North America Holdings, Inc Common Stock Of No Par Value Shares 2711 Centreville Road, Suite 400, Wilmington, New Castle, DE, 19808
UKP Holdings Inc. Common Stock Shares 100 AI-RECAP GP I, LLC Limited Partnership 100 National Corporate Research Limited, 850 New Burton Road, Suite 201, Dover, Delaware Kent County 19904
Exeter Properties Inc. Common Stock Wpv Shares 95 Winslade Investments Inc. Common Stock Wpv Shares 100 Vietnam 10th Floor, Handi Resco Building, No. 521 Kim Ma, Ba Dinh, Hanoi
65 – Subsequent events For details of subsequent events relating to: • Acquisitions – refer to note 3
Profit for the year before tax 2,101 1,112 Tax credit E 96 113
Profit for the year after tax 2,197 1,225 1 Other expenses include a charge of £8 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs (see note 35).
Statement of comprehensive income For the year ended 31 December 2018 £m £m
Items that will not be reclassified to income statement Remeasurements of pension schemes I 2 (2) Forfeited dividend income I 4 — Other comprehensive income/(loss), net of tax 6 (2)
Total comprehensive income for the year 2,203 1,223 1 The Company has made a change in accounting policy whereby investments in subsidiaries and joint ventures held as available for sale investments under IAS 39 have been reclassified to being held at cost under IAS 27.
As a result, comparatives have been restated. See note A for further details.
Statement of changes in equity For the year ended 31 December 2018
Balance at 1 January (restated)1 1,003 200 1,207 14 6,438 111 3,555 724 13,252 Profit for the year — — — — — — 2,197 — 2,197 Other comprehensive income — — — — — — 6 — 6 Total comprehensive income for the year — — — — — — 2,203 — 2,203 Dividends and appropriations 16 — — — — — — (1,189) — (1,189) Reserves credit for equity compensation plans 33 — — — — — 64 — — 64 Shares issued under equity compensation plans 32 2 — 7 — — (55) 49 — 3 Shares purchased in buy-back 32 (30) — — 30 — — (600) — (600) Redemption of fixed rate tier 1 notes 36,I — — — — — — — — — Aggregate tax effect E — — — — — — 8 — 8 Balance at 31 December 975 200 1,214 44 6,438 120 4,026 724 13,741
Balance at 1 January 1,015 200 1,197 — 6,438 78 3,747 1,116 13,791 Profit for the year — — — — — — 1,225 — 1,225 Other comprehensive loss — — — — — — (2) — (2) Total comprehensive income for the year — — — — — — 1,223 — 1,223 Dividends and appropriations 16 — — — — — — (1,081) — (1,081) Reserves credit for equity compensation plans 33 — — — — — 77 — — 77 Shares issued under equity compensation plans 32 2 — 10 — — (44) 42 — 10 Shares purchased in buy-back 32 (14) — — 14 — — (300) — (300) Redemption of fixed rate tier 1 notes 36,I — — — — — — (92) (392) (484) Aggregate tax effect E — — — — — — 16 — 16 Balance at 31 December 1,003 200 1,207 14 6,438 111 3,555 724 13,252 1 The Company has made a change in accounting policy whereby investments in subsidiaries and joint ventures held as available for sale investments under IAS 39 have been reclassified to being held at cost under IAS 27.
Equity Ordinary share capital 32 975 1,003 1,015 Preference share capital 35 200 200 200 Called up capital 1,175 1,203 1,215 Share premium 32(b) 1,214 1,207 1,197 Capital redemption reserve 32(b) 44 14 — Merger reserve I 6,438 6,438 6,438 Equity compensation reserve I 120 111 78 Retained earnings I 4,026 3,555 3,747 Direct capital instrument and tier 1 notes 36,M 724 724 1,116
Liabilities Non-current liabilities Borrowings K 6,699 6,450 6,638 Payables and other financial liabilities L 12,815 9,900 13,098 Tax liabilities H — — 4 Pension deficits and other provisions J 45 48 42 19,559 16,398 19,782 Current liabilities Borrowings K 251 978 642 Payables and other financial liabilities L 4,206 7,192 4,198 Pension deficits and other provisions J — 5 5 Other liabilities 92 154 139
Total equity and liabilities 37,849 37,979 38,557 1 The Company has made a change in accounting policy whereby investments in subsidiaries and joint ventures held as available for sale investments under IAS 39 have been reclassified to being held at cost under IAS 27. As a result, comparatives have been restated. See note A for further details.
Statement of cash flows For the year ended 31 December 2018
All the Company’s operating cash requirements are met by subsidiary companies and settled through intercompany loan accounts. As the direct method of presentation has been adopted for these activities, no further disclosure is required. In respect of financing and investing activities, the following items pass through the Company’s own bank accounts.
Cash flows from financing activities Shares purchased in buy-back (600) (300) Treasury shares purchased for employee trusts (4) — Funding provided from subsidiaries 2,564 2,365 Repayment of loans owed to subsidiaries — (156) New borrowings drawn down, net of expenses 3,023 1,265 Repayment of borrowings (3,536) (1,753) Net repayment of borrowings1 (513) (488) Preference dividends paid (17) (17) Ordinary dividends paid (1,128) (983) Forfeited dividend income 4 — Coupon payments on direct capital instrument and tier 1 notes (44) (81) Interest paid on borrowings (335) (346) Proceeds from issue of ordinary shares 8 10 Other2 (13) —
Cash and cash equivalents at 31 December 15 87 1 On 28 September 2017, notification was given that the Group would redeem the $650 million fixed rate tier 1 notes. At that date, the instrument was reclassified as a financial liability of £484 million, representing its fair value on translation into Sterling at that date. On 3 November 2017 the instrument was redeemed in full at a cost of £488 million. This included £4 million exchange losses subsequent to the reclassification which are included within other operating costs within the income statement.
2 Includes £10 million relating to goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs (see note 35) and a £3 million donation of forfeited dividend income to a charitable foundation.