(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 premiums written reflect business incepted during the year, and exclude any sales-based taxes or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the statement of financial position date. Unearned premiums are calculated on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written.
(J) Other fee and commission income Other fee and commission income consists primarily of fund management fees, distribution fees from mutual funds, commissions on reinsurance ceded, commission revenue from the sale of mutual fund shares and transfer agent fees for shareholder record keeping. Reinsurance commissions receivable are deferred in the same way as acquisition costs, as described in accounting policy
General insurance and health claims incurred include all losses occurring during the year, whether reported or not, related handling costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years. Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims. Internal costs include all direct expenses of the claims department and any part of the general administrative costs directly attributable to the claims function.
FRS 27 was grandfathered from UK regulatory requirements prior to the adoption of Solvency II. For UK non-profit insurance contracts, the liabilities are calculated using the gross premium valuation method. This method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses.
At each reporting date, an assessment is made of whether the recognised long-term business provisions are adequate, using current estimates of future cash flows. If that assessment shows that the carrying amount of the liabilities (less related assets) is insufficient in light of the estimated future cash flows, the deficiency is recognised in the income statement by setting up an additional provision in the statement of financial position.
Provisions for latent claims and claims that are settled on an annuity type basis such as structured settlements are discounted, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims and the nature of the liabilities. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is described in note 40(c)(ii). Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts. Where material, anticipated recoveries are disclosed under receivables and not deducted from outstanding claims provisions.
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.
For non-participating investment contracts with an account balance, claims reflect the excess of amounts paid over the account balance released.
Deposits collected under non-participating investment contracts are not accounted for through the income statement, except for the investment income attributable to those contracts, but are accounted for directly through the statement of financial position as an adjustment to the investment contract liability. The majority of the Group’s contracts classified as nonparticipating investment contracts are unit-linked contracts and are measured at fair value. Certain liabilities for non-linked nonparticipating contracts are measured at amortised cost. The liability’s fair value is determined using a valuation technique to provide a reliable estimate of the amount for which the liability could be transferred in an orderly transaction between market participants at the measurement date, subject to a minimum equal to the surrender value. For unit-linked contracts, the fair value liability is equal to the current unit fund value, including any unfunded units. In addition, if required, non-unit reserves are held based on a discounted cash flow analysis. For nonlinked contracts, the fair value liability is based on a discounted cash flow analysis, with allowance for risk calibrated to match the market price for risk.
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.
Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and statement of financial position as appropriate. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance and investment contract liabilities. This includes balances in respect of investment contracts which are legally reinsurance contracts but do not meet the definition of a reinsurance contract under IFRS.
Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying contract liabilities, outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
Reinsurance of non-participating investment contracts and reinsurance contracts that principally transfer financial risk are
Strategic report Governance IFRS financial statements Other information accounted for directly through the statement of financial position. A
deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured. These deposit assets or liabilities are shown within reinsurance assets in the consolidated statement of financial position. If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition.
If the AVIF results from the acquisition of an investment in a joint venture or an associate, it is held within the carrying amount of that investment. In all cases, the AVIF is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. 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
For impairment testing, goodwill and intangible assets with indefinite useful lives have been allocated to cash-generating units.
The carrying amount of goodwill and intangible assets with indefinite useful lives is reviewed at least annually or when circumstances or events indicate there may be uncertainty over this value. Goodwill and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support its carrying value. Further details on goodwill allocation and impairment testing are given in note 16. Any impairments are charged as expenses in the income statement.
(up to useful life) if longer • Computer equipment Three to five years
The assets’ residual values, useful lives and method of depreciation are reviewed regularly, and at least at each financial year end, and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount. Borrowing costs directly attributable to the acquisition and construction of property and equipment are capitalised. All repair and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and the renovation replaces an identifiable part of the asset. Major renovations are depreciated over the remaining useful life of the related asset.
In general, the other than trading category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. Debt securities and equity securities, which the Group acquires with the intention to resell in the short term, are classified as trading, as are non-hedge derivatives (see accounting policy U below). The AFS
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.
For securities identified as being impaired, the cumulative unrealised loss previously recognised within the investment valuation reserve is transferred to realised losses for the year, with a corresponding movement through other comprehensive income.
An AFS equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair value relative to cost has been either at least 20%
Any subsequent increase in fair value of these impaired securities is recognised in other comprehensive income and recorded in the investment valuation reserve. Reversals of impairments on any of these assets are only recognised where the decrease in the impairment can be objectively related to an event occurring after the write-down (such as an improvement in the debtor’s credit rating), and are not recognised in respect of equity instruments.
(U) Derivative financial instruments and hedging Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, credit or equity indices, commodity values or equity instruments.
The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions. These amounts are disclosed in note 57(b). 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.
Interest rate swaps are contractual agreements between two parties to exchange fixed rate and floating rate interest by means of periodic payments, calculated on a specified notional amount and defined interest rates. Most interest rate swap payments are netted against each other, with the difference between the fixed and floating rate interest payments paid by one party. Currency swaps, in their simplest form, are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Both types of swap contracts may include the net exchange of principal. Exposure to gain or loss on these contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, and the timing of payments.
Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement.
The gain or loss on the hedged item that is attributable to the hedged risk is recognised in the income statement. This applies even if the hedged item is an available for sale financial asset or is measured at amortised cost. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment made to the carrying amount of the hedged item is amortised to the income statement, based on a recalculated effective interest rate over the residual period to maturity. In cases where the hedged item has been derecognised, the cumulative adjustment is released to the income statement immediately.
Strategic report Governance IFRS financial statements Other information related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method.
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. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable. The Group has not entered into any material finance lease arrangements either as lessor or lessee.
The Group operates a number of pension schemes, whose members receive benefits on either a defined benefit or defined contribution basis. Under a defined contribution plan, the Group’s legal or constructive obligation is limited to the amount it agrees to contribute to a fund and there is no obligation to pay further contributions if the fund does not hold sufficient assets to pay benefits. A defined benefit pension plan is a pension plan that is not a defined contribution plan and typically defines the amount of pension benefit that an employee will receive on retirement. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method. The pension obligation is measured as the present value of the estimated future cash outflows, using a discount rate based on market yields for highquality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. The resultant net surplus or deficit recognised as an asset or liability on the statement of financial position is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets.
Remeasurements of defined benefit plans comprise actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions, the return on plan assets (excluding net interest) and the effect of the asset ceiling (if any). The Group recognises remeasurements immediately in other comprehensive income and does not reclassify them to the income statement in subsequent periods. Service costs comprising current service costs, past service costs, gains and losses on curtailments and net interest expense/(income) are charged or credited to the income statement.
The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’
Remuneration Report and in note 31. The Group accounts for options and awards under equity compensation plans, which were granted after 7 November 2002, until such time as they are fully vested, using the fair value based method of accounting (the ‘fair value method’). Under this method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected vesting period of the related employees and credited to the equity compensation reserve, part of shareholders’ funds. In certain jurisdictions, awards must be settled in cash instead of shares, and the credit is taken to liabilities rather than reserves. The fair value of these cash-settled awards is recalculated each year, with the income statement charge and liability being adjusted accordingly.
Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill, or from the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time of the transaction. Current and deferred tax relating to items recognised in other comprehensive income and directly in equity are similarly recognised in other comprehensive income and directly in equity respectively. Deferred tax related to fair value re-measurement of available for sale investments, pensions and other post-retirement obligations and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on the direct capital instrument and tier 1 notes is credited directly in equity. 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.
An equity instrument is a contract that evidences a residual interest in the assets of an entity after deducting all its liabilities. Accordingly, a financial instrument is treated as equity if: (i) there is no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities on terms that may be unfavourable; and
equity. Gains and losses on own shares are charged or credited to the treasury share account in equity.
Net earned premiums H 25,224 22,868 Fee and commission income I&J 2,187 1,962 Net investment income K 22,066 30,257 Share of profit after tax of joint ventures and associates 41 216 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 3b 135 (11)
Reconciliation of Group adjusted operating profit to profit for the year For the year ended 31 December 2017 £m
Group adjusted operating profit before tax attributable to shareholders' profits after integration and restructuring costs 2,927 2,798
Profit for the year 1,646 859 1 Other items include an exceptional charge of £nil (2016:£475 million) relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017. Other items also include a charge of £nil (2016: £23 million), which represents the recognition of the loss upon the completion of an outwards reinsurance contract, written in 2015 by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premiums ceded, less £78 million in reinsurance recoverables recognised and £6 million claims handling provisions released.
Reconciliation of Group adjusted operating profit to profit for the year continued Group adjusted operating profit can be further analysed into the following segments (details of segments can be found in note 4): Year ended 31 December 2017
United Kingdom 1,523 423 — 2 1,948 Canada — 269 — 1 270 France 429 70 — (18) 481 Poland 132 8 — 6 146 Italy, Ireland, Spain and Other 315 90 — (13) 392 Asia 241 (13) (1) (26) 201 Aviva Investors 2 — 139 19 160 Other Group activities — (14) — (65) (79)
1 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparatives have been restated.
The accounting policies (identified alphabetically) on pages 93 to 105 and notes (identified numerically) on pages 113 to 228 are an integral part of the financial statements.
Assets Goodwill O & 16 1,876 2,045 Acquired value of in-force business and intangible assets O & 17 3,455 5,468 Interests in, and loans to, joint ventures D & 18 1,221 1,604 Interests in, and loans to, associates D & 19 421 481 Property and equipment P & 20 509 487 Investment property Q & 21 10,797 10,768 Loans V & 23 27,857 24,784 Financial investments S, T, U & 26 311,082 299,835 Reinsurance assets N & 43 13,492 26,343 Deferred tax assets AC & 46 144 180 Current tax assets 94 119 Receivables 27 8,285 7,794 Deferred acquisition costs, pension surpluses and other assets X & 28 6,374 5,893 Prepayments and accrued income X & 28c 2,860 2,882 Cash and cash equivalents Y & 55d 43,347 38,708 Assets of operations classified as held for sale AH & 3c 10,871 13,028
Share premium 30b 1,207 1,197 Capital redemption reserve 30b 14 — Merger reserve D & 35 8,974 8,974 10,195 10,171 Treasury shares 32 (14) (15) Currency translation reserve 36 1,141 1,146 Other reserves 36 (274) (349) Retained earnings 37 4,918 4,835
Liabilities Gross insurance liabilities L & 40 148,650 151,183 Gross liabilities for investment contracts M & 41 203,986 197,095 Unallocated divisible surplus L & 45 9,082 9,349 Net asset value attributable to unitholders D 18,327 15,638 Pension deficits and other provisions AA, AB & 47 1,429 1,510 Deferred tax liabilities AC & 46 2,377 2,413 Current tax liabilities 290 421 Borrowings AD & 49 10,286 10,295 Payables and other financial liabilities S & 50 16,459 17,751 Other liabilities 51 2,791 2,719 Liabilities of operations classified as held for sale AH & 3c 9,873 12,494
Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 55b 25 (432) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 55c (49) 42 New loans to joint ventures and associates 18 — (3) Repayment of loans to joint ventures and associates 18 — 97
Net repayment of loans to joint ventures and associates — 94 Purchases of property and equipment 20 (69) (67) Proceeds on sale of property and equipment 5 75 Purchases of intangible assets (107) (119)
2 Includes redemption of 8.25% US $650 million fixed rate tier 1 notes of £488 million.
Notes to the consolidated financial statements 1 – Prior period adjustments During 2017, following the launch of UK Insurance which brings together the UK Life, UK General Insurance and UK Health businesses, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. The UK
Insurance business continues to be dealt with as two businesses, UK Life and UK General Insurance & Health, under the overall leadership of Andy Briggs, CEO of UK Insurance. The Ireland Life and General Insurance businesses are now part of the European operations under the overall leadership of Maurice Tulloch, CEO of International Insurance. As a result of this change, comparative information in the Reconciliation of Group adjusted operating profit to profit for the year, note 4 Segmental information and note 10 Employee information have been restated. There is no impact on the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity or consolidated statement of cash flows.
2 – Exchange rates The Group’s principal overseas operations during the year were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into sterling at the average rates for the year and the assets and liabilities have been translated at the year end rates as follows: Eurozone Average rate (€1 equals) £0.88 £0.82 Period end rate (€1 equals) £0.89 £0.85 Canada Average rate ($CAD1 equals) £0.60 £0.56 Period end rate ($CAD1 equals) £0.59 £0.60 Poland Average rate (PLN1 equals) £0.21 £0.19 Period end rate (PLN1 equals) £0.21 £0.19 3 – Subsidiaries This note provides details of the acquisitions and disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the year end and subsequent events.
On 5 October 2017, Aviva announced an agreement to acquire a majority shareholding in Wealthify Group Limited, the holding company of
Disposals France – Antarius (see (b) (i) below) 180 — France – health (see (b) (ii) below) 36 — Spain (see (b) (iii) below) 28 — Ireland – health — (8) Other small operations (7) (3)
Held for sale remeasurements Asia – FPI (see (c) (ii) below) (118) — Asia – Taiwan (see (c) (iii) below) (7) —
This consists of £23 million of remeasurement gains in respect of the joint venture operations in Poland (see note 3 (a)(i) above) and Aviva Vietnam (see note 3 (a)(ii) above); £237 million profit on the disposals of Antarius, France health, three businesses in Spain (see note 3 (b)(i), (ii) and (iii) below for further details respectively) and other small operations; offset by £125 million of remeasurement losses in relation to
On 5 April 2017, Aviva announced that it had completed the sale of its entire 50% shareholding in Antarius to Sogecap, a subsidiary of Société Générale, for a consideration of €500 million (approximately £433 million). Antarius was owned jointly by Aviva and Crédit du Nord, a separate subsidiary of Société Générale. The transaction resulted in a profit on disposal of £180 million, calculated as follows: £m
Assets Goodwill, AVIF and other intangibles 12 Investment property 49 Loans 78 Financial investments 10,873 Reinsurance assets 408 Other assets 1,499 Cash and cash equivalents 468
Assets Goodwill, AVIF and other intangibles 161 Financial investments 4,402 Other assets 154 Cash and cash equivalents 440
Liabilities Insurance liabilities 3,777 Unallocated divisible surplus 244 Net asset value attributable to unitholders 551 Other liabilities 149
Profits on disposal 28 1 Cash consideration of £400 million above includes a loss of £22 million related to hedging the currency exposure on expected proceeds of the sale.
(c) Assets and liabilities of operations classified as held for sale
Strategic report Governance IFRS financial statements Other information 3 – Subsidiaries continued (i) Italy
Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers’ liability and professional indemnity liability) and medical expenses.
The principal activity of the Canadian operation is general insurance. In particular it provides personal and commercial lines insurance products principally distributed through insurance brokers. Canada includes the operations of RBC General Insurance Company following its acquisition on 1 July 2016.
Activities in Poland comprise long-term business and general insurance operations, including our long-term business in Lithuania.
Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan and the international operations of Friends Life. This segment also includes general insurance and health operations in Singapore and health operations in Indonesia. As set out in note 3(c), Taiwan and the international operations of Friends Life are classified as held for sale as at 31 December 2017.
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 —
Net earned premiums 5,341 4,015 2,944 5,637 586 5,792 884 — 25 25,224 Fee and commission income 906 121 24 316 83 141 193 407 (4) 2,187 6,247 4,136 2,968 5,953 669 5,933 1,077 407 21 27,411 Net investment income 16,202 138 86 2,613 292 811 1,465 136 323 22,066 Inter-segment revenue — — — — — — — 239 — 239 Share of profit of joint ventures and associates 72 — — 14 — 12 (57) — — 41 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — 216 16 28 (118) — (7) 135
Claims and benefits paid, net of recoveries from reinsurers (10,783) (2,547) (1,902) (5,145) (397) (2,799) (526) — (14) (24,113) Change in insurance liabilities, net of reinsurance 1,380 78 (221) (804) (134) (928) (450) — 5 (1,074) Change in investment contract provisions (9,041) — — (1,591) — (2,121) (947) (137) — (13,837) Change in unallocated divisible surplus 195 — — 153 (2) 85 (137) — — 294 Fee and commission expense (496) (1,268) (796) (703) (134) (421) (144) (39) (328) (4,329) Other expenses (1,385) (221) (178) (281) (102) (229) (298) (418) (425) (3,537) Inter-segment expenses (207) (8) (6) 2 (6) (12) — — (2) (239) Finance costs (233) (1) (5) (1) — (7) (3) — (433) (683)
Strategic report Governance IFRS financial statements Other information 4 – Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2016 – restated1
Premiums written net of reinsurance 3,795 3,823 2,453 6,538 487 5,184 775 — 23 23,078 Net change in provision for unearned premiums (2) (109) (33) (8) (16) (34) (8) — — (210)
Net earned premiums 3,793 3,714 2,420 6,530 471 5,150 767 — 23 22,868 Fee and commission income 841 117 17 258 60 148 198 326 (3) 1,962 4,634 3,831 2,437 6,788 531 5,298 965 326 20 24,830 Net investment income 24,661 242 50 2,951 141 816 1,240 83 73 30,257 Inter-segment revenue — — — — — — — 234 — 234 Share of profit of joint ventures and associates 172 — 1 16 7 3 17 — — 216 (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates (3) — — — — (8) — — — (11)
Adjusting items: Reclassification of corporate costs and unallocated interest — (5) 17 46 — — — 5 (63) — Investment return variances and economic assumption changes on long-term business (497) — — 86 1 21 10 — — (379) Short-term fluctuation in return on investments backing non-long-term business (135) (95) 42 (2) (1) 29 — — 680 518 Economic assumption changes on general insurance and health business — 229 — 13 — — — — — 242 Impairment of goodwill, joint ventures and associates and other amounts expensed — — — — — — — — — — Amortisation and impairment of intangibles 71 24 29 2 3 7 9 6 24 175 Amortisation and impairment of AVIF 387 — — 3 2 2 142 — 4 540 Loss/(profit) on the disposal and remeasurement of subsidiaries, joint ventures and associates 3 — — — — 8 — — — 11 Other5 — 498 — — — — — — — 498
Group adjusted operating profit before tax attributable to shareholders' profits after integration and restructuring costs 1,434 380 252 473 146 391 184 141 (603) 2,798
Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 1,553 395 270 481 146 392 201 160 (588) 3,010 1 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.
2 Total reported income, excluding inter-segment revenue, includes £33,784 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written.
3 Aviva Investors group adjusted operating profit includes £2 million profit relating to the Aviva Investors Pooled Pensions business.
Strategic report Governance IFRS financial statements Other information 4 – Segmental information continued (a) (iii) Segmental statement of financial position as at 31 December 2017
Goodwill 663 924 88 — 26 293 51 — — 2,045 Acquired value of in-force business and intangible assets 3,152 160 292 86 12 619 1,062 9 76 5,468 Interests in, and loans to, joint ventures and associates 1,257 — 13 169 48 71 527 — — 2,085 Property and equipment 78 27 24 240 4 5 12 5 92 487 Investment property 6,304 208 — 2,878 — 201 — 951 226 10,768 Loans 23,693 5 170 757 — 122 37 — — 24,784 Financial investments 168,273 3,961 4,670 68,427 3,015 29,267 11,460 574 10,188 299,835 Deferred acquisition costs 1,122 478 360 280 45 213 113 3 — 2,614 Other assets 51,489 5,499 1,372 7,716 237 3,585 1,479 961 6,967 79,305 Assets of operations classified as held for sale — — — 13,028 — — — — — 13,028
Liability for investment contracts 121,508 — — 49,929 2 15,690 8,395 1,571 — 197,095 Unallocated divisible surplus 2,709 — — 5,151 60 1,223 206 — — 9,349 Net asset value attributable to unitholders 76 — — 2,349 — 509 — — 12,704 15,638 External borrowings 1,793 — — 1 — 46 — — 8,455 10,295 Other liabilities, including inter-segment liabilities 15,239 (472) 1,107 4,694 139 1,288 645 396 1,778 24,814 Liabilities of operations classified as held for sale — — — 12,494 — — — — — 12,494
Total equity and liabilities 440,419 1 Following the launch of UK Insurance which brings together UK Life, UK General Insurance and UK Health into a combined business, the Ireland Life and General Insurance businesses have been aligned to the new management structure and reported within Europe. As a result, comparative balances have been restated.
Our long-term business comprises life insurance, long-term health and accident insurance, savings, pensions and annuity business written by our life insurance subsidiaries, including managed pension fund business. Long-term business also includes our share of the other life and related business written in our associates and joint ventures, as well as lifetime mortgage business written in the UK.
Our fund management business invests policyholders’ and shareholders’ funds and provides investment management services for institutional pension fund mandates. It manages a range of retail investment products, including investment funds, unit trusts, OEICs and
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.
Profit/(loss) before tax attributable to shareholders’ profits 2,304 537 151 (989) 2,003 Adjusting items 578 163 13 311 1,065
Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 2,882 700 164 (678) 3,068 1 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.
(b) (ii) Segmental income statement – products and services for the year ended 31 December 2016
Profit/(loss) before tax attributable to shareholders’ profits 2,194 (16) 108 (1,093) 1,193 Adjusting items 448 849 30 490 1,817
Strategic report Governance IFRS financial statements Other information 4 – Segmental information continued (b) (iii) Segmental statement of financial position – products and services as at 31 December 2017
Strategic report Governance IFRS financial statements Other information 5 – Details of income This note gives further detail on the items appearing in the income section of the consolidated income statement.
Fee and commission income Fee income from investment contract business 1,062 1,021 Fund management fee income 512 403 Other fee income 422 330 Reinsurance commissions receivable 33 47 Other commission income 161 150 Net change in deferred revenue (3) 11
Realised gains/(losses)on disposals 511 66 Unrealised gains and losses (policy K)
Gains/(losses) arising in the year 436 (204) Gains recognised now realised (511) (66)
Rent 574 604 Expenses relating to these properties (101) (66) Realised gains on disposal 30 56 Fair value gains/(losses) on investment properties (note 21) 481 (129)
984 465 Foreign exchange (losses) and gains on investments other than trading (12) 979 Other investment expenses (75) (135)
Strategic report Governance IFRS financial statements Other information 6 – Details of expenses This note gives further detail on the items appearing in the expenses section of the consolidated income statement.
Investment income attributable to unitholders 496 96 Reinsurance commissions and other fee and commission expense 454 449
Prior year comparatives have been revised to reflect an alignment in the classification of UK Life expenses following the Friends Life Part VII transfer. This resulted in a £522 million reclassification of claims and benefits paid from non-participating to participating investment contracts, a £4,495 million increase in investment income allocated to investment contracts, a £8,411 million decrease in other changes in provisions and a £3,916 million increase in the change in reinsurance asset for investment contract provisions. These adjustments have no impact on the total expenses incurred by the Group. Integration and restructuring costs were £141 million (2016: £212 million), which has decreased mainly due to lower integration spend following the Friends Life acquisition and lower Solvency II project costs, partially offset by costs related to the integration of RBC and restructuring costs in France.
Interest expense on operational borrowings Amounts owed to financial institutions 34 39 Securitised mortgage loan notes at fair value 83 84
The investment variances and economic assumption changes excluded from the long-term business Group adjusted operating profit are as follows: Life business 2017 £m
Investment variances and economic assumption changes were £34 million positive (2016: £379 million positive). The variance in 2017 is driven by positive variances in the UK, which are partially offset by negative variances in France.
Positive variances in the UK are mainly due to economic modelling developments implemented in 2017. These include a one-off development to align the approach to calculating the valuation interest rate 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. Positive variances also reflect fewer than expected defaults and downgrades on corporate bonds, better than expected experience on equity release mortgages (in terms of losses related to no negative equity guarantees) and a reduction in the default allowances for commercial mortgages. The negative variance in France is 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. This economic assumption change reflects the current environment of prolonged low interest rates. A further negative variance stems from losses realised in 2017 on derivative-based funds.
Union. The adverse impact of this adjustment on the Group’s equity release and commercial mortgage portfolios was broadly offset in the second half of the year as expectations for future property price and rental growth have increased. In addition, in the UK the investment variance reflected a refined approach of assuming best estimate expected credit defaults on corporate bonds, with a resulting increase in Group adjusted operating profit in the period. The positive variance in the UK was partially offset by negative variances in France and Italy.
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 equities and properties. 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 expected rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification under IFRS. The principal assumptions underlying the calculation of the expected investment return for equities and properties are: Equities Properties
The expected return on equities and properties 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 2017
Strategic report Governance IFRS financial statements Other information 9 – Longer-term investment return and economic assumption changes for non-long-term business For non-long-term business, the total investment income, including realised and unrealised gains, is split between a calculated longer-term return, which is included in Group adjusted operating profit, and short-term fluctuations from this, which are disclosed outside Group adjusted operating profit but are included in profit before tax. This note gives details of the longer-term return calculation and the relevant assumptions, as well as the economic assumption changes on our general insurance and health business.
(b) The longer-term investment return and short-term fluctuation are as follows: Non-long-term business 2017 £m
Analysis of investment income: Net investment income/expenses 49 (136) Foreign exchange gains/losses and other charges (24) (35)
(c) The longer-term investment return is calculated separately for each principal non-long-term business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments (including debt securities) is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the longer-term return reflects assets backing non-long-term business held in Group centre investments.
Market value movements which give rise to variances between actual and longer-term investment returns are disclosed separately in short-term fluctuations outside operating profit.
The impact of realised and unrealised gains and losses on Group centre investments, including the centre hedging programme which is designed to economically protect the total Group’s capital against adverse equity and foreign exchange movements, is included in shortterm fluctuations on other operations. The adverse short-term fluctuations during 2017 are mainly due to foreign exchange losses and adverse market movements on Group centre holdings, including the centre hedging programme.
Debt securities 10,054 10,799 Equity securities 772 267 Properties 499 341 Cash and cash equivalents 1,115 1,162 Other1 2,498 2,032
The longer-term rates of return on equities and properties have been calculated by reference to the ten year mid-price swap rate for an AArated bank in the relevant currency plus a risk premium. The underlying reference rates and risk premiums are shown in note 8.
(e) The table below compares the actual return on investments attributable to the non-long-term business, after deducting investment management expenses and charges, with the aggregate longer-term return over a five year period.
Actual return attributable to shareholders 1,148 1,853 Longer-term return credited to operating results (2,170) (2,523)
Management continues to view the excess of longer-term returns over actual returns as short-term fluctuations. The principal assumptions underlying the calculation of the longer-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.
(f) The table below shows the sensitivity of the Group’s adjusted non-long-term business Group adjusted operating profit before tax to changes in the longer-term rates of return: Movement in investment return for By Change in 2017 £m
Strategic report Governance IFRS financial statements Other information 10 – Employee information This note shows where our staff are employed throughout the world, excluding staff employed by our joint ventures and associates, and analyses the total staff costs.
Defined benefit schemes (note 48d) 23 17 Defined contribution schemes (note 48d) 146 138
Profit sharing and incentive plans 208 214 Equity compensation plans (note 31d) 77 37 Termination benefits 23 20
Staff costs are charged within: Acquisition costs 526 433 Claims handling expenses 164 145 Central costs and sharesave schemes 100 90 Other operating expenses (note 6) 1,115 1,059 Integration and restructuring costs 37 37
Total staff costs 1,942 1,764 11 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration Report in the ‘Corporate governance’ section of this report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2017 was £12 million (2016: £10.8 million). Employer contributions to pensions for executive directors for qualifying periods were £50,336 (2016: £14,168). The aggregate net value of share awards granted to the directors in the period was £10.6 million (2016: £8.1 million). The net value has been calculated by reference to the closing middle market price of an ordinary share at the date of grant. During the year, no share options were exercised by directors (2016: no share options).
Strategic report Governance IFRS financial statements Other information 12 – Auditors’ remuneration This note shows the total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to our principal auditors, PricewaterhouseCoopers LLP.
Fees payable to PwC LLP and its associates for the statutory audit of the Aviva Group and Company financial statements 2.6 2.8 Fees payable to PwC LLP and its associates for other services
Total audit fees 17.6 17.6 Audit related assurance 4.7 6.3 Other assurance services 2.2 8.1
Fees payable for the audit of the Group’s subsidiaries include fees for the statutory audit of the subsidiaries, both inside and outside the UK, and for the work performed by the principal auditors in respect of the subsidiaries for the purpose of the consolidated financial statements of the Group. Audit related assurance comprises services in relation to statutory and regulatory filings. These include fees for the audit of the Group’s
Solvency II regulatory returns from 2017, services for the audit of other regulatory returns of the Group’s subsidiaries and review of interim financial information under the Listing Rules of the UK Listing Authority. Total audit fees (excluding additional fees relating to the prior year audits of Group subsidiaries) and audit-related assurance fees were £21.5 million (2016: £23.2 million). Other assurance services in 2017 of £2.2 million (2016: £8.1 million) mainly include fees relating to the independent review of internal model valuation that the Company believes is most appropriately performed by the principal auditors. The 2017 fees for other non-audit services of £0.8 million include a number of individually smaller services.
Current tax For the period 651 930 Prior period adjustments (46) 1
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £13 million and £nil million (2016: £10 million and £8 million), respectively.
Long-term business technical provisions and other insurance items 37 (147) Deferred acquisition costs (2) (12) Unrealised gains/(losses) on investments (33) 144 Pensions and other post-retirement obligations 19 21 Unused losses and tax credits 19 39 Subsidiaries, associates and joint ventures (4) 4 Intangibles and additional value of in-force long-term business (85) (99) Provisions and other temporary differences 172 93
Current tax In respect of pensions and other post-retirement obligations (45) (25) In respect of foreign exchange movements 4 31
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the home country of the
Company as follows: Shareholder £m Policyholder £m Shareholder £m Policyholder £m
Different basis of tax – policyholders — 301 301 — 513 513 Adjustment to tax charge in respect of prior periods (44) — (44) (34) — (34) Non-assessable income and items not taxed at the full statutory rate (47) — (47) 39 — 39 Non-taxable (profit)/loss on sale of subsidiaries and associates (27) — (27) 1 — 1 Disallowable expenses 47 — 47 49 — 49 Different local basis of tax on overseas profits 82 (1) 81 97 (1) 96 Change in future local statutory tax rates (36) — (36) (36) — (36) Movement in deferred tax not recognised (3) — (3) (13) — (13) Tax effect of profit from joint ventures and associates (3) — (3) (6) — (6) Other 2 — 2 (2) — (2)
January 2021 and 25.83% from 1 January 2022. These reduced rates have been incorporated in the calculation of France’s deferred tax assets and liabilities as at 31 December 2017 and results in a reduction in the Group’s net deferred tax liabilities of £15 million, comprising of a £8 million credit to the Income Statement and £7 million credit to the Statement of Comprehensive Income.
Profit for the year 2,429 (783) 1,646 2,304 (1,445) 859 Amount attributable to non-controlling interests (134) (15) (149) (147) (9) (156) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of the direct capital instrument (DCI) and tier 1 notes (net
Profit attributable to ordinary shareholders 2,213 (798) 1,415 2,072 (1,454) 618
Group adjusted operating profit attributable to ordinary shareholders 3,068 2,213 54.8 3,010 2,072 51.1 Integration and restructuring costs (141) (111) (2.8) (212) (170) (4.2)
Group adjusted operating profit attributable to ordinary shareholders after integration and restructuring costs 2,927 2,102 52.0 2,798 1,902 46.9
(iii) The calculation of basic earnings per share uses a weighted average of 4,041 million (2016: 4,051 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2017 was 4,013 million (2016: 4,062 million) and 4,010 million (2016: 4,058 million) excluding treasury shares.
(iv) On 25 May 2017 Aviva announced a share buy-back of ordinary shares for an aggregate purchase price of up to £300 million, which was carried out in full during the period from 25 May 2017 to 19 September 2017. The number of shares in issue has reduced by 58 million as at 31 December 2017 in respect of shares acquired and cancelled under the buy-back programme. Net of new shares issued during the period, the number of shares in issue reduced by 49 million.
Subsequent to 31 December 2017, the directors proposed a final dividend for 2017 of 19.00 pence per ordinary share (2016: 15.88 pence), amounting to £763 million (2016: £646 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 17 May 2018 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2018. 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 19.25% (2016: 20.00%).
Strategic report Governance IFRS financial statements Other information 16 – Goodwill This note analyses the changes to the carrying amount of goodwill during the year, and details the results of our impairment testing on both goodwill and intangible assets with indefinite lives.
Accumulated impairment At 1 January (247) (215) Impairment charges1 (10) — Disposals 96 — Foreign exchange rate movements (7) (32)
A summary of the goodwill and intangibles with indefinite useful lives allocated to groups of cash generating units is presented below.
Goodwill in all business units is tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill relates, to the recoverable value of that cash generating unit. The recoverable amount is the value in use of the cash generating unit unless otherwise stated. In 2017, following the classification of the Group’s two businesses in Italy, its remaining life insurance businesses in Spain, and FPI in Asia as held for sale (see note 3(c)), the Group measured the recoverable amount of those business units at their estimated fair value less costs to sell.
These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, mortality, morbidity and persistency. Future new business profits beyond the initial three years are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to management estimates, past experience and relevant available market statistics. Expected profits from future new business are discounted using a risk adjusted discount rate. The discount rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
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%.
For the goodwill in the UK Life long-term business that arose on the Friends Life acquisition, the value of the business was sufficient to demonstrate goodwill recoverability on its own. As such it was not necessary to estimate the present value of expected profits from future new business. For the goodwill in the Italian long-term business and the goodwill and indefinite life intangible asset of the remaining Spanish longterm business, the recoverable amount of the related cash generating units in 2017 was based on their fair value less costs to sell. The basis for the estimate of the fair value less costs to sell was the agreed consideration between the bancassurance partners (see note 3(c)(i) and
Shareholder value basis Future new business profits growth rate Future new business profits discount rate 2017 (Pre-tax)
Value in use is calculated as the discounted value of expected future profits of each business. The calculation uses cash flow projections based on business plans approved by management covering a three year period. These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, premium rate and fee income changes, claims inflation and commission rates.
United Kingdom general insurance and health 1 1 5.8 7.7 Ireland general insurance and health Nil Nil 6.2 6.7 Italy general insurance and health 1 1 – 1.2 11.2 9.0 – 11.8
Strategic report Governance IFRS financial statements Other information 16 – Goodwill continued Results of impairment testing
related to non-participating investment contracts of £8 million and £110 million (see also note 17) respectively 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. Our estimate of fair value less costs to sell was calculated on the basis of the agreed sales consideration of £340 million (see note 3(c)(ii)) after deducting a £6 million reinsurance recapture fee between FPI and Aviva Re Limited which is embedded in the sale agreement.
Gross amount At 1 January 2016 2,631 2,703 1,734 325 7,393 Additions and transfers — — 337 — 337 Disposals (43) — (216) — (259) Foreign exchange rate movements 51 1 121 42 215
At 31 December 2016 (870) (583) (504) (57) (2,014) Amortisation for the year (206) (262) (186) — (654) Disposals 28 7 146 — 181 Foreign exchange rate movements (12) — — — (12)
At 31 December 2016 (19) (24) (81) (68) (192) Impairment charges3 (8) (110) (7) — (125) Disposals — — 43 — 43 Foreign exchange rate movements — — (1) (3) (4)
(a) AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total AVIF of £3,258 million (£1,533 million on insurance contracts, £1,725 million on investment contracts), £2,142 million (2016: 3,368 million) is expected to be recovered more than one year after the statement of financial position date. In 2017, the additions relate to the full consolidation of Aviva Vietnam which was previously accounted under the equity method as a joint venture (see note 3(a)(ii)), and the disposals relate to the sale of
Strategic report Governance IFRS financial statements Other information 17 – Acquired value of in-force business (AVIF) and intangible assets continued 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 16 (b)). In 2017, an impairment charge of £110 million was recognised in relation to the AVIF on non-participating investment contracts at our subsidiary Friends Provident International Limited (‘FPI’) to write down the related AVIF balance to its recoverable amount as explained in note 16(b). In addition, £8 million of AVIF on insurance contracts in relation to the book of business reinsured by FPI to
Aviva Re Limited was also considered to be non-recoverable and was written-off.
(b) 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 2017 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 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 (see note 3(a)(i)). Additions of intangibles with finite lives in 2016 primarily relate to RBC Insurance’s distribution network and customer relationships acquired as part of the acquisition of RBC General Insurance Company and capitalised software in the UK. Disposals in 2017 relate to the derecognition of intangible assets with finite useful lives in relation to the disposal of part of the
Impairment losses of £7 million in 2017 and £14 million in 2016 on intangible assets with finite lives arose on capitalised software in other group activities.
(c) Intangible assets with indefinite useful lives primarily comprise the value of distribution channels, Union Financière de France Banque in France and Banco Mare Nostrum (BMN) in Spain, where the existing lives of the assets support this classification. Impairment testing of these intangible assets is covered in note 16(b).
(i) The movements in the carrying amount comprised: Goodwill and intangibles £m
At 1 January 92 1,512 — 1,604 90 1,406 94 1,590 Share of results before tax — 99 — 99 — 182 — 182 Share of tax — (3) — (3) — (4) — (4)
Additions and disposals during the year relate to the Group’s holdings in property management undertakings.
Reclassification to subsidiary reflects changes in the Group’s holdings in its Poland and Vietnam undertakings, as described in note 3(a). During the year, the Group’s joint venture in Taiwan, First Aviva Life Insurance Co. Limited, was classified as held for sale following the
Goodwill and intangibles £m Equity interests £m Loans £m Total £m
The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted with the exception of Aviva SA Emklilik ve Hayat A.S. which has issued publicly a minority portion of shares. All investments in such undertakings are held by subsidiaries, except for the shares in the Chinese joint venture, Aviva-COFCO Life Insurance Co. Limited, which are held by Aviva plc. The Group’s share of net assets of that company is £274 million (2016: £251 million) and has a fair value of £547 million (2016: £511 million).
The Group has no joint ventures whose non-controlling interest (NCI) is material on the basis of their share of profit/(loss).
(iv) The joint ventures have no significant contingent liabilities to which the Group is exposed. The Group has commitments to provide funding to property management joint ventures of £6 million (2016: £6 million).
Share of (loss)/profit after tax (65) 17 (48) — 46 46 Additions — 2 2 39 44 83 Reduction in Group interest — (5) (5) — (4) (4) Dividends received from associates — (13) (13) — (13) (13) Foreign exchange rate movements — 4 4 — 40 40
Strategic report Governance IFRS financial statements Other information 19 – Interests in, and loans to, associates continued (ii) No associates are considered to be material from a Group perspective (2016: 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 £2 million (2016: £3 million). In certain jurisdictions the ability of associates to transfer funds in the form of cash dividends or to repay loans and advances made by the Group is subject to local corporate or insurance laws and regulations and solvency requirements.
The recoverable amount of property management undertakings is the fair value less costs to sell of the associate, measured in accordance with the Group’s accounting policy for investment property (see accounting policy Q).
In 2017 the Group determined that the goodwill of £47 million and AVIF of £18 million of its investment in Aviva Life Insurance Company India Limited (‘Aviva India’) were fully impaired following management’s annual impairment review. The total impairment of £65 million was recognised within the income statement as a component of share of profit after tax of joint ventures and associates. The recoverable amount of Aviva India was determined based on its value in use which was calculated on an embedded value (‘EV’)
Strategic report Governance IFRS financial statements Other information 20 – Property and equipment This note analyses our property and equipment, which are primarily properties occupied by Group companies.
Cost or valuation At 1 January 2016 3 360 3 267 236 869 Additions 2 3 — 14 48 67 Disposals — (77) — (13) (20) (110) Transfers from investment property (note 21) — 39 — — — 39 Fair value losses — (18) — — — (18) Foreign exchange rate movements — 34 — 2 13 49
Depreciation and impairment At 1 January 2016 — (23) (2) (248) (147) (420) Charge for the year — — (1) (11) (13) (25) Disposals — 3 1 12 19 35 Impairment charge — — — — — — Foreign exchange rate movements — — — 1 — 1
At 31 December 2016 — (20) (2) (246) (141) (409) Charge for the year — — — (13) (22) (35) Disposals1 — 15 — 134 54 203 Impairment charge — 2 — — (8) (6) Foreign exchange rate movements — — — — (3) (3)
Total net fair value losses of £4 million on owner occupied properties consist of £6 million of losses in the year (2016 £23 million losses) which have been taken to the income statement and £3 million reversal of losses (2016: £1 million reversal) taken to the income statement in previous years and £1 million losses (2016: £4 million gains) which have been taken to other comprehensive income. Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers. These values are assessed in accordance with the relevant parts of the current Royal Institute of Chartered Surveyors Appraisal and Valuation Standards in the UK, and with current local valuation practices in other countries. This assessment is in accordance with UK Valuations Standards (‘Red book’), and is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing wherein the parties had acted knowledgeably and without compulsion, on the basis of the highest and best use of asset that is physically possible, legally permissible and financially feasible. The valuation assessment adopts market-based evidence and is in line with guidance from the International Valuation Standards Committee and the requirements of IAS 16,
Strategic report Governance IFRS financial statements Other information 21 – Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation.
Less: Assets classified as held for sale — — — (48) — (48)
Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include the following: • Quoted prices for similar assets and liabilities in active markets.
Where we use broker quotes and no information as to the observability of inputs is provided by the broker, the investments are classified as follows: • Where the broker price is validated by using internal models with market observable inputs and the values are similar, we classify the investment as Level 2.
Inputs to Level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset or liability. Examples are investment properties, certain private equity investments and private placements.
(c) Comparison of the carrying amount and fair values of financial instruments
Financial assets Loans2 (note 23 (a)) 27,796 27,857 24,705 24,784 Financial Investments (note 26 (a)) 311,082 311,082 299,835 299,835
Fair value of the following assets and liabilities approximate to their carrying amounts: • Receivables • Cash and cash equivalents
Financial assets of operations classified as held for sale 6,192 27 2,093 8,312 — 8,312
Non-recurring fair value measurement Properties occupied by Group companies — — 333 333
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 was £333 million (2016: £321 million), stated at their revalued amounts in line with the requirements of IAS16 Property, Plant and Equipment.
Recurring fair value measurements Investment Property (note 21) — — 10,768 10,768 — 10,768 Loans (note 23 (a)) — 360 20,923 21,283 3,501 24,784 Financial investments measured at fair value (note 26 (a))
Fixed maturity securities 96,102 66,421 16,447 178,970 — 178,970 Equity securities 71,129 — 913 72,042 — 72,042 Other investments (including derivatives) 38,582 6,240 4,001 48,823 — 48,823
Financial assets of operations classified as held for sale 9,408 366 980 10,754 75 10,829
Refer to note 26 for further details of this adjustment and the financial impact arising.
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels of the fair value hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of the reporting period.
Strategic report Governance IFRS financial statements Other information 22 – Fair value methodology continued (f) Valuation approach for fair value assets and liabilities classified as Level 2
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
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 Settlements2 — — — — — — — — — — — 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) — —
Opening balance at 1 January 2016 11,301 18,129 14,603 936 4,153 — (3,421) (22) (1,093) (527) — Total net gains/(losses) recognised in the
Purchases 721 116 1,587 94 718 228 (184) — (302) — — Issuances — 2,612 — — — — (41) — — — — Disposals (1,534) (1,140) (1,528) (194) (1,144) (75) 358 — 196 — — Settlements2 — — 67 — — — 21 — — 17 — Transfers into Level 3 — 718 1,893 — 40 50 (40) — — (817) — Transfers out of Level 3 — — (1,284) (1) (111) (15) 81 — 179 — — Reclassification to held for sale (40) — (590) — (36) 666 — — — — — Foreign exchange rate movements 395 5 1,113 23 220 113 (71) — (5) — —
• Privately placed notes held by our UK Life business of £1.5 billion (2016: £3.1 billion) 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. • Collateralised loan obligations of £0.4 billion (2016: £0.4 billion) have been valued using internally developed discounted cash flow models incorporating a significant number of modelling assumptions and unobservable market data including assumptions regarding correlation among the underlying loans, a probability of default and liquidity premium.
• Equity securities which primarily comprise private equity holdings of £0.8 billion (2015: £0.8 billion) held in the UK are valued by a number of third party specialists. These are valued using a range of techniques, including earnings multiples, forecast cash flows and price/earnings ratios which are deemed to be unobservable.
• The following Other investments are valued based on external valuation reports received from fund managers: Private equity investment funds amounting to £0.6 billion (2016: £0.8 billion); Other investment funds including property funds amounting to £1.8 billion (2016: £0.8 billion); and
External hedge funds held principally by businesses in the UK and France amounting to £0.4 billion (2016: £0.5 billion).
Strategic report Governance IFRS financial statements Other information 22 – Fair value methodology continued Where these valuations are at a date other than balance sheet date, as in the case of some private equity funds, adjustments are made to reflect items such as subsequent draw-downs and distributions and the fund manager’s carried interest.
Remaining Level 3 investments amount to £0.6 billion (2016: £0.3 billion) within debt securities, equity securities and other investments held by a number of businesses throughout the Group.
• For third-party valuations either not validated or validated against a third-party model or broker quote, the third-party valuation in its entirety is considered an unobservable input. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple or other suitable valuation multiples of the financial instrument implied by the third-party valuation. For example, for a fixed income security the implied yield would be the rate of return which discounts the security’s contractual cash flows to equal the third-party valuation.
The principal liabilities classified as Level 3, and the valuation techniques applied to them, are: • £3.3 billion (2016: £3.4 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. • £1.3 billion (2016: £1.1 billion) of securitised mortgage loan notes, presented within Borrowings, are valued using a similar technique to the related Level 3 securitised mortgage assets. • Derivative liabilities of £0.4 billion (2016: £1.6 billion) comprising over-the-counter derivatives being primarily RPI swaps and index linked asset swaps. These swaps are valued using either discounted cash flow models. Cash flows within these models may be adjusted based on assumptions reflecting the underlying credit risk and liquidity risk and these assumptions are deemed to be non-market observable.
The table below shows the fair value and fair value hierarchy for those assets and liabilities not carried at fair value.
Assets and liabilities not carried at fair value Loans — 1,280 2,124 3,404 Borrowings 9,779 205 374 10,358
The movements in the impairment provisions on these loans for the years ended 31 December 2017 and 2016 were as follows: £m
Loans to banks include cash collateral received under stock lending arrangements (see note 58 for further discussion regarding these collateral positions). The obligation to repay this collateral is included in payables and other financial liabilities (note 50).
In a UK long-term business subsidiary, Aviva Equity Release UK Limited (AER), the beneficial interest in certain portfolios of lifetime mortgages has been transferred to five special purpose securitisation companies (the ERF companies), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within the ERF companies after meeting all their obligations to the note holders, loan providers and other third parties in the priority of payments. The purchases of the mortgages were funded by the issue of fixed and floating rate notes by the ERF companies.
1 Following a review of the classification of mortgage loans, £4,992 million has been transferred from securitised to non-securitised mortgage loans in 2016. The net impact on total loans is nil.
Strategic report Governance IFRS financial statements Other information 25 – Interests in structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. The Group has interests in both consolidated and unconsolidated structured entities as described below.
Initiatives (PFIs). • Specialised investment vehicles include Open Ended Investment Companies (OEICs), Property Limited Partnerships (PLPs), Sociétés d’Investissement a Capital Variable (SICAVs), Tax Transparent Funds (TTFs) and other investment vehicles.
Strategic report Governance IFRS financial statements Other information 25 – Interests in structured entities continued (b) Interests in unconsolidated structured entities
Group’s total interest in unconsolidated structured entities is classified as ‘Interests in and loans to joint ventures and associates’ and ‘financial investments held at fair value through profit or loss’. The Group does not sponsor any of the unconsolidated structured entities.
As at 31 December 2017, a summary of the Group’s interest in unconsolidated structured entities is as follows: £m1
Interest in, and loans to, associates Financial investments Loans Total assets
Analysed as: Unit trust and other investment vehicles — — 45,666 — 45,666 — — 43,062 — 43,062 PLPs and property funds 820 326 1,435 — 2,581 1,146 305 1,186 — 2,637 Other (Including other funds and equity securities) — — 508 — 508 — — 608 — 608 1 Following a review of the Group’s investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported.
2 Reported within ‘other debt securities’ in note 26a. 3 Loans include Healthcare, infrastructure & PFI other loans along with certain non-securitised mortgage loans.
Specialised investment vehicles: 3,877 12 3,726 14 Analysed as: OEICs 1,177 3 1,536 5 PLPs 2,666 9 2,155 9 SICAVs 34 0 35 —
1 Investment funds relate primarily to the Group’s Polish pension funds.
Strategic report Governance IFRS financial statements Other information 26 – Financial investments This note analyses our financial investments by type and shows their cost and fair value. These will change from one period to the next as a result of new business written, claims paid and market movements.
Convertibles and bonds with warrants attached — 9 — 9 — 180 — 180 Other — 10,801 — 10,801 — 12,224 — 12,224
Other debt securities of £10,801 million (2016: £12,224 million) include residential and commercial mortgage-backed securities, as well as other structured credit securities. Following a review of the Group’s investment classifications, comparative amounts have been amended from those previously reported, reflecting the fact that equity and debt securities held indirectly through majority owned investment funds in the UK managed by third parties, which in 2016 were presented as unit trusts and other investment vehicles within other investments, are now presented as debt and equity securities. The effect of this change is to increase equity and debt securities by £3,434 million and £3,694 million and decrease unit trusts and other investment vehicles within other investments by £7,128 million.
In addition, assets classified as held for sale of £10,706 million have been revised from available for sale to other than trading.
Strategic report Governance IFRS financial statements Other information 26 – Financial investments continued (b) Cost, unrealised gains and fair value
Fixed maturity securities 162,092 20,244 (6,388) 175,948 172,007 16,014 (1,313) 186,708 Equity securities 75,060 16,819 (1,716) 90,163 60,194 14,152 (1,640) 72,706 Other investments Unit trusts and other investment vehicles 34,271 11,120 275 45,666 39,144 2,940 978 43,062 Derivative financial instruments 1,328 4,569 (390) 5,507 1,313 5,381 (575) 6,119 Deposits with credit institutions 161 — — 161 325 — — 325 Minority holdings in property management undertakings 1,332 180 (77) 1,435 1,126 138 (78) 1,186 Other investments – long-term 477 61 (31) 507 432 32 (30) 434 Other investments – short-term 1 — — 1 1 — — 1
These are further analysed as follows: At fair value through profit or loss 273,087 52,891 (8,326) 317,652 273,548 38,550 (2,657) 309,441 Available for sale 1,635 102 (1) 1,736 994 107 (1) 1,100 1 Following a review of the Group’s investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note 26 (a) for further details of this adjustment and the financial statement impact arising.
All unrealised gains and losses and impairments on financial investments classified as fair value through profit or loss have been recognised in the income statement.
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 gain of £6,880 million (2016: £19,452 million net gain). Of this net gain, £6,955 million net gain (2016: £19,722 million net gain) related to investments designated as other than trading and £75 million net loss (2016: £270 million net loss) related to financial investments designated as trading.
There are no impairments in 2017. The previously recognised impairment on other investments of £9 million in respect of financial investments classified as available-for-sale was recovered through sale during 2016.
The Group receives collateral in order to reduce the credit risk of these arrangements, either in the form of securities or cash. See note 58 for further discussion regarding collateral positions held by the Group.
Certain financial investments are also required to be deposited under local laws in various overseas countries as security for the holders of policies issued in those countries. Other investments are pledged as security collateral for bank letters of credit.
The following is a summary of non-UK government debt by issuer as at 31 December 2017, analysed by policyholder, participating and shareholder funds.
(5%), Polish (5%), and US (5%) government debt securities. The participating funds exposure to (non-UK) government debt amounts to £35.4 billion (2016: £36.5 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 (23%), Germany (4%), Belgium (3%), Poland (2%), and Ireland (2%).
Direct shareholder and participating fund assets exposures to worldwide bank debt securities (net of non-controlling interests, excluding policyholder assets)
Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £5.4 billion (2016: £6.6 billion). The majority of our holding (81%) is in senior debt. The primary exposures are to UK (31%), US (22%), Dutch (11%), and French (11%) banks.
Net of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £14.6 billion (2016: £17.9 billion). The majority of the exposure (83%) is in senior debt. Participating funds are the most exposed to French (22%), UK (15%) and US (12%) banks.
Australia 0.2 — 0.2 0.6 0.2 0.8 Denmark — — — 0.6 — 0.6 France 0.5 0.1 0.6 2.7 0.6 3.3 Germany — — — 0.6 0.3 0.9 Ireland — — — — — — Italy — — — 0.2 — 0.2 Netherlands 0.4 0.2 0.6 1.4 0.2 1.6 Spain 0.4 — 0.4 0.3 0.1 0.4 Sweden 0.2 — 0.2 0.4 0.1 0.5 Switzerland — — — 1.3 — 1.3 United Kingdom 1.3 0.4 1.7 1.5 0.8 2.3 United States 1.0 0.2 1.2 1.7 0.1 1.8 Other 0.4 0.1 0.5 1.2 0.1 1.3
Total (excluding assets held for sale) 4.4 1.0 5.4 12.5 2.5 15.0
(11%) banks. 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 £15.0 billion (2016: £19.5 billion). The majority of the exposure (83%) is in senior debt. Participating funds are most exposed to French (22%), UK (15%) and US (12%) banks.
Strategic report Governance IFRS financial statements Other information 27 – Receivables This note analyses our total receivables.
Expected to be recovered in less than one year 8,278 9,132 Expected to be recovered in more than one year 45 66
The carrying amount comprises: Deferred acquisition costs in respect of: Insurance contracts – Long-term business 858 694 Insurance contracts – General insurance and health business 1,110 1,037 Participating investment contracts – Long-term business 33 19 Non-participating investment contracts – Long-term business 1,071 861 Retail fund management business 2 3
Deferred acquisition costs (DAC) on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year. Of the above total, £1,521 million (2016: £1,262 million) is expected to be recovered more than one year after the statement of financial position date. For long-term business where amortisation of the DAC balance depends on projected profits, the amount expected to be recovered is estimated and actual experience will differ.
Surpluses in the staff pension schemes and £9 million (2016: £1 million) of other assets are recoverable more than one year after the statement of financial position date.
Carrying amount at 1 January 1,574 1,037 3 2,614 1,604 812 5 2,421 Acquisition costs deferred during the year 306 2,418 — 2,724 283 2,264 — 2,547 Amortisation1 (154) (2,369) (1) (2,524) (377) (2,118) (2) (2,497) Impact of assumption changes 192 — — 192 40 — — 40 Effect of portfolio transfers, acquisitions and disposals 26 25 — 51 (29) (8) — (37) Foreign exchange rate movements 18 1 — 19 53 87 — 140 Other movements — (2) — (2) — — — —
Less: Amounts classified as held for sale (158) (10) — (168) — — — —
1 2016 amortisation includes an additional charge of £183 million to reflect a reduction in projected future profits following a change in the allocation of fixed costs between UK Life product lines.
Strategic report Governance IFRS financial statements Other information 28 – Deferred acquisition costs, pension surpluses, other assets, prepayments and accrued income continued The balance of deferred acquisition costs for long-term business increased over 2017 mainly due to reductions in per policy costs on unitlinked pensions increasing the level of DAC that can be supported in UK Life business. The balance of deferred acquisition costs for general insurance and health business increased over 2017 mainly due to increased new business sales. Where amortisation of the DAC balance depends on projected profits, changes to economic conditions may lead to a movement in the
Furthermore, the profile of this restriction across product lines has changed leading to a directional switch in the sensitivity year-on-year.
1 Following a review of the Group’s investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note 26 (a) for further details of this adjustment and the financial statement impact arising.
At 31 December 2017, the exposure on these reinsurance assets has reduced significantly as a result of action taken to restructure agreements with the Group’s largest reinsurance counterparty, BlackRock Life Limited, and reduce counterparty risk. As a consequence of this £14,353 million of funds previously reported with BlackRock Life Limited have been transferred to debt and equity securities.
Strategic report Governance IFRS financial statements Other information 30 – Ordinary share capital This note gives details of Aviva plc’s ordinary share capital and shows the movements during the year.
The allotted, called up and fully paid share capital of the Company at 31 December 2017 was: 4,012,682,691 (2016: 4,061,539,206) ordinary shares of 25 pence each 1,003 1,015
The Group maintains a number of active share option and award plans and schemes (the Group’s share plans). These are as follows: (i) Savings-related options
These are options granted under the tax-advantaged Save As You Earn (SAYE) share option scheme in the UK and Irish revenue-approved
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.
At 31 December 2017, awards issued under the Company’s executive incentive plans over ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva long-term incentive plan 2011 Number of shares Year of vesting
Aviva recruitment and retention share award plan Number of shares Year of vesting
The vesting of awards under the LTIP is subject to the attainment of performance conditions as described in the directors’ remuneration report.
• Shares which vest in 2018: 154,296 are subject to the same performance conditions that apply to the 2015 LTIP grant 35,264 subject to the performance conditions relating to the performance of the participant’s previous employer • Shares which vest in 2019: 102,602 are subject to the same performance conditions that apply to the 2016 LTIP grant 5,305 are subject to the performance conditions relating to the performance of the participant’s previous employer
These performance conditions are as outlined in the relevant year’s directors’ remuneration report. Shares which do not vest will lapse.
Strategic report Governance IFRS financial statements Other information 31 – Group’s share plans continued (c) Movements in the year
Outstanding at 1 January 24,253,209 355.08 18,152,399 338.00 Granted during the year 5,998,098 409.00 13,679,774 351.00 Exercised during the year (3,094,372) 327.04 (4,709,978)) 286.71 Forfeited during the year (944,431) 364.03 (591,727) 370.87 Cancelled during the year (1,004,017) 361.90 (2,038,503) 383.14 Expired during the year (111,909) 355.32 (238,756) 368.09
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 £1.00 and £4.94 (2016: £0.96 and £3.72) respectively.
The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2017 2016
Share price 523p 472p Expected volatility1 28% 25% Expected volatility of comparator companies’ share price1 26% 24% Correlation between Aviva and comparator competitors’ share price1 59% 53% Expected life1 2.76 years 2.66 years Expected dividend yield2 0.00% 4.00% Risk-free interest rate1 0.59% 0.59%
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 32 – Treasury shares The following table summarises information about treasury shares at 31 December 2017: Number £m Number £m
Shares held by employee trusts 295,906 1 1,127,473 1 Shares held by subsidiary companies 2,471,599 13 2,577,362 14
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. In 2015 however, new shares were issued to the trust, in order to facilitate the release of shares. 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
Cost debited to shareholders' funds At 1 January 1,127,473 1 1,918,088 2 Acquired in the year 236,585 1 — — Distributed in the year (1,068,152) (1) (790,615) (1)
At 31 December 2017, the balance of shares 2,471,599 (2016: 2,577,362 shares) had an aggregate nominal value of £617,900 (2016: £644,340) and a market value of £13,295,284 (2016: £12,536,289).
The preference share capital of the Company at 31 December was: 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
At the end of 2017 the fair value of Aviva plc’s preference share capital was £348 million (2016: £280 million).
At the 2015 Annual General Meeting, the Company was authorised to allot the following: • Sterling new preference shares, as defined in the Company’s articles of association, up to a maximum nominal value of £500 million; and • Additional dollar preference shares, as defined in the 2015 Notice of Annual General Meeting, up to a maximum nominal value of
Notional amount 2017 5.9021% £500 million direct capital instrument – Issued November 2004 500 500 8.25% $650 million fixed rate tier 1 notes – Issued May 2012 — 392 6.875% £210 million STICS – Issued November 2003 231 231
The STICS have no fixed redemption date but the Company may, at its sole option, redeem the instrument (in whole or in part) on 21 November 2019, or on the coupon payment date falling on successive fifth anniversaries from this date. For each coupon period beginning 21 November 2019, the STICS will bear interest reset every five years at the rate per annum which is the aggregate of 2.97% and the Gross Redemption Yield of the Benchmark Gilt.
The Company has the option to defer coupon payments on the DCI and the STICS on any relevant payment date. In relation to the DCI, deferred coupons shall only be satisfied should the Company exercise its sole option to redeem the instruments.
Deferred coupons on the DCI and the STICS will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital. These instruments have been treated as equity. Please refer to accounting policy AE.
Strategic report Governance IFRS financial statements Other information 35 – Merger reserve Prior to 1 January 2004, certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods.
The balance of the merger reserve at 31 December 2017 is £8,974 million (2016: £8,974 million).
36 – 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
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 Reserves credit for equity compensation plans — — — — 77 77 Shares issued under equity compensation plans — — — — (44) (44)
1 Foreign exchange rate movements recorded in the consolidated statement of comprehensive income of £68 million (2016: £1,128 million) relate to the currency translation reserve of £125 million (2016: £1,019 million), the hedging instruments reserve of £(100) million (2016: £(36) million) and non-controlling interests (refer to note 38) of £43 million (2016: £145 million).
Balance at 1 January 4,835 4,774 Profit for the year attributable to equity shareholders 1,497 703 Remeasurements of pension schemes (note 48) (5) 311 Dividends and appropriations (note 15) (1,081) (973) Net shares issued under equity compensation plans 42 26 Shares purchased in buy-back (note 30) (300) — Reclassification of tier 1 notes to financial liabilities (note 34) (92) — Fair value gains realised from other reserves (note 36) 2 46 Transfer from other reserves on disposal of subsidiaries, joint ventures and associates (note 36) 1 — Aggregate tax effect 19 (52)
Strategic report Governance IFRS financial statements Other information 38 – Non-controlling interests This note gives details of the Group’s non-controlling interests and shows the movements during the year.
Equity shares in subsidiaries 423 519 Share of earnings 288 392 Share of other reserves 274 264
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. Refer to note 3 for more information. Changes in noncontrolling interests in 2016 primarily relate to a newly consolidated subsidiary in Aviva France.
Insurance contracts (130,972) 5,469 (125,503) (137,218) 6,186 (131,032) Participating investment contracts (87,654) 2 (87,652) (89,739) 2 (89,737) Non-participating investment contracts (124,995) 6,094 (118,901) (114,531) 18,366 (96,165)
Long-term business (1,798) 64 (1,734) (1,925) 65 (1,860) General insurance and health (8,964) 845 (8,119) (8,749) 1,090 (7,659)
Outstanding claims provisions 1,798 8,964 10,762 1,925 8,749 10,674 Provision for claims incurred but not reported — 2,837 2,837 — 2,960 2,960
Less: Amounts classified as held for sale (783) (131) (914) (4,448) — (4,448)
1 Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations are included in other line items.
General insurance and health Change in insurance liabilities (note 40c(iv) and 43c(ii)) 73 138 211 Less: Unwind of discount on GI reserves and other (9) 9 —
General insurance and health Change in insurance liabilities (note 40c(iv) and 43c(ii))2 867 (222) 645 Less: Unwind of discount on GI reserves and other (11) 10 (1)
Total change in insurance liabilities (note 6) 8,111 (1,218) 6,893 1 Reinsurance assets at 31 December 2016 for General Insurance and health business include the impact of the £78 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business. 2 Includes £475 million in the UK General Insurance business relating to the impact of the change in the Ogden discount rate.
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued (b) Long-term business liabilities (i) Business description
RIEESA is a non-profit fund where 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. RIEESA is used to provide capital support to NWPSF, and has been used in the past to write non-participating business.
• 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.
For UK with-profits life funds falling within the scope of FRS 27, which was grandfathered from UK regulatory requirements under IFRS 4 prior to the adoption of Solvency II, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profits fund where the determination of the realistic value of liabilities in that with-profits fund takes account, directly or indirectly, of this value. For NWPSF, OWPSF, UKLAP WPSF and PMSF no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated divisible surplus. For FP WPSF, FPLAL WPSF, FLC New WPSF, FLC Old WPSF, FLAS WPSF, WL WPSF and SGF the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits and hence no additional explicit adjustment is required for this value.
The Group’s UK with-profit liabilities are evaluated by reference to FRS27, which was grandfathered under IFRS 4, prior to the adoption of Solvency II. Under these rules, provision for guarantees and options within realistic liabilities are measured using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
The key elements of the realistic liabilities are the with-profits benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities, which includes the value of any ‘planned enhancements’ to benefits agreed by the Company.
The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract. For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses. The cost of future policy-related liabilities include: • Maturity Guarantees; • Guarantees on surrender, including no-MVR (Market Value Reduction) Guarantees and Guarantees linked to inflation; • Guaranteed Annuity Options; • GMP (Guaranteed Minimum Pension) underpin on Section 32 transfers; and
On 1 January 2016 the Solvency I Pillar 1 regulatory regime was replaced with Solvency II, under which realistic liabilities were replaced with Best Estimate Liabilities (BEL). Key differences between the realistic liabilities and the Solvency II BEL are that BEL excludes the shareholder’s share of future bonuses, excludes certain planned and approved enhancements to benefits (part of Solvency II surplus funds) and uses a higher yield (EIOPA specified) for future investment returns and discounting. Adjusting the yield used in the calculation of the
BEL by removing the volatility and credit risk adjustments, including planned enhancements that are part of Solvency II surplus funds and making other less significant adjustments, results in a valuation in accordance with FRS 27.
Volatility assumptions are set with reference to implied volatility data on traded market instruments, where available, or on a best estimate basis where not.
The equity volatility used depends on term, money-ness and region. The figure shown is for a sample UK equity, at the money, with a tenyear term.
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 2017 2016
The valuation of non-profit business is based on grandfathered regulatory requirements under IFRS 4 prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profits funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience with an allowance for prudence. For FP WPSF, FPLAL WPSF, FLC New WPSF, FLC Old WPSF, FLAS WPSF, WL WPSF and SGF the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits. For unit-linked and some unitised with-profits business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows using prudent assumptions and on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience. 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. A further margin for risk is then deducted for all asset classes. The provisions held in respect of guaranteed annuity options 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.
Assurances Life conventional non-profit 0.8% to 2.5% 0.5% to 2.6% Pensions conventional non-profit 1.0% to 2.4% 0.8% to 2.1%
Non-unit reserves on Unit Linked business Life 0.8% to 1.2% 0.7% to 1.3% Pensions 0.8% to 1.5% 0.7% to 1.6%
1 Income protection business (pre-existing UKLAP) now uses a nominal swaps curve for all sub-classes and has been shown as an equivalent flat rate in the table above. Previously, a real interest rate was used for the index linked claims in payment.
December 2017 (2016: 47 bps, 48 bps, and 102 bps respectively). The risk allowances made for corporate bonds and mortgages for business transferred in from Friends Life Limited in 2017 equated to 47 bps and 33 bps respectively at 31 December 2017 (2016: 37 bps and 42 bps respectively). For corporate bonds, the allowance represented approximately 37% and 39% respectively of the average credit spread for the portfolios transferred in from Aviva Annuity UK Limited and from Friends Life Limited (2016: 31% and 31% respectively). The total valuation allowance for business transferred from Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages but excluding equity release, was £1.3 billion (2016: £1.3 billion) over the remaining term of the portfolio while for Friends Life Limited it was £0.5 billion (2016: £0.5 billion). The total valuation allowance for business transferred from Aviva Annuity
Pure endowments and deferred annuities before vesting AM00/AF00 adjusted AM00/AF00 adjusted Annuities in payment Pensions business and general annuity business PCMA00/PCFA00 adjusted plus allowance for future mortality improvement
The following movements have occurred in the gross long-term business provisions during the year £m
Provisions in respect of new business 5,731 5,224 Expected change in existing business provisions (7,747) (8,235) Variance between actual and expected experience 1,520 4,752 Impact of non-economic assumption changes (1,175) (536) Impact of economic assumption changes 2,115 5,930 Other movements recognised as an expense1 180 29 Change in liability recognised as an expense (note 40a(ii)) 624 7,164 Effect of portfolio transfers, acquisitions and disposals2 (8,124) — Foreign exchange rate movements 1,252 4,761 Other movements 2 (55)
Carrying amount at 31 December 130,972 137,218 1 Other movements during 2017 primarily relates to a special bonus distribution to with-profits policyholders (UK Life). 2 The movement during 2017 primarily relates to the disposal of Antarius in France and a major share of the business in Spain offset by the consolidation of the Poland and Vietnam joint ventures.
Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held: Rate Mean term of liabilities
The discount rate that has been applied to latent claims reserves and reinsured London Market business is based on the relevant 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 6 and 15 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.
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued No adjustments are made to the claims technicians’ case estimates included in booked claim provisions, except for rare occasions when the estimated ultimate cost of individual large or unusual claims may be adjusted, subject to internal reserve committee approval, to allow for uncertainty regarding, for example, the outcome of a court case. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate. Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.
Changes to claims development patterns can materially impact the results of actuarial projection techniques. However, allowance for the inherent uncertainty in the assumptions underlying reserving projections is automatically allowed for in the explicit allowance for risk and uncertainty included when setting booked reserves. Lump sum payments in settlement of bodily injury claims decided by the UK courts are calculated in accordance with the Ogden Tables and discount rate. The Ogden discount rate is set by the Lord Chancellor in accordance with the Damages Act 1996 and is applied when calculating the present value of future care costs and loss of earnings for claims settlement purposes.
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued (iv) Movements
The following changes have occurred in the general insurance and health claims provisions during the year: £m
Claims payments made in the period, net of recoveries (6,647) (6,164) Unwind of discounting 9 11
The effect of changes in the main assumptions is given in note 44 and the economic assumption changes are explained in note 9.
The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2008 to 2017. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2008, by the end of 2017 £9,033 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £9,508 million was re-estimated to be £9,195 million at 31 December 2017. The original estimates will be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity. The Group aims to maintain reserves in respect of its general insurance and health business that protect against adverse future claims experience and development. The Group establishes reserves in respect of the current accident year (2017), where the development of claims is less mature, that allow for the greater uncertainty attaching to the ultimate cost of current accident year claims. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will result in a release of reserves from earlier accident years, as shown in the loss development tables and movements table (c)(iv) above. Releases from prior accident year reserves are also due to an improvement in the estimated cost of claims. Key elements of the release from 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. • £79 million release from Europe (including Ireland) mainly due to continued favourable development in France and Italy.
Gross cumulative claim payments At end of accident year (4,915) (3,780) (3,502) (3,420) (3,055) (3,068) (3,102) (2,991) (3,534) (3,517) One year later (7,350) (5,464) (5,466) (4,765) (4,373) (4,476) (4,295) (4,285) (4,972) Two years later (7,828) (6,102) (5,875) (5,150) (4,812) (4,916) (4,681) (4,710) Three years later (8,304) (6,393) (6,163) (5,457) (5,118) (5,221) (4,974) Four years later (8,607) (6,672) (6,405) (5,712) (5,376) (5,467) Five years later (8,781) (6,836) (6,564) (5,864) (5,556) Six years later (8,906) (6,958) (6,649) (5,978) Seven years later (8,986) (7,043) (6,690) Eight years later (9,012) (7,078) Nine years later (9,033)
Present value 2,119 148 136 198 285 423 566 868 1,202 1,959 3,377 11,281 Cumulative effect of foreign exchange
Strategic report Governance IFRS financial statements Other information 40 – Insurance liabilities continued (iii) Net of reinsurance
Estimate of net ultimate claims At end of accident year 9,262 7,115 6,650 6,202 5,941 5,838 5,613 5,548 6,489 6,714 One year later 9,104 7,067 6,751 6,103 5,765 5,745 5,575 5,635 6,458 Two years later 9,028 7,036 6,685 6,095 5,728 5,752 5,591 5,608 Three years later 9,007 6,978 6,644 6,077 5,683 5,733 5,559 Four years later 8,962 6,940 6,634 6,034 5,717 5,689 Five years later 8,949 6,977 6,614 6,005 5,680 Six years later 8,926 6,908 6,624 6,003 Seven years later 8,894 6,897 6,615 Eight years later 8,898 6,896 Nine years later 8,886
Present value recognised in the statement of financial position 821 138 143 187 287 420 584 942 1,376 1,943 3,231 10,072
The following changes have occurred in the provision for unearned premiums (UPR) during the year: Carrying amount at 1 January 4,766 4,048 Premiums written during the year 10,523 9,694 Less: Premiums earned during the year (10,365) (9,503)
The liability for investment contracts (gross of reinsurance) at 31 December comprised: £m
Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.
Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost. We currently have no non-participating investment contracts measured at amortised cost. Of the non-participating investment contracts measured at fair value, £123,916 million in 2017 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 28 and the deferred income liability is shown in note 51. For non-participating investment contracts acquired in a business combination, an acquired value of in-force business asset is recognised in respect of the fair value of the investment management services component of the contracts, which is amortised on a systematic basis over the useful lifetime of the related contracts. The amount of the acquired value of in-force business asset is shown in note 17, which relates primarily to the acquisition of Friends Life in 2015. 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.
Participating investment contracts are treated consistently with insurance contracts with the change in investment contract provisions primarily consisting of the movement in participating investment contract liabilities (net of reinsurance) over the reporting period.
Change in liability recognised as an expense2 2,684 2,914 Effect of portfolio transfers, acquisitions and disposals3 (7,243) — Foreign exchange rate movements 2,452 8,721 Other movements 22 56
3 The movement during 2017 relates to the disposal of Antarius in France.
Strategic report Governance IFRS financial statements Other information 41 – Liability for investment contracts continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The variance between actual and expected experience in 2017 of £2.1 billion is primarily driven by favourable equity returns in the UK. 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 44, together with the impact of movements in related non-financial assets.
Carrying amount at 1 January 114,531 103,034 Provisions in respect of new business 4,484 3,222 Expected change in existing business provisions (4,427) (3,481) Variance between actual and expected experience 10,115 11,105 Impact of non-economic assumption changes 2 17 Impact of economic assumption changes (1) 2 Other changes in liabilities 10 334
Carrying amount at 31 December 124,995 114,531 1 The movement during 2017 relates to the disposal of Antarius in France. The movement during 2016 relates to the disposal of a closed book of offshore bonds business.
The material guarantees and options to which this provision relates are: (i) Maturity value and death benefit guarantees
For unitised business, there are a number of circumstances where a ‘no MVR’ guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the accumulated value of units and the market value of the underlying assets.
Strategic report Governance IFRS financial statements Other information 42 – Financial guarantees and options continued (iii) Guaranteed annuity options
In addition, the with-profits fund companies have made promises to certain policyholders in relation to their with-profits mortgage endowments. Top-up payments will be made on these policies at maturity to meet the mortgage value up to a maximum of the 31
The Group’s UK non-profit funds are evaluated by reference to statutory reserving rules, which are based on the UK regulatory requirements (grandfathered under IFRS 4), prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business.
Certain unit-linked pension products linked to long-term life insurance funds provide policyholders with guaranteed benefits at retirement or death. No additional provision is made for this guarantee as the investment management strategy for these funds is designed to ensure that the guarantee can be met from the fund, mitigating the impact of large falls in investment values and interest rates.
German pension products sold in Friends Life between 2006 and 2014 are subject to a Return of Premium guarantee whereby the product guarantees to return the maximum of the unit fund value or total premiums paid (before deductions). Provisions for this guarantee are calculated using a market-consistent stochastic model and amount to £132 million at 31 December 2017 (2016: £145 million).
Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, ‘Provision pour Aléas Financiers’ (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at full year 2017. The most significant of these contracts is the AFER Eurofund which has total liabilities of £38 billion at 31 December 2017 (2016: £37 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 2.40% for 2017 (2016: 2.65%) compared with an accounting income from the fund of 2.89% (2016: 3.14%).
Non-AFER contracts with guaranteed surrender values had liabilities of £11 billion at 31 December 2017 (2016: £19 billion) and all guaranteed annual bonus rates are between 0% and 4.5%. The decrease in Non-AFER contracts is mainly due to the sale of Antarius during the year. For non-AFER business the accounting income return exceeded guaranteed bonus rates in 2017.
In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated statement of financial position at the end of 2017 for this guarantee is £20 million (2016: £59 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2017, total sums at risk for these contracts were £28 million (2016: £38 million) out of total unit-linked funds of £19 billion (2016: £19 billion). The decrease is mainly due to the sale of Antarius during the year. It is estimated that this liability would increase by £28 million (2016: £51 million) if yields were to decrease by 1% per annum and by £6 million (2016: £10 million) if equity markets were to decline by 10% from year end 2017 levels. For interest rate sensitivities if the resulting interest rates are negative, a floor of zero is not applied. These figures do not reflect our ability to review the tariff for this option.
At 31 December 2017 total liabilities were £21 billion (2016: £18 billion), with a further provision of £48 million (2016: £47 million) for guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would need to decrease by £1 million (2016: £5 million decrease) if interest rates fell by 1% from the end of 2017 values. For the interest rate sensitivities, if the resulting interest rates are negative, a floor of zero is not applied. In the local valuation there is no allowance for stochastic modelling of guarantees and options.
GAOs, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made.
Of the above total, £12,302 million (2016: £22,919 million) is expected to be recovered more than one year after the statement of financial position date.
Strategic report Governance IFRS financial statements Other information 43 – Reinsurance assets continued (c) Movements
Change in assets2 (12,587) 5,382 Effect of portfolio transfers, acquisitions and disposals3 (410) 8 Foreign exchange rate movements 8 168
Carrying amount at 31 December 11,565 24,554 1 The movement during 2016 includes the reclassification of UK Life investments in certain life insurance funds from unit trusts and other investment vehicles (financial instruments) to reinsurance assets. The movement during 2017 includes £14,353 million of reinsurance assets (UK Life) being reclassified as collective investments in unit-linked funds following a restructure of a reinsurance treaty.
3 The movement during 2016 relates to the recognition of a reinsurance asset following disposal of a closed book of offshore bonds business. The movement during 2017 primarily relates to Antarius in France.The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets and mainly relates to business in the UK, 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 do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 44, together with the impact of movements in related liabilities and other non-financial assets.
(ii) In respect of general insurance and health outstanding claims provisions and IBNR
Incurred in current year 179 433 Incurred in prior years1 15 109
Carrying amount at 31 December 257 250 1 For 2016 includes £107 million of ceded premiums relating to an outwards reinsurance contract completed by the UK General Insurance business.
Strategic report Governance IFRS financial statements Other information 44 – Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2016 to 2017, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes.
This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.
The impact of interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where a decrease in the valuation interest rate, in response to narrowing of credit spreads is partially offset by increasing risk-free rates, has increased liabilities. Within the UK there were also two modelling changes which resulted in a reduction in reserves: an alignment of approach in calculating the valuation interest rate across the Life portfolios of £153 million and a refinement to the approach in calculating the valuation interest rate for certain deferred annuity business of £136 million. Outside of the UK, there was a one-off impact in France 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 of £138 million. The overall impact on profit also depends on movements in the value of assets backing the liabilities, which is not included in this disclosure. The impact of expenses on long-term business has resulted in an increase in reserves, following a review of recent experience. In the UK
this includes a strengthening of maintenance expense reserves from harmonising the UK expense basis following the Friends Life Part VII transfer in 2017 of £89 million (2016: £nil); recognition of future project expense reserves of £125 million (2016: £nil); partly offset by a release due to updating the charging structure in place with Aviva Investors following the Friends Life integration of £70million (2016: £42 million) (and other less significant adverse movements of £13 million in 2016). Across Europe and Asia, expense reserves have reduced by £16 million
Strategic report Governance IFRS financial statements Other information 45 – 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 not defined. This note shows the movements in the UDS during the year.
Current tax assets recoverable and liabilities payable in more than one year are £19 million and £14 million (2016: £29 million and £7 million), respectively.
Long-term business technical provisions and other insurance items 1,582 1,852 Deferred acquisition costs (199) (195) Unrealised gains on investments (2,899) (3,157) Pensions and other post-retirement obligations (502) (456) Unused losses and tax credits 166 203 Subsidiaries, associates and joint ventures (16) (20) Intangibles and additional value of in-force long-term business (721) (795) Provisions and other temporary differences 173 337
1 The movement during 2016 relates mainly to the acquisition of RBC General Insurance Company.
In addition, the Group has unrecognised gross capital losses of £443 million (2016: £503 million). These have no expiry date. There are no temporary differences in respect of unremitted overseas retained earnings for which deferred tax liabilities have not been recognised at 31 December 2017 (2016: £nil).
Total IAS 19 obligations to staff pension schemes 828 899 Restructuring provisions 92 111 Other provisions 515 501
Other provisions primarily include amounts set aside throughout the Group for costs of compensation, litigation and staff entitlements.
Additional provisions 31 161 192 60 143 203 Unused amounts reversed (1) (37) (38) (2) (126) (128) Change in the discounted amount arising from passage of time 2 — 2 2 — 2
Charge/(release) to income statement 32 124 156 60 17 77 Utilised during the year (53) (98) (151) (118) (63) (181) Acquisition/(disposal) of subsidiaries — (3) (3) — — — Foreign exchange rate movements 2 (9) (7) 3 29 32
Net IAS 19 surpluses/(deficits) in the schemes 2,920 (189) (96) 2,635 2,672 (238) (87) 2,347
A full actuarial valuation of each of the defined benefit schemes is carried out at least every three years for the benefit of scheme trustees and members. Actuarial reports have been submitted for each scheme within this period, using appropriate methods for the respective countries on local funding bases. The number of scheme members was as follows: United Kingdom Ireland Canada
Future accruals for the Irish and Canadian defined benefit schemes ceased with effect from 30 April 2013 and 31 December 2011 respectively. The Irish scheme is regulated by the Pensions Authority in Ireland. The main Canadian plan is a Registered Pension Plan in Canada and as such is registered with the Canada Revenue Agency and Financial Services Commission of Ontario and is required to comply with the Income Tax of Canada and the various provincial Pension Acts within Canada.
Movements in the pension schemes’ surpluses and deficits comprise: Fair Value of
Total pension cost charged to net operating expenses — (19) (19) Net interest credited/(charged) to investment income /(finance costs)2 470 (407) 63
Employer contributions 259 — 259 Plan participant contributions 9 (9) — Benefits paid (2,021) 2,021 — Administrative expenses paid from scheme assets1 (21) 18 (3) Foreign exchange rate movements 18 (25) (7)
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 7).
Total pension cost charged to net operating expenses — (14) (14) Net interest credited/(charged) to investment income /(finance costs)2 590 (517) 73
Strategic report Governance IFRS financial statements Other information 48 – Pension obligations continued (ii) Scheme assets
Scheme assets are stated at their fair values at 31 December 2017. Total scheme assets are comprised by scheme as follows: UK
Total IAS 19 fair value of scheme assets 17,744 658 276 18,678 18,803 610 281 19,694 1 Cash and other assets comprise cash at bank, insurance policies, receivables, payables and repos. At 31 December 2017, cash and other assets primarily consist of repos of £5,386 million (2016: £4,666 million).
Total scheme assets are analysed by those that have a quoted market price in an active market and other as follows: Total Quoted £m
Bonds Fixed interest 4,334 3,162 7,496 3,697 3,788 7,485 Index-linked 11,627 409 12,036 11,141 485 11,626
Total IAS 19 fair value of scheme assets 14,366 4,312 18,678 15,882 3,812 19,694 1 Cash and other assets comprise cash at bank, insurance policies, receivables, payables and repos. At 31 December 2017, cash and other assets primarily consist of repos of £5,386 million (2016: £4,666 million).
2 As at 31 December 2017, the FPPS’s cash and other balances includes an insurance policy of £630 million (2016: £633 million) issued by a Group company that is not transferable under IAS 19 and is consequently eliminated from the Group’s IAS 19 scheme assets.
IAS 19 plan assets include investments in Group-managed funds in the consolidated statement of financial position of £2,091 million (2016: £1,428 million) and transferable insurance policies with other Group companies of £172 million (2016: £174 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.
Strategic report Governance IFRS financial statements Other information 48 – Pension obligations continued
2 In the UK, the only remaining linkage between pension benefits and general salary increases is in respect of a small amount of Guaranteed Minimum Pension benefits, in line with National Average Earnings.
UK– ASPS Club Vita pooled experience, including an allowance for future improvements 60 88.9 91.1 90.3 92.5 (28.9) (31.1) (30.3) (32.5) – RAC SAPS, including allowances for future improvement 65 87.6 89.4 89.3 91.0 (22.6) (24.4) (24.3) (26.0) – FPPS SAPS, including allowances for future improvement 60 89.1 91.0 89.9 91.9 (29.1) (31.0) (29.9) (31.9)
Canada Canadian Pensioners’ Mortality 2014 Private Table, including allowance for future improvements
Impact on present value of defined benefit obligation at 31 December 2017 (2,680) 3,576 2,526 (1,929) 565 Impact on present value of defined benefit obligation at 31 December 2016 (3,225) 4,362 3,344 (2,601) 606 1 The effect of assuming all members in the schemes were one year younger.
As noted above, the long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long-term, and to maximise returns consistent with an acceptable level of risk so as to control the longterm costs of these schemes. To meet these objectives, the schemes’ assets are invested in a portfolio, consisting primarily of debt securities as detailed in section (b)(ii). The investment strategy will continue to evolve over time and is expected to match the liability profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched to interest rate risk relative to the funding bases.
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 Aviva Staff Pension Scheme entering into a longevity swap in 2014 covering approximately £5 billion of pensioner in payment scheme liabilities.
Formal actuarial valuations normally take place every three years and where there is a deficit, the Group and the trustees would agree a deficit recovery plan. The assumptions adopted for triennial actuarial valuations are determined by the trustees and agreed with the Group and are normally more prudent than the assumptions adopted for IAS19 purposes, which are best estimate.
For ASPS, following the latest formal actuarial valuation (with an effective date of 31 March 2015) a deficit recovery plan was agreed, to make good the deficit over a period of time, consistent with the requirements of the UK pension regulations. As at 31 December 2017, the
ASPS was fully funded. Total employer contributions for all schemes in 2018 are currently expected to be £0.2 billion.
The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their attitude to risk and their retirement plans. Members of this section contribute at least 2% of their pensionable salaries, and depending on the percentage chosen, the Group contributes up to a maximum 14%, together with the cost of the death-in-service benefits. These contribution rates remained unchanged until June 2017. From 1 July 2017, for every 1% additional employee contribution, the Group will contribute an additional 0.1% employer contribution. The amount recognised as an expense for defined contribution schemes is shown section (d) below.
Continuing operations UK defined benefit schemes 22 16 Overseas defined benefit schemes 1 1
Total defined benefit schemes (note 10b) 23 17 UK defined contribution schemes 121 117 Overseas defined contribution schemes 25 21
Total borrowings comprise: Core structural borrowings, at amortised cost 8,640 8,577 Operational borrowings, at amortised cost 466 608 Operational borrowings, at fair value 1,180 1,110 1,646 1,718
(b) Core structural borrowings (i) The carrying amounts of these borrowings are: Subordinated debt 6.125% £700 million subordinated notes 2036 694 694 6.125% £800 million undated subordinated notes 796 795 6.875% £600 million subordinated notes 2058 594 594 6.875% €500 million subordinated notes 2038 444 427 12.000% £162 million subordinated notes 2021 202 213 8.250% £500 million subordinated notes 2022 581 598 6.625% £450 million subordinated notes 2041 448 448 7.875% $575 million undated subordinated notes 437 494 6.125% €650 million subordinated notes 2043 575 552 3.875% €700 million subordinated notes 2044 618 593 5.125% £400 million subordinated notes 2050 394 394 3.375% €900 million subordinated notes 2045 789 758 4.500% C$450 million subordinated notes 2021 264 269 4.375% £400 million subordinated notes 2049 394 393
Strategic report Governance IFRS financial statements Other information 49 – Borrowings continued (c) Operational borrowings (i) The carrying amounts of these borrowings are: Amounts owed to financial institutions Loans 466 608
All the above borrowings are stated at amortised cost, except for the loan notes issued in connection with the UK lifetime mortgage business of £1,180 million (2016: £1,110 million). These loan notes are carried at fair value, their values are modelled on risk-adjusted cash flows for defaults discounted at a risk-free rate plus a market-determined liquidity premium, and are therefore classified as ‘Level 3’ in the fair value hierarchy. These have been designated at fair value through profit and loss in order to present the relevant mortgages, borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch.
Total contractual undiscounted cash flows 1,802 716 2,518 2,183 816 2,999
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% €500 million 20 May 2008 22 May 2038 22 May 2018 3 month Euribor + 3.35% £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% $575 million 8 November 2012 Undated 8 November 2018 6 year USD mid-swaps + 6.828% €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%
All senior notes are at fixed rates and their total fair value at 31 December 2017 was £756 million (2016: £720 million).
Fund and they have no recourse whatsoever to the policyholder or shareholders’ funds of any companies in the Group. Loans of £61 million (2016: £66 million) included in the table relate to those Property Funds which have been consolidated as subsidiaries.
(c) Other non-recourse loans primarily include external debt raised by special purpose vehicles in the UK long-term business. The lenders have no recourse whatsoever to the shareholders’ funds of any companies in the Group.
(d) Other loans include external debt raised by overseas long-term businesses to fund operations.
Loan notes have been issued by special purpose securitisation companies in the UK. Details are given in note 24.
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.
The Group has the following undrawn committed central borrowing facilities available to them, which are used to support the commercial paper programme: £m
Expiring within one year — — Expiring beyond one year 1,650 1,650
Payables arising out of direct insurance 1,276 1,201 Payables arising out of reinsurance operations 304 263 Deposits and advances received from reinsurers 129 150 Bank overdrafts (see below) 499 558 Derivative liabilities (note 57) 5,766 6,795 Amounts due to brokers for investment purchases 112 64 Obligations for repayment of cash collateral received 6,817 7,433 Other financial liabilities 1,598 1,296
Bank overdrafts amount to £115 million (2016: £69 million) in life business operations and £384 million (2016: £489 million) in general insurance business and other operations.
Deferred income 133 131 Reinsurers’ share of deferred acquisition costs 17 14 Accruals 1,236 1,144 Other liabilities 1,440 1,431
Expected to be settled within one year 2,276 2,015 Expected to be settled in more than one year 550 705 52 – Contingent liabilities and other risk factors This note sets out the main areas of uncertainty over the calculation of our liabilities.
Note 40 gives details of the estimation techniques used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities.
Strategic report Governance IFRS financial statements Other information 52 – Contingent liabilities and other risk factors continued (c) Guarantees on long-term savings products
As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate guarantees, in respect of certain long-term insurance and investment products. Note 42 gives details of these guarantees and options. In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, property values and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. The directors continue to believe that the existing provisions for such guarantees and options are sufficient.
The Group’s insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the
PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group’s regulators outside the UK
The impact of any such finding (whether in the UK or overseas) could have a negative impact on the Group’s reported results or on its relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on the business of the Group, its results, operations and/or financial condition and divert management’s attention from the day-to-day management of the business.
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. In addition, in line with standard business practice, various Group companies have given guarantees, indemnities and warranties in connection with disposals in recent years of subsidiaries and associates to parties outside the Aviva Group. In the opinion of the directors, no material unprovisioned loss will arise in respect of these guarantees, indemnities and warranties.
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases 44 44
Strategic report Governance IFRS financial statements Other information 54 – Group capital management (a) Introduction
Capital is a primary consideration across a wide range of business activities, including product development, pricing, business planning, merger and acquisition transactions and asset & liability management. A Capital Management Standard, applicable group-wide, sets out minimum standards and guidelines over responsibility for capital management including considerations for capital management decisions and requirements for management information, capital monitoring, reporting, forecasting, planning and overall governance.
Refer to note 56 for more information about the Group’s risk management approach; • Retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines; • Allocate capital rigorously to support value adding growth and repatriate excess capital where appropriate; and
Equity shareholders' funds 16,969 16,803 Non-controlling interests 1,235 1,425 Direct capital instrument & tier 1 notes 731 1,123 Preference shares 200 200 Subordinated debt1 7,221 7,213 Senior debt 1,419 1,364
To support value adding growth by efficient capital allocation, the Group continued to reallocate capital from businesses where the capital returns were low; for example the Group withdrew capital from France and Spain (see note 3(b)(i) and (iii)).
Changes in working capital (Increase)/decrease in reinsurance assets 12,707 (4,736) (Increase)/decrease in deferred acquisition costs (389) (96) Increase/(decrease) in insurance liabilities and investment contracts 13,658 22,434 Decrease/(increase) in other assets 2,174 3,643 28,150 21,245 Net sales/(purchases) of operating assets Net (purchases) of investment property (672) (722) Net proceeds on sale of investment property 1,065 1,460 Net (purchases)/sales of financial investments (10,137) 708 (9,744) 1,446
Cash consideration for subsidiaries, joint ventures and associates acquired and additions 32 458 Less: Cash and cash equivalents acquired with subsidiaries (57) (26)
Strategic report Governance IFRS financial statements Other information 55 – Statement of cash flows continued (c) Cash flows in respect of the disposal of subsidiaries, joint ventures and associates comprised: Cash proceeds from disposal of subsidiaries, joint ventures and associates 861 94 Less: Net cash and cash equivalents divested with subsidiaries (910) (52)
Cash at bank and in hand 6,293 5,049 Cash equivalents 37,793 33,914
Cash and cash equivalents reconciles to the statement of financial position as follows: Cash and cash equivalents (excluding bank overdrafts) 44,086 38,963 Less: Assets classified as held for sale (739) (255)
56 – Risk management This note sets out the major risks our businesses and our shareholders face and describes the Group’s approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in the Group’s earnings and capital position.
The risk management framework in Aviva forms an integral part of the management and Board processes and decision-making framework across the Group. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report risks, including the use of our risk models and stress and scenario testing. 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.
To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. The business chief executive officers make an annual declaration supported by an opinion from the business chief risk officers that the system of governance and internal controls was effective and fit for purpose for their business throughout the year.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued Risk appetites, requiring management action if breached, are also set for interest rate and foreign exchange risk (calculated on the basis of the Solvency II solvency capital requirement), and liquidity risk (based on stressing forecast central liquid assets and cash inflows and outflows over a specified time horizon). For other risk types the Group sets Solvency II capital tolerances. The Group’s position against risk appetite and capital tolerances is monitored and reported to the Board on a regular basis. Long-term sustainability depends upon the protection of franchise value and good customer relationships. As such, Aviva has a risk preference that we will not accept risks that materially impair the reputation of the Group and requires that customers are always treated with integrity. The oversight of risk and risk management at the Group level is supported by the Asset Liability Committee, which focuses on business and financial risks, and the Operational Risk Committee which focuses on operational and reputational risks. Similar committee structures with equivalent terms of reference exist in the business units. 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.
The Group loan portfolio principally comprises: • Policy loans which are generally collateralised by a lien or charge over the underlying policy; • Loans and advances to banks which primarily relate to loans of cash collateral received in stock lending transactions. These loans are fully collateralised by other securities; • Healthcare, infrastructure and PFI loans secured against healthcare, education, social housing and emergency services related premises; and
The Group is exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The Group operates a policy to manage its reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall risk is within appetite. The Group Capital and Group Risk teams have an active monitoring role with escalation to the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Group ALCO and the Board Risk Committee as appropriate.
The Group’s largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) as a result of the BlackRock funds offered to UK Life customers via unit-linked contracts. At 31 December 2017, the reinsurance asset recoverable, including debtor balances, from
The Group is exposed to counterparty credit risk through derivative trades. This risk is generally mitigated through holding collateral for most trades. Residual exposures are captured within the Group’s credit management framework.
In assessing whether financial assets carried at amortised cost or classified as available for sale are impaired, due consideration is given to the factors outlined in accounting policies (T) and (V). The following table provides information regarding the carrying value of financial assets subject to impairment testing that have been impaired and the ageing of those assets that are past due but not impaired. The table excludes assets carried at fair value through profit or loss and held for sale.
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 2017 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.
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.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued (iii) Interest rate risk
Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group’s interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options are given in note 42.
Profit before tax on General Insurance and Health Insurance business is generally a mixture of insurance, expense and investment returns. The asset portfolio is invested primarily in fixed income securities and the reduction in interest rates in recent years has reduced the investment component of profit. The portfolio investment yield and average total invested assets in our general insurance and health business are set out in the table below.
Inflation risk arises primarily from the Group’s exposure to general insurance claims inflation, to inflation linked benefits within the defined benefit staff pension schemes and within the UK annuity portfolio and to expense inflation. Increases in long-term inflation expectations are closely linked to long-term interest rates and so are frequently considered with interest rate risk. Exposure to inflation risk is monitored through capital modelling, sensitivity testing and stress and scenario testing. The Group typically manages inflation risk through its investment strategy and, in particular, by investing in inflation linked securities and through a variety of derivative instruments, including inflation linked swaps.
The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 59% of the Group’s premium income arises in currencies other than sterling and the Group’s net assets are denominated in a variety of currencies, of which the largest are sterling, euro and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group’s business and meet local regulatory and market requirements. However, the Group does use foreign currency forward contracts to hedge planned dividends from its subsidiaries.
Net assets at 31 December 2017 (44) 44 (31) 31 Net assets at 31 December 2016 (92) 92 (63) 20
The balance sheet changes arise from retranslation of business unit statements of financial position from their functional currencies into sterling, with above movements being taken through the currency translation reserve. These balance sheet movements in exchange rates therefore have no impact on profit. Net asset and profit before tax figures are stated after taking account of the effect of currency hedging activities.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued (vii) Correlation 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. 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.
The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets held to meet them. A maturity analysis of the contractual amounts payable for borrowings and derivatives is given in notes 49 and 57, respectively. Contractual obligations under operating leases and capital commitments are given in note 53.
Long-term business Insurance contracts – non-linked 116,400 9,757 31,423 44,791 30,429 Investment contracts – non-linked 73,112 5,358 17,050 27,568 23,136 Linked business 153,901 17,374 27,234 51,454 57,839 General insurance and health 16,488 6,761 6,594 2,448 685 1 Following a review of the Group’s analysis of maturity of insurance and investment contract liabilities, comparative amounts have been amended from those previously reported. This has resulted in a reclassification of £2,363 million from liabilities held in connection with linked business to investment contracts – linked business and an increase in the proportion of linked business contract liabilities with a maturity date which in excess of 15 years.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued (ii) Analysis of maturity of financial assets
1 Following a review of the Group’s investment classifications, comparative amounts in respect of unit trusts and other investment vehicles and equity and debt securities have been amended from those previously reported. Refer to note 26 for further details of this adjustment and the financial statement impact arising.
The assets above are analysed in accordance with the earliest possible redemption date of the instrument at the initiation of the Group.
Where an instrument is transferable back to the issuer on demand, such as most unit trusts or similar types of investment vehicle, it is included in the ‘On demand or within 1 year’ column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date of issuance. Most of the Group’s investments in equity securities and fixed maturity securities are market traded and therefore, if required, can be liquidated for cash at short notice.
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 policy holder 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.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued Embedded derivatives
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 40 ‘insurance liabilities’. The vast majority of the Group’s general insurance business is managed and priced in the same country as the domicile of the customer.
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. Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits.
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued A client relationship team is in place to manage client retention risk, while all new asset management products undergo a review and approval process at each stage of the product development process, including approvals from legal, compliance and risk functions.
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 groupwide 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.
The nature of long-term business is such that a number of assumptions are made in compiling these financial statements. Assumptions are made about investment returns, expenses, mortality rates and persistency in connection with the in-force policies for each business unit. Assumptions are best estimates based on historic and expected experience of the business. A number of the key assumptions for the
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued Long-term business Sensitivities as at 31 December 2017 31 December 2017 Impact on profit before tax £m Interest rates
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) — — —
Insurance Participating (50) 30 (10) (130) 65 (30) (5) (15) Insurance non-participating (190) 20 (775) (35) 10 (190) (90) (920) Investment participating (10) 5 (5) — — (5) — — Investment non-participating 10 (15) — 50 (70) (65) — — Assets backing life shareholders' funds (155) 230 5 (85) 85 — — —
Sensitivities as at 31 December 2016 31 December 2016 Impact on profit before tax £m Interest rates
31 December 2016 Impact on shareholders' equity before tax £m Interest rates
Strategic report Governance IFRS financial statements Other information 56 – Risk management continued For general insurance and health, the impact of the expense sensitivity on profit also includes the increase in ongoing administration expenses, in addition to the increase in the claims handling expense provision.
Equity/ property 31 December 2017 Impact on shareholders' equity before tax £m Interest rates
The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. 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.
The Group uses a variety of derivative financial instruments, including both exchange traded and over-the-counter instruments, in line with our overall risk management strategy. The objectives include managing exposure to market, foreign currency and/or interest rate risk on existing assets or liabilities, as well as planned or anticipated investment purchases. In the narrative and tables below, figures are given for both the notional amounts and fair values of these instruments. The notional amounts reflect the aggregate of individual derivative positions on a gross basis and so give an indication of the overall scale of the derivative transaction. They do not reflect current market values of the open positions. The fair values represent the gross carrying values at the year end for each class of derivative contract held (or issued) by the Group. 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 58 for further information on collateral and net credit risk of derivative instruments.
The Group has formally assessed and documented the hedge effectiveness in accordance with IAS 39, Financial Instruments: Recognition and Measurement.
To reduce its exposure to foreign currency risk, the Group has designated a portion of its euro denominated debt as hedge instruments to hedge a net investment in its European subsidiaries. In 2016 additional euro denominated loans were designated as hedging instruments.
Foreign exchange losses of £98 million (2016: loss of £34 million) on translation of the debt to sterling at the statement of financial position date in respect of the effective portion have been recognised in the hedging instruments reserve in shareholders’ equity. A loss of £13 million has been recognised in the income statement due to the termination of a net investment hedge. This hedge was fully effective throughout the prior year.
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.
(i) The Group’s non-hedge derivatives at 31 December 2017 and 2016 were as follows: Contract/ notional amount £m
The Group’s derivative risk management policies are outlined in note 56.
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 27 and 50 respectively. Collateral received and pledged by the
Strategic report Governance IFRS financial statements Other information 58 – Financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar arrangements (a) Offsetting arrangements
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. Derivative transactions requiring Aviva or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit default swaps. These transactions are conducted under terms that are usual and customary to standard long-term borrowing, derivative, securities lending and securities borrowing activities. The derivative assets and liabilities in the table below are made up of the contracts described in detail in note 57. Aviva participates in a number of stock lending and repurchase arrangements. In some of these arrangements cash is exchanged by
Financial liabilities Derivative financial liabilities (4,790) — (4,790) 3,233 17 1,120 (420) Other financial liabilities (2,961) — (2,961) — — 2,961 —
Derivative assets are recognised as ‘Derivative financial instruments’ in note 26(a), while fair value liabilities are recognised as ‘Derivative liabilities’ in note 50. £902 million (2016: £752 million) of derivative assets and £976 million (2016: £860 million) of derivative liabilities are not subject to master netting agreements and are therefore excluded from the table above. Amounts receivable related to securities lending and reverse-repurchase arrangements totalling £2,524 million (2016: £2,579 million) are recognised within ‘Loans to banks’ in note 23. Other financial liabilities presented above represent liabilities related to repurchase arrangements recognised within ‘Obligations for repayment of cash collateral received’ in note 50.
Strategic report Governance IFRS financial statements Other information 58 – Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements continued
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 23, was £22,978 million (2016: £22,559 million), all of which other than £4,780 million (2016: £5,764 million) is related to securities lending arrangements. Collateral of £2,697 million (2016: £2,764 million) has been received related to balances recognised within ‘Loans to banks’ (refer to note 23). The value of collateral that was actually sold or repledged in the absence of default was £nil (2016: £nil). The level of collateral held is monitored regularly, with further collateral obtained where this is considered necessary to manage the
Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 18(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. Key management personnel of the Company may from time to time purchase insurance, savings, asset management or annuity products marketed by group companies on equivalent terms to those available to all employees of the Group. In 2017, other transactions with key management personnel were not deemed to be significant either by size or in the context of their individual financial positions.
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 48(b)(ii). As at 31 December 2017, the Friends Provident Pension Scheme (‘FPPS’), acquired in 2015 as part of the acquisition of the Friends Life business, held an insurance policy of £630 million (2016: £633 million) issued by a group company, which eliminates on consolidation. The related parties’ receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms.
Salary and other short-term benefits 12.5 14.6 Other long-term benefits 5.4 5.3 Post-employment benefits 1.5 1.5 Equity compensation plans 16.4 9.3 Termination benefits 0.4 —
The principal subsidiaries of the Company at 31 December 2017 are listed below by country of incorporation.
A complete list of the Group’s related undertakings comprising of subsidiaries, joint ventures, associates and other significant holdings is contained within note 61.
Aviva Life & Pensions UK Limited Aviva Life Services UK Limited
The Ocean Marine Insurance Company Limited Aviva Management Services UK Limited
Aviva Canada Inc. and its principal subsidiaries: Aviva Insurance Company of Canada Aviva General Insurance Company
Aviva Epargne Retraite (99.9%) Union Financière de France Banque (Banking) (74.3%)
Aviva Life Insurance Company Limited 1 Refer to Note 3(c)for further details in respect of operations classified as held for sale
Aviva Italia Holding S.p.A and its principal subsidiaries: Avipop Assicurazioni S.p.A (50%) 1
BZ WBK – Aviva Towarzystwo Ubezpieczen Ogolnych S.A. (51%) BZ WBK-Aviva Towarzystwo Ubezpieczeń na Życie Spółka Akcyjna
The Group has ongoing interests in the following operations that are classified as joint ventures or associates. Further details of those operations that were most significant in 2017 are set out in notes 18 and 19 to the financial statements.
The Group has interests in several property limited partnerships. Further details are provided in notes 18, 19 and 25 to the financial statements.
Strategic report Governance IFRS financial statements Other information 61 – Related Undertakings The Companies Act 2006 requires disclosure of certain information about the Group’s related undertakings which is set out in this note. Related undertakings comprise subsidiaries, joint ventures, associates and other significant holdings. Significant holdings are where the
Group either has a shareholding greater than or equal to 20% of the nominal value of any share class, or a book value greater than 20% of the Group’s assets.
financial statements. Refer to accounting policies (D) Consolidation principles for further detail on principles of consolidation and definition of joint ventures.
The Group’s related undertakings along with the country of incorporation, the registered address, the classes of shares held and the effective percentage of equity owned at 31 December 2017 are disclosed below.
China 12/F,Block A,Landgent Centre, 20 East Third Ring Middle Road, Beijing, 100022
LMS Prolink Limited2 Common A Shares 34 555 Chabanel Ouest, Bureau 900,
SachsenFonds Asset Management Czech s.r.o. Ordinary Shares 98 5/482, Ve Svahu, Prague 4, 14700
Afer Actions Pme-Cl (Bpaapci) FCP 100 102 C Rue Amelot, 75011, Paris
SCPI Pierrevenus Ordinary Shares 75 13 Rue du Moulin Bailly, 92270, Bois
OPCI Preim Retail 1 OPCI 23 20 Place Vendôme, 75001, Paris
Sapphire Ile de France SCI Ordinary Euro 1 Each Shares 100
Aviva Valeurs Responsable A FCP 100 32, avenue d’Iéna, 75116 Paris
Union Financière de France Banque Ordinary Shares 74 36 Rue De Naples 75008 Paris
Vauban Developpement SARL Ordinary Shares 100 7 Rue Auber, 75009, Paris
Aviva Couv Actions C. FCP 100 91-93 Boulevard Pasteur, 75015, Paris
Tour Majunga – La Défense 9, 6 place de la Pyramide
JPMorgan Indonesia Fund SICAV 30 6th Floor, Alexandra House, 18 Chater
Aviva Undershaft Three Se Ordinary Shares 100 25/28 North Wall Quay, Dublin
W Nine UT2 Unit Trust 50 3rd Floor Walker House, 28-34 Hill Street,
1 Fitzroy Place Jersey Unit Trust2 Unit Trust 50 2 Fitzroy Place Jersey Unit Trust2 Unit Trust 50
Centaurus Sarl Ordinary Shares 100 12 rue du Fort Bourbon, L-1249
Victor Hugo Ordinary Shares 100 14 rue du Fort Bourbon, L-1249
Infrastructure Credit Fund Ordinary Shares 100 16 Avenue de la Gare, 1610
Patriarch Classic B&W Global Freestyle FCP 27 2 Boulevard de la Foire, L-1528
Pramerica Pan-European Real Estate Fund Ordinary Shares 62 2 Rue de Bitbourg, L-1273
Encore Plus Lux Co Ile de la Jatte II S.à.r.l. Ordinary Shares 5
Encore Plus Lux Co Metzanine II S.à r.l. Ordinary Shares 5
AXA IM Cash Sterling Strategic Fund FCP 21 db x-trackers II Eurozone Government Bond 15+ UCITS ETF (DR) SICAV 35
Pioneer Fund Solutions Conservative SICAV 25 9 rue du Fort Bourbon, L-1249
Deutsche European Property Fund Ordinary Shares 28 c/o CACEIS BANK Lux, 5, Allée Scheffer, L-
Aviva Investors Asia Pte. Limited Ordinary Shares 100 12 Marina View, #18-02 Asia Square
Navigator Investment Services Limited Ordinary Shares 100 6 Shenton Way, #09-08, OUE Downtown,
Pte Ltd Ordinary A Shares 92 6 Temasek Boulevard, #29-00, Suntec
Encore Plus Vaguada SL Ordinary Shares 5 9 Camino Fuente de la Mora, Madrid
Synergy Financial Products Limited Ordinary Shares 57 201 Bishopsgate, London, EC2M 3AE
Ballard Investment Company Limited Ordinary Shares 25 43-45 Portman Square, London, W1H 6LY
Limited2 Ordinary Shares 50 4th Floor, New London House, 6 London
Polaris U.K. Limited Ordinary Shares 39 5 Lister Hill, Horsforth, Leeds, LS18 5AZ
Jacks Lane Energy Limited Ordinary Shares 100 c/o Anesco Limited, The Green Easter
1 Fitzroy Place Limited Partnership2 Limited Partnership 50 10-11 GNS Limited Ordinary Shares 100 11-12 Hanover Square LP2 Limited Partnership 50 11-12 Hanover Square Nominee 1 Limited2 Ordinary Shares 50 11-12 Hanover Square Nominee 2 Limited2 Ordinary Shares 50 130 Fenchurch Street LP2 Limited Partnership 50 130 Fenchurch Street Nominee 1 Limited2 Ordinary Shares 50 130 Fenchurch Street Nominee 2 Limited2 Ordinary Shares 50 1-5 Lowndes Square Management
Company Limited A Shares, B Shares 76 2 Fitzroy Place Limited Partnership2 Limited Partnership 50 20 Gracechurch (General Partner) Limited General Partner 100 20 Gracechurch Limited Partnership Limited Partnership 100 20 Lowndes Square Management Company
Limited A Shares, B Shares 77 2015 Sunbeam Limited Ordinary Shares 100 2-10 Mortimer Street (GP No 1) Limited2 Ordinary Shares 50 2-10 Mortimer Street GP Limited2 Ordinary Shares 50 2-10 Mortimer Street Limited Partnership2 Limited Partnership 50 30 Warwick Street LP2 Limited Partnership 50 30 Warwick Street Nominee 1 Limited2 Ordinary Shares 50 30 Warwick Street Nominee 2 Limited2 Ordinary Shares 50 30-31 Golden Square LP2 Limited Partnership 50 30-31 Golden Square Nominee 1 Limited2 Ordinary Shares 50 30-31 Golden Square Nominee 2 Limited2 Ordinary Shares 50 400 Caledonian Road Management
Company Limited A Shares, B Shares 78 43 Lowndes Square Management Company
Limited Non-Listed Shares 100 1 Investment Company with Variable Capital (‘ICVC’)
• joint ventures – refer to note 3c (iv) • joint ventures – refer to note 3d
Income Dividends received from subsidiaries I 1,740 2,510 Interest receivable from group companies I 116 56 Net investment income — 28
Expenses Operating expenses B (217) (603) Interest payable to group companies I (175) (182) Interest payable on borrowings (352) (345)
Statement of comprehensive income For the year ended 31 December 2017 £m
Other comprehensive income/(loss) Items that may be reclassified subsequently to income statement Fair value gains/(losses) on investments in subsidiaries and joint ventures E 707 (1,742)
Items that will not be reclassified to income statement Remeasurements of pension schemes E (2) (6)
Statement of changes in equity For the year ended 31 December 2017
Balance at 1 January 1,012 200 1,185 — 6,438 10,863 70 3,124 1,116 24,008 Profit for the year — — — — — — — 1,559 — 1,559 Other comprehensive loss — — — — — (1,742) — (6) — (1,748) Total comprehensive loss for the year — — — — — (1,742) — 1,553 — (189) Dividends and appropriations 15 — — — — — — — (973) — (973) Reserves credit for equity compensation plans — — — — — — 38 — — 38 Shares issued under equity compensation plans 3 — 12 — — — (30) 26 — 11 Shares purchased in buy-back 30 — — — — — — — — — — Redemption of fixed rate tier 1 notes E — — — — — — — — — — Aggregate tax effect C — — — — — — — 17 — 17
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 93 to 105. The notes identified alphabetically on pages 233 to 238 are an integral part of these separate financial statements. Where the same items appear in the Group financial statements, reference is made to the notes (identified numerically) on pages 113 to 228.
Ordinary share capital 30 1,003 1,015 Preference share capital 33 200 200 Called up capital 1,203 1,215 Share premium 30b 1,207 1,197 Capital redemption reserve 30b 14 — Merger reserve E 6,438 6,438 Investment valuation reserve E 9,828 9,121 Equity compensation reserve E 111 78 Retained earnings E 3,555 3,747 Direct capital instrument and tier 1 notes D, 34 724 1,116
Movements in the Company’s investments in its subsidiaries are as follows: £m
At 31 December 2017, the Company’s investment in the joint venture, Aviva-COFCO Life Insurance Co. Limited has a fair value of £547 million (2016: £511 million). This is classified as Level 3 in the fair value hierarchy. The definition of the fair value hierarchy is included in note 22 to the Group consolidated financial statements.
Unrecognised tax losses and temporary differences of previous years were used to reduce the deferred tax expense by £nil (2016: £nil)
Tax credited directly to equity in the year, in respect of coupon payments on the direct capital instrument and fixed rate tier 1 notes, amounted to £16 million (2016: £17 million).
Current tax assets recoverable in more than one year are £255 million (2016: £135 million).
Balance at 1 January 2016 6,438 10,863 70 3,124 Arising in the year: Profit for the year — — — 1,559 Fair value losses on investments in subsidiaries and joint venture — (1,742) — — Remeasurements of pension schemes — — — (6) Dividends and appropriations — — — (973) Reserves credit for equity compensation plans — — 38 — Issue of share capital under equity compensation scheme — — (30) 26 Aggregate tax effect — — — 17
Within 1 year 978 333 1,311 642 328 970 1 – 5 years 266 1,311 1,577 570 1,305 1,875 5 – 10 years 444 1,591 2,035 427 1,572 1,999 10 – 15 years1 - 1,589 1,589 - 1,567 1,567 Over 15 years1 5,791 3,282 9,073 5,698 3,499 9,197
Where subordinated debt is undated, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £49 million (2016: £49 million). The fair value of the subordinated debt at 31 December 2017 was £7,046 million (2016: £6,385 million), calculated with reference to quoted prices. The fair value of the senior debt at 31 December 2017 was £756 million (2016: £720 million), calculated with reference to quoted prices. The fair value of the commercial paper is considered to be the same as its carrying value.
Further details of these borrowings and undrawn committed facilities can be found in the Group consolidated financial statements, note 49, with details of the fair value hierarchy in relation to these borrowings in note 22.
I – Related party transactions continued Loans owed by subsidiaries continued
Statement of Financial Position date, the total amount drawn down on the facility was £1,286 million (2016: £1,959 million). On 27 June 2016, the Company provided an unsecured loan of C$446 million to Aviva Group Holdings Limited, its subsidiary, with a maturity date of 27 June 2046. The loan accrues interest at 348 basis points above 6 month CDOR. As at the Statement of Financial Position date, the total amount drawn was £263 million (2016: £269 million).
Statement of Financial Position date, the total amount drawn was £444 million (2016: £427 million).
Within 1 year 3,108 122 3,230 156 143 299 1 – 5 years 9,900 390 10,290 13,098 336 13,434 Over 5 years — — — — — —
In this section Page Alternative Performance Measures 240 Shareholder services 246
Operating profit for the life insurance 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. • The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification.
• For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risks. Where such securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase.
• The expected return on equities and properties is calculated by reference to the opening 10-year swap rate in the relevant currency plus an appropriate risk margin.
Operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. This would include movements in liabilities due to changes in discount rate arising from management decisions that impact on product profitability over the lifetime of products. Changes due to economic items, such as market value movement 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 operating profit.
• Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. • The longer-term return for other investments is the actual income receivable for the period.
Changes due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed separately outside operating profit. The impact of changes in the discount rate applied to claims provisions is also disclosed outside operating profit. The exclusion of short-term investment variances from this APM