4 Subsidiaries, joint ventures and associates – disposals and held for sale 5 Segmental information 127 6 Details of income 134 7 Details of expenses 135 8 Finance costs 136 9 Life business investment variances and economic assumption changes 136 10 Non-life business: short-term fluctuations in return on investments 11 Employee information 140 12 Directors 140 13 Auditors’ remuneration 141 14 Tax 142 15 Earnings per share 144 16 Dividends and appropriations 145 17 Goodwill 146 18 Acquired value of in-force business (AVIF) and intangible assets 148 19 Interests in, and loans to, joint ventures 149 20 Interests in, and loans to, associates 150 21 Property and equipment 152 22 Investment property 153 23 Fair value methodology 153 24 Loans 160 25 Securitised mortgages and related assets 161 26 Interest in structured entities 162 27 Financial investments 164 28 Receivables 168 29 Deferred acquisition costs 168 30 Pension surpluses, other assets, prepayments and accrued income 31 Assets held to cover linked liabilities 169 32 Ordinary share capital 170 33 Group’s share plans 171 34 Treasury shares 174 35 Preference share capital 174 36 Direct capital instrument and tier 1 notes 175 37 Merger reserve 175 38 Currency translation and other reserves 176 39 Retained earnings 176 40 Non-controlling interests 177 41 Contract liabilities and associated reinsurance 177 42 Insurance liabilities 179 43 Insurance liabilities methodology and assumptions 184 44 Liability for investment contracts 188 45 Financial guarantees and options 189 46 Reinsurance assets 191 47 Effect of changes in assumptions and estimates during the year 194 48 Unallocated divisible surplus 195 49 Tax assets and liabilities 195 50 Pension deficits and other provisions 197 51 Pension obligations 198 52 Borrowings 203 53 Payables and other financial liabilities 206 54 Other liabilities 207 55 Contingent liabilities and other risk factors 207 56 Commitments 208 57 Group capital management 209 58 Statement of cash flows 212 59 Risk management 213 60 Derivative financial instruments and hedging 226 61 Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements 62 Related party transactions 230 63 Organisational structure 231 64 Related undertakings 233 65 Subsequent events 241
Report on the audit of the financial statements Opinion In our opinion, Aviva plc’s Group financial statements and Company financial statements (the ‘financial statements’): • give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2018 and of the Group’s and the
We have audited the financial statements, included within the Annual report and accounts (the ‘Annual report’) which comprise: • the Consolidated and Company statements of financial position as at 31 December 2018; • the Consolidated and Company income statements and statements of comprehensive income for the year then ended; • the Reconciliation of Group adjusted operating profit to profit for the year then ended; • the Consolidated and Company statements of changes in equity for the year then ended; • the Consolidated and Company statements of cash flows for the year then ended; • the principal accounting policies adopted in the preparation of the financial statements; and • the notes to the financial statements, which include other explanatory information.
Other than those disclosed in Note 13 to the consolidated financial statements, we have provided no non-audit services to the Group or the Company in the period from 1 January 2018 to 31 December 2018.
Our audit approach Overview • Overall Group materiality: £156.0 million (2017: £147.0 million), based on 5% of Group adjusted operating profit before tax attributable to shareholders’ profits after the deduction of integration and restructuring costs. • Overall Company materiality: £105.0 million (2017: £55.5 million), based on 5% of IFRS profit before tax. • Based on the output of our risk assessment, along with our understanding of the Aviva Group structure, we performed full scope audits over the following components; UK Life, UK General Insurance, Canada and France Life. • We identified a further two components, Aviva Investors and Italy Life, where specific account balances were considered to be significant in size in relation to the Group, and scoped our audit to include detailed testing of those account balances. • We completed review procedures over other components not subject to full scope audits, including the remaining components that make up Aviva’s eight major markets. • We also performed audit procedures over the head office operations and the consolidation process, as well as over certain other group activities, including specific account balances in the Aviva Employment Services and Aviva Group Holdings components. • Our risk assessment analysis identified the following as areas of focus for the financial statements: – Valuation of life insurance contract liabilities – Valuation of non-life insurance contract liabilities – Valuation of hard to value investments – Valuation of a specific UK Life provision
The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including fraud Based on our understanding of the Group, Company and its industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of UK and European regulatory principles, such as those governed by the Prudential Regulation Authority and the Financial Conduct Authority, and we considered the extent to which non-compliance might have a material effect on the financial statements of the Group and Company. We also considered those laws and regulations that have a direct impact on the financial statements of the Group and Company such as the Companies Act 2006, the Listing Rules, the Prudential Regulation Authority’s regulations, the Pensions Regulator legislation, the UK tax legislation and equivalent local laws and regulations applicable to in scope components.
We have also evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls) and determined that the principal risks were related to management bias in accounting estimates and judgmental areas of the financial statements as shown in our “Key Audit Matters”. Audit procedures performed by the engagement team included: Discussions with the Board, management, internal audit, senior management involved in the Risk and Compliance functions and the Group and Company’s legal function, including consideration of known or suspected instances of non-compliance with laws and regulation and fraud; • Evaluation and testing of the operating effectiveness of management’s controls designed to prevent and detect irregularities; • Assessment of matters reported on the Group and Company’s whistleblowing helpline and fraud register and the results of management’s investigation of such matters; • Reading key correspondence with the Prudential Regulation Authority and the Financial Conduct Authority in relation to compliance with laws and regulations; • Reviewing relevant meeting minutes including those of the Risk Committee and Audit Committee; • Making enquiries of the Group Investigations team who are responsible for independently reviewing fraudulent activity across the group, utilising activities including, but not limited to, whistle blowing hotlines and data analytics; • Identifying and testing journal entries, in particular any journal entries posted with unusual account combinations or posted by senior management; • Designing audit procedures to incorporate unpredictability around the nature, timing or extent of our testing; and • Testing transactions entered into outside of the normal course of the Group and Company’s business specifically in respect of the acquisitions and disposals
• We tested the design and operating effectiveness of controls over the accuracy and completeness of the data used.
• Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices.
• We used the results of an independent PwC annual benchmarking survey of assumptions to further challenge the assumption setting process by comparing certain assumptions used relative to the Group’s industry peers.
Key audit matter How our audit addressed the key audit matter Annuitant mortality assumptions (Group) Refer to the Audit Committees’ Report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 43 Insurance liabilities methodology and assumptions (a) Long-term business.
There are two main components to the annuitant mortality assumptions: • Mortality base assumption: this component is typically less subjective as it is derived using external Continuous Mortality Investigation (CMI) tables or an equivalent, adjusted for internal experience. However, judgement is required in choosing the appropriate table and fitting internal experience to this table.
• We assessed the results of the experience investigations carried out by UK Life management for the annuity business to determine whether they provided support for the assumptions used by management.
• We compared the mortality assumptions selected by UK Life against those used by their peers.
UK Life has substantial holdings in illiquid asset classes with significant credit risk, notably commercial mortgages and equity release mortgages.
Based on the work performed and the evidence obtained, we consider the allowance for credit default risk to be appropriate.
Future maintenance expenses and expense inflation assumptions are used in the measurement of life insurance contract liabilities. The assumptions reflect the expected future expenses that will be required to maintain the in-force policies at the balance sheet date, including an allowance for project costs and a margin for prudence. The assumptions used require significant judgement.
In addition to the procedures above, in respect of the expense assumptions, we performed the following: • We tested the methodology used by management to derive the assumptions with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience. This included testing the split of expenses between acquisition and maintenance by agreeing a sample to supporting evidence.
Key audit matter How our audit addressed the key audit matter Implementation of new actuarial modelling system (Group) Refer to the Audit Committees’ Report and note 59 Risk management (e) Life and health insurance risk.
There is a risk that the new model may not measure the insurance liabilities appropriately due to, for example, the methodology not following relevant rules and actuarial guidance, calculation errors or the incorrect application of policyholder data and actuarial assumptions.
We performed the following: • We assessed the changes to the methodology as a result of adopting the new model relative to relevant rules and actuarial guidance, including understanding the rationale for any differences identified in the liabilities between the new and existing models.
• We examined the testing performed by management to check the appropriateness of the liabilities generated by the new model and the comparison to the liabilities from the existing model.
Based on the work performed and the evidence obtained, we consider the output from the new actuarial model to be appropriate in measuring the relevant insurance contract liabilities.
A range of methods, including stochastic projections, may be used to determine these provisions. Underlying these methods are a number of explicit or implicit assumptions relating to the expected settlement amount and settlement patterns of claims. This includes assumptions relating to the settlement of personal injury lump sum compensation amounts.
Given their size in relation to the consolidated Group and the complexity of the judgements involved, our work focused on the liabilities in the UK General Insurance and Canada General Insurance components.
In the UK General Insurance and Canada markets, we assessed the Directors’ calculation of the non-life insurance liabilities by performing the following procedures: • We tested the underlying data to source documentation on a sample basis. • Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices.
• We understood and tested the governance process in place to determine the insurance contract liabilities, including testing the associated financial reporting control framework.
• For the remaining classes we evaluated the methodology and assumptions, or performed a diagnostic check to identify and investigate any anomalies.
Based on the work performed and evidence obtained, we consider the methodology and assumptions used to value the non-life insurance contract liabilities to be appropriate.
The valuation of the investment portfolio involves judgement and continues to be an area of inherent risk. The risk is not uniform for all investment types and is greatest for the following, where the investments are hard to value because quoted prices are not readily available: • Commercial mortgage loans (UK Life). • Equity release and UK securitised mortgage loans (UK Life). • Structured bond-type investments (France Life). • Collateralised loan obligations and non-recourse loans (UK Life).
We assessed the Directors’ approach to valuation for these hard to value investments by performing the following procedures: • We agreed data inputs used in the valuation models to underlying documentation on a sample basis. • We evaluated the methodology and assumptions used by management, including yield curves, discounted cash flows, property growth rates, longevity and liquidity premiums as relevant to each asset class.
Based on the work performed and the evidence obtained, we consider the methodology and assumptions used by management to be appropriate.
UK Life hold a provision relating to a historical issue over pension arrangement advice given by Friends Provident.
In determining our materiality, we considered financial metrics which we believed to be relevant, and concluded, consistent with last year that profit before tax was the most relevant benchmark as the Company is profit-orientated and users of the financial statements will be focused on this benchmark.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £7 million (Group audit) (2017: £5 million) and £5.2 million (Company audit) (2017: £2.8 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
• The section of the Annual report on page 59 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
Appointment Following the recommendation of the audit committee, we were appointed by the members on 3 May 2012 to audit the financial statements for the year ended 31 December 2012 and subsequent financial periods. The period of total uninterrupted engagement is seven years, covering the years ended 31 December 2012 to 31 December 2018.
Aviva plc (the ‘Company’), a public limited company incorporated and domiciled in the United Kingdom (UK), together with its subsidiaries (collectively, the ‘Group’ or ‘Aviva’) transacts life assurance and long-term savings business, fund management and most classes of general insurance and health business through its subsidiaries, joint ventures, associates and branches in the UK, Ireland, continental Europe, Canada and Asia.
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.
New standards, interpretations and amendments to published standards that have been adopted by the Group The Group and/or the Company has adopted the following amendments to standards which became effective for the annual reporting period beginning on 1 January 2018: (i) Amendments to IFRS 4, Insurance Contracts In September 2016, the IASB published amendments to IFRS 4 Insurance Contracts that address the accounting consequences of the application of IFRS 9 to insurers prior to implementing the new accounting standard for insurance contracts, IFRS 17, which replaces IFRS 4. The amendments introduce two options for insurers: the deferral approach and the overlay approach. The deferral approach provides an entity, if eligible, with a temporary exemption from applying IFRS 9. The overlay approach allows an entity to remove from profit or loss the effects of some of the accounting mismatches that may occur before the new insurance contracts standard is applied. In November 2018 the IASB recommended an amendment to IFRS 17 to defer the effective date to 1 January 2022. At the same time, they recommended an extension to the fixed expiry date for the temporary exemption for insurers from applying IFRS 9 until 1 January 2022. These amendments are subject to IASB’s due process and will be included in an exposure draft expected to be published later in 2019.
The carrying amount of the Group’s liabilities connected with insurance exceeded 90% of the carrying amount of the Group’s total liabilities as at 31 December 2015, when the assessment was performed in accordance with the date specified in the amendments to IFRS 4. As such, the Group is eligible to apply the deferral approach, as defined by the amendments to IFRS 4. The Group has opted to apply this deferral from 2018. At 31 December 2015 the Group’s total liabilities were £369,642 million and liabilities connected with insurance in the statement of financial position at this date primarily included insurance and participating investment contracts within the scope of IFRS 4 (£218,604 million), nonparticipating investment contract liabilities (£103,125 million), unallocated divisible surplus (£8,811 million), borrowings (£8,770 million), and certain amounts within payables and other financial liabilities which arise in the course of writing insurance business (£10,285 million).
IFRS 9 information relating to entities within the Group which have applied the standard from 1 January 2018 can be found in the entities’ publicly available individual financial statements.
The Group has opted to defer the adoption of IFRS 9 from 2018. The impact of the adoption of IFRS 9 on the Group’s consolidated financial statements will be largely dependent on the interaction with the new insurance contracts standard IFRS 17. As such, it is not possible to fully assess the effect of the adoption of IFRS 9. IFRS 9 has been endorsed by the EU.
The scope of IFRS 15 includes all contracts where an Aviva company has agreed to provide goods or services to a customer, except for the following:
The adoption of this standard has resulted in the following minor amendments to the Group accounting policies: • (I) Other investment contract fee revenue – updated to clarify that fees related to investment management services are recognised as revenue over time, as performance obligations are satisfied. Variable consideration, such as performance fees and commission subject to clawback arrangements, are only recorded as revenue to the extent it is highly probable that it will not be subject to significant reversal.
(iv) Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions In June 2016, the IASB issued amendments to IFRS 2 Sharebased Payment. The amendments were endorsed by the EU in February 2018 and are effective from 1 January 2018.
(v) Annual Improvements to IFRSs 2014-2016 These improvements consist of amendments to three IFRSs including IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates. The amendment to IFRS 12 was effective for annual reporting periods beginning on or after 1 January 2017. The amendments to IFRS 1 and IAS 28 are effective for annual reporting periods beginning on or after 1 January 2018. The amendments were endorsed by the EU in February 2018.
(vi) Amendments to IAS 40 – Transfers of Investment Property In December 2016, the IASB published amendments to IAS 40 Investment Property. The amendments are effective from 1 January 2018 and have been endorsed by the EU.
The impact of the adoption of IFRS 17 has yet to be fully assessed by the Group but it is expected there will be significant impacts relating to the measurement and presentation of the contracts in scope of the standard. It is expected that the standard will apply to annual reporting periods beginning on or after 1 January 2022 and this standard has not yet been endorsed by the EU.
(ii) IFRS 16, Leases In January 2016, the IASB published IFRS 16 Leases which will replace IAS 17 Leases. IFRS 16 introduces a definition of a lease with a single lessee accounting model eliminating the classification of either operating or finance leases. Lessees will be required to account for all leases in a similar manner to the current finance lease accounting recognising lease assets and liabilities on the statement of financial position. Lessor accounting remains similar to current practice.
The following new standards and amendments to existing standards have been issued, are not yet effective and are not expected to have a significant impact on the Group’s consolidated financial statements: (iii) IFRIC 23, Uncertainty over Income Tax Treatments In June 2017, the IASB published IFRIC 23 Uncertainty over Income Tax Treatments. The standard is effective for annual
Strategic report Governance IFRS financial statements Other information reporting beginning on or after 1 January 2019 and has been endorsed by the EU.
(iv) Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement In February 2018, the IASB published Plan Amendment, Curtailment or Settlement (Amendments to IAS 19). The amendments are effective for annual reporting beginning on or after 1 January 2019 and have not yet been endorsed by the EU.
(v) Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures In October 2017, the IASB published Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28). The amendments are effective for annual reporting beginning on or after 1 January 2019 and have been endorsed by the EU.
(vii) Amendments to References to the Conceptual Framework in IFRS Standards Published by the IASB in March 2018. The amendments are effective for annual reporting beginning on or after 1 January 2020 and have not yet been endorsed by the EU.
(viii) Amendment to IFRS 3, Business Combinations, IAS 1 and IAS 8: Definition of material Published by the IASB in October 2018. The amendments are effective for annual reporting beginning on or after 1 January 2020 and have not yet been endorsed by the EU.
Group adjusted operating profit for long-term business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with allowance for the corresponding expected movements in liabilities. Variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit. For non-long-term business, the total investment income, including realised and unrealised gains, is analysed between that calculated using a longer-term return and short-term fluctuations from that level. The exclusion of short-term realised and unrealised investment gains and losses from the Group adjusted operating profit APM reflects the long-term nature of much of our business and presents separately the operating profit APM which is used in managing the performance of our operating segments from the impact of economic factors. Further details of this analysis and the assumptions used are given in notes 9 and 10.
Group adjusted operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to mergers and acquisition activity which we view as strategic in nature, hence they are excluded from the operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group’s chief operating decision maker. Other items are those items that, in the Directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance. Details of these items, including an explanation of the rationale for their exclusion, are provided in the Alternative Performance Measures section within ‘Other information’.
Consolidation Assessment of whether the Group controls the underlying entities including consideration of its decision making authority and rights to the variable returns from the entity
Assessment of the significance of insurance risk transferred to the Group in determining whether a contract should be accounted for as insurance or investment contract
UK Life hold a product governance provision relating to a historical issue over pension arrangement advised sales by Friends Provident. The amount of provision is determined based on the Group’s estimation of the expenditure required to settle the obligation at the statement of financial position date. The valuation of the provision involves a high degree of judgement and estimation uncertainty due to the time that has elapsed since the advice was given.
The Group is required to use the acquisition method of accounting for business combinations. Under this method, the Group recognises identifiable assets, liabilities and contingent liabilities at fair value, and any non-controlling interest in the acquiree. For each business combination, the Group has the option to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the consideration transferred over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see accounting policy O below). Acquisitionrelated costs are expensed as incurred.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. When assessing control over investment vehicles, along with the factors determining control
Strategic report Governance IFRS financial statements Other information outlined above, the Group considers the scope of its decisionmaking authority including its ability to direct the relevant activities of the fund and exposure to variability of returns from the perspective of an investor in the fund and of the asset manager. In addition, the Group assesses rights held by other parties including substantive removal rights that may affect the Group’s ability to direct the relevant activities and indicate that the Group does not have power. Where the Group is deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position.
Other than investments in investment vehicles which are carried at fair value through profit or loss, investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included as an asset in the consolidated statement of financial position. As explained in accounting policy O, the cost includes goodwill recognised on acquisition. The Group’s share of their postacquisition profit or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. Equity accounting is discontinued when the Group no longer has significant influence or joint control over the investment.
In certain businesses, the accounting policies or accounting estimates have been changed, as permitted by IFRS 4 and IAS 8 respectively, to remeasure designated insurance liabilities to reflect current market interest rates and changes to regulatory capital requirements. When accounting policies or accounting estimates have been changed, and adjustments to the measurement basis have occurred, the financial statements of that year will have disclosed the impacts accordingly. One such example is our adoption of Financial Reporting Standard 27 Life Assurance (FRS 27) which was issued by the UK’s Accounting Standards Board (ASB) in December 2004 (subsequently withdrawn by the ASB in 2015).
(H) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are recognised at the date when payments are due. Premiums are shown before deduction of commission and before any sales-based taxes or duties. Where policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
General insurance and health provisions Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the statement of financial position date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the statement of financial position date. As such, booked claim provisions for general insurance and health insurance are based on the best estimate of the cost of future claim payments plus an
Other assessments and levies The Group is subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included in insurance liabilities but are included under ‘Pension deficits and other provisions’ in the statement of financial position.
(M) Non-participating investment contract liabilities Claims For non-participating investment contracts with an account balance, claims reflect the excess of amounts paid over the account balance released.
Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of payments such as transaction costs and front-end fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate.
(P) Property and equipment Owner-occupied properties are carried at their revalued amounts, and movements are recognised in other comprehensive income and taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives. All other items classed as property and equipment within the statement of financial position are carried at historical cost less accumulated depreciation.
Investment properties under construction are included within property and equipment until completion, and are stated at cost less any provision for impairment in their values until construction is completed or fair value becomes reliably measurable.
(R) Impairment of non-financial assets Property and equipment and other non-financial assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Non-financial assets, except goodwill which have suffered an impairment, are reviewed for possible reversal of the impairment at each reporting date.
Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values. Debt securities are initially recorded at their fair value, which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS, are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise.
AFS debt securities An AFS debt security is impaired if there is objective evidence that a loss event has occurred which has impaired the expected cash flows, i.e. where all amounts due according to the contractual terms of the security are not considered collectible. An impairment charge, measured as the difference between the security’s fair value and amortised cost, is recognised when the issuer is known to be either in default or in financial difficulty. Determining when an issuer is in financial difficulty requires the use of judgement, and we consider a number of factors including industry risk factors, financial condition, liquidity position and near-term prospects of the issuer, credit rating declines and a breach of contract. A decline in fair value below amortised cost due to changes in risk-free interest rates does not necessarily represent objective evidence of a loss event.
Strategic report Governance IFRS financial statements Other information being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the statement of financial position at the date of purchase, representing their fair value at that date.
The Group has collateral agreements in place between the individual Group entities and relevant counterparties. Accounting policy W covers collateral, both received and pledged, in respect of these derivatives.
Changes in the fair value of derivatives that are designated and qualify as net investment or cash flow hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in other comprehensive income and a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate.
Strategic report Governance IFRS financial statements Other information discounted cash flow models, based on a risk-adjusted discount rate which reflects the risks associated with these products. They are revalued at each period end, with movements in their fair values being taken to the income statement.
Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the statement of financial position with a corresponding liability for the repayment in financial liabilities (note 61). However, where the Group has a currently enforceable legal right of set-off and the ability and intent to net settle, the collateral liability and associated derivative balances are shown net. Non-cash collateral received is not recognised in the statement of financial position unless the transfer of the collateral meets the derecognition criteria from the perspective of the transferor. Such collateral is typically recognised when the Group either (a) sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability; or (b) the counterparty to the arrangement defaults, at which point the collateral is seized and recognised as an asset.
Collateral pledged in the form of cash, which is legally segregated from the Group, is derecognised from the statement of financial position with a corresponding receivable recognised for its return. Non-cash collateral pledged is not derecognised from the statement of financial position unless the Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised in the statement of financial position within the appropriate asset classification.
Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer. Recoverability is assessed net of reinsurance, and may result in deferred acquisition costs being written-off if any liability recognised for the reinsurer’s share is insufficient.
Where the Group is the lessor, lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term.
(AA) Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more probable than not that an outflow of resources embodying economic benefits
Strategic report Governance IFRS financial statements Other information will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Restructuring provisions include lease termination penalties and employee termination payments. They comprise only the direct expenditures arising from the restructuring, which are those that are necessarily entailed by the restructuring; and not associated with the ongoing activities of the entity. The amount recorded as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date. Where the effect of the time value of money is material, the provision is the present value of the expected expenditure. Provisions are not recognised for future operating losses.
Deferred tax is provided on any temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be
In addition to paying tax on shareholders’ profits (‘shareholder tax’), the Group’s life businesses in the UK, Ireland and Singapore pay tax on policyholders’ investment returns (‘policyholder tax’) on certain products at policyholder tax rates. The incremental tax borne by the Group represents income tax on policyholder’s investment return. In jurisdictions where policyholder tax is applicable, the total tax charge in the income statement is allocated between shareholder tax and policyholder tax. The shareholder tax is calculated by applying the corporate tax rate to the shareholder profit. The difference between the total tax charge and shareholder tax is allocated to policyholder tax. This calculation methodology is consistent with the legislation relating to the calculation of tax on shareholder profits. The Group has decided to show separately the amounts of policyholder tax to provide a meaningful measure of the tax the Group pays on its profit. In the pro forma reconciliations, the Group adjusted operating profit has been calculated after charging policyholder tax.
Claims and benefits paid, net of recoveries from reinsurers (23,142) (24,113) Change in insurance liabilities, net of reinsurance 41(b) 6,246 (1,074) Change in investment contract provisions 5,321 (13,837) Change in unallocated divisible surplus 48 3,237 294 Fee and commission expense (3,393) (4,329) Other expenses (3,843) (3,537) Finance costs 8 (573) (683)
Attributable to: Equity holders of Aviva plc 1,568 1,497 Non-controlling interests 40 119 149
Basic (pence per share) 38.2p 35.0p Diluted (pence per share) 37.8p 34.6p
Consolidated statement of comprehensive income For the year ended 31 December 2018 £m
Items that will not be reclassified to income statement Owner-occupied properties – fair value gains/(losses) 38 1 (1) Remeasurements of pension schemes 39 (279) (5) Aggregate tax effect – shareholder tax on items that will not be reclassified subsequently to income statement 14(b) 43 5
Adjusted for the following: Life business: Investment variances and economic assumption changes 9 (197) 34 Non-life business: Short-term fluctuation in return on investments 10(a) (476) (345) General insurance and health business: Economic assumption changes 10(a) 1 (7) Impairment of goodwill, joint ventures, associates and other amounts expensed 17(a) (13) (49) Amortisation and impairment of intangibles 18 (209) (197) Amortisation and impairment of acquired value of in-force business 18 (426) (495) Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 4(a) 102 135 Other2 231 — Adjusting items before tax (987) (924)
Profit for the year 1,687 1,646 1 Non-insurance businesses in the UK previously included within ‘Other operations’, such as the savings business, have been reclassified to life 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 life business operating profit by £80 million (2017: £30 million) and increase general insurance and health operating profit by £4 million (2017: £4 million).
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).
Balance at 1 January 1,015 200 10,171 (15) 1,146 (349) 4,835 1,123 18,126 1,425 19,551 Profit for the year — — — — — — 1,497 — 1,497 149 1,646 Other comprehensive income — — — — 121 (93) (2) — 26 43 69 Total comprehensive income for the year — — — — 121 (93) 1,495 — 1,523 192 1,715 Dividends and appropriations — — — — — — (1,081) — (1,081) — (1,081) Non-controlling interests share of dividends declared in the year — — — — — — — — — (103) (103) Shares purchased in buy-back2 (14) — 14 — — — (300) — (300) — (300) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — (126) 137 1 — 12 — 12 Changes in non-controlling interests in subsidiaries — — — — — — — — — (315) (315) Reserves credit for equity compensation plans — — — — — 77 — — 77 — 77 Shares issued under equity compensation plans 2 — 10 — — (44) 42 — 10 — 10 Capital contributions from non-controlling interests — — — — — — — — — 36 36 Reclassification of tier 1 notes to financial liabilities3 — — — — — — (92) (392) (484) — (484) Treasury shares held by subsidiary companies — — — 1 — — — — 1 — 1 Owner-occupied properties fair value gains transferred to retained earnings on disposals — — — — — (2) 2 — — — — Aggregate tax effect – shareholder tax — — — — — — 16 — 16 — 16
Consolidated statement of financial position As at 31 December 2018 £m
Ordinary share capital 32 975 1,003 Preference share capital 35 200 200
Equity excluding non-controlling interests 17,489 17,900 Non-controlling interests 40 966 1,235 Total equity 18,455 19,135
Consolidated statement of cash flows For the year ended 31 December 2018
Cash flows from operating activities1 Cash generated from operating activities 58(a) 6,405 8,361 Tax paid (447) (620)
Effect of exchange rate changes on cash and cash equivalents 92 266
The accounting policies (identified alphabetically) on pages 102 to 115 and notes (identified numerically) on pages 123 to 241 are an integral part of the financial statements.
(ii) Friends First On 13 November 2017, Aviva plc announced the acquisition of Friends First Life Assurance Company DAC (Friends First), an Irish insurer, for a consideration of €146 million (approximately £129 million). Following completion of the transaction on 1 June 2018, Friends First is now a wholly owned subsidiary. As a result of this acquisition, Aviva is now one of the largest composite insurers in Ireland.
Total identifiable assets 4,622 Liabilities Gross Insurance liabilities 1,409 Gross liabilities for investment contracts 2,921 Unallocated divisible surplus 66 Payables and other financial liabilities 33 Other liabilities 28
Total identifiable liabilities 4,457 Net identifiable assets acquired 165 Consideration 129 Negative goodwill arising on acquisition 36
The acquisition resulted in a gain from negative goodwill of £36 million, as the fair value of the net assets acquired of £165 million exceeded the consideration paid of £129 million. The gain arose primarily due to differences between the valuation of the pension scheme liability used to determine the transaction price and the recognition and measurement principles defined by IAS 19. The gain has been recognised immediately in the income statement as required by IFRS 3. The receivables balance of £33 million is made up of other receivables, prepayments and accrued income, measured at fair value and assessed as fully recoverable.
Subsequent events On 30 January 2019, Aviva acquired a majority holding in Neos Ventures Limited for a cash consideration of £9 million.
Strategic report Governance IFRS financial statements Other information 4 – Subsidiaries, joint ventures and associates – disposals and held for sale This note provides details of the disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the year end.
(a) Summary The profit on the disposal and remeasurement of subsidiaries, joint ventures and associates comprises: £m
The profit on disposal in the period of £113 million (2017: £237 million) primarily relates to the disposals of Italy Avipop and three businesses in Spain (see note 4(b)(i) and (ii) below for further details respectively). There has been a £13 million remeasurement loss in relation to Friends Provident International Limited (FPI) (see note 4(c)(i) for further details) and a £2 million remeasurement gain due to change in control status of the Hong Kong business (see note 4(d) for further details).
Group’s share of net assets disposed 224 107 331 Cash consideration 235 189 424 Less: transaction costs (3) (4) (7)
(i) Italy – Avipop On 29 March 2018, Aviva announced that it had completed the sale of its entire shareholding of Avipop Assicurazioni S.p.A and Avipop Vita S.p.A to Banco BPM for cash consideration of €265 million (approximately £235 million). The transaction resulted in a total gain on disposal of £24 million.
(ii) Spain On 11 July 2018, Aviva announced that it had completed the sale of its entire shareholding in life insurance and pension joint ventures Caja Murcia Vida and Caja Granada Vida to Bankia for a total consideration of €203 million (approximately £180 million). In addition, on 1 October 2018, Aviva completed the sale of its entire 50% shareholding in the small life insurance operation Pelayo Vida to Santa Lucia for a total consideration of €10 million (approximately £9 million). These transactions resulted in a total gain on disposal of £64 million.
Assets and liabilities of operations classified as held for sale as at 31 December 2018 relate to the expected disposal of the international operations of FPI. See below for further details. Assets and liabilities of operations classified as held for sale during 2017 relate to Italy Avipop, Aviva Taiwan and Spain which were disposed of in 2018 and FPI.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information The Group’s results can be segmented either by activity or by geography. Our primary reporting format is along market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement and consolidated statement of financial position.
Poland Activities in Poland comprise long-term business and general insurance and includes our long-term business in Lithuania.
Italy, Ireland, Spain and Other These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8. The principal activities of our operations in Italy and Ireland are long-term business and general insurance. The principal activity of our operation in Spain was the sale of accident and health insurance and a selection of savings products. Our ‘Other’ operations include our life operations in Turkey. This segment also includes Friends First, which was acquired on 1 June 2018 (see note 3). The results of entities within Spain are included up to the date of disposal (Unicorp Vida and Caja España Vida on 15 September 2017, Caja Murcia Vida and Caja Granada Vida on 11 July 2018 and Pelayo Vida on 1 October 2018) and the results of Avipop, part of our operations in Italy, have been included up to the date of disposal on 29 March 2018 (see note 4).
(a) (i) Segmental income statement for the year ended 31 December 2018
profits 1,436 413 (75) 426 178 304 90 170 (813) 2,129 Adjusting items: Reclassification of corporate costs and unallocated interest — (16) 31 48 — (1) — 5 (67) — Life business: Investment variances and economic assumption changes 115 — — (6) 10 57 21 — — 197 Non-life business: Short-term fluctuation in return on investments — 172 45 44 2 57 — — 156 476 General insurance and health business: Economic assumption changes — 4 — (5) — — — — — (1) Impairment of goodwill, joint ventures, associates and other amounts expensed — — — — 2 — 3 — 8 13 Amortisation and impairment of intangibles 73 32 46 2 7 3 13 3 30 209 Amortisation and impairment of AVIF 285 — — 2 — 6 130 — 3 426 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — — — (89) 5 (27) 9 (102) Other5 — (190) — — — (36) — — (5) (231) Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits after integration and restructuring costs 1,909 415 47 511 199 301 262 151 (679) 3,116
Gross written premiums 6,872 4,355 3,138 5,692 594 5,923 1,032 — — 27,606 Premiums ceded to reinsurers (1,531) (271) (110) (78) (11) (101) (127) — — (2,229) Internal reinsurance revenue — (6) — — — (9) (10) — 25 — Premiums written net of reinsurance 5,341 4,078 3,028 5,614 583 5,813 895 — 25 25,377 Net change in provision for unearned premiums — (63) (84) 23 3 (21) (11) — — (153)
Profit/(loss) before tax 1,951 307 (54) 426 202 352 (138) 188 (860) 2,374 Tax attributable to policyholders’ returns (330) — — — — (4) (37) — — (371) Profit/(loss) before tax attributable to shareholders’
Adjusting items: Reclassification of corporate costs and unallocated interest — (12) 28 48 — — — 5 (69) — Life business: Investment variances and economic assumption changes (323) — — 249 (7) 12 38 — (3) (34) Non-life business: Short-term fluctuation in return on investments — 56 7 (26) (3) 27 — — 284 345 General insurance and health business: Economic assumption changes — 18 (2) (9) — — — — — 7 Impairment of goodwill, joint ventures, associates and other amounts expensed — — 2 — — — 47 — — 49 Amortisation and impairment of intangibles 74 31 50 1 7 5 9 5 15 197 Amortisation and impairment of AVIF 327 — — 2 — 1 154 — 11 495 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — (216) (16) (28) 118 — 7 (135) Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits after integration and restructuring costs 1,699 400 31 475 183 365 191 198 (615) 2,927
(a) (iv) Segmental statement of financial position as at 31 December 2017
Goodwill 663 924 84 — 29 124 52 — — 1,876 Acquired value of in-force business and intangible assets 2,751 152 258 90 78 4 26 4 92 3,455 Interests in, and loans to, joint ventures and associates 936 — 9 184 — 68 445 — — 1,642 Property and equipment 52 30 46 253 4 3 8 4 109 509 Investment property 6,242 324 — 3,322 — 215 — 788 (94) 10,797 Loans 26,695 5 180 739 7 197 34 — — 27,857 Financial investments 184,428 4,184 4,592 72,886 3,775 27,403 5,007 400 8,407 311,082 Deferred acquisition costs 1,364 487 383 322 118 222 8 2 — 2,906 Other assets 38,800 5,370 1,338 8,567 244 3,591 765 1,020 11,995 71,690 Assets of operations classified as held for sale — — — — — 1,685 9,186 — — 10,871
Other ‘Other’ includes service companies, head office expenses such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments and elimination entries for certain inter-segment transactions.
(b) (i) Segmental income statement – products and services for the year ended 31 December 2018
Gross written premiums1 18,140 10,519 — — 28,659 Premiums ceded to reinsurers (1,775) (551) — — (2,326) Premiums written net of reinsurance 16,365 9,968 — — 26,333 Net change in provision for unearned premiums — (81) — — (81) Net earned premiums 16,365 9,887 — — 26,252 Fee and commission income 1,496 138 365 181 2,180 17,861 10,025 365 181 28,432 Net investment (expense)/income (10,375) 63 (1) (534) (10,847) Inter-segment revenue — — 263 — 263 Share of profit/(loss) of joint ventures and associates 112 — — — 112 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 84 — 27 (9) 102 Segmental income 7,682 10,088 654 (362) 18,062 Claims and benefits paid, net of recoveries from reinsurers (16,540) (6,602) — — (23,142) Change in insurance liabilities, net of reinsurance 6,044 202 — — 6,246 Change in investment contract provisions 5,321 — — — 5,321 Change in unallocated divisible surplus 3,237 — — — 3,237 Fee and commission expense (1,248) (2,592) (31) 478 (3,393) Other expenses (2,152) (596) (461) (634) (3,843) Inter-segment expenses (249) (12) — (2) (263) Finance costs (164) (6) — (403) (573) Segmental expenses (5,751) (9,606) (492) (561) (16,410) Profit/(loss) before tax 1,931 482 162 (923) 1,652 Tax attributable to policyholders’ returns 477 — — — 477 Profit/(loss) before tax attributable to shareholders’ profits 2,408 482 162 (923) 2,129 Adjusting items 591 222 (16) 190 987 Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 2,999 704 146 (733) 3,116 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £56 million, which all relates to property and liability insurance. 2 Non-insurance business 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 operating profit by £80 million and increase general insurance and health operating profit by £4 million.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information continued (b) (ii) Segmental income statement – products and services for the year ended 31 December 2017 – restated1
Net earned premiums 15,342 9,882 — — 25,224 Fee and commission income 1,486 134 369 198 2,187 16,828 10,016 369 198 27,411 Net investment income/(expense) 21,468 331 (1) 268 22,066 Inter-segment revenue — — 244 — 244 Share of profit of joint ventures and associates 41 — — — 41 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 100 42 — (7) 135
Segmental income 38,437 10,389 612 459 49,897 Claims and benefits paid, net of recoveries from reinsurers (17,791) (6,322) — — (24,113) Change in insurance liabilities, net of reinsurance (863) (211) — — (1,074) Change in investment contract provisions (13,837) — — — (13,837) Change in unallocated divisible surplus 294 — — — 294 Fee and commission expense (1,210) (2,668) (36) (415) (4,329) Other expenses (1,919) (626) (425) (567) (3,537) Inter-segment expenses (226) (15) — (3) (244) Finance costs (240) (6) — (437) (683)
Profit/(loss) before tax 2,645 541 151 (963) 2,374 Tax attributable to policyholders’ returns (371) — — — (371)
Profit/(loss) before tax attributable to shareholders’ profits 2,274 541 151 (963) 2,003 Adjusting items 578 163 13 311 1,065 Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 2,852 704 164 (652) 3,068 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. The impact of this change was to reduce long-term operating profit by £30 million and increase general insurance and health operating profit by £4 million.
2 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £91 million, of which £73 million relates to property and liability insurance and £18 million relates to long-term business.
3 General insurance and health business segment includes gross written premiums of £914 million relating to health business. The remaining business relates to property and liability insurance. 4 Other includes 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
(b) (iii) Segmental statement of financial position – products and services as at 31 December 2018
Strategic report Governance IFRS financial statements Other information 6 – Details of income This note gives further detail on the items appearing in the income section of the consolidated income statement.
Realised (losses)/gains on disposals (922) 511 Unrealised gains and losses (see accounting policy K)
(Losses)/gains arising in the year (1,726) 436 Gains/(losses) recognised now realised 922 (511)
Realised gains on disposals 7,278 6,198 Unrealised gains and losses (see accounting policy K)
Rent 583 574 Expenses relating to these properties (121) (101) Realised gains on disposal 69 30 Fair value gains on investment properties (note 22) 307 481 838 984 Foreign exchange gains/(losses) on investments other than trading 192 (12) Other investment expenses (64) (75)
Share of profit after tax of joint ventures (note 19(a)(i)) 91 89 Share of profit/(loss) after tax of associates (note 20(a)(i)) 21 (48) Share of profit after tax of joint ventures and associates 112 41 Profit on disposal and remeasurement of subsidiaries, joint ventures and associates (note 4(a)) 102 135
Participating investment contracts (note 44(c)(i)) 540 2,684 Non-participating investment contracts 272 1,247
Staff costs (note 11(b)) 1,172 1,115 Central costs and sharesave schemes 216 184 Depreciation 40 35 Impairment of goodwill on subsidiaries (note 17(a)) 13 2 Amortisation of acquired value of in-force business on insurance/investment contracts (note 18) 426 468 Amortisation of intangible assets (note 18) 209 186 Net impairment of acquired value of in-force business (note 18) — 8 Impairment of intangible assets (note 18) — 7 Integration and restructuring costs — 141 Other expenses (see below) 1,729 1,335
Other types of expenses were £1,729 million (2017: £1,335 million) which mainly included costs relating to property, IT and other items. Other items included 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, 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 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).
The change in insurance liabilities line includes a gain of £190 million relating to the movement in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (see note 43(b)).
Interest expense on core structural borrowings Subordinated debt 364 391 Long term senior debt 6 4 Commercial paper (2) (2)
Amounts owed to financial institutions 20 34 Securitised mortgage loan notes at fair value 95 83
Interest on collateral received 8 9 Net finance charge on pension schemes (note 51(b)(i)) 22 24 Unwind of discount on GI reserves — 2 Extinguishment of debt — 47 Other similar charges 60 91
Total finance costs 573 683 9 – Life business investment variances and economic assumption changes The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management, the effects of short-term economic volatility are treated as adjusting items. The Group focuses instead on a Group adjusted operating profit measure that incorporates an expected return on investments supporting its life business, as described below.
(a) Definitions Group adjusted operating profit for life business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Group adjusted operating profit includes the effect of variance in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions, where not treated as other items. Changes due to economic items, such as market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside Group adjusted operating profit.
The variance in 2017 was driven by positive variances in the UK, partially offset by negative variances in France. Positive variances in the UK were mainly due to economic modelling developments implemented in 2017. These included developments to align the approach to calculating valuation interest rates across the heritage Aviva and Friends Life portfolios and also a development to the approach to calculating the valuation interest rate for certain deferred annuity business. The negative variance in France was primarily due to an increase in life annuity pension reserves, resulting from a reduction to the discount rate cap used in the calculation of these reserves.
Strategic report Governance IFRS financial statements Other information 9 – Life business investment variances and economic assumption changes continued (c) Methodology The expected investment returns and corresponding expected movements in life business liabilities are calculated separately for each principal life business unit.
The expected return on investments for both policyholders’ and shareholders’ funds is based on opening economic assumptions applied to the expected funds under management over the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the end of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equity and property. Expected funds under management are equal to the opening value of funds under management, adjusted for sales and purchases during the period arising from expected operating experience.
The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating experience of the life business, or management decisions to change asset mix, the effect is included in the Group adjusted operating profit. The residual difference between actual and expected investment return is included in investment variances, outside Group adjusted operating profit but included in profit before tax.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside Group adjusted operating profit. For many types of life business, including unit-linked and with-profits funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The profit impact of economic volatility on other life business depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The expected return on equity and property has been calculated by reference to the ten year mid-price swap rate for an AA-rated bank in the relevant currency plus a risk premium. The use of risk premium reflects management’s long-term expectations of asset return in excess of the swap yield from investing in different asset classes. The asset risk premiums are set out in the table below: All territories 2018
(a) The short-term fluctuations in investment return and economic assumption changes attributable to the non-life business result and reported outside operating profit were as follows: Non-life business 2018 £m
Analysis of investment income: Net investment (expenses)/income (88) 49 Foreign exchange losses and other charges (8) (24)
(96) 25 1 Represents short-term fluctuations on assets backing non-life business in Group centre investments, including the centre hedging programme and Group external borrowings.
(c) The long-term investment return is calculated separately for each principal non-life market. In respect of equities and investment properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the long-term rate of investment return.
Market value movements which give rise to variances between actual and long-term investment returns are disclosed separately in shortterm fluctuations outside operating profit.
Assets supporting general insurance and health business 14,364 14,938 Assets supporting other non-life business2 812 685
The principal assumptions underlying the calculation of the long-term investment return are: Long-term rates of return
Actual return attributable to shareholders 821 1,148 Long-term return credited to operating results (1,983) (2,170)
Management continues to view the excess of actual returns over long-term returns as short-term fluctuations. The principal assumptions underlying the calculation of the long-term investment returns are reviewed on a regular basis, having regard to local economic and market forecasts, and are considered appropriate for the purpose of decision making and internal performance management by the Group chief operating decision maker.
Equities 1% higher/lower Group adjusted operating profit before tax 8 3 Investment properties 1% higher/lower Group adjusted operating profit before tax 5 3
(a) Employee numbers The number of persons employed by the Group, including directors under a service contract, was: December Average for the year1
United Kingdom 15,746 14,639 15,414 14,785 Canada 4,334 4,336 4,330 4,320 France 3,928 3,959 3,911 3,962 Poland 1,708 1,718 1,716 1,715 Italy, Ireland, Spain and Other 1,950 1,687 1,864 1,723 Asia 1,832 1,789 1,817 1,729 Aviva Investors 1,471 1,437 1,460 1,350 Other Group activities 734 764 720 748
Total employee numbers 31,703 30,329 31,232 30,332 1 Average employee numbers have been calculated using a monthly average that takes into account recruitment, leavers, transfers, acquisitions and disposals of businesses during the year. 2 Following a review of employee numbers, comparative amounts have been amended from those previously reported. The effect of this change is to increase the number of employees in Canada by 77, Asia by 231 and in Total by 308, and to increase the average number of employees in Canada by 78, Asia by 164 and in Total by 242.
Wages and salaries 1,260 1,241 Social security costs 233 224 Post-retirement obligations
Defined benefit schemes (note 51(d)) 23 23 Defined contribution schemes (note 51(d)) 163 146
Profit sharing and incentive plans 221 208 Equity compensation plans (note 33(d)) 64 77 Termination benefits 10 23 Total staff costs 1,974 1,942
Total audit and assurance fees 21.3 24.5 Tax compliance services — — Tax advisory services — — Services relating to corporate finance transactions — — Other non-audit services not covered above 1.0 0.8
Fees payable to PwC LLP and its associates for services to Group companies 22.3 25.3
Other assurance services in 2018 of £0.9 million (2017: £2.2 million) mainly include fees relating to the independent review of the Solvency II internal model that the Company believes is most appropriately performed by the principal auditors.
(iii) The tax credit above, comprising current and deferred tax, can be analysed as follows: £m
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax credit by £nil million and £nil million (2017: £13 million and £nil million), respectively.
(b) Tax (credited)/charged to other comprehensive income (i) The total tax (credit)/charge comprises: £m
(ii) The tax charge attributable to policyholders’ returns included above is £nil (2017: £nil).
Strategic report Governance IFRS financial statements Other information 14 – Tax continued (c) Tax credited to equity Tax credited directly to equity in the year in respect of coupon payments on the direct capital instrument and tier 1 notes amounted to £8 million (2017: £16 million).
Different basis of tax – policyholders — (385) (385) — 301 301 Adjustment to tax charge in respect of prior periods (16) — (16) (44) — (44) Non-assessable income and items not taxed at the full statutory rate (4) — (4) (47) — (47) Non-taxable profit on sale of subsidiaries and associates (59) — (59) (27) — (27) Disallowable expenses 50 — 50 47 — 47 Different local basis of tax on overseas profits 71 (1) 70 82 (1) 81 Change in future local statutory tax rates — — — (36) — (36) Movement in deferred tax not recognised (3) — (3) (3) — (3) Tax effect of profit from joint ventures and associates (6) — (6) (3) — (3) Other 4 — 4 2 — 2
The tax (credit)/charge attributable to policyholder returns is removed from the Group’s total profit before tax in arriving at the Group’s profit before tax attributable to shareholders’ profits. As the net of tax profits attributable to with-profits and unit-linked policyholders is zero, the Group’s pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge/(credit) attributable to policyholders included in the total tax charge.
Finance Act 2016 introduced legislation reducing the UK corporation tax rate from 1 April 2020 to 17%. In addition, in France the rate of corporation tax was reduced from 34.43% to 32.02% from 1 January 2019, to 27.37% from 1 January 2021 and 25.83% from 1 January 2022. These reduced rates were used in the calculation of the Group’s deferred tax assets and liabilities as at 31 December 2018 and 31 December 2017.
Profit for the year 2,469 (782) 1,687 2,429 (783) 1,646 Amount attributable to non-controlling interests (100) (19) (119) (134) (15) (149) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes
Strategic report Governance IFRS financial statements Other information 15 – Earnings per share continued (b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: Total £m
Profit attributable to ordinary shareholders 1,515 3,963 38.2 1,415 4,041 35.0 Dilutive effect of share awards and options — 47 (0.4) — 48 (0.4)
Group adjusted operating profit attributable to ordinary shareholders 2,316 3,963 58.4 2,213 4,041 54.8 Dilutive effect of share awards and options — 47 (0.6) — 48 (0.7)
Ordinary dividends declared and charged to equity in the year Final 2017 – 19.00 pence per share, paid on 17 May 2018 764 — Final 2016 – 15.88 pence per share, paid on 17 May 2017 — 646 Interim 2018 – 9.25 pence per share, paid on 24 September 2018 364 — Interim 2017 – 8.40 pence per share, paid on 17 November 2017 — 337 1,128 983 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on DCI and tier 1 notes 44 81
Interest on the direct capital instrument and tier 1 notes is treated as an appropriation of retained profits and, accordingly, is accounted for when paid. Tax relief is obtained at a rate of 19% (2017: 19.25%).
Gross amount At 1 January 2,080 2,292 Acquisitions and additions 8 11 Disposals (99) (241) Foreign exchange rate movements 2 18
The total impairment of goodwill in 2018 is a charge of £13 million comprised of impairments of goodwill relating to business in the UK, Asia and Poland. The total impairment of goodwill in 2017 was a charge of £10 million relating to business in Canada and the held for sale adjustments for Friends Provident International Limited (FPI). Impairment tests on goodwill were conducted as described in note 17(b) below.
(b) Goodwill allocation and impairment testing A summary of the goodwill and intangibles with indefinite useful lives allocated to groups of cash generating units is presented below.
Key assumptions The Solvency II non-economic assumptions in relation to mortality, morbidity, persistency and expenses and other items are derived actively, based on management’s best estimate assumptions. Economic assumptions are based on market data as at the end of each reporting period. The basic risk-free rate curves used to value the technical provisions reflect the curves, credit risk adjustment and fundamental spread for the matching adjustment published by EIOPA on their website. For the purposes of calculating value in use, the Solvency II risk margin has been modified to an economic view, with a cost of capital rate of 2%.
United Kingdom general insurance and health 1 1 6.3 5.8 Ireland general insurance and health Nil Nil 6.9 6.2 Italy general insurance and health Nil 1 12.5 11.2 Canada general insurance 4 4 7.8 7.0
Results of impairment testing As a result of the announced sale of the Group’s entire shareholding in FPI, the recoverable amount of FPI within the wider Asian cash generating unit was determined based on the agreed consideration less costs to sell. This indicated an impairment of goodwill and AVIF related to non-participating investment contracts of £8 million and £110 million respectively in 2017 (see note 18) as a result of the shortfall of £118 million between FPI’s carrying amount and its fair value less costs to sell of £334 million. The estimate of fair value less costs to sell was calculated on the basis of the agreed sales consideration of £340 million (see note 4(c)(i)) after deducting a £6 million reinsurance recapture fee between FPI and Aviva Re Limited which is embedded in the sale agreement. The FPI goodwill balance is fully written down, however, there has been a further impairment of £13 million to AVIF in 2018 (see note 18).
Review of a UK business within the other Group activities operating segment identified the need to impair a balance of £8 million of goodwill due to the current and forecast performance of the related cash generating unit being below the original financial plan.
A further impairment of £2 million was identified to the goodwill allocated to the Polish business due to the deterioration of the financial position and forecast financial performance of one of the cash generating units.
Other than for the cash generating units noted above, the recoverable amount exceeds the carrying value of the cash generating units including goodwill, and there is no further impairment of goodwill in 2018.
Gross amount At 1 January 2017 2,639 2,704 1,976 367 7,686 Additions and transfers 8 — 184 — 192 Disposals (40) (7) (208) — (255) Foreign exchange rate movements 13 — 14 13 40
At 31 December 2018 1,418 1,498 882 63 3,861 Less: Assets classified as held for sale (5) (649) (6) — (660) 1,413 849 876 63 3,201 1 On insurance and participating investment contracts. 2 On non-participating investment contracts. 3 Impairment charges comprise £13 million of AVIF impairment in respect of FPI recognised within profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates due to FPI’s classification as held for sale (see note 4 and 17(b)).
Non-participating investment contract AVIF is reviewed for evidence of impairment, consistent with reviews conducted for other finite life intangible assets. Insurance and participating investment contract AVIF is reviewed for impairment at each reporting date as part of the liability adequacy requirements of IFRS 4. AVIF is reviewed for evidence of impairment and impairment tested at product portfolio level by reference to the value of future profits in accordance with Solvency II principles, adjusted where Solvency II does not represent a best estimate of shareholders’ interests, consistent with the impairment test for goodwill for long-term business (see note 17(b)).
Strategic report Governance IFRS financial statements Other information 18 – Acquired value of in-force business (AVIF) and intangible assets continued (b) Other intangible assets with finite useful lives Other intangible assets with finite useful lives consist mainly of the value of bancassurance and other distribution agreements and capitalised software. Additions of intangibles with finite lives in 2018 relate to capitalisation of software costs in relation to the Group’s digital initiatives primarily undertaken by the Group’s digital company Aviva UK Digital Limited.
Additions of intangibles with finite lives in 2017 related to capitalisation of software costs in relation to the Group’s digital initiatives as well as additions of finite life intangibles on the Group balance sheet following the full consolidation of the Group’s previously equity accounted joint ventures in Poland.
Disposals in 2018 relate to the sale of the Italy Avipop business (see note 4). Disposals in 2017 relate to the derecognition of intangible assets with finite useful lives in relation to the disposal of part of the Group’s Spanish business.
Disposals in 2018 relate to the sale of the Spanish business (see note 4).
Share of results after tax — 96 96 — 96 96 Amortisation of intangibles1 (5) — (5) (7) — (7) Loss on remeasurement of joint venture — — — — (7) (7) Share of (loss)/profit after tax (5) 96 91 (7) 89 82 Reclassification from/(to) subsidiary — 5 5 (23) (34) (57) Additions — 33 33 — 55 55 Disposals — (79) (79) — (409) (409) Share of (losses)/gains taken to other comprehensive income — (10) (10) — 6 6 Dividends received from joint ventures — (35) (35) — (38) (38) Foreign exchange rate movements (6) (6) (12) (5) (17) (22) At 31 December 46 1,168 1,214 57 1,164 1,221 1 Comprises amortisation of AVIF on insurance contracts of £nil million (2017: £1 million) and other intangibles of £5 million (2017: £6 million).
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, as explained in note 4(b)(iii).
The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted with the exception of AvivaSA Emeklilik ve Hayat A.S which has issued publicly a minority portion of shares. All investments in such undertakings are held by subsidiaries, except for the shares in the Chinese joint venture, Aviva-COFCO Life Insurance Company Ltd., which are held by Aviva plc. The Group’s share of net assets of that company is £294 million (2017: £274 million) and it has a carrying value at cost of £123 million (2017: £123 million).
Ascot Real Estate Investments LP Property management UK 50.00% 50.00% 2-10 Mortimer Street Limited Partnership Property management UK 50.00% 50.00% Southgate LP Property management UK 50.00% 50.00% Aviva-COFCO Life Insurance Company Ltd. Life insurance China 50.00% 50.00% Aviva Life Insurance Company Limited Life insurance Hong Kong 40.00% 100.00% PT Astra Aviva Life Life and Health insurance Indonesia 50.00% 50.00% AvivaSA Emeklilik ve Hayat A.S Life insurance Turkey 40.00% 40.00%
Share of profit/(loss) after tax — 21 21 (65) 17 (48) Additions — 2 2 — 2 2 Reduction in Group interest — (78) (78) — (5) (5) Reclassification to investment — (54) (54) — — — Dividends received from associates — (8) (8) — (13) (13) Foreign exchange rate movements — — — — 4 4
Strategic report Governance IFRS financial statements Other information 20 – Interests in, and loans to, associates continued The Group’s share of total comprehensive income related to associates is £21 million (2017: £48 million expense).
(ii) No associates are considered to be material from a Group perspective (2017: none). All investments in principal associates are held by subsidiaries. The Group’s principal associates are as follows: Proportion of ownership interest
(iii) The associates have no significant contingent liabilities to which the Group is exposed. The Group has commitments to provide funding to property management associates of £5 million (2017: £2 million).
The recoverable amount of Aviva India was determined based on its value in use which was calculated on an embedded value (EV) basis in line with Actuarial Practice Standard 10 (APS 10) as defined by the Institute of Actuaries of India. The EV cash flow projections, based on business plans covering a three year period, were adjusted to reflect a more prudent view of the value of the in-force business by applying higher expense overruns over an extended 7 year period on a run-off rate of 14% and pre-tax discount rate of 12%.
The recoverable amount determined based on this adjusted embedded value calculation and allocated to Aviva’s 49% shareholding was £93 million which upon comparison with Aviva India’s carrying amount at the time of the impairment assessment indicated that its goodwill and AVIF balances were fully impaired.
Cost or valuation At 1 January 2017 5 341 3 270 277 896 Additions 1 3 — 18 47 69 Disposals1 — (20) — (134) (61) (215) Transfers (to)/from investment property (note 22) (5) 11 — — — 6 Fair value losses — (4) — — — (4) Foreign exchange rate movements — 9 — 1 2 12
At 31 December 2017 — (3) (2) (125) (120) (250) Charge for the year — — (1) (14) (25) (40) Disposals — — — 6 2 8 Impairment charge — — — — — — Foreign exchange rate movements — — — (4) (5) (9) At 31 December 2018 — (3) (3) (137) (148) (291)
Total net fair value gains of £3 million on owner-occupied properties consist of £1 million of losses in the year (2017: £6 million losses) which have been taken to the income statement and £3 million reversal of losses (2017: £3 million reversal) taken to the income statement in previous years and £1 million gains (2017: £1 million losses) which have been taken to other comprehensive income.
If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £364 million (2017: £349 million).
Carrying value At 1 January 9,147 1,650 10,797 9,169 1,647 10,816 Acquisitions 218 208 426 — — — Additions 543 97 640 530 12 542 Capitalised expenditure on existing properties 136 15 151 99 31 130 Fair value gains 307 — 307 440 41 481 Disposals (713) (177) (890) (1,216) (85) (1,301) Transfers to property and equipment (note 21) — — — (6) — (6) Reclassification1 (82) 82 — — — — Foreign exchange rate movements 45 6 51 131 4 135
Please see note 23 ‘Fair value methodology’ for further information on the fair value measurement and valuation techniques of investment property.
The fair value of investment properties leased to third parties under operating leases at 31 December 2018 was £11,172 million (2017: £10,513 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 56(b)(i).
23 – Fair value methodology This note explains the methodology for valuing our assets and liabilities measured at fair value, and for fair value disclosures. It also provides an analysis of these according to a ‘fair value hierarchy’, determined by the market observability of valuation inputs.
(b) Changes to valuation techniques There were no changes in the valuation techniques during the year compared to those described in the 2017 annual consolidated financial statements.
Loans (note 24(a)) 28,731 28,785 27,796 27,857 Financial investments (note 27(a)) 297,585 297,585 311,082 311,082
Fixed maturity securities 169,289 169,289 174,808 174,808 Equity securities 82,128 82,128 89,968 89,968 Other investments (including derivatives) 46,168 46,168 46,306 46,306
Financial liabilities Non-participating investment contracts (note 44(a)) 112,013 112,013 116,332 116,332 Net asset value attributable to unitholders 18,125 18,125 18,327 18,327 Borrowings (note 52(a))1 9,826 9,420 11,538 10,286 Derivative liabilities (note 60(b)) 5,571 5,571 5,751 5,751 1 Within the fair value total, the estimated fair value has been provided for the portion of loans and borrowings that are carried at amortised cost as disclosed in note 23 (h).
Fixed maturity securities 102,979 48,732 17,578 169,289 — 169,289 Equity securities 81,714 — 414 82,128 — 82,128 Other investments (including derivatives) 37,780 4,281 4,107 46,168 — 46,168
Financial assets of operations classified as held for sale 5,240 19 1,992 7,251 — 7,251 Total 227,713 53,550 60,581 341,844 3,259 345,103 Financial liabilities measured at fair value
Non-participating investment contracts1 (note 44(a)) 111,966 47 — 112,013 — 112,013 Net asset value attributable to unit holders 18,100 — 25 18,125 — 18,125 Borrowings (note 52(a)) — — 1,225 1,225 8,195 9,420 Derivative liabilities (note 60(b)) 466 4,571 534 5,571 — 5,571
Non-recurring fair value measurement Properties occupied by group companies — — 352 352 Total — — 352 352
IFRS 13, Fair Value Measurement, permits assets and liabilities to be measured at fair value on either a recurring or non-recurring basis. Recurring fair value measurements are those that other IFRSs require or permit in the statement of financial position at the end of each reporting period, whereas non-recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit in the statement of financial position in particular circumstances. The value of owner-occupied properties measured on a non-recurring basis at 31 December 2018 was £352 million (2017: £333 million), stated at their revalued amounts in line with the requirements of IAS 16 Property, Plant and Equipment.
Fixed maturity securities 107,771 51,900 15,137 174,808 — 174,808 Equity securities 89,192 — 776 89,968 — 89,968 Other investments (including derivatives) 38,249 5,194 2,863 46,306 — 46,306
Total 241,404 57,564 55,615 354,583 3,465 358,048 Financial liabilities measured at fair value
Non-participating investment contracts1 (note 44(a)) 116,123 209 — 116,332 — 116,332 Net asset value attributable to unit holders 18,314 — 13 18,327 — 18,327 Borrowings (note 52(a)) — — 1,180 1,180 9,106 10,286 Derivative liabilities (note 60(b)) 521 4,872 358 5,751 — 5,751
Financial liabilities of operations classified as held for sale 5,346 26 3,306 8,678 — 8,678
Non-recurring fair value measurement Properties occupied by group companies — — 333 333 Total — — 333 333
Strategic report Governance IFRS financial statements Other information 23 – Fair value methodology continued (e) Valuation approach for fair value assets and liabilities classified as Level 2 Please see note 23(a) for a description of typical Level 2 inputs.
Unit Trusts and other investment funds included under the other investments category are valued using net asset values which are not subject to a significant adjustment for restrictions on redemption or for limited trading activity.
Transfers to/from Level 3 £1.4 billion of assets transferred into Level 3 and £0.6 billion of assets transferred out of Level 3 relate principally to debt securities held by our businesses in the UK and France. These are transferred between Levels 2 and 3 depending on the availability of observable inputs and whether the counterparty and broker quotes are corroborated using valuation models with observable inputs.
There were no significant transfers of liabilities into and out of Level 3 during the year.
(g) Further information on Level 3 assets and liabilities: The table below shows movement in the Level 3 assets and liabilities measured at fair value.
Opening balance at 1 January 2017 10,768 20,923 16,447 913 4,001 980 (3,408) (20) (1,600) (1,110) — Total net gains/(losses) recognised in the income statement1 511 643 (795) (179) 55 162 — 7 (105) (97) (165) Purchases 672 3,252 1,745 66 944 267 (153) — (9) — (113) Issuances — 151 — — — (1) — — — — — Disposals (1,289) (1,025) (1,771) (12) (439) (1,383) 153 — 180 27 377 Transfers into Level 3 — — 899 2 10 132 — — (164) — (132) Transfers out of Level 3 — — (1,399) — (83) (135) — — 1,342 — 135 Reclassification to held for sale — — (340) (19) (1,682) 2,041 3,408 — — — (3,408) Foreign exchange rate movements 135 5 351 5 57 30 — — (2) — —
Strategic report Governance IFRS financial statements Other information 23 – Fair value methodology continued Total net losses recognised in the income statement in the year ended 31 December 2018 in respect of Level 3 assets measured at fair value amounted to £761 million (2017: net gains of £397 million) with net losses in respect of liabilities of £143 million (2017: net losses of £360 million). Net losses of £529 million (2017: net gains of £200 million) attributable to assets and net losses of £178 million (2017: net losses of £212 million) attributable to liabilities relate to those still held at the end of the year.
(i) Investment property • Investment property is valued in the UK at least annually by external chartered surveyors in accordance with guidance issued by The
• Mortgage loan assumptions for future property prices and rental income also include an allowance for the possible adverse impact of the decision for the UK to leave the European Union (see note 9).
• Infrastructure and Private Finance Initiative (PFI) loans held by our UK Life business are valued using a discounted cash flow model. This adds spreads for credit and illiquidity to a risk-free discount rate. Credit spreads used in the discount rate are calculated using an internally developed methodology which depends on the credit rating of each loan, credit spreads on publicly traded bonds and an estimated recovery rate in event of default and are deemed to be unobservable. The liquidity premium used in the discount rate is 65 bps.
(iii) Debt securities • Structured bond-type and non-standard debt products held by our business in France and bonds held by our UK business have no active market. These debt securities are valued either using counterparty or broker quotes and validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the third-party models includes a significant unobservable liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model are sufficiently significant to result in a Level 3 classification.
• Privately placed notes held by our UK Life business have been valued using broker quotes or a discounted cash flow model using discount factors based on swap curves of similar maturity, plus internally derived spreads for credit risk. As these spreads have been deemed to be unobservable these notes have been classified as Level 3.
Strategic report Governance IFRS financial statements Other information 23 – Fair value methodology continued (vii) Liabilities The principal liabilities classified as Level 3, and the valuation techniques applied to them, are: • £3.1 billion (2017: £3.3 billion) of non-participating investment contract liabilities which are included within financial liabilities of operations classified as held for sale. These are classified as Level 3, either because the underlying unit funds are classified as Level 3 or because the liability relates to unfunded units or other non-unit adjustments which are based on a discounted cash flow analysis using unobservable market data and assumptions. These liabilities are included within the relevant asset category within the sensitivity table below.
Where these valuations are at a date other than the balance sheet date, as in the case of some private equity funds, adjustments are made to reflect items such as subsequent drawdowns and distributions and the fund manager’s carried interest.
As recognised in the consolidated statement of financial position line item Level 1 £m Total fair value £m
Assets and liabilities not carried at fair value Loans 24(b) 3,259 — 1,454 1,751 3,205 Borrowings 52(a) 8,195 7,979 213 409 8,601
Less: Amounts classified as held for sale — — — (6) — (6)
Of the above total loans, £26,696 million (2017: £26,206 million) are due to be recovered in more than one year after the statement of financial position date.
Loans at fair value Fair values have been calculated by using cash flow models appropriate for each portfolio of mortgages. Further details of the fair value methodology and models utilised are given in note 23 (g).
The cumulative change in fair value of loans attributable to changes in credit risk to 31 December 2018 was a £1,304 million loss (2017: £1,090 million loss).
Healthcare, Infrastructure and PFI other loans of £5.4 billion (2017: £3.6 billion) are secured against the income from healthcare and educational premises.
25 – Securitised mortgages and related assets The Group, in its UK Life business, has loans receivable, secured by mortgages, which have then been securitised through non-recourse borrowings. This note gives details of the relevant transactions.
For commitments to property management joint ventures and associates, please refer to notes 19 and 20, respectively. The Group has not provided any other financial or other support in addition to that described above as at the reporting date, and there are no intentions to provide support in relation to any other unconsolidated structured entities in the foreseeable future.
Aviva’s interest in unconsolidated structured entities that it also manages at 31 December 2018 is £2.1 billion (2017: £1.9 billion) and the total funds under management relating to these investments at 31 December 2018 is £16.8 billion (2017: £16.2 billion).
Convertibles and bonds with warrants attached — — — — — 9 — 9 Other — 10,291 — 10,291 — 10,801 — 10,801 — 166,883 1,595 168,478 — 173,275 1,647 174,922 Certificates of deposit — 1,123 85 1,208 — 947 79 1,026
Total financial investments 4,994 298,160 1,682 304,836 5,507 312,145 1,736 319,388 Less: assets classified as held for sale
— (7,251) — (7,251) (8) (8,298) — (8,306) 4,994 290,909 1,682 297,585 5,499 303,847 1,736 311,082 1 Following a review of the Group’s investment classifications, comparative amounts in the table have been revised. This review has resulted in a reclassification of £5,443 million in Equity securities previously classified as
Other debt securities of £10,291 million (2017: £10,801 million) include residential and commercial mortgage-backed securities, as well as other structured credit securities.
Unit trusts and other investment vehicles 41,703 6,841 (3,332) 45,212 34,271 11,120 275 45,666 Derivative financial instruments 1,274 4,697 (977) 4,994 1,328 4,569 (390) 5,507 Deposits with credit institutions 155 — — 155 161 — — 161 Minority holdings in property management undertakings 1,784 241 (50) 1,975 1,332 180 (77) 1,435 Other investments – long-term 473 33 (31) 475 477 61 (31) 507 Other investments – short-term 1 — — 1 1 — — 1
Unrealised gains and losses on financial investments classified as at fair value through profit or loss, recognised in the income statement in the year, were a net loss of £28,001 million (2017: £6,880 million net gain). Of this net loss, £27,197 million net loss (2017: £6,955 million net gain) related to investments designated as other than trading and £804 million net loss (2017: £75 million net loss) related to financial investments designated as trading.
Strategic report Governance IFRS financial statements Other information 27 – Financial investments continued (d) Non-UK Government Debt Securities (gross of non-controlling interests) The following is a summary of non-UK government debt by issuer as at 31 December 2018, analysed by policyholder, participating and shareholder funds.
Assets of operations classified as held for sale 9 1 — — 1 531 10 532
Total (excluding assets held for sale) 4,875 5,714 37,215 35,375 11,986 11,120 54,076 52,209
At 31 December 2018, the Group’s total government (non-UK) debt securities stood at £54.1 billion (2017: £52.7 billion). The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds.
The participating funds exposure to (non-UK) government debt amounts to £37.2 billion (2017: £35.4 billion). The primary exposures, relative to total (non-UK) government debt exposures included within our participating funds, are to the (non-UK) government debt securities of France (38%), Italy (26%), Germany (5%), Belgium (2%), Ireland (2%) and Poland (2%).
Australia 0.2 — 0.2 0.8 0.2 1.0 Denmark — — — 0.5 — 0.5 France 0.5 0.1 0.6 2.6 0.4 3.0 Germany — — — 0.6 0.2 0.8 Italy — — — 0.1 — 0.1 Netherlands 0.3 0.2 0.5 1.4 0.2 1.6 Spain 0.4 — 0.4 0.5 0.1 0.6 Sweden 0.1 — 0.1 0.3 0.1 0.4 Switzerland — — — 0.7 — 0.7 United Kingdom 1.3 0.4 1.7 1.1 0.5 1.6 United States 1.0 0.2 1.2 1.5 0.1 1.6 Other 0.4 0.1 0.5 1.8 0.2 2.0 Total 4.2 1.0 5.2 11.9 2.0 13.9 Assets of operations classified as held for sale — — — — — —
Total (excluding assets held for sale) 4.2 1.0 5.2 11.9 2.0 13.9 2017 Total 4.4 1.0 5.4 12.1 2.5 14.6
Australia 0.2 — 0.2 0.8 0.2 1.0 Denmark — — — 0.5 — 0.5 France 0.5 0.1 0.6 2.7 0.4 3.1 Germany — — — 0.7 0.2 0.9 Italy — — — 0.2 — 0.2 Netherlands 0.3 0.2 0.5 1.5 0.2 1.7 Spain 0.4 — 0.4 0.5 0.1 0.6 Sweden 0.1 — 0.1 0.3 0.1 0.4 Switzerland — — — 0.7 — 0.7 United Kingdom 1.3 0.4 1.7 1.2 0.5 1.7 United States 1.0 0.2 1.2 1.6 0.1 1.7 Other 0.4 0.1 0.5 1.9 0.2 2.1 Total 4.2 1.0 5.2 12.6 2.0 14.6 Assets of operations classified as held for sale — — — — — — Total (excluding assets held for sale) 4.2 1.0 5.2 12.6 2.0 14.6 2017 Total 4.4 1.0 5.4 12.5 2.5 15.0
Gross 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 £14.6 billion (2017: £15.0 billion). The majority of the exposure (86%) is in senior debt. Participating funds are most exposed to French (21%), UK (12%), Dutch (12%) and US (12%) banks.
Amounts owed by contract holders 2,142 2,154 Amounts owed by intermediaries 1,318 1,235 Deposits with ceding undertakings 93 103 Amounts due from reinsurers 311 348 Amounts due from brokers for investment sales 295 206 Amounts receivable for collateral pledged 2,752 2,515 Amounts due from government, social security and taxes 762 744 Other receivables 1,217 1,018
Carrying amount at 1 January 858 33 1,071 1,110 2 3,074 Acquisition costs deferred during the year 265 13 87 2,279 — 2,644 Amortisation (141) (9) (140) (2,282) (2) (2,574) Impact of assumption changes 14 1 16 — — 31 Effect of portfolio transfers, acquisitions and disposals (5) — — (10) — (15) Foreign exchange rate movements 2 1 2 (9) — (4) Other movements1 (62) 62 — — — — Carrying amount at 31 December 931 101 1,036 1,088 — 3,156 Less: Amounts classified as held for sale — — (191) — — (191) 931 101 845 1,088 — 2,965 1 Following the adoption of IFRS 15, the categorisation of DAC balances has been analysed resulting in a transfer of £62m from insurance contracts to participating investment contracts.
Less: Amounts classified as held for sale (34) — (124) (10) — (168)
Where amortisation of the DAC balance depends on projected profits, changes to economic conditions may lead to a movement in the DAC balance and a corresponding impact on profit. It is estimated that the movement in the DAC balance would reduce profit by £40 million (2017: £38 million) if market yields on fixed income investments were to increase by 1% and increase profit by £39 million (2017: £29 million) if yields were to reduce by 1%. At both 31 December 2018 and 31 December 2017 the DAC balance has been restricted by the value of projected future profits and hence is more sensitive to changes in the value of those projected profits.
30 – Pension surpluses, other assets, prepayments and accrued income (a) Pension surpluses and other assets – carrying amount The carrying amount comprises: £m
31 – Assets held to cover linked liabilities Certain unit-linked products have been classified as investment contracts, while some are included within the definition of an insurance contract. The assets backing these unit-linked liabilities are included within the relevant balances in the consolidated statement of financial position, while the liabilities are included within insurance and investment contract provisions. This note analyses the carrying values of assets backing these liabilities.
(b) During 2018, a total of 119,491,188 ordinary shares of 25 pence each were cancelled and 9,160,708 were allotted and issued by the Company as follows: Number of shares
At 1 January 4,012,682,691 1,003 14 1,207 4,061,539,206 1,015 — 1,197 Shares issued under the Group’s Employee and
Executive Share Option Schemes 9,160,708 2 — 7 8,867,985 2 — 10 Shares cancelled through buy-back (119,491,188) (30) 30 — (57,724,500) (14) 14 — At 31 December 3,902,352,211 975 44 1,214 4,012,682,691 1,003 14 1,207
On 20 September 2017, the Company announced that it had successfully completed the share buy-back programme (the 2017 programme) which was notified to the market on 25 May 2017. As a result of the 2017 programme, Aviva acquired 57,724,500 shares at an average price of £5.20 per share. These shares with a nominal value of £14 million were bought back and subsequently cancelled during the year, giving rise to a capital redemption reserve of an equivalent amount as required by the Companies Act 2006. The aggregate consideration paid was £300 million which is reflected in retained earnings (see note 39).
Strategic report Governance IFRS financial statements Other information 33 – Group’s share plans This note describes various equity compensation plans operated by the Group, and shows how the Group values the options and awards of shares in the Company.
(v) Aviva Investors deferred share award plan awards These awards have been made under the Aviva Investors Deferred Share Award Plan (AI DSAP), where employees can choose to have the deferred element of their bonus deferred into awards over Aviva shares. The awards vest in three equal tranches on the second, third and fourth year following the year of grant.
(vii) Various all employee share plans The Company maintains a number of active stock option and share award voluntary schemes: a) The global matching share plan b) Aviva Group employee share ownership scheme c) Aviva France employee profit sharing scheme.
(b) Outstanding options and awards (i) Share options At 31 December 2018, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva savings related share option scheme
Strategic report Governance IFRS financial statements Other information 33 – Group’s share plans continued The following table summarises information about options outstanding at 31 December 2018: Range of exercise prices
Aviva Investors long-term incentive plan 2015 Number of shares Year of vesting
The global matching share plan Number of shares Year of vesting
Under the RRSAP, some shares are subject to the attainment of the same performance conditions that apply to the LTIP grants as follows: • Shares which vest in 2019: – 102,602 are subject to the same performance conditions that apply to the 2016 LTIP grant – 144,980 are subject to the performance conditions relating to the performance of the participant’s previous employer
• Shares which vest in 2020: – 53,246 are subject to the performance conditions relating to the performance of the participant’s previous employer
• Shares which vest in 2021: – 5,305 are subject to the performance conditions relating to the performance of the participant’s previous employer
Strategic report Governance IFRS financial statements Other information 33 – Group’s share plans continued (iii) Shares to satisfy awards and options New issue shares are now generally used to satisfy all awards and options granted under plans that have received shareholder approval and where local regulations permit. Further details are given in note 32.
(c) Movements in the year A summary of the status of the option plans as at 31 December 2017 and 2018, and changes during the years ended on those dates, is shown below.
Outstanding at 1 January 25,096,578 370.81 24,253,209 355.08 Granted during the year 8,139,367 387.00 5,998,098 409.00 Exercised during the year (2,111,514) 361.96 (3,094,372) 327.04 Forfeited during the year (1,855,638) 385.00 (944,431) 364.03 Cancelled during the year (495,646) 364.93 (1,004,017) 361.90 Expired during the year (115,121) 381.97 (111,909) 355.32
(d) Expense charged to the income statement The total expense recognised for the year arising from equity compensation plans were as follows: £m
Equity-settled expense 64 77 Cash-settled expense — — Total (note 11(b)) 64 77
(e) Fair value of options and awards granted after 7 November 2002 The weighted average fair values of options and awards granted during the year, estimated by using the Binomial option pricing model and Monte Carlo Simulation model, were £0.78 and £4.84 (2017: £1.00 and £4.94) respectively.
Share price 480p 506p Exercise price 387p 409p Expected volatility 24.85% 26.04% Expected life 3.67 years 3.70 years Expected dividend yield 5.88% 4.61% Risk-free interest rate 1.05% 0.55%
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. 2,111,514 options granted after 7 November 2002 were exercised during the year (2017: 3,094,372).
(ii) Share awards The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions: Weighted average assumption 2018 2017
Share price 500p 523p Expected volatility1 25% 28% Expected volatility of comparator companies’ share price1 25% 26% Correlation between Aviva and comparator competitors’ share price1 64% 59% Expected life1 2.64 years 2.76 years Expected dividend yield2 0.00% 0.00% Risk-free interest rate1 0.80% 0.59% 1 For awards with market-based performance conditions only. 2 Expected dividend yield assumption was only used to fair value LTIP awards issued in France. In 2017, LTIP awards with no market performance conditions were issued in France therefore this assumption was not used in the year.
Strategic report Governance IFRS financial statements Other information 34 – Treasury shares The following table summarises information about treasury shares at 31 December 2018: Number £m Number £m
(a) Shares held by employee trusts Prior to 2014, we satisfied awards and options granted under the Group’s share plans primarily through shares purchased in the market and held by employee share trusts. From 2014 we primarily issue new shares except where it is necessary to use shares held by an employee share trust. This note gives details of the shares held in these trusts. Movements in the carrying value of shares held by employee trusts comprise: Number £m Number £m
These shares were either purchased in the market or, in 2015, new shares were issued to the trust and are carried at weighted average cost. At 31 December 2018, they had an aggregate nominal value of £113,997 (2017: £73,977) and a market value of £1,712,227 (2017: £1,498,764). The trustees have waived their rights to dividends on the shares held in the trusts.
35 – Preference share capital This note gives details of Aviva plc’s preference share capital.
Issued and paid up 100,000,000 8.375% cumulative irredeemable preference shares of £1 each 100 100 100,000,000 8.75% cumulative irredeemable preference shares of £1 each 100 100 200 200
At the end of 2018 the fair value of Aviva plc’s preference share capital was £264 million (2017: £348 million).
Following our statement at the full year 2017 results that we “have the ability to cancel our preference shares”, Aviva listened to the views of investors, who expressed concerns, and as a result Aviva subsequently announced on 23 March 2018 that it had decided to take “no action to cancel its preference shares”. Under current regulation the preference shares will no longer count as regulatory capital in 2026. Aviva will work towards obtaining regulatory approval for the preference shares, or a suitable substitute, to qualify as capital from 2026 onwards. If as we approach 2026 Aviva needs to reconsider this position, it will do so after taking into account the fair market value of the preference shares at that time.
On 30 April 2018 Aviva announced a charge of £14 million relating to a provision for the goodwill payment scheme to those preference shareholders who sold preference shares in the period from 8 and 22 March (inclusive) at a share price that was lower than the price that the preference shares returned to following the announcement on 23 March 2018. The total cost of the goodwill payment scheme was £10 million relating to the goodwill payments to preference shareholders, and associated administration costs, against our initial estimate of £14 million. The nature of these costs and the restricted time-period that defines eligibility to receive a payment demonstrates that they are non-recurrent and are not reflective of the Group’s ongoing financial performance.
In relation to the STICS, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons upon the earliest of the following: • Resumption of payment of coupons on the STICS; or • Redemption; or • The commencement of winding up of the issuer.
Strategic report Governance IFRS financial statements Other information 38 – Currency translation and other reserves This note gives details of the currency translation and other reserves forming part of the Group’s consolidated equity and shows the movements during the year net of non-controlling interests: Other reserves
Balance at 1 January 2017 1,146 28 59 (514) 78 (349) Arising in the year through other comprehensive income: Fair value losses — (1) (7) — — (8) Fair value gains transferred to profit on disposals — — (2) — — (2) Share of other comprehensive income of joint ventures and associates — — 6 — — 6 Foreign exchange rate movements1 125 — — (100) — (100) Aggregate tax effect – shareholders’ tax (4) 2 9 — — 11 Total other comprehensive income for the year 121 1 6 (100) — (93) Fair value gains transferred to retained earnings on disposals — (2) — — — (2) Transfer to profit on disposal of subsidiaries, joint ventures and associates (126) (1) — 138 — 137 Changes in non-controlling interests in subsidiaries — — — — — — Reserves credit for equity compensation plans — — — — 77 77 Shares issued under equity compensation plans — — — — (44) (44)
Balance at 1 January 4,918 4,835 Profit for the year attributable to equity shareholders 1,568 1,497 Remeasurements of pension schemes1 (note 51) (279) (5) Dividends and appropriations (note 16) (1,189) (1,081) Shares purchased in buy-back (note 32) (600) (300) Net shares issued under equity compensation plans 49 42 Effect of changes in non-controlling interests in existing subsidiaries 1 — Forfeited dividend income2 4 — Transfer from other reserves on disposal of subsidiaries, joint ventures and associates (note 38) — 1 Reclassification of tier 1 notes to financial liabilities (note 36) — (92) Fair value gains realised from other reserves (note 38) — 2 Aggregate tax effect 51 19
Balance at 31 December 4,523 4,918 1 Net remeasurements of pension schemes recorded in the consolidated statement of comprehensive income of £279 million loss (2017: £5 million loss) includes £280 million of remeasurement losses (2017: £5 million losses) on the main pension schemes (refer to note 51) with a small amount of gains in relation to other schemes. 2 The Group has commenced a shareholder forfeiture programme, where the shares of shareholders with whom Aviva has lost contact over the last 12 years will be forfeited and sold on. Any associated unclaimed dividends will be reclaimed by the Group. After covering administration costs, the majority of the money will be put into a charitable foundation.
Equity shares in subsidiaries 288 423 Share of earnings 415 288 Share of other reserves 13 274 716 985
Balance at 31 December 966 1,235 1 Changes in non-controlling interests in 2018 primarily relate to the sale of the Group’s shareholdings in Avipop (Italy), the sale of the life insurance and pension joint ventures Caja Murcia Vida and Caja Granada Vida (Spain)
and the change in control status of Hong Kong. Refer to note 4 for more information. Changes in non-controlling interests in 2017 primarily relate to Aviva’s sale of its 50% shareholding in Antarius (France), the sale of its 50% shareholding in life insurance and pension partnerships Unicorp Vida and Caja España Vida (Spain) and the consolidation of joint venture insurance operations in Poland, effective 1 January 2017, as a result of changes to the shareholders’ agreement.
41 – Contract liabilities and associated reinsurance The Group’s liabilities for insurance and investment contracts it has sold, and the associated reinsurance, is covered in the following notes: • Note 42 covers insurance liabilities • Note 43 covers the methodology and assumptions used in calculating the insurance liabilities • Note 44 covers liabilities for investment contracts • Note 45 details the financial guarantees and options on certain contracts • Note 46 details the associated reinsurance assets on these liabilities • Note 47 shows the effects of changes in the assumptions on the liabilities
(11,406) 1,611 (9,795) (11,801) 1,729 (10,072) Provision for unearned premiums (4,946) 254 (4,692) (4,980) 257 (4,723) Provision arising from liability adequacy tests1 (16) — (16) (13) — (13) (16,368) 1,865 (14,503) (16,794) 1,986 (14,808)
Less: Amounts classified as held for sale 8,462 (45) 8,417 9,577 (123) 9,454
(346,545) 11,755 (334,790) (352,636) 13,492 (339,144) 1 Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations, where applicable, are included in other line items. At 31 December 2018 this provision is nil for the life operations.
General insurance and health Change in insurance liabilities (note 42(c)(iii) and 46(c)(ii)) 73 138 211 Less: Unwind of discount (9) 9 —
For non-participating investment contracts, deposits collected and amounts withdrawn are not shown on the income statement, but are accounted for directly through the statement of financial position as an adjustment to the gross liabilities for investment contracts. The associated change in investment contract provisions shown on the income statement consists of the attributed investment return. For participating investment contracts, the change in investment contract provisions on the income statement primarily consists of the movement in participating investment contract liabilities (net of reinsurance) over the reporting period.
Strategic report Governance IFRS financial statements Other information 42 – Insurance liabilities This note analyses the Group’s gross insurance contract liabilities for the long-term and general insurance and health business, describes how the Group calculates these liabilities and presents the movement in these liabilities during the year.
General insurance and health Outstanding claims provisions 9,046 8,964 Provision for claims incurred but not reported 2,360 2,837 11,406 11,801 Provision for unearned premiums 4,946 4,980 Provision arising from liability adequacy tests1 16 13
(b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: • In the UK, long-term business is mainly written in the ‘Non-Profit’ fund and in a number of ‘With-Profits’ sub-funds. In the ‘Non-Profit’ fund shareholders are entitled to 100% of the distributed profits. In the ‘With-Profits’ sub-funds the with-profits policyholders are entitled to between 40% and 100% of distributed profits, depending on the fund rules. There is also the Reattributed Inherited Estate External Support Account (RIEESA), which does not itself underwrite any business, but provides capital support to one of the with-profits subfunds and receives any surplus or deficit emerging from it. In the RIEESA, shareholders are entitled to 100% of the distributed profits, but these cannot be distributed until the ‘lock-in’ criteria set by the Reattribution Scheme have been met
• In France, the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders
• In other operations in Europe and Asia, a range of long-term insurance and savings products are written
Carrying amount at 1 January 130,972 137,218 Liabilities in respect of new business 6,190 5,731 Expected change in existing business (7,952) (7,747) Variance between actual and expected experience (1,844) 1,520 Impact of operating assumption changes (1,456) (1,175) Impact of economic assumption changes (959) 2,115 Other movements recognised as an expense1 (263) 180 Change in liability recognised as an expense (note 41(b)) (6,284) 624 Effect of portfolio transfers, acquisitions and disposals2 788 (8,124) Foreign exchange rate movements 413 1,252 Other movements3 (60) 2
For many types of long-term business, including unit-linked and participating insurance liabilities, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The gross long-term business liabilities decreased by £5.1 billion during 2018 (2017: £6.2 billion decrease) mainly driven by the variance between actual and expected experience of £(1.8) billion, which was mainly due to adverse equity returns in France and the reduction in with-profits and unit-linked liabilities in the UK; the impact of noneconomic assumption changes of £(1.5) billion mainly due to updates to longevity assumptions (with the impact on profit partially offset by a corresponding reduction in reinsurance assets) in the UK; and the economic assumption changes of £(1.0) billion, which reflects an increase in valuation interest rates in response to widening credit spreads, primarily in respect of immediate annuity and participating insurance contracts in the UK.
(ii) Group practice Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The liabilities for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
Motor 5,019 963 5,982 5,039 1,339 6,378 Property 1,833 104 1,937 1,734 114 1,848 Liability 1,856 1,164 3,020 1,814 1,270 3,084 Creditor 4 7 11 24 11 35 Other 334 122 456 353 103 456 9,046 2,360 11,406 8,964 2,837 11,801
The discount rate that has been applied to latent claims reserves and reinsured London Market business is based on the swap curve in the relevant currency having regard to the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 10 and 18 years depending on the geographical region.
Any change in discount rates between the start and the end of the accounting period is reflected outside of Group adjusted operating profit as an economic assumption change.
Carrying amount at 1 January 11,801 11,709 Impact of changes in assumptions1 (22) (7) Claim losses and expenses incurred in the current year 7,158 6,890 Decrease in estimated claim losses and expenses incurred in prior periods (544) (172) Incurred claims losses and expenses 6,592 6,711 Less: Payments made on claims incurred in the current year (3,927) (3,642) Payments made on claims incurred in prior periods (3,343) (3,283) Recoveries on claim payments 357 278
Claims payments made in the period, net of recoveries (6,913) (6,647) Unwind of discounting 8 9
Carrying amount at 1 January 4,980 4,766 Premiums written during the year 10,519 10,523 Less: Premiums earned during the year (10,421) (10,365)
Changes in UPR recognised as an expense/(income) 98 158 Gross portfolio transfers and acquisitions1 (103) 46 Foreign exchange rate movements (29) 10
Carrying amount at 31 December 4,946 4,980 1 The movement during 2018 relates to the disposal of Avipop in Italy. The £46 million in respect of 2017 relates to the full consolidation of the Poland Joint Venture.
Key elements of the development of prior accident year general insurance and health net provisions during 2018 were: • £372 million release from the UK due to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (for further details see note 43) and favourable claims experience in Personal and Commercial motor • £78 million release from Canada primarily due to favourable claims experience on personal motor and aligning RBC claims practices with that of the Aviva book • £127 million release from Europe (including Ireland) mainly due to continued favourable development in France
Key elements of the development of prior accident year general insurance and health net provisions during 2017 were: • £107 million release from UK due to favourable claims experience in Personal Motor offset by the less favourable experience in 2017 of
Commercial Liability claims and large claims in Personal and Commercial Property • £2 million strengthening from Canada due to the better than expected claims experience following the 2010 Ontario auto reforms tailing off, unfavourable development in the Ontario Accident Benefits coverage in the RBC book in 2017, deterioration of experience in Alberta Auto Bodily Injury and Newfoundland Auto Bodily Injury
Discount rates Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. For equity release assets, the risk allowances are consistent with those used in the fair value asset methodology, as described in note 23. A further margin for risk is then deducted for all asset classes.
Assurances Life conventional non-profit 0.9% to 2.6% 0.8% to 2.5% Pensions conventional non-profit 1.1% to 2.1% 1.0% to 2.4%
Non-unit reserves on unit-linked business Life 0.9% to 1.3% 0.8% to 1.2% Pensions 0.9% to 1.6% 0.8% to 1.5%
Expenses Maintenance expense assumptions for non-profit business are generally expressed as a ‘per policy’ charge set with regards to an allocation of current year expense levels by broad category of business and using the policy counts for in-force business. The assumptions also include an allowance for prudence and increase by future expense inflation over the lifetime of each contract. Expense inflation is assumed to be in line with RPI, and in line with external agreements for business administered externally. An additional liability is held if projected per-policy expenses in future years are expected to exceed current assumptions. Further, explicit project expense liabilities are held for nondiscretionary project costs that typically relate to mandatory requirements. Expense-related liabilities are only held where expenses are not covered by anticipated future profits in the liability methodology, notably for unit-linked contracts. Investment expense assumptions are generally expressed as a proportion of the assets backing the liabilities.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities methodology and assumptions continued Mortality Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality tables used 2018 2017
With-profits business The Group’s UK with-profits funds are evaluated by reference to FRS 27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. This uses an approach of calculating the realistic liabilities for the contracts. The realistic liabilities include the with-profits benefit reserve (WPBR), and an additional provision for the expected cost of any guarantees and options in excess of the WPBR.
Future investment return A ‘risk-free’ rate equal to the spot yield on UK swaps is used for the valuation of with-profits business. The rates vary according to the outstanding term of the policy, with a typical rate as at 31 December 2018 of 1.44% (2017: 1.29%) for a policy with ten years outstanding.
Mortality Mortality assumptions for with-profits business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality table used 2018 2017
Guarantees and options The provisions held in respect of guaranteed annuity options for the with-profits and the non-profit business are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option. For further details see note 45.
(b) General insurance and health Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claims above certain limits are referred to senior claims handlers for estimate authorisation.
Based upon this, there is certainty that there will be a change in the Ogden rate in 2019, but uncertainty remains around the amount and timing of the final rate. At December 2018, the claim reserves in the UK have been calculated using a discount rate of 0.00% (2017: -0.75%) resulting in a release of £190 million, though the rate to be announced by the Lord Chancellor later this year may result in a different discount rate. By way of illustration, should the Ogden discount rate announced in the future be 0.50% then this would be expected to reduce reserves by approximately £80 million with an equivalent positive impact on profit before tax. Alternatively, should the Ogden discount rate announced in the future be -0.50% then this would be expected to increase reserves by approximately £110 million with an equivalent negative impact on profit before tax.
Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology for long-term business liabilities as described in note 43. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB deferred consideration of participating contracts to the IFRS 17 insurance standard, which is expected to be implemented on 1 January 2022.
Of the non-participating investment contracts measured at fair value, £119,402 million at 31 December 2018 (2017: £123,916 million) are unit-linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.
For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 29 and the deferred income liability is shown in note 54.
The variance between actual and expected experience in 2018 of £(1.4) billion is primarily driven by adverse equity returns in the UK and France.
The impact of assumption changes in the analysis shows the resulting movement in the carrying value of participating investment contract liabilities. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 47, together with the impact of movements in related non-financial assets.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of non-participating investment contract liabilities. The impacts of assumption changes on profit are included in the effect of changes in assumptions and estimates during the year shown in note 47, which combines participating and non-participating investment contracts together with the impact of movements in related non-financial assets.
The most significant of these contracts is the AFER Eurofund which has total liabilities of £39 billion at 31 December 2018 (2017: £38 billion). The guaranteed minimum bonus is agreed between Aviva France and the AFER association at the end of each year, in respect of the following year. The bonus was 2.25% for 2018 (2017: 2.40%) compared with an accounting income from the fund of 2.74% (2017: 2.89%).
Strategic report Governance IFRS financial statements Other information 45 – Financial guarantees and options continued (ii) Italy Guaranteed investment returns and guaranteed surrender values The Group has written contracts containing guaranteed investment returns and guaranteed surrender values in Italy. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations and IFRS 4.
(iii) Ireland Guaranteed annuity options and guaranteed maturity values As in the UK, the Group’s with-profits liabilities in Ireland are measured on a realistic basis, including realistic liabilities for guarantees and options. Guarantees and options in Ireland include GAOs, minimum maturity values on conventional with-profits business, guaranteed minimum bonus rates on unitised with profits business, and a ‘no MVR’ guarantee that may apply at certain policy anniversaries.
46 – Reinsurance assets This note details the reinsurance assets on our insurance and investment contract liabilities.
Total 11,755 13,492 1 Balances in respect of all reinsurance treaties are included under reinsurance assets, regardless of whether they transfer significant insurance risk. The reinsurance assets classified as non-participating investment contracts are financial instruments measured at fair value through profit or loss. During 2018, £3,840 million of reinsurance assets have been reclassified as collective investments in unit-linked funds following a restructure of a reinsurance treaty in UK Life. This is a continuation of activity undertaken in 2017 (£14,353 million).
Change in assets2 (2,141) (12,587) Effect of portfolio transfers, acquisitions and disposals3 399 (410) Foreign exchange rate movements 23 8
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes impact profit, these are included in the effect of changes in assumptions and estimates during the year (shown in note 47), together with the impact of movements in related liabilities and other non-financial assets.
Incurred in current year 176 179 Incurred in prior years 40 15
Reinsurance recoveries received in the year (313) (325) Unwind of discounting 8 8 Change in reinsurance asset recognised as income (note 41(b)) (111) (138) Effect of portfolio transfers, acquisitions and disposals1 (9) — Foreign exchange rate movements 2 (18)
Carrying amount at 31 December 1,611 1,729 1 The movement during 2018 relates to the proportion of reinsurance assets held by Avipop sold by Italy GI.
Strategic report Governance IFRS financial statements Other information 47 – Effect of changes in assumptions and estimates during the year Estimates and assumptions used in determining the liabilities for insurance and investment contracts were changed from 2017 to 2018, affecting the liabilities with an equivalent impact on profit recognised during the year. This note analyses the impact of these changes on liabilities for insurance and investment contracts, and related assets and liabilities, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and acquired value of in-force business, and does not allow for offsetting movements in the value of backing financial assets.
Assumptions Long-term insurance business Interest rates 1,061 (1,720) Expenses 9 (128) Persistency rates 23 (79) Mortality and morbidity for assurance contracts 24 113 Mortality for annuity contracts 780 779 Tax and other assumptions 18 2 Long-term investment business Expenses (1) — General insurance and health business Change in discount rate assumptions 1 (7)
Strategic report Governance IFRS financial statements Other information 48 – Unallocated divisible surplus An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore, the expected duration for settlement of the UDS is undefined.
Carrying amount at 1 January 9,101 10,208 Change in participating fund assets (4,139) 406 Change in participating fund liabilities 902 (710) Other movements — 10 Change in liability recognised as an expense (3,237) (294) Effect of portfolio transfers, acquisition and disposals1 48 (1,076) Foreign exchange rate movements 37 263 5,949 9,101
Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. As at 31 December 2018 there is negative UDS in five funds in Italy totalling £355 million (2017: no negative UDS). These balances were tested for recoverability and all but one is considered to be recoverable by comparing the excess of IFRS participating liabilities net of any related DAC or AVIF over the adjusted Solvency II best estimate liabilities for the relevant contracts. The Solvency II best estimate liabilities were adjusted where Solvency II does not represent a best estimate of shareholders’ interests consistent with the impairment test for goodwill for long-term business (see note 17) and for AVIF on insurance contracts (see note 18). An impairment of £8 million was applied to one fund to reflect no recoverability.
Included within uncertain tax provisions is the impact on the Group as a party to the CFC & Dividend Group Litigation Order, of which Prudential was the test case. The Supreme Court of the United Kingdom delivered its judgement on this case on 25 July 2018 which confirmed the taxpayer had successfully challenged the tax treatment of portfolio dividends received from non-UK entities before 2009. The Group is attempting to recover claims from HMRC covered by this judgement and is also pursuing connected claims in respect of a number of other periods, but there remains significant uncertainty over their recoverability.
The successful claims predominately relate to policyholder funds, where the benefit is not expected to exceed £131 million. There is no current expectation of a material future impact on profit before tax attributable to shareholders’ profits or the Group’s total equity.
The uncertainty in respect of the remaining claims has resulted in no recoverable amounts being recognised at either 31 December 2017 or 31 December 2018.
There are no amounts classified as held for sale within deferred tax at 31 December 2018 (2017: deferred tax assets £2 million and deferred tax liabilities £185 million).
Net liability at 1 January (2,416) (2,231) Acquisition and disposal of subsidiaries1 184 (6) Amounts credited/(charged) to income statement (note 14(a)) 545 (123) Amounts (charged) to other comprehensive income (note 14(b)) (9) (31) Foreign exchange rate movements (10) (18) Other movements 6 (7) Net liability at 31 December (1,700) (2,416) 1 The movement during 2018 relates mainly to the disposal of Avipop Assicurazioni SpA and Avipop Vita SpA.
In addition, the Group has unrecognised gross capital losses of £452 million (2017: £443 million). These have no expiry date.
Total IAS 19 obligations to staff pension schemes 758 828 Restructuring provisions 64 92 Other provisions 577 515
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations (a) Introduction The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland and Canada. The assets and liabilities of these defined benefit schemes as at 31 December 2018 are shown below.
Total fair value of scheme assets (see b(ii) below) 17,059 775 249 18,083 17,744 658 276 18,678 Present value of defined benefit obligation (14,246) (950) (324) (15,520) (14,824) (847) (372) (16,043)
Surpluses included in other assets (note 30) 3,256 — — 3,256 3,399 — — 3,399 Deficits included in provisions (note 50) (443) (175) (75) (693) (479) (189) (96) (764)
(ii) Other schemes In Ireland, the Group operates two main pension schemes, the Aviva Ireland Staff Pension Fund (AISPF) and the Friends First Group Retirement and Death Benefits Scheme (FFPS) which was acquired as part of the Friends First acquisition in June 2018 (see note 3). Future accruals for the AISPF and FFPS schemes ceased with effect from 30 April 2013 and 1 April 2014 respectively. The Irish schemes are regulated by the Pensions Authority in Ireland.
Acquisitions 87 (96) (9) Employer contributions 236 — 236 Plan participant contributions 9 (9) — Benefits paid (724) 724 — Administrative expenses paid from scheme assets2 (23) 19 (4) Foreign exchange rate movements 2 (2) — Net IAS 19 surplus in the schemes at 31 December 18,083 (15,520) 2,563 1 Past service costs include a charge of £63 million relating to the estimated additional liability arising in the UK defined benefit pension schemes as a result of the requirement to equalise members’ benefits for the effects of
Guaranteed Minimum Pension (GMP). This additional liability has arisen following the High Court judgement in October 2018 in the case involving Lloyds Banking Group. 2 Administrative expenses are expensed as incurred. 3 Net interest income of £89 million has been credited to investment income and net interest expense of £22 million has been charged to finance costs (see note 8).
The decrease in the surplus during the period is primarily due to remeasurements recognised in other comprehensive income relating to updated demographic assumptions in the ASPS, partially offset by employer contributions paid into the schemes.
Total pension cost charged to net operating expenses — (19) (19) Net interest credited/(charged) to investment income/(finance costs)2 470 (407) 63
Net IAS 19 surplus in the schemes at 31 December 18,678 (16,043) 2,635 1 Administrative expenses are expensed as incurred. 2 Net interest income of £87 million has been credited to investment income and net interest expense of £24 million has been charged to finance costs (see note 8).
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued (ii) Scheme assets Scheme assets are stated at their fair values at 31 December 2018.
Equities — — — — 129 — — 129 Property 353 — — 353 365 — — 365 Pooled investment vehicles 4,738 555 100 5,393 4,955 238 107 5,300 Derivatives (65) 4 — (61) (34) 4 — (30) Cash and other1 (3,877) (570) 1 (4,446) (5,710) (284) 6 (5,988) Total fair value of scheme assets 17,679 775 249 18,703 18,374 658 276 19,308 Less: consolidation elimination for non-transferable Group insurance policy2 (620) — — (620) (630) — — (630) Total IAS 19 fair value of scheme assets 17,059 775 249 18,083 17,744 658 276 18,678 1 Cash and other assets comprise cash at bank, insurance policies, receivables, payables and repurchase agreements. At 31 December 2018, cash and other assets primarily consist of repurchase agreements of £3,741 million
Equities — — — 35 94 129 Property — 353 353 — 365 365 Pooled investment vehicles 478 4,915 5,393 167 5,133 5,300 Derivatives (9) (52) (61) 4 (34) (30) Cash and other1 (1,195) (3,251) (4,446) (1,801) (4,187) (5,988) Total fair value of scheme assets 13,121 5,582 18,703 14,366 4,942 19,308 Less: consolidation elimination for non-transferable Group insurance policy2 — (620) (620) — (630) (630)
Total IAS 19 fair value of scheme assets 13,121 4,962 18,083 14,366 4,312 18,678 1 Cash and other assets comprise cash at bank, insurance policies, receivables, payables and repurchase agreements. At 31 December 2018, cash and other assets primarily consist of repurchase agreements of £3,741 million
IAS 19 plan assets include investments in Group-managed funds in the consolidated statement of financial position of £2,730 million (2017: £2,091 million) and transferable insurance policies with other Group companies of £156 million (2017: £172 million) in the ASPS. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate line in the table above, otherwise they appear in ‘Cash and other’. There are no significant judgements involved in the valuation of the scheme assets.
(iii) Assumptions on scheme liabilities The valuations used for accounting under IAS 19 have been based on the most recent funding actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2018.
Mortality assumptions Mortality assumptions are material in measuring the Group’s obligations under its defined benefit schemes. The assumptions used are summarised in the table below and have been selected to reflect the characteristics and experience of the membership of these schemes.
UK – ASPS Club Vita pooled experience, including an allowance for future improvements 60 88.8 90.7 90.2 92.5 (28.8) (30.7) (30.2) (32.5)
– FPPS SAPS, including allowances for future improvement 60 87.9 90.4 90.5 92.6 (27.9) (30.4) (30.5) (32.6)
– FFPS 88%/91% ILT15 with allowance for future improvements 68 86.8 89.1 89.1 91.1 (18.8) (21.1) (21.1) (23.1)
Strategic report Governance IFRS financial statements Other information 51 – Pension obligations continued It is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, the present value of the defined benefit obligation has been calculated using the projected unit credit method, which is the same as that applied in calculating the defined benefit obligation recognised within the consolidated statement of financial position. In addition, the sensitivities shown are for liabilities only and ignore the impact on assets, which would significantly mitigate the net interest rate and inflation sensitivity impact on the net surplus.
Maturity profile of the defined benefit obligation The discounted scheme liabilities have an average duration of 19 years in ASPS, 20 years in FPPS, 18 years in the RAC scheme, 19 years in AISPF, 28 years in FFPS and 11 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below: Undiscounted benefit payments (£m)
Interest rate and inflation rate risks are managed using a combination of liability-matching assets and swaps. Exposure to equity risk has been reducing over time and credit risk is managed within risk appetite. Currency risk is relatively small and is largely hedged. The other principal risk is longevity risk. This risk has reduced due to the ASPS entering into a longevity swap in 2014 covering approximately £5 billion of pensioner in payment scheme liabilities.
Other schemes The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme. In 2015, the RAC pension scheme entered into a longevity swap covering approximately £600 million of pensioner in payment scheme liabilities.
There were no significant contributions payable or prepaid in the consolidated statement of financial position as at either 31 December 2018 or 2017.
Core structural borrowings, at amortised cost 7,699 8,640 Operational borrowings, at amortised cost 496 466 Operational borrowings, at fair value 1,225 1,180 1,721 1,646
Subordinated debt 6.125% £700 million subordinated notes 2036 694 694 6.125% £800 million undated subordinated notes 797 796 6.875% £600 million subordinated notes 2058 594 594 6.875% €500 million subordinated notes 2038 — 444 12.000% £162 million subordinated notes 2021 191 202 8.250% £500 million subordinated notes 2022 563 581 6.625% £450 million subordinated notes 2041 449 448 7.875% $575 million undated subordinated notes — 437 6.125% €650 million subordinated notes 2043 582 575 3.875% €700 million subordinated notes 2044 625 618 5.125% £400 million subordinated notes 2050 395 394 3.375% €900 million subordinated notes 2045 799 789 4.500% C$450 million subordinated notes 2021 257 264 4.375% £400 million subordinated notes 2049 394 394
Senior notes 0.100% €350 million senior notes 2018 — 310 0.625% €500 million senior notes 2023 446 441 1.875% €750 million senior notes 2027 667 — 1,113 751
Strategic report Governance IFRS financial statements Other information 52 – Borrowings continued In 2018 the Group redeemed two subordinated debt instruments in full at their first call date, reduced the outstanding commercial paper balance and issued further senior debt. Further details are set out below: • On 22 May 2018, the Group redeemed its €500 million 6.875% subordinated notes in full at first call date • On 8 November 2018, the Group redeemed its $575 million 7.875% undated subordinated notes in full at first call date • On 13 November 2018, Aviva plc issued €750 million of senior notes at 1.875% which mature in 2027 • On 13 December 2018, the Group’s €350 million 0.100% senior notes matured • The outstanding commercial paper balance was reduced to £251 million (2017: £668 million) during 2018
Total contractual undiscounted cash flows 7,659 7,583 15,241 8,566 8,851 17,417
Borrowings are considered current if the contractual maturity dates are within a year. Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £49 million (2017: £82 million).
Total contractual undiscounted cash flows 1,663 693 2,356 1,802 716 2,518
Strategic report Governance IFRS financial statements Other information 52 – Borrowings continued (d) Description and features (i) Subordinated debt A description of each of the subordinated notes is set out in the table below: Notional amount Issue date Redemption date Callable at par at option of the
In the event the Company does not call the notes, the coupon will reset at each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40% £600 million 20 May 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% £162 million 21 May 2009 21 May 2021 N/A N/A £500 million 21 April 2011 21 April 2022 N/A N/A £450 million 26 May 2011 3 June 2041 3 June 2021 6 Month LIBOR + 4.136% €650 million 5 July 2013 5 July 2043 5 July 2023 5 year EUR mid-swaps + 5.13% €700 million 3 July 2014 3 July 2044 3 July 2024 5 year EUR mid-swaps + 3.48% £400 million 4 June 2015 4 June 2050 4 December 2030 3 month Euribor + 4.022% €900 million 4 June 2015 4 December 2045 4 December 2025 3 month Euribor + 3.55% C$450 million 9 May 2016 10 May 2021 N/A N/A £400 million 12 September 2016 12 September 2049 12 September 2029 3 month LIBOR + 4.721%
Subordinated notes issued by the Company rank below its senior obligations and ahead of its preference shares and ordinary share capital. The dated subordinated notes rank ahead of the undated subordinated notes. The fair value of notes at 31 December 2018 was £6,610 million (2017: £8,348 million), calculated with reference to quoted prices.
Non-recourse Loans to property partnerships 61 61 UK Life reassurance 177 111 Other non-recourse loans 52 58
At 31 December 2018 the obligations to repay third parties arising out of financial reinsurance operations were £177 million (2017: £111 million).
Other loans of £206 million (2017: £236 million) include external debt raised by overseas long-term businesses to fund operations.
Movements in the year (941) 75 (866) 63 (72) (9) Balance at 1 January 8,640 1,646 10,286 8,577 1,718 10,295 Balance at 31 December 7,699 1,721 9,420 8,640 1,646 10,286 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. 2 Gross issuances of commercial paper were £2,372 million in 2018 (2017: £1,265 million), offset by repayments of £2,791 million (2017: £1,265 million). 3 Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such holdings over the year are reflected in the tables above.
All movements in fair value in 2017 and 2018 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
Expiring within one year — — Expiring beyond one year 1,650 1,650 53 – Payables and other financial liabilities This note analyses our payables and other financial liabilities at the end of the year.
Deferred income 138 133 Reinsurers’ share of deferred acquisition costs 19 17 Accruals 1,266 1,236 Other liabilities 1,653 1,440
(e) Structured settlements The Group has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Group is exposed to credit risk to the extent that any of the life insurers fail to fulfill their obligations. The Group’s maximum exposure to credit risk for these types of arrangements is approximately CAD$1,235 million as at 31 December 2018 (2017: CAD$1,213 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the Canadian life insurance industry compensation plan. As at 31 December 2018, no information has come to the Group’s attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.
Strategic report Governance IFRS financial statements Other information 55 – Contingent liabilities and other risk factors continued (f) Other In the course of conducting insurance and investment business, various Group companies receive liability claims, and become involved in actual or threatened related litigation. In the opinion of the directors, adequate provisions have been established for such claims and no material loss will arise in this respect.
(a) Capital commitments Contractual commitments for acquisitions or capital expenditures of infrastructure loans, equity funds, investment property and property and equipment, which have not been recognised in the financial statements, are as follows: £m
Infrastructure loan advances 898 782 Investment property 42 42 Property and equipment 77 53 Other investment vehicles1 266 265 1,283 1,142 1 Represents commitments for further investment in certain private equity vehicles. Such commitments do not expose the Group to the risk of future losses in excess of its investment.
Strategic report Governance IFRS financial statements Other information 57 – Group capital management (a) Introduction Group capital is represented by Solvency II own funds1. At 31 December 2018, the estimated Solvency II shareholder own funds amounts to £23.6 billion (2017: £24.7 billion). The Solvency II position disclosed is based on a ‘shareholder view’. The shareholder view is considered by management to be more representative of the shareholders’ risk exposure and the Group’s ability to cover the Solvency Capital Requirement (SCR) with eligible own funds and aligns with management’s approach to dynamically manage its capital position.
(2017: £3.3 billion) and staff pension schemes in surplus of £1.1 billion at 31 December 2018 (2017: £1.5 billion) are excluded. These exclusions have no impact on Solvency II surplus. The most material fully ring fenced with-profit funds and staff pension schemes are selfsupporting on a Solvency II capital basis with any surplus capital above Solvency Capital Requirements (‘SCR’) not recognised in the Group position.
Solvency II own funds are comprised of a combination of shareholders’ funds, preference share capital, direct capital instrument, tier 1 notes, subordinated debt, and deferred tax assets measured on a Solvency II basis. Refer to note 57(c) for further details on Solvency II.
Strategic report Governance IFRS financial statements Other information 57 – Group capital management continued The Group manages capital in conjunction with solvency capital requirements, and seeks to, on a consistent basis: • Match the profile of our assets and liabilities, taking into account the risks inherent in each business • Maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength. Refer to note 59 for more information about the Group’s risk management approach
General insurance & health United Kingdom General Insurance1,2 1,509 1,872 United Kingdom Health1 122 106 Canada 1,290 1,364 France 585 589 Poland 131 140 Italy 148 319 Other Europe 185 203 Europe 1,049 1,251 Asia — 10 3,970 4,603
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and other borrowings. At 31 December 2018, the Group had £26.2 billion (2017: £27.8 billion) of total capital employed in our trading operations measured on an IFRS basis.
During the year, the Group also redeemed two subordinated debt instruments in full at their first call date, reduced the outstanding commercial paper balance and issued one senior debt. Further details are set out below: • On 22 May 2018, the Group redeemed its €500 million 6.875% subordinated notes in full at first call date • On 8 November 2018, the Group redeemed its $575 million 7.875% undated subordinated notes in full at first call date • On 13 November 2018, Aviva plc issued €750 million of senior notes at 1.875% which mature in 2027 • On 13 December 2018, the Group’s €350 million 0.100% senior notes matured • The outstanding commercial paper balance was reduced to £251 million (2017: £668 million)
At 31 December 2018, the market value of our external debt (subordinated debt and senior debt), preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interests, of £250 million), and direct capital instrument and tier 1 notes was £9,278 million (2017: £11,311 million).
All regulated subsidiaries complied with their capital requirements throughout the year.
Changes in working capital Decrease in reinsurance assets 2,191 12,707 (Increase) in deferred acquisition costs (98) (389) (Decrease)/increase in insurance liabilities and investment contracts (11,808) 13,658 (Increase)/decrease in other assets (1,708) 2,174 (11,423) 28,150 Net purchases of operating assets Net purchases of investment property (791) (672) Net proceeds on sale of investment property 959 1,065 Net sales of financial investments (3,423) (10,137) (3,255) (9,744) Total cash generated from operating activities 6,405 8,361
The cash flows presented in this statement cover all the Group’s activities and include flows from both policyholder and shareholder activities. Operating cash flows reflect the movement in both policyholder and shareholder controlled cash and cash equivalent balances.
(b) Cash flows in respect of the acquisition of, and additions to, subsidiaries, joint ventures and associates comprised: £m
Cash consideration for subsidiaries, joint ventures and associates acquired and additions (165) (32) Less: Cash and cash equivalents acquired with subsidiaries 357 57 Total cash flow on acquisitions and additions 192 25
For the purposes of risk identification and measurement, and aligned to Aviva’s risk policies, risks are usually grouped by risk type: credit, market, liquidity, life insurance (including long-term health), general insurance (including short-term health), asset management and operational risk. Risks falling within these types may affect a number of metrics including those relating to balance sheet strength, liquidity and profit. They may also affect the performance of the products we deliver to our customers and the service to our customers and distributors, which can be categorised as risks to our brand and reputation or as conduct risk.
Risk models are an important tool in our measurement of risks and are used to support the monitoring and reporting of the risk profile and in the consideration of the risk management actions available. We carry out a range of stress (where one risk factor, such as equity returns, is assumed to vary) and scenario (where combinations of risk factors are assumed to vary) tests to evaluate their impact on the business and the management actions available to respond to the conditions envisaged. For those risk types managed through the holding of capital, being our principal risk types except for liquidity risk, we measure and monitor our risk profile on the basis of the Solvency II solvency capital requirement.
The risk management framework of a small number of our joint ventures and strategic equity holdings differs from the Aviva framework outlined in this note. We work with these entities to understand how their risks are managed and to align them, where possible, with Aviva’s framework.
Our approach to managing credit risk recognises that there is a risk of adverse financial impact resulting from fluctuations in credit quality of third parties including default, rating transition and credit spread movements. Our credit risks arise principally through exposures to debt security investments, structured asset investments, bank deposits, derivative counterparties, mortgage lending and reinsurance counterparties.
(i) Financial exposures by credit ratings Financial assets are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as sub-investment grade. The following table provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings. ‘Not rated’ assets capture assets not rated by external ratings agencies.
As at 31 December 2018 AAA AA A BBB Below BBB Not rated
Less: Amounts classified as held for sale £m Carrying value £m
The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £3.6 billion (2017: £2.0 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued The following table provides information on the Group’s exposure by credit ratings to financial assets that meet the definition of ‘solely payment of principal and interest’ (SPPI). Further information on the assessment criteria for SPPI may be found in note 23(c).
Loans — 1,620 — — — 894 Receivables 6 213 294 214 — 5,122 Accrued income & interest — — 18 — — 175 Other financial assets — — 10 — — — Total 6 1,833 322 214 — 6,191
At the period end, the Group held cash and cash equivalents of £13,246 million that met the SPPI criteria, of which £13,231 million is placed with financial institutions with issuer ratings within the range of AAA to BBB. Further information on the extent to which unrated receivables, including those that meet the SPPI criteria, are past due may be found in section (ix) of this note. The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure. The Group’s maximum exposure to credit risk of financial assets, without taking collateral or these hedges into account, is represented by the carrying value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance assets, derivative assets, loans and receivables. The carrying values of these assets are disclosed in the relevant notes: financial investments (note 27), reinsurance assets (note 46), loans (note 24) and receivables (note 28). The collateral in place for these credit exposures is disclosed in note 61 Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements.
(ii) Other investments Other investments (including assets of operations classified as held for sale) include unit trusts and other investment vehicles; derivative financial instruments, representing positions to mitigate the impact of adverse market movements; and other assets, including deposits with credit institutions and minority holdings in property management undertakings.
A proportion of the assets underlying these investments are represented by equities and so credit ratings are not generally applicable. Equity exposures are managed against agreed benchmarks that are set with reference to overall appetite for market risk.
The Group’s largest reinsurance counterparty is Swiss Reinsurance Company Ltd (including subsidiaries). At 31 December 2018, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd was £2,835 million (2017: £2,902 million). Up until late 2018, BlackRock Life Ltd had been the Group’s largest reinsurance counterparty as a result of the BlackRock funds offered to UK Life customers via unit-linked contracts. However, as a result of action taken to restructure the agreements with BlackRock Life Ltd the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd as at 31 December 2018 has been reduced to £2,457 million (2017: £5,307 million).
Debt securities 1,675 — — 5 — — 1,680 Reinsurance assets 7,791 — — — — — 7,791 Other investments 1 — — — — — 1 Loans 3,259 — — — — — 3,259 Receivables and other financial assets 8,776 74 16 11 2 — 8,879
Debt securities 1,726 — — — — — 1,726 Reinsurance assets 7,521 — — — — — 7,521 Other investments 1 — — — — — 1 Loans 3,465 — — — — — 3,465 Receivables and other financial assets 8,185 78 12 5 5 — 8,285
Excluded from the tables above are financial and reinsurance assets carried at fair value through profit or loss that are not subject to impairment testing, as follows: £168.0 billion of debt securities (2017: £174.2 billion), £52.8 billion of other investments (2017: £53.3 billion), £25.5 billion of loans (2017: £24.4 billion) and £4.0 billion of reinsurance assets (2017: £6.1 billion).
Equity risk is also managed using a variety of derivative instruments, including futures and options. Businesses actively model the performance of equities through the use of risk models, in particular to understand the impact of equity performance on guarantees, options and bonus rates. An equity hedging strategy remains in place to help control the Group’s overall direct and indirect exposure to equities. At 31 December 2018 the Group continues to hold a series of macro equity hedges to reduce the overall shareholder equity risk exposure.
Sensitivity to changes in equity prices is given in section (j) Risk and capital management, below.
(ii) Property price risk The Group is subject to property price risk directly due to holdings of investment properties in a variety of locations worldwide and indirectly through investments in mortgages and mortgage backed securities. Investment in property is managed at business unit level, and is subject to local regulations on investments, liquidity requirements and the expectations of policyholders.
Some of the Group’s products, principally participating contracts, expose us to the risk that changes in interest rates will impact on profits through a change in the interest spread (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under those contracts). The primary markets where Aviva is exposed to this risk are the UK, France and Italy.
Despite the continued pick up in market interest rates from the historical lows experienced in 2016, the continued low interest rate environment in a number of markets around the world has resulted in our current reinvestment yields being lower than the overall current portfolio yield, primarily for our investments in fixed income securities and commercial mortgage loans. As long as market yields remain below the current portfolio level, the portfolio yield, and as a result net investment income, will continue to decline. While we anticipate interest rates may remain below historical averages before the 2008 financial crisis for some time to come, it is also possible that further future increases in interest rates or market anticipation of such increases, if larger and more rapid than expected, could adversely impact market values of our portfolio of fixed income securities and increase the risk of credit defaults and downgrades.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued Details of material guarantees and options are given in note 45. In addition, the following table summarises the weighted average minimum guaranteed crediting rates and weighted average book value yields on assets as at 31 December 2018 for our Italian and French participating contracts, where the Group’s key exposure to sustained low interest rates arises.
The nature of the business means that prices in certain circumstances can be increased to maintain overall profitability. This is subject to the competitive environment in each market. To the extent that there are further falls in interest rates the investment yield would be expected to decrease further in future periods.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued (v) Currency risk The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profits contract liabilities or are hedged. As a result the foreign exchange gains and losses on investments are largely offset by changes in unit-linked and with-profits liabilities and fair value changes in derivatives attributable to changes in foreign exchange rates recognised in the income statement.
Net assets at 31 December 2018 (61) 77 (31) 31 Net assets at 31 December 2017 (44) 44 (31) 31
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued (d) Liquidity risk Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages and infrastructure loans. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,650 million) from a range of leading international banks to further mitigate this risk.
Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date. This table includes amounts held for sale.
On demand or within 1 year £m Over 15 years £m
Debt securities 169,289 31,282 43,876 92,985 1,146 Equity securities 82,128 — — — 82,128 Other investments 46,168 41,027 77 4,301 763 Loans 28,785 2,089 4,236 22,457 3 Cash and cash equivalents 46,484 46,484 — — — 372,854 120,882 48,189 119,743 84,040
On demand or within 1 year £m Over 5 years £m
Debt securities 174,808 28,037 47,289 99,078 404 Equity securities 89,968 — — — 89,968 Other investments 46,306 40,500 364 4,680 762 Loans 27,857 1,651 5,053 21,149 4 Cash and cash equivalents 43,347 43,347 — — — 382,286 113,535 52,706 124,907 91,138
(e) Life and health insurance risk Life insurance risk in the Group arises through its exposure to mortality risk and exposure to worse than anticipated operating experience on factors such as persistency levels, exercising of policyholder options and management and administration expenses. The Group’s health insurance business (including private health insurance, critical illness cover, income protection and personal accident insurance, as well as a range of corporate healthcare products) exposes the Group to morbidity risk (the proportion of our customers falling sick) and medical expense inflation. The Group chooses to take measured amounts of life and health insurance risk provided that the relevant business has the appropriate core skills to assess and price the risk and adequate returns are available. The Group’s underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. Life insurance risk is managed primarily at business unit level with oversight at the Group level.
The underlying risk profile of our life and health insurance risks, primarily persistency, longevity, mortality and expense risk, has remained stable during 2018, although the current continued relatively low levels of interest rates have increased our sensitivity to longevity shocks compared to historical norms. We are also exposed to longevity risk through the Aviva Staff Pension Scheme, to which our economic exposure has been reduced since 2014 by entering into a longevity swap covering approximately £5 billion of pensioner in payment scheme liabilities. Longevity risk remains the Group’s most significant life insurance risk, while persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal capital model and subject to sensitivity and stress and scenario testing. Our UK Life business is in the process of implementing a new actuarial modelling system for non-profit business. During the year ended 31 December 2018, annuities and certain protection products were transferred into the new modelling system which had minimal financial impact.
Examples of each type of embedded derivative affecting the Group are: • Options: call, put, surrender and maturity options, guaranteed annuity options, options to cease premium payment, options for withdrawals free of market value adjustment, annuity options, and guaranteed insurability options. • Guarantees: embedded floor (guaranteed return), maturity guarantee, guaranteed death benefit, and guaranteed minimum rate of annuity payment. • Other: indexed interest or principal payments, maturity value, loyalty bonus.
Strategic report Governance IFRS financial statements Other information 59 – Risk management continued (f) General insurance risk Types of risk General insurance risk in the Group arises from: • Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations; • Unexpected claims arising from a single source or cause; • Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and • Inadequate reinsurance protection or other risk transfer techniques.
Aviva has a preference for general insurance risk in measured amounts for explicit reward, in line with our core skills in underwriting and pricing. The majority of the general insurance business underwritten by the Group continues to be short tail in nature such as motor, household and commercial property insurances. The Group’s underwriting strategy and appetite is communicated via specific policy statements, related business standards and guidelines. General insurance risk is managed primarily at business unit level with oversight at the Group level. Claims reserving is undertaken by local actuaries in the various general insurance businesses and is also subject to periodic external reviews. Reserving processes are further detailed in note 42 Insurance liabilities.
Management of general insurance risks Significant insurance risks will be reported under the risk management framework. Additionally, the capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements.
(g) Asset management risk Aviva is directly exposed to the risks associated with operating an asset management business through its ownership of Aviva Investors. The underlying risk profile of our asset management risk is derived from investment performance, specialist investment professionals and leadership, product development capabilities, fund liquidity, margin, client retention, regulatory developments, fiduciary and contractual responsibilities. Funds invested in illiquid assets such as commercial property are particularly exposed to liquidity risk. The risk profile is regularly monitored.
(h) Operational risk Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment. We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible.
Our business units are primarily responsible for identifying and managing operational risks within their businesses, within the Group-wide operational risk framework including the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning.
If we do not manage the perception of our brands and reputation successfully, it could cause existing customers or agents to withdraw from our business and potential customers or agents to choose not to do business with us.
(j) Risk and capital management (i) Sensitivity test analysis The Group uses a number of sensitivity tests to understand the volatility of earnings, the volatility of its capital requirements, and to manage its capital more efficiently. Sensitivities to economic and operating experience are regularly produced on the Group’s key financial performance metrics to inform the Group’s decision making and planning processes, and as part of the framework for identifying and quantifying the risks to which each of its business units, and the Group as a whole, are exposed.
Credit spreads The impact of a 0.5% increase in credit spreads over risk-free interest rates on corporate bonds and other non-sovereign credit assets. The test allows for any consequential impact on liability valuations.
31 December 2017 Impact on shareholders’ equity before tax £m Interest rates
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 (150) 175 (35) 20 (20) — — —
Changes in sensitivities between 2018 and 2017 reflect underlying movements in the value of assets and liabilities, the relative duration of assets and liabilities and asset liability management actions. The sensitivities to economic and demographic movements relate mainly to business in the UK. Our sensitivity to interest rates has increased over the period mainly due to the impacts of our hedging programme which protects Solvency II capital and increased exposure in the UK, predominantly as a result of surplus assets originated in 2018 to back new business in 2019 that would otherwise be invested in cash.
Fund management and non-insurance business sensitivities as at 31 December 2018 31 December 2018 Impact on profit before tax £m Interest rates
The sensitivity analyses do not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations.
As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders, and taking other protective action.
Strategic report Governance IFRS financial statements Other information 60 – Derivative financial instruments and hedging This note gives details of the various financial instruments the Group uses to mitigate risk.
The fair values do not provide an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA (International Swaps and Derivatives Association, Inc.) master agreements or their equivalent. Such agreements are designed to provide a legally enforceable set-off in the event of default, which reduces credit exposure. In addition, the Group has collateral agreements in place between the individual Group entities and relevant counterparties. Refer to note 61 for further information on collateral and net credit risk of derivative instruments.
Strategic report Governance IFRS financial statements Other information 60 – Derivative financial instruments and hedging continued (b) Derivatives not qualifying for hedge accounting Certain derivatives either do not qualify for hedge accounting under IAS 39 or the option to designate them as hedge instruments has not been taken. These are referred to below as non-hedge derivatives.
Forwards 17,529 73 (117) 10,281 87 (34) Interest rate and currency swaps 7,908 29 (708) 7,336 176 (568) Options 174 9 — — — —
(c) Collateral Certain derivative contracts, primarily interest rate and currency swaps, involve the receipt or pledging of cash and non-cash collateral. The amounts of cash collateral receivable or repayable are included in notes 28 and 53 respectively. Collateral received and pledged by the Group is detailed in note 61.
Aviva mitigates credit risk in derivative contracts by entering into collateral agreements, where practical, and into ISDA master netting agreements for each of the legal entities to facilitate its right to offset credit risk exposure. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by Aviva or its counterparty.
Aviva participates in a number of stock lending and repurchase arrangements. In some of these arrangements cash is exchanged by Aviva for securities and a related receivable is recognised within ‘Loans to banks’ in note 24. These arrangements are reflected in the tables below. In instances where the collateral is recognised on the statement of financial position, the obligation for its return is included within ‘Payables and other financial liabilities’ in note 53.
Financial liabilities Derivative financial liabilities (4,701) — (4,701) 2,896 7 1,288 (510) Other financial liabilities (3,314) — (3,314) — — 3,314 — Total financial liabilities (8,015) — (8,015) 2,896 7 4,602 (510)
Strategic report Governance IFRS financial statements Other information 61 – Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements continued Amounts subject to enforceable netting arrangements
Amounts receivable related to securities lending and reverse-repurchase arrangements totalling £1,923 million (2017: £2,524 million) are recognised within ‘Loans to banks’ in note 24.
The total amount of collateral received which the Group is permitted to sell or repledge in the absence of default, excluding collateral related to balances recognised within ‘Loans to banks’ disclosed in note 24, was £19,504 million (2017: £22,978 million), all of which other than £4,058 million (2017: £4,780 million) is related to securities lending arrangements. Collateral of £1,914 million (2017: £2,697 million) has been received related to balances recognised within ‘Loans to banks’ in note 24. The value of collateral that was actually sold or repledged in the absence of default was £nil (2017: £nil).
Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 19(a)(iii). The Group has equity interests in these joint ventures, together with the provision of administration services and financial management to many of them. Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance.
Our UK fund management companies manage most of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Group-managed funds and insurance policies with other group companies, as explained in note 51(b)(ii). As at 31 December 2018, the Friends Provident Pension Scheme (‘FPPS’), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £620 million (2017: £630 million) issued by a group company, which eliminates on consolidation.
Salary and other short-term benefits 7.9 12.5 Other long-term benefits 8.6 5.4 Post-employment benefits 1.5 1.5 Equity compensation plans 10.5 16.4 Termination benefits — 0.4
Strategic report Governance IFRS financial statements Other information 63 – Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2018. Aviva plc is the holding company of the Group.
Subsidiaries The principal subsidiaries of the Company at 31 December 2018 are listed below by country of incorporation.
France Aviva France SA (99.99%) and its principal subsidiaries: Aviva Assurances SA (99.9%) Aviva Investors France SA (99.9%) Aviva Vie SA (99.9%) Aviva Epargne Retraite (99.9%) Aviva Retraite Professionnelle SA (99.9%) Union Financière de France Banque (Banking) (75%)
1 See note 4(c) for further details in respect of operations classified as held for sale
Strategic report Governance IFRS financial statements Other information 63 – Organisational structure continued Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Aviva S.p.A (51%) Aviva Italia S.p.A Aviva Life S.p.A Aviva Vita S.p.A (80%)
Poland Aviva Powszechne Towarzystwo Emerytalne Aviva Santander S.A. (81%) Aviva Towarzystwo Ubezpieczen na Zycie S.A. (90%) Aviva Towarzystwo Ubezpieczen Ogolnych S.A. (90%) Santander Aviva Towarzystwo Ubezpieczeń S.A. (51%) Santander Aviva Towarzystwo Ubezpieczeń na Życie S.A. (51%)
The definition of a subsidiary undertaking in accordance with the Companies Act 2006 is different from the definition under IFRS. As a result, the related undertakings included within the list below may not be the same as the undertakings consolidated in the Group IFRS financial statements. See accounting policies (D) Consolidation principles for further detail on principles of consolidation and definition of joint ventures.
LMS Prolink Limited2 Common A Shares 34 555 Chabanel Ouest, Bureau 900, Montreal QC H2N 2H8
Westmount Guarantee Services Inc. Common A Shares 33 Cayman Islands 115 East 57th Street, Suite 1019,New York NY 10022
Ordinary Shares 100 13, Avenue Lebrun, 92188, Antony Cedex Pierrevenus Ordinary Shares 74 14 Rue Roquépine, 75008, Paris AFER – SFER Ordinary Shares 50 Aviva Convertibles Ordinary Shares 86 Aviva Europe Ordinary Shares 96 Aviva Developpement Ordinary Shares 99 Aviva Diversifie Ordinary Shares 95 Aviva Investors France Ordinary Shares 99 Aviva Oblig International Ordinary Shares 72 Aviva Oblirea Ordinary Shares 85 Aviva Patrimoine Ordinary Shares 92 Aviva Rendement Europe Ordinary Shares 90 Aviva Valeurs Francaises Ordinary Shares 83 Aviva Valeurs Immobilieres Ordinary Shares 41 153, Boulevard Haussmann, 75008, Paris Selectus FCP 96 17 Rue du Cirque, 75008, Paris Financiere Du Carrousel Ordinary Shares 74 Infinitis Ordinary Shares 74 20 Place Vendôme, 75001, Paris AXA Lbo Fund IV Feeder Private Equity Fund 35 AXA UK Infrastructure Investment SAS Ordinary Shares 100 Croissance Pme A C. FCP 97 24 Rue de la Pépinière, 75008 Paris Aviva Investors Euro Crédit Bonds 1-3 HDR FCP 39 Afer Actions Amerique Fcp FCP 100 Afer Actions Euro A FCP 100 Afer Actions Monde FCP 100 Afer Convertibles C. FCP 100 Afer Diversifie Durable FCP 100 Afer Marches Emergents Fcp FCP 100 Afer Multi Foncier FCP 100 Afer Obl Md Ent C. FCP 100
Aviva Selection (Edmasio) FCP 100 CGU Equilibre FCP 81 L’Antenne-U (Edmlanu) FCP 97 UFF Global Convertibles A FCP 99 53 Avenue d’Iéna UFF Valeurs Pme-A (Fintrma) FCP 98 62 Rue du Faubourg Saint-Honoré, 75008, Paris Diapason 1 FCP 84 7 Rue Auber, 75009, Paris Vip Conseils Ordinary Shares 34 70 Avenue De L’Europe, 92270 Bois-Colombes Aviva Epargne Retraite Ordinary Shares 100 Aviva France Ventures Ordinary Shares 100 Aviva Investissements Ordinary Shares 100 Aviva Retraite Professionnelle Ordinary Shares 100 Aviva Vie, Société Anonyme d’Assurances Vie et de Capitalisation
Victoire Immo 1- Société Civile Ordinary Shares 100 Voltaire S.A.S Ordinary Shares 100 90 Boulevard Pasteur, 75015, Paris Aviva Actions S2 C. FCP 100
Kroknet S. a. r. l. Ordinary Shares 90 Germany c/o Wswp Weinert GmbH, Theatinerstr. 31, 80333, Munich
First Meridian Cautious Balanced Fund GBP OEIC 29 First Meridian Cautious Balanced Fund USD OEIC 20 The Fincrest Global Equity Fund OEIC 23 PO Box 255, Trafalgar Court, Les Banques, St. Peter Port, GY1 3QL
Aviva Life Insurance Company Limited Ordinary Shares 40 India 2nd Floor, Prakash Deep Building 7, Tolstoy Marg, New Delhi, Delhi, 110001
A.G.S. Customer Services (India) Private Limited Ordinary Shares 100 Indonesia Pondok Indah Office Tower 3, 1st Floor, Jl. Sultan Iskandar Muda Kav. V-TA, Pondok Indah, Jakarta Selatan, Jakarta, 12310
BMO Multi-Strategy Global Equity Fund OEICS 93 Georges Court, 54-62 Townsend Street, Dublin 2
CALM Eurozone Equity Sub Fund OEIC 91 AG10 Currency Fund OEIC 93 78 Sir John Rogersons Quay Dublin 2 Ireland State Street IUT Balanced Fund S30 Unit Trust 30 SSgA GRU Euro Index Equity Fund Unit Trust 47 One Coleman Street, London EC2R 5AA, United Kingdom
Company name Share Class1 % held Aviva Vita S.p.A Ordinary Shares 80 Petunia Spa Ordinary A Shares 51 Milano, Piazza Lina Bo Bardi n. 3 Aviva Immobiliare Real Estate Fund 100 Jersey 19-21 Broad Street, St Helier, JE1 3PB 11-12 Hanover Square UT2 Unit Trust 50 130 Fenchurch Street UT2 Unit Trust 50 30 Warwick Street UT2 Unit Trust 50 30-31 Golden Square UT2 Unit Trust 50 Aviva Investors Jersey Unit Trusts Management Limited
Barratt House UT2 Unit Trust 50 Chancery House London UT2 Unit Trust 50 Irongate House UT2 Unit Trust 50 New Broad Street House UT2 Unit Trust 50 Pegasus House and Nuffield House UT2 Unit Trust 50 W Nine UT2 Unit Trust 50 3rd Floor Walker House, 28-34 Hill Street, St Helier, JE4 8PN
Yatra – (Saffron) Ordinary Shares 27 Lime Grove House , Green Street, St Helier, JE1 2ST
Designer Retail Outlet Centres (York) Unit Trust Unit Trust 97 Designer Retail Outlet Centres Unit Trust Unit Trust 97 Quantum Property Unit Trust2 Unit Trust 50 Serviced Offices UK Unit Trust2 Unit Trust 50 Southgate Unit Trust Unit Trust 50 3rd Floor, One The Esplanade, Jersey, JE2 3QA Crieff Road Limited Ordinary Shares 100 FF UK Select Limited Ordinary Shares 100 Lithuania Lvovo g. 25, Vilnius, LT-09320 Uždaroji akcinė gyvybės draudimo ir pensijų bendrovė "Aviva Lietuva" (Joint Stock Limited Life Insurance and Pension Company Aviva Lietuva)
Luxembourg 10 Rue du Fort Bourbon, L-1249 VH German Mandate Ordinary Shares 100 11 Rue du Fort Bourbon, L-1249 Centaurus Sarl Ordinary Shares 100 14 Rue du Fort Bourbon, L-1249 Aviva Investors European Renewable Energy S.A. Ordinary Shares 100 15 Rue du Fort Bourbon, L-1249 Aviva Investors European Secondary Infrastructure Credit SV S.A
Ordinary Shares 67 16 Avenue de la Gare, 1610 Aviva Investors Luxembourg Services S.à r.l. Ordinary Shares 100 Aviva Investors Polish Retail S.à r.l. Ordinary Shares 100 16 Rue Jean-Pierre Brasseur, L-1258 VAM Funds (Lux) – International Real Estate Equity Fund
VAM Managed Funds (Lux) – Close Brothers Growth Fund 19 Rue du Fort Bourbon, L-1249 Lend Lease Retail Partners Ordinary Shares 26 1c Rue Gabriel Lippmann Patriarch Classic B&W Global Freestyle FCP 31 2 Boulevard de la Foire, L-1528 Pramerica Pan-European Real Estate Fund Ordinary Shares 76 2 Rue de Bitbourg, L-1273 Henderson Horizon – European Growth Fund SICAV 32 2 Rue du Fort Bourbon, L-1249 AFRP S.à r.l. Ordinary Shares 100 AIEREF Holding 1 S.a.r.l Equity Shares 44 AIEREF Holding 2 S.a.r.l Equity Shares 100 Aviva Investors Alternative Income Solutions General Partner S.à r.l.
Company name Share Class1 % held Aviva Investors CELLS Holding Sarl Ordinary Shares 100 Aviva Investors CELLS SCSp Limited Partnership 100 Aviva Investors CELLS Stern Sarl Ordinary Shares 100 Aviva Infrastructure Debt Europe I S.A SICAV 100 Aviva Investors EBC S.à r.l. Ordinary Shares 100 Aviva Investors Emerging Markets Bond Fund SICAV 89 Aviva Investors Emerging Markets Corporate Bond Fund
Aviva Investors Global Aggregate Bond Fund SICAV 95 Aviva Investors Global Investment Grade Corporate Bond Fund
Aviva Investors Global Convertibles Fund SICAV 39 Aviva Investors Global Emerging Markets Index Fund
Aviva Investors Global Equity Endurance Fund SICAV 100 Aviva Investors Global High Yield Bond Fund SICAV 69 Aviva Investors Luxembourg Nominal Par Value Shares 100 Aviva Investors Multi-Strategy Fixed Income Fund SICAV 70 Aviva Investors Short Duration Global High Yield Bond Fund
Jupiter Global Fund – Jupiter Global Financials SICAV 21 Jupiter Global Fund – Jupiter New Europe SICAV 55 2c, rue Albert Borschette, L-1246, Luxembourg Grand Duchy of Luxembourg
AQR Systematic Total Return Fund II SICAV 41 47 Avenue John F. Kennedy Luxembourg L – 1855