Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. When assessing control over investment vehicles, the Group considers the scope of its decision-making authority including its ability to direct the relevant activities of the fund and exposure to variability of returns from the perspective of an investor in the fund and of the asset manager. In addition, the Group assesses rights held by other parties including substantive removal rights that may affect the Group’s ability to direct the relevant activities and indicate that the Group does not have power. Where Group companies are deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position. Where the Group does not control such vehicles, and these investments are held by its insurance or investment funds, they are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position, in accordance with IAS 39 Financial Instruments: Recognition and Measurement. As part of their investment strategy, the UK and certain European and Asian long-term business policyholder funds have invested in a number of property limited partnerships (PLPs), either directly or via property unit trusts (PUTs), through a mix of capital and loans. The PLPs are managed by general partners (GPs), in which the long-term business shareholder companies
impact on the valuation of financial instruments, the difference between the fair value at initial recognition and the transaction price is not recognised immediately in the income statement, but deferred and recognised in the income statement on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out or otherwise matured. If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value.
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. Deposits collected under investment contracts without a discretionary participation feature (non-participating contracts) are not accounted for through the income statement, except for the fee income (covered in accounting policy I) and 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.
Accounting policies continued value during the year, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year. Realised gains or losses on investment property represent the difference between the net disposal proceeds and the carrying amount of the property.
General insurance and health provisions Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the statement of financial position date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the statement of financial position date. As such, booked claim provisions for general insurance and health insurance are based on the best estimate of the cost of future claim payments plus an explicit allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 41(c). Provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is described in note 41(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.
(N) Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies. Where general insurance liabilities are discounted, any corresponding reinsurance assets are also discounted using consistent assumptions. 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 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.
Intangible assets Intangibles consist primarily of contractual relationships such as access to distribution networks and customer lists. The economic lives of these are determined by considering relevant factors such as usage of the asset, typical product life cycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position and the period of control over the assets. These intangibles are amortised over their useful lives, which range from five to 30 years, using the straight-line method. The amortisation charge for the year is included in the income statement under ‘Other expenses’. For intangibles with finite lives, impairment charges will be recognised in the income statement where evidence of such impairment is observed. Intangibles with indefinite lives are subject to regular impairment testing, as described below.
AFS equity securities: An AFS equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair value relative to cost has been either at least 20% for a continuous six-month period or more than 40% at the end of the reporting period, or been in an unrealised loss position for a continuous period of more than 12 months at the end of the reporting period. We also review our largest equity holdings for evidence of impairment, as well as individual equity holdings in industry sectors known to be in difficulty. Where there is objective evidence that impairment exists, the security is written down regardless of the size of the unrealised loss. 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. 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. All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the statement of financial position at the date of purchase, representing their fair value at that date. Derivative contracts may be traded on an exchange or overthe -counter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, caps and floors. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. Many OTC transactions are contracted and documented under International Swaps and Derivatives Association (ISDA) master agreements or their equivalent, which are designed to provide legally enforceable set-off in the event of default, reducing the Group’s exposure to credit risk. 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 59(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.
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. The Group also documents its assessment of whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item, both at inception and on an ongoing basis. Changes in the fair value of derivatives that are designated and qualify as net investment or cash flow hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in other comprehensive income and a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate. 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. For a variety of reasons, certain derivative transactions, while providing effective economic hedges under the Group’s risk management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. Their fair value gains and losses are recognised immediately in net investment income.
therefore continues to be recognised in the statement of financial position within the appropriate asset classification.
(X) Deferred acquisition costs and other assets Costs relating to the acquisition of new business for insurance and participating investment contracts are deferred in line with existing local accounting practices, to the extent that they are expected to be recovered out of future margins in revenues on these contracts. For participating contracts written in the UK, acquisition costs are generally not deferred as the liability for these contracts is calculated in accordance with the PRA’s realistic capital regime and FRS 27. For non-participating investment and investment fund management contracts, incremental acquisition costs and sales enhancements that are directly attributable to securing an investment management service are also deferred. Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer, and is treated as a separate liability. Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these future margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General insurance and health deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset. Deferred acquisition costs are reviewed by category of business at the end of each reporting period and are written-off where they are no longer considered to be recoverable. Other receivables and payables are initially recognised at cost, being fair value. Subsequent to initial measurement they are measured at amortised cost.
(Y) Statement of cash flows Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other shortterm highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are those with less than three months’ maturity from the date of acquisition, or which are redeemable on demand with only an insignificant change in their fair values. For the purposes of the statement of cash flows, cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the statement of financial position.
Operating cash flows Purchases and sales of investment property, loans and financial investments are included within operating cash flows as the purchases are funded from cash flows associated with the origination of insurance and investment contracts, net of payments of related benefits and claims.
(Z) Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Where the Group is the lessee, payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the term of the relevant leases. 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.
Pension obligations The Group operates a number of pension schemes, whose members receive benefits on either a defined benefit or defined contribution basis. Under a defined contribution plan, the 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 high-quality 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. If the fair value of plan assets exceeds the present value of the defined benefit obligation, the resultant asset is limited to the asset ceiling defined as present value of economic benefits available in the form of future refunds from the plan or
Equity compensation plans The Group offers share award and option plans over the Company’s ordinary shares for certain employees, including a Save As You Earn plan (SAYE plan), details of which are given in the Directors’ Remuneration Report and in note 32. 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 cashsettled awards is recalculated each year, with the income statement charge and liability being adjusted accordingly. As described in accounting policy AE below, shares purchased by employee share trusts to fund these awards are shown as a deduction from shareholders’ funds at their original cost. When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited against the cost of these shares, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings.
(AC) Income taxes The current tax expense is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to components of other comprehensive income and equity, as appropriate. Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, technical provisions and other insurance items, provisions for pensions and other post-retirement benefits and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. The rates enacted or substantively enacted at the statement of financial position date are used to value the deferred tax assets and liabilities. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future profits will be available. Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. 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 postretirement obligations and other amounts charged or credited directly to other comprehensive income is recognised in the statement of financial position as a deferred tax asset or liability. Current tax on interest paid on direct capital instruments and fixed rate tier 1 notes is credited directly in equity. In addition to paying tax on shareholders’ profits, 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. Policyholder tax is accounted for as an income tax and is included in the total tax expense. The Group has decided to show separately the amounts of policyholder tax to provide a more meaningful measure of the tax the Group pays on its profits. In the pro forma reconciliations, operating profit has been calculated after charging policyholder tax.
(AD) Borrowings Borrowings are classified as being for either core structural or operational purposes. They are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, most borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. All borrowing costs are expensed as they are incurred except where they are directly attributable to the acquisition or construction of property and equipment as described in accounting policy P above. Where loan notes have been issued in connection with certain securitised mortgage loans, the Group has taken advantage of the revised fair value option under IAS 39 to present the mortgages, associated liabilities and derivative 128 | Aviva plc Annual report and accounts 2014
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 which would otherwise arise from using different measurement bases for these three items.
(AG) Earnings per share Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of ordinary shares purchased by the Group and held as Treasury shares. Earnings per share has also been calculated on the adjusted operating profit before impairment of goodwill and other adjusting items, after tax, attributable to ordinary shareholders, as the directors believe this figure provides a better indication of operating performance. Details are given in note 15. For the diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees. Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net earnings per share.
Consolidated income statement For the year ended 31 December 2014 £m
Net earned premiums H 20,057 20,623 1,489 Fee and commission income I & J 1,230 1,279 28 Net investment income K 21,889 12,509 2,340 Share of profit after tax of joint ventures and associates 147 120 — Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 4b 174 115 808
Continuing operations – Basic (pence per share) 48.4p 22.0p Continuing operations – Diluted (pence per share) 47.7p 21.8p 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note 4 for further details.
Fair value gains 62 19 Fair value (losses)/gains transferred to profit on disposals (7) 1
Total comprehensive income for the year from continuing operations 2,674 261 Total comprehensive income for the year from discontinued operations1
The accounting policies (identified alphabetically) on pages 117 to 129 and notes (identified numerically on pages 137 to 237 are an integral part of the financial statements.
Other: Corporate centre (132) (150) — Group debt costs and other interest (463) (502) (9)
Operating profit before tax attributable to shareholders' profits after integration and restructuring costs 2,033 1,686 287
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 9 72 (49) 452 Short-term fluctuation in return on investments on non-long-term business 10a 261 (336) — Economic assumption changes on general insurance and health business 10a (145) 33 — Impairment of goodwill, associates and joint ventures and other amounts expensed 17a, 20 (24) (77) — Amortisation and impairment of intangibles (90) (91) (9) Profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 4b 174 115 808
Profit before tax attributable to shareholders' profits 2,281 1,281 1,538 Tax on operating profit 15a(i) (561) (534) (83) Tax on other activities 15a(i) (40) 131 (182)
Profit for the year 1,738 2,151 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note 4 for further details.
Profit for the year — — — — — — 1,569 1,569 — 169 1,738
2 £57 million relates to the foreign exchange loss on redemption of €700 million direct capital instrument on 28 November 2014. See Note 35 for further detail.
Payables and other financial liabilities S & 51 12,012 11,945 12,051
Net cash (used in)/from operating activities – continuing operations (544) 2,099 Net cash from operating activities – discontinued operations1
Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 56b (79) (29) Disposals of subsidiaries, joint ventures and associates, net of cash transferred 56c 110 377 New loans to joint ventures and associates 19a(i) (73) (6) Repayment of loans to joint ventures and associates 19 & 20 33 25 Net new loans to joint ventures and associates (40) 19 Purchases of property and equipment 21 (116) (30) Proceeds on sale of property and equipment 21 19 56 Other cash flow related to intangible assets (122) (59)
Redemption of direct capital instrument (547) — Proceeds from issue of ordinary shares 8 — Treasury shares purchased for employee trusts — (32) New borrowings drawn down, net of expenses 2,383 2,201 Repayment of borrowings (2,442) (2,441) Net repayment of borrowings 50e (59) (240) Interest paid on borrowings (527) (605) Preference dividends paid 16 (17) (17) Ordinary dividends paid3 16 (447) (429) Coupon payments on direct capital instruments and fixed rate tier 1 notes 16 (88) (92) Capital contributions from non-controlling interests of subsidiaries 39 — 1 Dividends paid to non-controlling interests of subsidiaries 39 (189) (134) Changes in controlling interest in subsidiaries4 (89) —
Net cash used in financing activities – continuing operations (1,955) (1,548)
Total net (decrease)/increase in cash and cash equivalents (2,747) 1,235 Cash and cash equivalents at 1 January 25,989 24,564 Effect of exchange rate changes on cash and cash equivalents (678) 190
Cash and cash equivalents at 31 December 56d 22,564 25,989 1 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). See note 4 for further details. 2 The statement of cash flows has been restated following the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details. 3 Ordinary dividends paid amounted to £449 million. £2 million of unclaimed and waived dividends has been set off against this above. See Note 16 for further detail. 4 Changes in controlling interests in subsidiaries primarily relate to Italy where we increased our ownership interest in certain existing subsidiaries during 2014.
Notes to the consolidated financial statements 1 – Analysis of the impact of new standards and amendments to published standards that have been adopted by the Group Impact of amendments to accounting standards on the consolidated statement of financial position
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) £0.81 £0.85 Period end rate (€1 equals) £0.78 £0.83 Canada Average rate ($CAD1 equals) £0.55 £0.62 Period end rate ($CAD1 equals) £0.55 £0.57 Poland Average rate (PLN1 equals) £0.19 £0.20 Period end rate (PLN1 equals) £0.18 £0.20 United States Average rate ($US1 equals) £0.61 £0.64 Period end rate ($US1 equals) £0.64 £0.60 3 – Presentation of discontinued operations The sale of the Group’s US Life and annuity business and related internal investment management operations (“US Life”), as described in note 4(b)(viii), has been classified as discontinued operations together with the results of US Life for preceding years, as the Group exited from a major geographical area of operation. This is consistent with the presentation in the 2013 Annual Report and Accounts.
(i) Indonesia In the second half of 2013, management decided to restructure existing operations in Indonesia and establish a new joint venture. The Indonesian operations were classified as held for sale at 31 December 2013 as Aviva’s holding was to change from a 60% controlling interest, which was consolidated as a subsidiary, to a 50% joint venture accounted for using the equity method. On 17 January 2014, Aviva and PT Astra International Tbk (“Astra”) signed an agreement to form the 50-50 joint venture (Astra Aviva Life) which completed in May 2014. As of that date, Aviva and Astra began to share joint control and the Group’s holding in Astra Aviva Life was reclassified as a joint venture (refer to note 19). A net gain of £1 million was recognised during 2014. Recycling of currency translation and investment valuation reserves of £4 million on completion resulted in an overall net loss on disposal of £3 million.
4 – Subsidiaries continued (iii) Italy – long-term business – Eurovita In the first half of 2013, the Italian long-term business Eurovita Assicurazioni S.p.A (“Eurovita”) was classified as held for sale, as a result of management determining that the value of the business would be principally recovered through sale. Finoa Srl (“Finoa”), an Italian holding company in which Aviva owns a 50% share, owned a 77.55% share of Eurovita. Following classification as held for sale, Eurovita was re-measured at fair value based on expected sales proceeds less costs to sell of £39 million with a remeasurement loss of £178 million (Aviva share: £74 million loss) in 2013. On 30 June 2014 Finoa disposed of its entire interest in Eurovita for gross cash consideration of £36 million. The overall loss on the sale of Finoa’s 77.55% stake in Eurovita was £6 million analysed as: £m
Liabilities Insurance liabilities 103 Liability for investment contracts 2,687 Unallocated divisible surplus 123 External borrowings 28 Other liabilities 23
Cash consideration received 18 Less: transaction costs attributable to Aviva (4)
(iv) Aviva Investors – River Road On 28 March 2014 Aviva Investors announced its agreement to sell US equity manager River Road Asset Management, LLC (“River Road”) to Affiliated Managers Group, Inc. The sale was completed on 30 June 2014 for consideration of £75 million, after transaction costs. Assets disposed of were £40 million, comprised of £38 million of goodwill and intangibles and £2 million of other investments, resulting in a £35 million gain on disposal.
Assets Goodwill 56 Intangible assets 3 Financial investments 806 Receivables and other assets 5 Prepayments and accrued income 13 Cash and cash equivalents 23
Loss on sale (17) Reversal of 2013 impairment 9 Currency translation reserve recycled to the income statement (8)
Assets Goodwill — 4 Interests in, and loans to, joint ventures and associates — 29 Financial investments — 2,675 Reinsurance assets — 37 Deferred acquisition costs — 6 Other assets — 196 Cash and cash equivalents 9 351
Additional impairment to write down the disposal group to fair value less costs to sell — (185)
Liabilities Insurance liabilities (1) (238) Liability for investment contracts — (2,710) Unallocated divisible surplus — 4 Provisions — (3) Deferred tax liabilities — (1) External borrowings — (29) Other liabilities (1) (46)
Italy, Spain and Other These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8. This segment includes our operations in Italy (including Eurovita up until the date of disposal in June 2014) and Spain (including Aseval and CxG up until the dates of their disposals in April 2013 and December 2014 respectively). The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range of long-term insurance and savings products, and the general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. Our Other European operations include our life operations in Turkey (including our reduced joint venture share following IPO in November 2014) and our Turkish general insurance business (up until the date of disposal in December 2014). This segment also includes the results of our Russian and Romanian businesses until the date of their disposals in 2013.
Canada 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.
Discontinued operations In October 2013 the Group sold its US life operations (including the related internal asset management operations of Aviva Investors), which has been presented as a discontinued operation for the comparative periods in the income statement, statement of comprehensive income and statement of cash flows. As described in note 4(b)(viii) the settlement of the purchase price adjustment, in conjunction with the aggregate development of other provisions is presented as profit from discontinued operations in 2014.
5 – Segmental information continued (a) (i) Segmental income statement for the year ended 31 December 2014
Premiums written net of reinsurance 3,515 4,028 5,684 482 3,444 2,104 781 — 18 20,056 Net change in provision for unearned premiums 23 43 (27) 6 10 (54) (3) — 3 1
Profit/(loss) before tax attributable to shareholders' profits from continuing operations 980 406 462 196 489 253 38 83 (626) 2,281
Operating profit/(loss) before tax attributable to 1 Total reported income, excluding inter-segment revenue, includes £20,816 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written. 2 Aviva Investors operating profit includes £2 million profit relating to the Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 Discontinued operations represent the results of the US Life and related internal asset management business (US Life) until the date of disposal (2 October 2013). For further details, see note 4. 5 In 2014, the Group paid a settlement of £20 million related to the purchase price adjustment relating to the disposal of the US Life business in 2013. The settlement and the aggregate development of other provisions related to the discontinued operations in 2014 resulted in a net £58 million gain which has been presented as profit on disposal of discontinued operations.
Notes to the consolidated financial statements continued 5 – Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2013
(Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 87 — — (4) 13 — 19 — — 115 808 923
Claims and benefits paid, net of recoveries from reinsurers (8,960) (2,818) (4,858) (363) (3,222) (1,342) (489) — (41) (22,093) (2,037) (24,130)
Change in insurance liabilities, net of reinsurance 4,102 119 (1,618) (103) (2) (42) 92 — (55) 2,493 (312) 2,181
Change in investment contract provisions (4,829) — (1,725) 34 (386) — — (144) — (7,050) (31) (7,081)
Change in unallocated divisible surplus 199 — 426 16 (363) — 2 — — 280 — 280
Tax attributable to policyholders' returns (190) — — — — — (1) — — (191) — (191)
Investment return variances and economic assumption changes on long-term business 414 — (70) 1 (267) — (29) — — 49 (452) (403)
Economic assumption changes on general insurance and health business — (28) — — — (4) — — (1) (33) — (33)
Amortisation and impairment of intangibles 21 1 — — 17 15 1 22 14 91 9 100
2 Aviva Investors operating profit includes £2 million profit relating to Aviva Investors Pooled Pensions business. 3 Other Group activities include Group Reinsurance. 4 Discontinued operations represent the results of the US life and related internal asset management businesses (US Life) until the date of disposal (2 October 2013). For further details see note 4.
5 – Segmental information continued (a) (iii) Segmental statement of financial position as at 31 December 2014
Acquired value of in-force business and intangible assets 127 103 96 5 581 60 2 25 29 1,028 Interests in, and loans to, joint ventures and associates 953 — 145 10 82 2 352 — — 1,544
Net asset value attributable to unitholders 19 — 2,928 — 317 — — — 6,218 9,482
Other liabilities, including inter-segment liabilities 9,539 (1,787) 3,673 120 662 404 388 377 3,048 16,424 Liabilities of operations classified as held for sale — — — — — — — — 2 2
Other liabilities, including inter-segment liabilities 8,489 (3,337) 3,782 114 963 411 354 272 5,032 16,080 Liabilities of operations classified as held for sale — — — — 3,003 — 20 — — 3,023
General insurance and health Our general insurance and health business provides insurance cover to individuals and to small and medium sized businesses, for risks associated mainly with motor vehicles, property and liability, such as employers’ liability and professional indemnity liability, and medical expenses.
5 – Segmental information continued (b) (i) Segmental income statement – products and services for the year ended 31 December 2014
Inter-segment revenue — — 158 — 158 Share of profit of joint ventures and associates 144 3 — — 147 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 140 (16) 35 15 174
Claims and benefits paid, net of recoveries from reinsurers (13,861) (5,613) — — (19,474) Change in insurance liabilities, net of reinsurance (5,604) 34 — — (5,570) Change in investment contract provisions (6,518) — — — (6,518) Change in unallocated divisible surplus (3,364) — — — (3,364)
Notes to the consolidated financial statements continued 5 – Segmental information continued (b) (ii) Segmental income statement – products and services for the year ended 31 December 2013
Gross written premiums1 12,674 9,361 — — 22,035 Premiums ceded to reinsurers (905) (641) — — (1,546)
Inter-segment revenue — — 143 — 143 Share of profit of joint ventures and associates 117 3 — — 120 (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 125 (10) — — 115
Claims and benefits paid, net of recoveries from reinsurers (16,333) (5,760) — — (22,093) Change in insurance liabilities, net of reinsurance 2,519 (26) — — 2,493 Change in investment contract provisions (7,050) — — — (7,050) Change in unallocated divisible surplus 280 — — — 280
Operating profit/(loss) before tax attributable to shareholders' profits from continuing operations 1,901 797 93 (742) 2,049 Operating profit/(loss) before tax attributable to shareholders' profits from discontinued operations3 272 — 31 (13) 290
5 – Segmental information continued (b) (iii) Segmental statement of financial position – products and services as at 31 December 2014
Assets of operations classified as held for sale — 9 — — 9
(b) (iv) Segmental statement of financial position – products and services as at 31 December 2013 – (Restated)1
Acquired value of in-force business and intangible assets 791 160 48 69 1,068 Interests in, and loans to, joint ventures and associates 1,462 5 — — 1,467
Assets of operations classified as held for sale 2,949 164 — — 3,113
Gross insurance liabilities 96,153 14,402 — — 110,555 Gross liabilities for investment contracts 116,058 — — — 116,058 Unallocated divisible surplus 6,713 — — — 6,713 Net asset value attributable to unitholders 3,643 — — 6,719 10,362
Other liabilities, including inter-segment liabilities 12,019 (2,574) 346 6,289 16,080 Liabilities of operations classified as held for sale 2,881 142 — — 3,023
Gross written premiums (note 5a and 5b) Long-term: Insurance contracts 7,898 8,749 Participating investment contracts 4,829 3,925
Fee and commission income Fee income from investment contract business 459 465 Fund management fee income 320 347 Other fee income 344 294 Reinsurance commissions receivable 81 90 Other commission income 13 45 Net change in deferred revenue 13 38
From financial instruments designated as trading and other than trading 4,945 5,488 From AFS investments and financial instruments at amortised cost 36 75
Gains arising in the year 13,403 4,639 Gains recognised in prior periods and now realised (2,829) (3,250)
Losses/(gains) recognised in prior periods as unrealised in equity 7 (1)
Share of profit after tax of joint ventures (note 19) 129 140 Share of profit/(loss) after tax of associates (note 20a) 18 (20) Share of profit after tax of joint ventures and associates 147 120 Profit on disposal and remeasurement of subsidiaries, joint ventures and associates (note 4b) 174 115
Total income 43,555 39,311 150 | Aviva plc Annual report and accounts 2014
Insurance contracts 10,085 11,899 Participating investment contracts 4,431 5,089 Non-participating investment contracts 27 61
Claims and benefits paid to policyholders on general insurance and health business 5,917 6,082
Change in insurance liabilities Change in insurance liabilities (note 41) 5,890 (2,396) Change in reinsurance asset for insurance provisions (note 41) (320) (97)
Change in investment contract provisions Investment income allocated to investment contracts 2,629 4,406 Other changes in provisions
Participating investment contracts (note 42) 3,218 2,244 Non-participating investment contracts 678 409
Commission expenses for insurance and participating investment contracts 2,103 2,264 Change in deferred acquisition costs for insurance and participating investment contracts (59) 184 Deferrable costs for non-participating investment contracts 63 82 Other acquisition costs 828 872 Change in deferred acquisition costs for non-participating investment contracts 38 (93)
Investment income attributable to unitholders 112 347 Reinsurance commissions and other fee and commission expense 304 319
Impairment of goodwill on subsidiaries (note 17) — 48 Amortisation of acquired value of in-force business on insurance contracts 32 37 Amortisation of intangible assets 81 81 Impairment of intangible assets 10 14 Integration and restructuring costs (see below) 140 363 Other expenses 773 701
Net impairment on financial investments 1 2 Net impairment on receivables and other financial assets 5 —
Other net foreign exchange (gains)/losses (53) (78) Finance costs (note 8) 540 609
Notes to the consolidated financial statements continued 8 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 50) and similar charges. Finance costs comprise: Continuing operations 2014 £m £m
Interest expense on core structural borrowings Subordinated debt 289 305 Long term senior debt 19 21 Commercial paper 2 2
Interest expense on operational borrowings Amounts owed to financial institutions 48 70 Securitised mortgage loan notes at fair value 87 89
Total finance costs from continuing operations 540 609 Total finance costs from discontinued operations — 16
(b) Economic volatility The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows: Long-term business 2014 £m 2013 £m
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. These are the same assumptions as are used under MCEV principles to calculate the longer-term investment return for the Group’s long-term business. 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; this includes an adjustment for credit risk on all eurozone sovereign debt. Where such securities are classified as available for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
Short-term fluctuations in investment return (see (b) below) – continuing operations 261 (336) Economic assumption changes – continuing operations (see (g) below) (145) 33
(b) The longer-term investment return and short-term fluctuation for continuing operations are as follows: Non-long-term business - Continuing operations 2014 £m
(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 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, including the centre hedging programme.
Group centre investments, including the centre hedging programme. 2 Restated following the adoption of amendments to ‘IAS 32: Financial Instruments: Presentation’. Refer to note 1 for further information. 3 Includes the internal loan.
(f) The table below shows the sensitivity of the Group’s non-long-term business operating profit for continuing operations before tax to changes in the longer-term rates of return: Continuing operations – Movement in investment return for By Change in 2014 £m £m
(g) The economic assumption changes mainly arise from movements in the rate used to discount latent claims reserves and periodic payment orders. As explained in accounting policy L, provisions for latent claims are discounted, using rates based on the relevant swap curve, in the relevant currency at the reporting date, having regard to the duration of the expected settlement of the claims. The discount rate is set at the start of the accounting period, with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption change. The range of discount rates used is disclosed in note 41.
11 – Employee information This note shows where our staff are employed throughout the world, excluding staff employed by our joint ventures and associates, and analyses the total staff costs.
Employees in continuing operations 26,364 27,718 26,937 29,970 Employees in discontinued operations — — — 1,552 1 Average employee numbers have been calculated using a monthly average that takes into account recruitment, leavers, transfers and disposals of businesses during the year.
Wages and salaries 1,067 1,230 Social security costs 177 200 Post-retirement obligations Defined benefit schemes (note 49d)1 30 (128) Defined contribution schemes (note 49d) 110 107 Profit sharing and incentive plans 94 117 Equity compensation plans (note 32d) 40 39 Termination benefits 16 106
Acquisition costs 478 474 Claims handling expenses 131 156 Central costs and sharesave schemes 61 85 Other operating expenses 848 841 Integration and restructuring costs 16 115
Staff costs from continuing operations 1,534 1,671 Staff costs from discontinued operations — 109
Total staff costs 1,534 1,780 12 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration Report in the ‘Corporate governance’ section of this report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2014 was £5.6 million (2013: £5.9 million). Employer contributions to pensions for executive directors for qualifying periods were £62,257 (2013: £86,923). The aggregate net value of share awards granted to the directors in the period was £3.6 million (2013: £4.5 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, 2,903 share options were exercised by directors (2013: £nil).
Fees payable to PwC LLP and its associates for the statutory audit of the Aviva Group and Company financial statements 2.5 2.4 Fees payable to PwC LLP and its associates for other services
Audit of Group subsidiaries 9.8 10.1 Additional fees related to the prior year audit of Group subsidiaries 0.1 0.7
Total audit fees 12.4 13.2 Audit related assurance 2.3 2.2 Other assurance services 9.8 6.1
Tax compliance services 0.1 0.1 Tax advisory services 0.1 0.1 Services relating to corporate finance transactions — 0.1 Other non audit services not covered above 1.5 1.1
Fees payable to PwC LLP and its associates for services to Group companies classified as continuing operations 26.2 22.9
Fees payable to PwC LLP and its associates for audit of Group subsidiaries — 1.2 Fees payable to PwC LLP and its associates for other non-audit services to Group subsidiaries — 0.1
Deferred tax Origination and reversal of temporary differences 315 63 Changes in tax rates or tax laws (17) (13) Write-(back)/down of deferred tax assets (7) 14
Total tax charged to income statement from continuing operations 983 594 Total tax charged to income statement from discontinued operations — 265
Total tax charged to income statement 983 859 156 | Aviva plc Annual report and accounts 2014
(iv) Unrecognised tax losses and temporary differences of previous years were used to reduce the current tax expense and deferred tax expense by £5 million and £nil (2013: £3 million and £57 million), respectively.
Long-term business technical provisions and other insurance items (1,209) (24) Deferred acquisition costs 34 (90) Unrealised gains/(losses) on investments 1,254 145 Pensions and other post-retirement obligations 7 6 Unused losses and tax credits 32 112 Subsidiaries, associates and joint ventures 5 (2) Intangibles and additional value of in-force long-term business (7) (6) Provisions and other temporary differences 175 (77)
Deferred tax charged to income statement from continuing operations 291 64 Deferred tax charged to income statement from discontinued operations — 187 Total deferred tax charged to income statement 291 251
Current tax from continuing operations In respect of pensions and other post-retirement obligations (77) (15) In respect of foreign exchange movements (12) 6
Different basis of tax – policyholders — 302 302 — 147 147 Adjustment to tax charge in respect of prior periods (36) — (36) (18) — (18) Non-assessable income and items not taxed at the full statutory rate (22) — (22) (54) — (54) Non-taxable loss/(profit) on sale of subsidiaries and associates (31) — (31) (154) — (154)
Total tax charged to income statement 601 382 983 668 191 859
UK legislation was substantively enacted in July 2013 to reduce the main rate of corporation tax from 23% to 21% from 1 April 2014, resulting in an effective rate for the year ended 31 December 2014 of 21.5%. A further reduction to 20% was also enacted with effect from 1 April 2015. The 20% rate has been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2014.
15 – Earnings per share This note shows how we calculate earnings per share, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our operating profit as we believe this gives a better indication of operating performance.
Profit/(loss) for the year 1,612 68 1,680 1,515 (637) 878 Amount attributable to non-controlling interests (143) (26) (169) (174) 31 (143) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of direct capital instruments (DCI) and fixed rate tier
Operating profit attributable to ordinary shareholders 2,173 1,383 47.0 2,049 1,254 42.6 Non-operating items: Investment return variances and economic assumption changes on long-term business 72 4 0.1 (49) (142) (4.8)
Short-term fluctuation in return on investments backing non-long-term business 261 197 6.7 (336) (254) (8.6) Economic assumption changes on general insurance and health business (145) (114) (3.9) 33 27 0.9 Impairment of goodwill, joint ventures and associates and other amounts
Profit attributable to ordinary shareholders 2,339 1,483 50.4 2,819 1,921 65.3 1 DCI includes direct capital instruments and fixed rate tier 1 notes
(iii) The calculation of basic earnings per share uses a weighted average of 2,943 million (2013: 2,940 million) ordinary shares in issue, after deducting shares owned by the employee share trusts. The actual number of shares in issue at 31 December 2014 was 2,950 million (2013: 2,947 million) and 2,948 million (2013: 2,938 million) excluding shares owned by the employee share trusts.
Profit attributable to ordinary shareholders 1,425 2,943 48.4 648 2,940 22.0 Dilutive effect of share awards and options — 44 (0.7) — 39 (0.2)
Profit attributable to ordinary shareholders 58 2,943 2.0 1,273 2,940 43.3 Dilutive effect of share awards and options — 44 (0.1) — 39 (0.6)
Diluted earnings per share from discontinued operations 58 2,987 1.9 1,273 2,979 42.7
Operating profit attributable to ordinary shareholders 1,383 2,943 47.0 1,254 2,940 42.6 Dilutive effect of share awards and options — 44 (0.7) — 39 (0.5)
Diluted operating profit per share from continuing operations 1,383 2,987 46.3 1,254 2,979 42.1
Operating profit attributable to ordinary shareholders — 2,943 — 207 2,940 7.0 Dilutive effect of share awards and options — 44 — — 39 (0.1)
Diluted operating profit per share 1,383 2,987 46.3 1,461 2,979 49.0 16 – Dividends and appropriations This note analyses the total dividends and other appropriations we paid during the year. The table below does not include the final dividend proposed in December 2014 because it is not accrued in these financial statements.
Ordinary dividends declared and charged to equity in the year Final 2013 – 9.40 pence per share, paid on 16 May 2014 277 — Final 2012 – 9.00 pence per share, paid on 17 May 2013 — 264 Interim 2014 – 5.85 pence per share, paid on 17 November 2014 172 — Interim 2013 – 5.60 pence per share, paid on 15 November 2013 — 165
In December 2014, the directors proposed a final dividend for 2014 of 12.25 pence per ordinary share (2013: 9.40 pence), amounting to £361 million (2013: £277 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 15 May 2015 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2015. Interest payments on the direct capital instruments issued in November 2004 and the fixed rate tier 1 notes issued in May 2012 are treated as an appropriation of retained profits and, accordingly, are accounted for when paid. Tax relief is obtained at a rate of 21.50% (2013: 23.25%).
Gross amount At 1 January 1,770 2,774 Acquisitions and additions 3 6
Movements in contingent consideration (39) — Foreign exchange rate movements (40) 24
Accumulated impairment At 1 January (290) (1,071) Impairment losses charged to expenses — (48)
United Kingdom – general insurance and health 924 924 — — 924 924 Ireland – general insurance and health 107 115 — — 107 115 France – long-term business — — 48 52 48 52 Poland – long-term business 8 9 — — 8 9 Italy
Spain – long-term business 148 259 — — 148 259 Aviva Investors – fund management — 27 — — — 27
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.
United Kingdom general insurance and health 1.3 1.3 6.7 7.7 Ireland general insurance and health 1.3 1.3 5.9 8.4 Italy general insurance and health 2.0 2.0 6.8 – 7.9 8.7 – 10.2
Foreign exchange rate movements 2 — — 4 6 1 On insurance and participating investment contracts. 2 On non-participating investment contracts. 3 The carrying amount of acquired value of in-force business and intangible assets at 1 January 2013 includes held for sale assets of £491 million.
(b) Other intangible assets with finite useful lives consist primarily of the value of bancassurance and other distribution agreements. Additions relate to intangible assets with finite lives including capitalised software in the UK and Canadian general insurance business.
The intangible assets with finite lives disposed of in the year relate primarily to River Road and a Canadian broker. Disposals also comprise the derecognition of exhausted assets which are fully amortised or impaired with nil carrying value.
(a) Carrying amount and details of joint ventures (i) The movements in the carrying amount comprised: Goodwill and intangibles £m
Share of results before tax — 138 — 138 — 161 — 161
Share of results after tax — 135 — 135 — 145 — 145
Share of gains/(losses) taken to other comprehensive income — 22 — 22 — (37) — (37)
Less: Amounts classified as held for sale — — — — — (29) — (29)
The Southgate Limited Partnership Property management UK 50.00% 50.00% Airport Property Partnership Property management UK 50.00% 50.00% First-Aviva Life Insurance Co. Ltd Life insurance Taiwan 49.00% 49.00% Aviva-COFCO Life Insurance Co. Ltd Life insurance China 50.00% 50.00% PT Astra Aviva Life Life insurance Indonesia 50.00% 60.00%1
AvivaSA Emeklilik ve Hayat A.S Life insurance Turkey 41.28% 49.83% 1 Operations reclassified as a joint venture in 2014 upon change in control, refer to note 4(b)(i).
19 – Interests in, and loans to, joint ventures continued Additionally, the Group has one property limited partnership joint venture whose non-controlling interest (NCI) is material on the basis of their share of profit/(loss), as follows: Proportion of ownership interests held by NCI
b) Impairment testing Joint ventures are tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill or intangible relates to the recoverable value of that cash generating unit. The recoverable amount of long-term business undertakings is the value in use of the joint venture. This is calculated according to the methodology for the calculation of the value in use of long-term business cash generating units for the impairment testing of goodwill, as set out in note 17(b). The recoverable amount of property management undertakings is the fair value less costs to sell of the joint venture, measured in accordance with the Group’s accounting policy for Investment Property (see accounting policy Q). There is no impairment in the goodwill and intangible amounts within the joint ventures.
Share of results before tax — 44 — 44 — 10 — 10
Share of results after tax — 42 — 42 — 9 — 9
Share of results after tax (24) 42 — 18 (29) 9 — (20)
Reduction in group interest — (43) — (43) — (8) — (8) Reclassification from subsidiary — 125 — 125 — — — — Reclassification from investment — 25 — 25 — — — —
Other movements Additions of equity interests and reduction in group interests relate to the purchase and sale of portions of the Group’s holdings in various property management undertakings. Reclassification from subsidiary relates primarily to the reclassification of property management undertakings following reductions in the Group’s stakes in 2014. The Group’s share of total comprehensive income related to associates is £18 million (2013: loss of £20 million).
Aviva Life Insurance Company India Life insurance India 26.00% 26.00% SCPI Ufifrance Immobilier Property Management France 20.40% 20.40% Ashtenne Industrial Fund (A.I.F) Property Management UK 20.10% 32.17% Encore +1 Property Management UK 10.82% 12.32% 1. The Group has significant influence over Encore + and it is therefore accounted for as an associate.
Notes to the consolidated financial statements continued 20 – Interests in, and loans to, associates continued (iii) The associates have no significant contingent liabilities to which the Group is exposed. 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.
Total net fair value gains of £4 million on owner occupied properties consist of £7 million gains (2013: £2 million losses) which have been taken to other comprehensive income and £3 million losses which have been taken to the income statement. 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, Property, Plant and Equipment. Similar considerations apply to properties under construction, where an estimate is made of valuation when complete, adjusted for anticipated costs to completion, profit and risk, reflecting market conditions at the valuation date. If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £329 million (2013: £255 million). The Group has no material finance leases for property and equipment.
22 – Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation.
Capitalised expenditure on existing properties 57 6 63 26 2 28
Please refer to note 23 ‘Fair value methodology’ for further information on the fair value measurement and valuation techniques of investment property. The fair value of investment properties leased to third parties under operating leases at 31 December 2014 was £8,917 million (2013: £9,447 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 54(b)(i).
Notes to the consolidated financial statements continued 23 – Fair value methodology continued The majority of the Group’s assets and liabilities measured at fair value are based on quoted market information or observable market data. 17.4% of assets and 2.4% of liabilities measured at fair value are based on estimates and recorded as Level 3. Where estimates are used, these are based on a combination of independent third-party evidence and internally developed models, calibrated to market observable data where possible. Third-party valuations using significant unobservable inputs validated against Level 2 internally modelled valuations are classified as Level 3, where there is a significant difference between the third-party price and the internally modelled value. Where the difference is insignificant, the instrument would be classified as Level 2.
(c) Comparison of the carrying amount and fair values of financial instruments Set out below is a comparison of the carrying amounts and fair values of financial assets and liabilities, excluding those classified as held for sale. These amounts may differ where the asset or liability is carried on a measurement basis other than fair value, e.g. amortised cost.
Financial liabilities measured at fair value Non-participating investment contracts1 (note 42(a)) 49,791 222 — 50,013 — 50,013 Net asset value attributable to unit holders 9,463 — 19 9,482 — 9,482 1 In addition to the balances in this table, included within Reinsurance assets in the Statement of financial position and note 44 are £2,533 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
Non-recurring fair value measurement1 Properties occupied by group companies — — 316 316 1 Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or require in particular circumstances.
Recurring fair value measurements Investment Property (note 22) — — 9,451 9,451 — 9,451
Financial assets of operations classified as held for sale 2,245 282 148 2,675 — 2,675
Financial liabilities measured at fair value Non-participating investment contracts2 (note 42(a)) 47,889 251 — 48,140 — 48,140 Net asset value attributable to unit holders 10,183 179 — 10,362 — 10,362
Financial liabilities of operations classified as held for sale — — — — 29 29 1 Restated following the adoption of amendments to IAS 32 ‘Financial instruments: Presentation’ – see note 1 for details. 2 In addition to the balances in this table, included within Reinsurance assets in the Statement of financial position and note 44 are £2,048 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as level 1 assets.
Non-recurring fair value measurement1 Properties occupied by group companies — — 257 257 1. Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or require in particular circumstances.
Transfers between Level 1 and Level 2 For the year ended 31 December 2014, transfers of financial assets from fair value hierarchy Level 1 to Level 2 amounted to £3.4 billion. These arose primarily in the UK and Ireland (£3.1 billion) as a result of the enhanced understanding of pricing vendor methodologies for the fair value hierarchy level classification of certain debt securities. The remaining £0.3 billion were transferred as a result of a decline in the level of market activity for certain debt securities. Transfers from Level 2 to Level 1 of £0.2 billion followed changes in the level of market activity of certain investments.
Notes to the consolidated financial statements continued 23 – Fair value methodology continued Transfer to/from Level 3 Transfers out of Level 3 of £0.5 billion principally related to debt securities held by our business in France resulting from improvements in the market liquidity or changes in the availability of observable market inputs.
Transfers of assets into Level 3 of £3.4 billion included: • £1.8 billion of privately placed notes held in the UK Life business. The discounted cash flow model used to fair value the notes was refined to incorporate asset specific counterparty credit ratings. Where these inputs have been deemed to be unobservable notes have been classified as Level 3.
• £1.4 billion of debt securities held in the UK and France and £0.2 billion of loans held in the UK have been transferred into Level 3 either due to the unavailability of significant observable market data or sufficiently significant differences between the valuation provided by the counterparty and broker quotes and the validation models.
For the year to 31 December 2014, transfers of financial liabilities between fair value hierarchies included the transfer of £0.3 billion of derivative liabilities in the UK from Level 2 to Level 3 due to the unavailability of observable market inputs.
(f) Further information on Level 3 assets and liabilities: The table below shows movement in the Level 3 assets and liabilities measured at fair value: Assets Liabilities
Transfers out of Level 3 — — (469) — — — — — 2 Reclassification to held for sale — — — — — — — — —
1 Restated following the adoption of amendments to IAS 32 ‘Financial instruments: Presentation’ – see note 1 for details. Changes in the total net (losses)/gains recognised in the income statement relating to Level 3 derivative financial instruments were offset by corresponding changes to other derivative financial instruments held by the same counterparty but classified as Level 2. There is no net impact on the consolidated income statement. 2 Total net (losses)/gains recognised in the income statement includes realised gains/(losses) on disposals.
• Structured bond-type and non-standard debt products held by our business in France amounting to £7.4 billion (2013: £7.1 billion) and bonds held by our UK business of £1.0 billion (2013: £0.5 billion), for which there is no active market. These bonds are valued either using counterparty or broker quotes. These bonds are validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the third-party models included a significant unobservable liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently significant to result in a Level 3 classification. At 31 December 2014, the values reported in respect of these products were the lower of counterparty and broker quotes and internally modelled valuations.
• Level 3 investments including a collateralised loan obligation of £0.4 billion (2013: £0.4 billion) and UK non-recourse loans of £0.5 billion (2013: £0.8 billion) have been valued using internally developed discounted cash flow models.
The principal liabilities classified as Level 3, and the valuation techniques applied to them, are: • £0.6 billion (2013: £0.5 billion) of securitised mortgage loan notes are valued using a similar technique to the related Level 3 securitised mortgage assets. • Derivative liabilities of £1.0 billion (restated 2013: £0.2 billion) comprising of over the counter derivatives such as credit default swaps and inflation swaps. These swaps are valued using either a Discounted Cash Flow (DCF) models or other valuation 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 not market observable.
(g) Assets and liabilities not carried at fair value for which fair value is disclosed The table below shows the fair value and fair value hierarchy for those assets and liabilities not carried at fair value. These exclude any assets or liabilities held for sale.
Asset and liabilities not carried at fair value Loans — 1,021 4,313 5,334 172 | Aviva plc Annual report and accounts 2014
(a) Carrying amounts The carrying amounts of loans at 31 December 2014 and 2013 were as follows: At fair value through profit or loss other than trading £m
Loans to brokers and other intermediaries — 123 123 — 78 78
Notes to the consolidated financial statements continued 25 – Securitised mortgages and related assets The Group, in its UK Life business has loans receivable, secured by mortgages, which have then been securitised through nonrecourse borrowings. This note gives details of the relevant transactions.
Initiative (PFIs). • Specialised investment vehicles include Open Ended Investment Companies (OEICs), Property Limited Partnerships (PLPs), Sociétés d'Investissement a Capital Variable (SICAVs) and other investment vehicles.
The Group’s holdings in investment vehicles are subject to the terms and conditions of the respective investment vehicle’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those investment vehicles. The investment manager makes investment decisions after extensive due diligence of the underlying investment vehicle including consideration of its strategy and the overall quality of the underlying investment vehicle’s manager. All of the investment vehicles in the investment portfolio are managed by portfolio managers who are compensated by the respective investment vehicles for their services. Such compensation generally consists of an asset-based fee and a performance- based incentive fee, and is reflected in the valuation of the investment vehicles.
26 – Interests in structured entities continued (a) Interests in consolidated structured entities The Group has determined that where it has control over investment vehicles, these investments are consolidated structured entities. As at 31 December 2014 the Group has granted loans to consolidated PLPs for a total of £210 million (2013: £371 million). The purpose of these loans is to assist the consolidated PLPs to purchase or construct properties within the funds business activity. The Group has also provided support, without having a contractual obligation to do so, to certain consolidated PLPs via letters of support amounting to £124 million (2013: £39 million). The Group has commitments to provide funding to consolidated PLPs of £9 million (2013: £34 million). The Group has also given support to the consolidated structured entity Aviva Equity Release UK Limited (AER). As discussed in note 25, at the inception of the securitisation vehicle, the UK subsidiary, Aviva Equity Release UK Limited (AER), has granted subordinated loan facilities to some of the ERF companies. AER receives various fees in return for the services provided to the entities. Aviva receives cash management fees based on the outstanding loan balance at the start of each quarter for the administration of the loan note liabilities. AER receives portfolio administration fees as compensation for managing the mortgage assets. As at the reporting date, the Group has no intentions to provide financial or other support in relation to any other investment vehicles.
(b) Interests in unconsolidated structured entities As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2014, the Group’s total interest in unconsolidated structured entities was £34,406 million on the Group’s statement of financial position, which are classified as 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 2014, a summary of the Group’s interest in unconsolidated structured entities is as follows: £m
Analysed as: Unit trust and other investment vehicles — — 29,640 29,640 — — 28,606 28,606 1 Reported within “other debt securities” in note 27a. 2 The Group has refined the definition of unconsolidated structured entities to include other investments that are held within consolidated structured entities. Consistent with this, FY13 comparatives have been restated totaling £33.1 billion, an increase of £6.6 billion.
(c) Other interests in unconsolidated structured entities The Group receives management fees and other fees in respect of its asset management businesses. The Group does not sponsor any of the funds or investment vehicles from which it receives fees. Management fees received for investments that the Group manages but does not have a holding in also represent an interest in unconsolidated structured entities. As these investments are not held by the Group, the investment risk is borne by the external investors and therefore the Group’s maximum exposure to loss relates to future management fees. The table below shows the assets under management of entities that the Group manages but does not have a holding of and the fees earned from those entities.
27 – Financial investments This note analyses our financial investments by type and shows their cost and fair value. These will change from one period to the next as a result of new business written, claims paid and market movements.
1 The statement of financial position has been restated following the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details. There is no impact on the result or the total equity for any period presented as a result of this restatement
Deposits with credit institutions 539 — — 539 601 — — 601 Minority holdings in property management undertakings 740 120 (106) 754 774 130 (108) 796
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. Gains and losses on financial investments from continuing operations classified as at fair value through profit or loss recognised in the income statement in the year were a net gain of £11,161 million (2013: £1,524 million net gain). Of this, £587 million net gain (2013: £135 million net gain) related to financial investments designated as trading and £10,574 million net gain (2013: £1,389 million net gain) related to investments designated as other than trading. The movement in the unrealised gain/loss position reported in the statement of financial position during the year, shown in the table above, includes foreign exchange movements on the translation of unrealised gains and losses on financial investments held by foreign subsidiaries, which are recognised in other comprehensive income, as well as transfers due to the realisation of gains and losses on disposal and the recognition of impairment losses. Total impairments of financial investments classified as available for sale (AFS) in the income statement in the year were £2 million. £5 million previously recognised impairment on equity securities was recovered through sale during 2014. The total accumulated impairment provision for financial investments classified as available-for-sale included in the table above within unrealised losses and impairments was £9 million (2013: £13 million). Movements in this AFS provision are shown in section (c) below.
Total (excluding assets held for sale) 2,151 1,985 32,438 30,045 10,366 10,001 44,955 42,031
At 31 December 2014, the Group’s total government (non-UK) debt securities stood at £45.0 billion (2013: £43.9 billion), an increase of £1.1 billion. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £10.4 billion (2013: £10.2 billion). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (23%), French (19%), Spanish (7%), German (6%) and Italian (5%) government debt securities. The participating funds exposure to (non-UK) government debt amounts to £32.4 billion (2013: £31.7 billion), an increase of £0.7 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 (35%), Italy (21%), Germany (5%), Belgium (4%), Netherlands (4%) and Spain (4%).
Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £3.9 billion. The majority of our holding (79%) is in senior debt. The primary exposures are to UK (26%), Spanish (21%) and US (18%) banks. Gross of non-controlling interests, our direct shareholder asset exposure to worldwide bank equity securities is £75 million. Gross of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £14.9 billion. The majority of the exposure (79%) is in senior debt. Participating funds are the most exposed to French (29%), UK (13%) and Dutch (11%) banks.
Amounts owed by contract holders 1,512 1,762 Amounts owed by intermediaries 1,100 1,222 Deposits with ceding undertakings 1,322 1,479 Amounts due from reinsurers 277 335 Amounts due from brokers for investment sales 69 149 Amounts receivable for cash collateral pledged 512 577 Amounts due from government, social security and taxes 415 475 Dividends receivable 6 4 Other receivables 720 1,549
Expected to be recovered in less than one year 5,833 7,334 Expected to be recovered in more than one year 100 142 1 Restated following the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details.
29 – Deferred acquisition costs, other assets, prepayments and accrued income (a) Deferred acquisition costs and other assets – carrying amount The carrying amount comprises: £m
Total deferred acquisition costs 2,378 2,403 Surpluses in the staff pension schemes (note 49(a)) 2,695 606 Other assets 18 49
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, £1,277 million (2013: £1,285 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 are recoverable more than one year after the statement of financial position date.
Acquisition costs deferred during the year 173 2,107 — 2,280 407 2,276 — 2,683
29 – Deferred acquisition costs, other assets, prepayments and accrued income continued The balance of deferred acquisition costs for long-term business remained broadly flat over 2014, as acquisition costs deferred during the year were offset by amortisation, the effect of assumption changes and exchange rate movements. Assumption changes mainly reflect the announcement in March 2014 of a 0.75% charge cap for default funds and removal of active member discounts on auto-enrolment pension schemes in the UK. Where amortisation of the DAC balance depends on projected profits, changes to economic conditions may lead to a movement in the DAC balance and a corresponding impact on profit. It is estimated that the movement in the DAC balance would reduce profit by £18 million (2013: £2 million) if market yields on fixed income investments were to increase by 1% and increase profit by £31 million (2013: £8 million) if yields were to reduce by 1%. The sensitivity to yields on fixed interest investments has increased particularly in the UK. As at 31 December 2014 the DAC balance has been restricted by the value of projected future profits. This was not the case in prior periods, therefore the DAC balance is now more sensitive to changes in the value of those projected profits. In the comparative period, the shadow adjustments related to deferred acquisition costs on business in the US backed by investments classified as available for sale (AFS), movements in which were recognised directly in other comprehensive income.
(d) Prepayments and accrued income Prepayments and accrued income of £2,466 million (2013 restated: £2,635 million), includes £81 million (2013: £103 million) that is expected to be recovered more than one year after the statement of financial position date.
1 Restated following the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details.
31 – 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 2014 was: 2,950,487,340 (2013: 2,946,939,622) ordinary shares of 25 pence each 737 736
(b) During 2014, a total of 3,547,718 ordinary shares of 25 pence each were allotted and issued by the Company as follows: Number of shares
(ii) Aviva long-term incentive plan awards These awards have been made under the Aviva long term incentive plan 2011, and are described in section (b) below and in the directors’ remuneration report.
(iii) Aviva annual bonus plan awards These awards have been made under the Aviva annual bonus plan 2011, and are described in section (b) below and in the directors’ remuneration report.
(v) Aviva Investors long-term incentive plan awards These awards have been made under the Aviva Investors Holdings Limited 2009 long term incentive plan, a long term profit sharing arrangement for key Aviva Investors’ employees. Awards will vest on the 3rd anniversary of grant, subject to achieving performance conditions.
(vi) Aviva Investors deferred share award plan awards These awards have been made under the Aviva Investors deferred share award plan, where employees can choose to have the deferred element of their bonus deferred into awards over Aviva shares. The awards vest in three equal tranches on the 2nd, 3rd and 4th year following the year of grant. No new Aviva plc ordinary shares will be issued to satisfy awards made under plans iv, v or vi.
32 – Group’s share plans continued The following table summarises information about options outstanding at 31 December 2014: Range of exercise prices
The comparative figures as at 31 December 2013 were: Range of exercise prices
(ii) Share awards At 31 December 2014, 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 Investors Holdings Limited 2009 long term incentive plan Number of shares Year of vesting
The vesting of awards under the Aviva long term incentive plan 2011 is subject to the attainment of performance conditions as described in the directors’ remuneration report. Shares which do not vest will lapse. No performance conditions are attached to the awards under the Aviva annual bonus plan 2011, Aviva Investors deferred share award plan or some of the awards under the Aviva recruitment and retention share award plan except as outlined below. 275,254 of the shares which vest in 2015 under the Aviva recruitment and retention share award plan are subject to the attainment of the same performance conditions that apply to the 2012 grant under the Aviva long term incentive plan 2011. 196,328 of the shares which vest in 2016 are subject to the attainment of the same performance conditions that apply to the 2013 grant under the Aviva long term incentive plan 2011. 12,828 of the shares which vest in 2017 are subject to the attainment of the same performance conditions that apply to the 2014 grant under the Aviva long term incentive plan 2011. These performance conditions are as outlined in the relevant year’s directors’ remuneration report. 26,044 of the shares awarded which vest in 2015 are subject to the performance conditions relating to the performance of the participant’s previous employer. 22,493 of the shares awarded which vest in 2015 are subject to performance conditions relating to the performance of the UK general insurance business. The vesting of the awards under the Aviva Investors Holdings Limited 2009 long term incentive plan are subject to Aviva Investors Holdings Limited achieving a return on capital employed (ROCE) of 27% per annum over a three year performance period. Shares which do not vest will lapse.
Notes to the consolidated financial statements continued 32 – Group’s share plans continued (c) Movements in the year A summary of the status of the option plans as at 31 December 2013 and 2014, and changes during the years ended on those dates, is shown below.
Granted during the year 3,994,548 419.00 2,986,293 312.00 Exercised during the year (4,626,781) 282.30 (2,442,874) 304.57 Forfeited during the year (1,028,382) 277.24 (1,171,735) 274.84 Cancelled during the year (490,267) 298.10 (1,355,364) 274.74 Expired during the year (677,432) 412.83 (3,158,682) 403.02
(e) Fair value of options and awards granted after 7 November 2002 The weighted average fair values of options and awards granted during the year, estimated by using the Binomial option pricing model and Monte Carlo Simulation model, were £1.47 and £4.19 (2013: £1.26 and £2.15) respectively.
Share price 524p 408p Exercise price 419p 312p Expected volatility 32% 38% Expected life 3.73 years 3.66 years Expected dividend yield 2.91% 3.58% Risk-free interest rate 1.42% 0.92%
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the options. 4,626,781 options granted after 7 November 2002 were exercised during the year (2013: 2,442,874).
(ii) Share awards The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions: Weighted average assumption 2014 2013
Share price 484.87p 295.37p Expected volatility1 33% 35% Expected volatility of comparator companies’ share price1 29% 31% Correlation between Aviva and comparator competitors’ share price1 58% 67% Expected life1 2.83 years 3.00 years Expected dividend yield2 2.94% — Risk-free interest rate1 0.75% 0.29% 1 For awards with market-based performance conditions. 2 The majority of awards with market based performance conditions include additional shares being provided to employees equal to dividend rights before vesting. As a result, no dividend yield assumption is required on these awards.
Acquired in the year 19,603 — 7,863,726 32 Distributed in the year (5,995,161) (23) (9,355,859) (33)
The shares are owned by employee share trusts with an undertaking to satisfy awards of shares in the Company under the Company’s share plans and schemes. Details of the features of the plans can be found in the directors’ remuneration report and/or in note 32. These shares were purchased in the market and are carried at weighted average cost. At 31 December 2014, they had an aggregate nominal value of £646,456 (2013: £2,140,346) and a market value of £12,528,317 (2013: £38,500,535). The trustees have waived their rights to dividends on the shares held in the trusts.
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
The issued preference shares are non-voting except where their dividends are in arrears, on a winding up or where their rights are altered. On a winding up, they carry a preferential right of return of capital ahead of the ordinary shares. Holders are entitled to receive dividends out of the profits available for distribution and resolved to be distributed in priority to the payment of dividends to holders of ordinary shares. The Company does not have a contractual obligation to deliver cash or other financial assets to the preference shareholders and therefore the directors may make dividend payments at their discretion.
35 – Direct capital instruments and fixed rate tier 1 notes
Issued November 2004 5.9021% £500 million direct capital instrument 500 500 4.7291% €700 million direct capital instrument — 490
Notes to the consolidated financial statements continued 35 – Direct capital instruments and fixed rate tier 1 notes continued The Company has the option to defer coupon payments on the DCI or FxdRNs on any relevant payment date. In relation to the DCI, deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company: • Redemption; or • Substitution by, or variation so they become, alternative Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; or • Substitution by preference shares. In relation to the FxdRNs, deferred coupons may be satisfied at any time, at the sole option of the Company. The Company is required to satisfy deferred coupons on the FxdRNs only in the following circumstances: • Redemption; or • Substitution by preference shares. No interest will accrue on any deferred coupon. Deferred coupons 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.
Arising in the year through other comprehensive income: Fair value losses — (2) (196) — — (198) Fair value gains transferred to profit on disposals — — (280) — — (280) Share of other comprehensive income of joint ventures and associates — — (37) — — (37) Impairment losses on assets previously revalued directly through other comprehensive income now taken to income statement — — 12 — — 12 Foreign exchange rate movements (34) — — (39) — (73) Aggregate tax effect – shareholders’ tax (6) — 161 — — 155
Total other comprehensive income for the year (40) (2) (340) (39) — (421) Tax transferred to income statement 30 — — — — 30 Transfer to profit on disposal of subsidiaries, joint ventures and associates (355) (1) (497) 50 — (803) Reserves credit for equity compensation plans — — — — 37 37 Shares issued under equity compensation plans — — — — (43) (43)
Arising in the year through other comprehensive income: Fair value gains — 7 62 — — 69 Fair value gains transferred to profit on disposals — — (7) — — (7) Share of other comprehensive income of joint ventures and associates — — 22 — — 22 Impairment losses on assets previously revalued directly through other comprehensive income now taken to income statement — — — — — — Foreign exchange rate movements (373) — — 56 — (317) Aggregate tax effect – shareholders’ tax 12 — (21) — — (9)
Total other comprehensive income for the year (361) 7 56 56 — (242) Tax transferred to income statement — — — — — — Fair value gains transferred to retained earnings on disposals — (2) — — — (2) Transfer to profit on disposal of subsidiaries, joint ventures and associates (12) (2) 1 — — (13) Reserves credit for equity compensation plans — — — — 39 39 Shares issued under equity compensation plans — — — — (28) (28)
Balance at 1 January 2,348 1,389 Profit for the year attributable to equity shareholders 1,569 2,008 Remeasurements of pension schemes 1,662 (674) Dividends and appropriations (note 16) (551) (538) Shares issued under equity compensation plans 24 43 Shares distributed by employee trusts (18) (28) Realised loss on redemption of direct capital instrument (57) — Effect of changes in non-controlling interests in existing subsidiaries (36) — Fair value gains transferred from other reserves 2 — Transfer from other reserves on disposal of subsidiaries, joint ventures and associates 2 1 Aggregate tax effect (328) 147
39 – Non-controlling interests This note gives details of the Group’s non-controlling interests and shows the movements during the year.
Notes to the consolidated financial statements continued 40 – Contract liabilities and associated reinsurance The following notes explain how the Group calculates its liabilities to policyholders for insurance and investment products it has sold to them. Notes 41 and 42 cover these liabilities, and note 43 details the financial guarantees and options given for some of these products. Note 44 details the reinsurance recoverables on these liabilities while note 45 shows the effects of changes in the assumptions. The following is a summary of the contract provisions and related reinsurance assets as at 31 December.
Provisions for claims incurred but not reported (2,578) 373 (2,205) (2,568) 315 (2,253)
Less: Amounts classified as held for sale 1 — 1 2,948 (37) 2,911 41 – Insurance liabilities This note analyses the Group insurance contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.
Long-term business provisions Participating 44,834 — 44,834 45,098 — 45,098 Unit-linked non-participating 7,963 — 7,963 8,714 — 8,714
Less: Amounts classified as held for sale — (1) (1) (106) (132) (238)
(ii) Change in insurance liabilities recognised as an expense The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown on the income statement, to the change in insurance liabilities recognised as an expense in the relevant movement tables in this note. The components of the reconciliation are the change in provision for outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on GI reserves (which is included within finance costs within the income statement). For general insurance and health business, the change in the provision for unearned premiums is not included in the reconciliation, as within the income statement, this is included within earned premiums.
Long-term business liabilities Change in long-term business provisions (note 41b(iv)) 5,847 (376) 5,471 Change in provision for outstanding claims 128 4 132
Change in provision for outstanding claims 75 (7) 68 (11) 11 — 64 4 68
General insurance and health liabilities Change in insurance liabilities (note 41c(iv) and 44
Total change in insurance liabilities (note 7) (2,396) (97) (2,493) 320 (8) 312 (2,076) (105) (2,181)
Notes to the consolidated financial statements continued 41 – Insurance liabilities continued (iii) Methodology and assumptions There are two main methods of actuarial valuation of liabilities arising under long-term insurance contracts – the net premium method and the gross premium method – both of which involve the discounting of projected premiums and claims. Under the net premium method, the premium taken into account in calculating the provision is determined actuarially, based on the valuation assumptions regarding discount rates, mortality and disability. The difference between this premium and the actual premium payable provides a margin for expenses. This method does not allow for voluntary early termination of the contract by the policyholder, and so no assumption is required for persistency. The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience.
Equity returns 22.3% 22.1% Property returns 15.0% 15.0% Fixed interest yields 27.2% 16.3%
Future regular bonuses Annual bonus assumptions for 2015 have been set consistently with the year-end 2014 declaration. Future annual bonus rates reflect the principles and practices of each fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.
Mortality Mortality assumptions for with-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality table used 2014 2013
PCMA00/PCFA00 adjusted plus allowance for future mortality improvement 190 | Aviva plc Annual report and accounts 2014
41 – Insurance liabilities continued Allowance for future mortality improvement is in line with the rates shown for non-profit business below.
Assurances Life conventional non-profit 1.7% 2.5% Pensions conventional non-profit 2.1% 3.2% Annuities Conventional immediate and deferred annuities 1.3% to 3.3% 3.2% to 4.7% Non-unit reserves on Unit Linked business Life 1.7% 2.8%
Income Protection Active lives 1.8% 2.9% Claims in payment – level 1.8% 3.1% Claims in payment – index linked (0.9)% (0.6)%
The above valuation discount rates are after reduction for investment expenses and credit risk. For conventional immediate annuity business the allowance for credit risk comprises long-term assumptions for defaults and downgrades, which vary by asset category and rating, and short-term supplementary allowances for higher expected defaults during the current economic conditions. The credit risk allowance made for corporate bonds and mortgages, including healthcare mortgages, held by Aviva Annuity UK Limited equated to 55 bps and 87 bps respectively at 31 December 2014 (2013: 48 bps and 124 bps respectively). For corporate bonds, the allowance represented c.40% of the average credit spread for the portfolio (2013: 44%). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.9 billion (2013: £2.0 billion) over the remaining term of the UK Life corporate bond and mortgage portfolio. Total liabilities for the annuity business were £34 billion at 31 December 2014 (2013: £30 billion). During 2014 there has been a change to the model and assumptions used to value certain equity release assets and the consequential impact on the liabilities that they back. The revised model derives a best estimate view on property growth and explicitly calculates the additional return that would be demanded by investors due to uncertainties in the asset cash flows. This results in a lower value of assets and a corresponding lower value of liabilities due to changes in the valuation interest rate. Changes in the Aviva Annuity UK Limited net asset value are driven by changes in the “No Negative Equity Guarantee” (NNEG) as any changes to asset values that are not driven by NNEG result in a corresponding offset to the liability values through a revised valuation interest rate. As a result the annuity liabilities have reduced by £452 million and the backing equity release mortgages have reduced by £278 million during the year. Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality tables used 2014 2013
The variance between actual and expected experience of £1.4 billion in 2014 is primarily due to the impact of favourable property returns on liabilities for unit-linked and participating contracts in the UK and Ireland. 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. Less significant variances arise from differences between actual and expected experience for persistency, mortality and other demographic factors in Italy and Spain. The impact of operating assumption changes of £1.1 billion in 2014 reduces the carrying value of insurance liabilities and relates mainly to longevity and expense releases in the UK business (with the impact on profit significantly offset by a corresponding reduction in reinsurance assets). The £6.8 billion impact of economic assumption changes reflects reductions in valuation interest rates, primarily in respect of immediate annuity and participating insurance contracts in the UK. For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 45, together with the impact of movements in related nonfinancial assets.
41 – Insurance liabilities continued The Group only establishes loss reserves for losses that have already occurred. The Group therefore does not establish catastrophe equalisation reserves that defer a share of income in respect of certain lines of business from years in which a catastrophe does not occur to future periods in which catastrophes may occur. When calculating reserves, the Group takes into account estimated future recoveries from salvage and subrogation, and a separate asset is recorded for expected future recoveries from reinsurers after considering their collectability. The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business.
The gross outstanding claims provision before discounting was £10,326 million (2013: £10,914 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims. The discount rate that has been applied to latent claims reserves 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 operating profit as an economic assumption change. During 2014, the Group has seen a reduction in the number of new bodily injury claims settled by periodic payment orders (PPOs) or structured settlements, which are reserved for on a discounted basis.
(iii) Assumptions Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claim technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation. 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. The assumptions used in most non-life actuarial projection techniques, including future rates of claims inflation or loss ratio assumptions, are implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at a point estimate for the ultimate cost of claims that represents the likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved. The range of possible outcomes does not, however, result in the quantification of a reserve range.
Interest rates used to discount latent claim liabilities The discount rates used in determining our latent claim liabilities are based on the relevant swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement of latent claims. The range of discount rates used is shown in section (ii) above and depends on the duration of the claim and the reporting date. At 31 December 2014, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £120 million (2013: £90 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business. The impact of a 1% fall in interest rates across all assets and liabilities of our general insurance and health businesses is shown in note 58.
Allowance for risk and uncertainty The uncertainties involved in estimating loss reserves are allowed for in the reserving process and by the estimation of explicit reserve uncertainty distributions. The reserve estimation basis for non-life claims requires all non-life businesses to calculate booked claim provisions as the best estimate of the cost of future claim payments, plus an explicit allowance for risk and uncertainty. The allowance for risk and uncertainty is calculated by each business unit in accordance with the requirements of the Group non-life reserving policy, taking into account the risks and uncertainties specific to each line of business and type of claim in that territory. The requirements of the Group non-life reserving policy also seek to ensure that the allowance for risk and uncertainty is set consistently across both business units and reporting periods. 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. The Ogden Tables contain a discount rate that is set by the Lord Chancellor and that is applied when calculating the present value of loss of earnings for claims settlement purposes. The process for setting this discount rate is under review. The timing of the conclusion of this review is unclear and it is still uncertain whether or by how much the rate will change. However an allowance has been included in provisions for a change in the Ogden discount rates. A reduction in the Ogden discount rates would increase lump sum payments to UK bodily injury claimants.
Claims payments made in the year, net of recoveries (5,917) (6,068) Unwind of discounting 9 15
41 – Insurance liabilities continued (d) Loss development tables (i) Description of tables The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2005 to 2014. 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 2005, by the end of 2014 £6,537 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 £7,106 million was re-estimated to be £6,612 million at 31 December 2014. 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 strong reserves in respect of its general insurance and health business in order to protect against adverse future claims experience and development. The Group establishes strong reserves in respect of the current accident year (2014) where the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of 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 2014 were: • £112 million release from UK & Ireland due to favourable development in UK & Ireland on personal and commercial motor, and commercial property claims. • £97 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario. • £15 million release from Europe mainly due to favourable development in France and Italy, partly offset by strengthening of motor third party claims in Turkey. Key elements of the movement in prior accident year general insurance and health net provisions during 2013 were: • £32 million release from UK & Ireland, including Group reinsurance business, mainly due to favourable development in health, commercial motor and commercial liability in Ireland, slightly offset by a small strengthening in the UK. • £160 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in Ontario. • £9 million release from Europe mainly due to favourable development across a number of lines of business in France.
(ii) Gross figures Before the effect of reinsurance, the loss development table is: Accident year
Gross cumulative claim payments At end of accident year (3,345) (3,653) (4,393) (4,915) (3,780) (3,502) (3,420) (3,055) (3,068) (3,102)
Estimate of gross ultimate claims At end of accident year 7,106 7,533 8,530 9,508 7,364 6,911 6,428 6,201 6,122 5,896
Two years later 6,813 7,243 8,430 9,277 7,281 6,950 6,315 6,002 Three years later 6,679 7,130 8,438 9,272 7,215 6,914 6,292 Four years later 6,603 7,149 8,409 9,235 7,204 6,912 Five years later 6,605 7,167 8,446 9,252 7,239 Six years later 6,591 7,167 8,381 9,213 Seven years later 6,596 7,176 8,381 Eight years later 6,604 7,184 Nine years later 6,612
Estimate of gross ultimate claims 6,612 7,184 8,381 9,213 7,239 6,912 6,292 6,002 6,039 5,896
Present value recognised in the statement of financial position 2,130 87 139 164 278 370 465 785 1,139 1,525 2,794 9,876
42 – Liability for investment contracts This note analyses our investment contract liabilities by type of product and describes how the Group calculates these liabilities and the assumptions used.
(a) Carrying amount The liability for investment contracts (gross of reinsurance) at 31 December comprised: Long-term business 2014 £m
Participating contracts 67,232 70,628 Non-participating contracts at fair value 50,013 48,140 Non-participating contracts at amortised cost — —
(b) Long-term business investment liabilities Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS. Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and Group practice for long-term business liabilities as described in note 41. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating contracts to Phase II of its insurance contracts project. For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus. Guarantees on long-term investment products are discussed in note 43. 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. Following the disposal of US Life we currently have no nonparticipating investment contracts measured at amortised cost. Of the non-participating investment contracts measured at fair value, £49,737 million in 2014 are unit linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves, if required, on a fair value basis. These contracts are generally classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant. For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 29 and the deferred income liability is shown in note 52. 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.
Carrying amount at 1 January 70,628 66,849 Provisions in respect of new business 4,144 3,421 Expected change in existing business provisions (1,972) (2,243) Variance between actual and expected experience 713 1,085 Impact of operating assumption changes 14 329 Impact of economic assumption changes 303 (301) Other movements 16 (47) Change in liability recognised as an expense 3,218 2,244 Effect of portfolio transfers, acquisitions and disposals1 (2,671) (39) Foreign exchange rate movements (3,943) 1,380 Other movements2 — 194
Carrying amount at 31 December 67,232 70,628 1 The movements during 2014 related to the disposal of Eurovita. 2 Other movements (outside change in liability recognised as an expense) in 2013 of £194 million represented the reclassification of liabilities from insurance to participating investment in Eurovita.
Guaranteed death and maturity benefits 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 2014 for this guarantee is £28 million (2013: £20 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2014, total sums at risk for these contracts were £70 million (2013: £101 million) out of total unit-linked funds of £15 billion (2013: £15 billion). The average age of policyholders was approximately 54. It is estimated that this liability would increase by £36 million (2013: £22 million) if yields were to decrease by 1% per annum and by £12 million (2013: £8 million) if equity markets were to decline by 10% from year end 2014 levels. These figures do not reflect our ability to review the tariff for this option.
(ii) Ireland Guaranteed annuity options Products with GAOs similar to those offered in the UK have been issued in Ireland. The net provision as at 31 December 2014 for such options is £273 million (2013: £202 million). This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality option take-up and long-term interest rates. These GAOs are “in the money” at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of derivatives (receiver swaps and payer swaptions).
Notes to the consolidated financial statements continued 43 – Financial guarantees and options continued ‘No MVR’ guarantees Certain unitised with-profit policies containing “no MVR” guarantees, similar to those in the UK, have been sold in Ireland. These guarantees as at 31 December 2014 are “in-the-money” by £0.1 million (2013: £0.2 million “in-the-money”). This has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees. The value of these guarantees is usually sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies.
(iii) Spain and Italy Guaranteed investment returns and guaranteed surrender values The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy. Traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and up to 4% in Italy on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2014, total liabilities for the Spanish business were £1 billion (2013: £1 billion) with a further reserve of £6.1 million (2013: £0.1 million) for guarantees. Total liabilities for the Italian business were £13.9 billion (2013: £11 billion), with a further provision of £42 million (2013: £43 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 increase by £34 million (2013: £7 million) in Spain and £nil (2013: £nil) in Italy if interest rates fell by 1% from end 2014 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-term market interest rate of 1.37% and no lapses or premium discontinuances. In the local valuation there is no allowance for stochastic modelling of guarantees and options.
Of the above total, £5,974 million (2013: £5,553 million) is expected to be recovered more than one year after the statement of financial position date.
Carrying amount at 1 January 5,784 5,972 Asset in respect of new business 316 268 Expected change in existing business asset 7 19 Variance between actual and expected experience 536 454 Impact of operating assumption changes (585) 247 Impact of economic assumption changes 554 (426) Other movements 34 81
Carrying amount at 1 January 1,164 1,254 Impact of changes in assumptions 65 (45) Reinsurers’ share of claim losses and expenses
Incurred in current year 292 312 Incurred in prior years (105) (32)
Change in reinsurance asset recognised as income (49) (64) Effect of portfolio transfers, acquisitions and disposals (31) (9) Foreign exchange rate movements 8 (11) Other movements 5 (6)
Carrying amount at 1 January 256 248 Premiums ceded to reinsurers in the year 643 641 Less: Reinsurers’ share of premiums earned during the year (634) (643) Change in reinsurance asset recognised as income 9 (2) Reinsurers’ share of portfolio transfers and acquisitions (2) 7 Foreign exchange rate movements (10) — Other movements (3) 3
Persistency rates 15 (1) Mortality for assurance contracts 20 8 Mortality for annuity contracts 283 85 Tax and other assumptions 75 20 Investment contracts Interest rates (2) — Expenses — — Persistency rates — — Tax and other assumptions — — General insurance and health business Change in loss ratio assumptions — 3 Change in discount rate assumptions (145) 33 Change in expense ratio and other assumptions 1 —
Net deferred tax liability (1,015) (312) Less: Amounts classified as held for sale — (7)
Net liability at 1 January (312) (1,007) Acquisition and disposal of subsidiaries1 5 682 Amounts charged to income statement (note 14a) (291) (251) Amounts (charged)/credited to other comprehensive income (note 14b) (445) 271 Foreign exchange rate movements 28 (8) Other movements — 1
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is convincing evidence that future profits will be available. Where this is the case, the directors have relied on business plans supporting future profits. The Group has unrecognised tax losses and other temporary differences of £694 million (2013: £777 million) to carry forward against future taxable income of the necessary category in the companies concerned. Of these, trading losses of £48 million will expire within the next 20 years. The remaining losses have no expiry date. In addition, the Group has unrecognised capital losses of £434 million (2013: £438 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 2014 (2013: £nil).
Total IAS 19 obligations to main staff pension schemes (Note 49(a)) 391 367 Deficits in other staff pension schemes 43 43
Other provisions comprise many small provisions throughout the Group for obligations such as costs of compensation, litigation and staff entitlements. Of the total, £493 million (2013: £532 million) is expected to be settled more than one year after the statement of financial position date.
(i) UK schemes In the UK, the Group operates two main pension schemes, the Aviva Staff Pension Scheme (ASPS) and the smaller RAC (2003) Pension Scheme which was retained after the sale of RAC Limited in September 2011. As the defined benefit section of both UK schemes is now closed to both new members and future accrual, existing deferred members in active service and new entrants participate in the defined contribution section of the ASPS. Both schemes operate within the UK pensions’ regulatory framework.
Net surplus in the schemes at 1 January 12,398 (12,159) 239 Administrative expenses1 — (27) (27)
Total pension cost charged to expenses — (27) (27) Net interest credited/(charged) to investment income/(finance costs)2 542 (522) 20
Remeasurements: Actual return on scheme assets 3,135 — 3,135 Less: Interest income on scheme assets (542) — (542)
Total remeasurements recognised in other comprehensive income from continuing operations 2,593 (931) 1,662
The present value of unfunded post-retirement benefit obligations included in the table above is £120 million at 31 December 2014 (2013: £118 million). The increase in the net surplus in the pension schemes was primarily due to positive asset performance driven by a fall in interest rates. This was partially offset by an increase in the defined benefit obligation due to a fall in discount rate. Within the discount rate the adverse impact from the fall in interest rates was partly countered by the benefit from a widening of the spread between UK corporate bond yields and gilt yields.
Remeasurements: Actual return on scheme assets 366 — 366 Less: Interest income on scheme assets (543) — (543)
Employer contributions 149 — 149 Employee contributions 1 (1) — Benefits paid (371) 371 — Administrative expenses paid from scheme assets2 (18) 18 — Foreign exchange rate movements (10) 6 (4)
Total scheme assets are analysed by those that have a quoted market price in active market and other as follows: Total Quoted £m
Notes to the consolidated financial statements continued 49 – Pension obligations continued (iii) Assumptions on scheme liabilities The valuations used for accounting under IAS 19 have been based on the most recent full actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2014.
– RAC SAPS series 1, including allowances for future improvement 65 87.5 90.1 89.3 91.6
Ireland 89% PNA00 with allowance for future improvements 61 87.8 91.1 90.7 94.0
Notes to the consolidated financial statements continued 49 – Pension obligations continued (c) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest 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 Company contributes up to a maximum 14%, together with the cost of the death-in-service benefits. These contribution rates are unchanged for 2015. The amount recognised as an expense for defined contribution schemes is shown section (d) below.
Continuing operations UK defined benefit schemes 31 19 Overseas defined benefit schemes (1) (147)
Total defined benefit schemes (note 11b) 30 (128) UK defined contribution schemes 94 90 Overseas defined contribution schemes 16 17
There were no significant contributions payable or prepaid in the consolidated statement of financial position as at either 31 December 2014 or 2013.
50 – Borrowings Our borrowings are either core structural borrowings or operational borrowings. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.
50 – Borrowings continued (b) Core structural borrowings (i) The carrying amounts of these borrowings are: Upper Tier 2 £m Lower Tier 2 £m Senior £m Total £m Upper Tier 2 £m Lower Tier 2 £m Senior £m Total £m
The classifications between Upper Tier 2, Lower Tier 2 and Senior debt shown above are as defined by the PRA in GENPRU Annex 1 ‘Capital Resources’. All the above borrowings are stated at amortised cost. As described in note 59, the Group has designated a portion of its euro denominated debt as a hedge of the net investment in its European subsidiaries. The carrying value of the debt, included in the table above, at 31 December 2014 was £1,292 million (2013: £1,428 million).
All the above borrowings are stated at amortised cost, except for the loan notes issued in connection with the UK lifetime mortgage business of £1,372 million (2013: £1,313 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 either ‘Level 2’ or ‘Level 3’ in the fair value hierarchy, depending on whether observable market prices are available for the loan note. These have been designated at fair value through profit and loss in order to present the relevant mortgages, borrowings and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch. The securitised mortgage loan notes are at various fixed, floating and index-linked rates. Further details about these notes are given in note 25.
Total contractual undiscounted cash flows 2,376 1,006 3,382 3,127 1,238 4,365
(iii) Commercial paper The commercial paper consists of £516 million issued by the Company (2013: £556 million) and is considered core structural funding. All commercial paper is repayable within one year and is issued in a number of different currencies, primarily sterling, euros and US dollars. Its fair value is considered to be the same as its carrying value.
50 – Borrowings continued (c) The UK long-term business entered into a financial reassurance agreement with Swiss Re in 2008, under which up-front payments are received from Swiss Re in return for 90% of future surpluses arising. The loan will be repaid as profits emerge on the business. The UK long-term business entered into an additional financial reassurance agreement with BNP Paribas in 2012 in return for 100% of future surpluses arising. The loan will be repaid as profits emerge on the business. (d) 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. (e) Other loans include external debt raised by overseas long-term businesses to fund operations.
Amortisation of discounts and other non-cash items 5 (29) (24) 5 (21) (16) Movements in debt held by Group companies3 — 1 1 (1) (49) (50)
(f) Undrawn borrowings The Group and Company have the following undrawn committed central borrowing facilities available to them, of which £750 million (2013: £750 million) is used to support the commercial paper programme: £m
Expiring within one year 350 400 Expiring beyond one year 1,200 1,100 51 – Payables and other financial liabilities This note analyses our payables and other financial liabilities at the end of the year.
Payables arising out of direct insurance 948 1,115 Payables arising out of reinsurance operations 358 440 Deposits and advances received from reinsurers 92 145 Bank overdrafts (see below) 550 493 Derivative liabilities (note 59) 3,481 2,251 Amounts due to brokers for investment purchases 73 164 Obligations for repayment of cash collateral received 5,577 5,604 Other financial liabilities 933 1,747
Expected to be settled within one year 10,731 10,337 Expected to be settled in more than one year 1,281 1,608 1 Restated for the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details.
(b) Asbestos, pollution and social environmental hazards In the course of conducting insurance business, various companies within the Group receive general insurance liability claims, and become involved in actual or threatened related litigation arising there from, including claims in respect of pollution and other environmental hazards. Amongst these are claims in respect of asbestos production and handling in various jurisdictions, including Europe, Canada and Australia. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. However, on the basis of current information having regard to the level of provisions made for general insurance claims, the directors consider that any additional costs arising are not likely to have a material impact on the financial position of the Group.
(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 43 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.
53 – Contingent liabilities and other risk factors continued (e) Structured settlements The Company has purchased annuities from licensed Canadian life insurers to provide for fixed and recurring payments to claimants. As a result of these arrangements, the Company is exposed to credit risk to the extent that any of the life insurers fail to fulfill their obligations. The Company's maximum exposure to credit risk for these types of arrangements is approximately $1,224 million as at 31 December 2014 (2013: $1,119 million). Credit risk is managed by acquiring annuities from a diverse portfolio of life insurers with proven financial stability. This risk is reduced to the extent of coverage provided by Assuris, the life insurance industry compensation plan. As at 31 December 2014, no information has come to the Company's attention that would suggest any weakness or failure in life insurers from which it has purchased annuities and consequently no provision for credit risk is required.
54 – Commitments This note gives details of our commitments to capital expenditure and under operating leases.
Later than 1 year and not later than 5 years 290 357 Later than 5 years 421 575
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases 47 45
Financed by Equity shareholders' funds 10,018 7,964 Non-controlling interests 1,166 1,471 Direct capital instruments & fixed rate tier 1 notes 892 1,382 Preference shares 200 200 Subordinated debt 4,594 4,370 Senior debt 716 755
Tangible debt leverage 41% 48% 1 ‘Corporate’ and ‘other Business’ includes centrally held tangible net assets, the main UK staff pension scheme surplus and also reflects internal lending arrangements. These internal lending arrangements, which net out on consolidation, include the formal loan arrangement between Aviva Group Holdings Limited and Aviva Insurance Limited (AIL). Internal capital management in place allocated a majority of the total capital of AIL to the UK general insurance operations with the remaining capital deemed to be supporting residual (non-operational) Pillar II ICA risks.
3 Total debt comprises direct capital instruments and fixed rate tier 1 notes, Aviva plc preference share capital and core structural borrowings. In addition preference share capital of GA plc of £250 million within non-controlling interests has been included.
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. At the end of 2014 the Group had £17.6 billion (2013: £16.1 billion) of total capital employed in our trading operations measured on an IFRS basis. In April 2014 the Group redeemed £200 million and €50 million of Lower Tier 2 subordinated debt at their first call dates. In July 2014 the Group issued €700 million of Lower Tier 2 subordinated debt callable in 2024. This was used to repay a €700 million direct capital instrument at its first call date, in November 2014. On a net basis, these transactions did not impact on Group IGD solvency and Economic Capital measures. Tangible debt leverage, the ratio of external senior and subordinated debt to tangible capital employed, is 41% (2013: 48%). At the end of 2014 the market value of our external debt, subordinated debt, preference shares (including both Aviva plc preference shares of £200 million and General Accident plc preference shares, within non-controlling interest, of £250 million), and direct capital instruments and fixed rate tier 1 notes was £7,511 million (2013: £7,573 million).
Profit before tax from continuing operations 2,663 1,472 Adjustments for: Share of profits of joint ventures and associates (147) (120) Dividends received from joint ventures and associates 52 47 (Profit)/loss on sale of: Investment property (49) 2 Property and equipment (4) — Subsidiaries, joint ventures and associates (174) (115)
Changes in working capital Increase in reinsurance assets (818) (571) Increase in deferred acquisition costs (21) 90 Increase in insurance liabilities and investment contracts 11,552 3,983 Increase in other assets (1,495) 5,135
Total cash (used in)/generated from operating activities (87) 4,512 1 Restated for the adoption of amendments to IAS 32 ‘Financial Instruments: Presentations’ – see note 1 for details.
The cash flows presented in this statement cover all the Group’s activities and include flows from both policyholder and shareholder activities. Operating cash flows reflect the movement in both policyholder and shareholder controlled cash and cash equivalent balances. During the year the net operating cash outflow reflects a number of factors, including the level of premium income, payments of claims, creditors and surrenders and purchases and sales of operating assets including financial investments. It also includes changes in the size and value of consolidated cash investment funds and changes in the Group participation in these funds.
(b) Cash flows in respect of, and additions to, the acquisition of subsidiaries, joint ventures and associates comprised: Cash consideration for subsidiaries, joint ventures and associates acquired and additions 79 1 Less: Cash and cash equivalents acquired with subsidiaries — 28
Cash flows on disposals – continuing operations 110 377 Cash flows on disposal – discontinued operations (20) (1,582)
Cash at bank and in hand 2,855 4,103 Cash equivalents 20,259 22,379
Analysis of liabilities: Participating insurance liabilities 1,766 12,111 9,870 23,747 95 23,842 20,992 44,834 — 44,834 45,098
57 – Capital statement continued Analysis of movements in capital of long-term businesses For the year ended 31 December 2014
Available capital resources at 31 December 253 2,111 1,583 3,947 2,684 6,631 13,269 19,900 1 New with-profit sub-fund (NWPSF) changes in management policy include increase in the value of the reattributed estate (RIEESA) as a result of the transfer of the non-profit business from RIEESA to NWPSF of £1.1 billion.
2 Included within transfers, acquisitions and disposals is £550 million of cash consideration paid from life operations to other non-life operations within the Group for the sale of Aviva Life & Pensions Ireland Limited and Aviva Powszechne Towarzystwo Emerytalne BZ WBK S.A.
Notes to the consolidated financial statements continued 57 – Capital statement continued
Estimated excess available capital £bn 1 These realistic liabilities include the shareholders’ share of accrued bonuses of £(0.2) billion (31 December 2013: £0.1 billion). Realistic liabilities adjusted to eliminate the shareholders’ share of accrued bonuses are £33.0 billion (31
December 2013: £33.4 billion).These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4 billion, £0.3 billion and £3.0 billion for NWPSF, OWPSF and WPSF respectively (31 December 2013: £1.4 billion, £0.2 billion and £2.5 billion for NWPSF, OWPSF and WPSF respectively).
• (ii) UK non-participating funds – any available surplus held in these is attributable to shareholders. Capital in the non-profit funds may be made available to meet requirements elsewhere in the Group subject to meeting the regulatory requirements of the fund. Any transfer of the surplus may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
58 – Risk management This note sets out the major risks our businesses and its 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.
(a) Risk management framework The risk management framework (RMF) in Aviva forms an integral part of the management and Board processes and decisionmaking 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 (IMMMR) 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, general insurance, 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.
As at 31 December 2014 AAA AA A BBB Speculative grade Not rated
As at 31 December 2013 restated 1 AAA AA A BBB Speculative grade Not rated
Carrying value £m 1 Restated for the adoption of amendments to IAS 32 ‘Financial Instruments: Presentation’ – see note 1 for details
Notes to the consolidated financial statements continued 58 – Risk management continued The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £2.5 billion (2013: £2.4 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade. The Group continues to hold a series of macro credit hedges to reduce the overall credit risk exposure, and has increased these hedges during 2014. The Group's maximum exposure to credit risk of financial assets, without taking collateral or these hedges into account, is represented by the carrying value of the financial instruments in the statement of financial position. These comprise debt securities, reinsurance assets, derivative assets, loans and receivables. The carrying values of these assets are disclosed in the relevant notes: financial investments (note 27), reinsurance assets (note 44), loans (note 24) and receivables (note 28). The collateral in place for these credit exposures is disclosed in note 60; Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements To the extent that collateral held is greater than the amount receivable that it is securing, the table above shows only an amount equal to the latter. In the event of default, any over-collateralised security would be returned to the relevant counterparty.
(ii) Financial exposures to peripheral European countries and worldwide banks Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2014 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain, which has benefitted from an increase in market values. The completion of the disposal of the Group’s interest in Eurovita has resulted in a reduction of our exposure to Italian sovereign and corporate debt. In light of the improving economic situation in Ireland, we have made a modest increase in our exposure to Irish sovereign debt during 2014. Information on our exposures to peripheral European sovereigns and banks is provided in notes 27(e) and 27(f). We continue to monitor closely the situation in the eurozone and have had additional restrictions on further investment in place since late 2009 as well as taking actions to reduce exposure to higher risk assets.
(iv) Loans 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.
(v) Credit concentration risk The long-term and general insurance businesses are generally not individually exposed to significant concentrations of credit risk due to the regulations applicable in most markets and the Group credit policy and limits framework, which limit investments in individual assets and asset classes. Credit concentrations are monitored as part of the regular credit monitoring process and are reported to Group ALCO. With the exception of government bonds the largest aggregated counterparty exposure within shareholder assets (i.e. excluding potential exposures arising from reinsurance of unit linked funds) is approximately 1.6% of the total shareholder assets (gross of ‘held for sale’).
58 – Risk management continued (viii) Derivative credit exposures The Group is exposed to counterparty credit risk through derivative trades. This risk is mitigated through collateralising almost all trades (the exception being certain foreign exchange trades where it has historically been the market norm not to collateralise). Residual exposures are captured within the Group’s credit management framework.
(x) Impairment of financial assets 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 or ‘held for sale’.
Debt securities 1,021 — — — — — 1,021 Reinsurance assets 5,425 — — — — — 5,425
Receivables and other financial assets 5,849 60 9 7 8 — 5,933
Debt securities 1,133 — — — — — 1,133 Reinsurance assets 5,172 — — — — — 5,172
(c) Market risk Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations in interest rates, foreign currency exchange rates, equity and property prices. Market risk arises in business units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly by the shareholders. We actively seek some market risks as part of our investment and product strategy. However, we have limited appetite for interest rate risk as we do not believe it is adequately rewarded. The management of market risk is undertaken at business unit and at Group level. Businesses manage market risks locally using the Group market risk framework and within local regulatory constraints. Group ALM is responsible for monitoring and managing market risk at Group level and has established criteria for matching assets and liabilities to limit the impact of mismatches due to market movements. In addition, where the Group’s long-term savings businesses have written insurance and investment products where the majority of investment risks are borne by its policyholders, these risks are managed in line with local regulations and marketing literature, in order to satisfy the policyholders’ risk and reward objectives. The Group writes unit-linked business in a number of its operations. The shareholders’ exposure to market risk on this business is limited to the extent that income arising from asset management charges is based on the value of assets in the fund. The most material types of market risk that the Group is exposed to are described below.
(i) Equity price risk The Group is subject to equity price risk arising from changes in the market values of its equity securities portfolio. We continue to limit our direct equity exposure in line with our risk preferences. At a business unit level, investment limits and local asset admissibility regulations require that business units hold diversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdings of unquoted equity securities.
Notes to the consolidated financial statements continued 58 – Risk management continued 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. At 31 December 2014 the Group’s shareholder funds held £2 billion notional of equity hedge put spreads, with up to 9 months to maturity with an average strike of 81-61% of the prevailing market levels on 31 December 2014. Sensitivity to changes in equity prices is given in section ‘(j) risk and capital management’ below.
58 – Risk management continued 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.
(v) Currency risk The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either by unit-linked or with-profit contract liabilities or hedging. 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 half 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 euro, sterling 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. Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group’s regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set.
A 10% change in sterling to euro/Canada$ (CAD) period-end foreign exchange rates would have had the following impact on total equity.
A 10% change in sterling to euro/ Canada$ (CAD) average foreign exchange rates applied to translate foreign currency profits would have had the following impact on profit before tax, excluding ‘discontinued operations’.
(vi) Derivatives risk Derivatives are used by a number of the businesses. Activity is overseen by the Group ALM and Group Risk teams, which monitor exposure levels and approves large or complex transactions. Derivatives are primarily used for efficient investment management, risk hedging purposes, or to structure specific retail savings products. The Group applies strict requirements to the administration and valuation processes it uses, and has a control framework that is consistent with market and industry practice for the activity that is undertaken.
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.
(f) General insurance risk Types of risk General insurance risk in the Group arises from: • Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations; • Unexpected claims arising from a single source or cause; • Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and • Inadequate reinsurance protection or other risk transfer techniques.
58 – Risk management continued (h) Operational risk Operational risk is the risk of direct or indirect loss, arising from inadequate or failed internal processes, people and systems, or external events including changes in the regulatory environment. We have limited appetite for operational risk and aim to reduce these risks as far as is commercially sensible. Our business units are primarily responsible for identifying and managing operational risks within their businesses, within the group-wide operational risk framework including the risk and control self-assessment process. Businesses must be satisfied that all material risks falling outside our risk tolerances are being mitigated, monitored and reported to an appropriate level. Any risks with a high potential impact are monitored centrally on a regular basis. Businesses use key indicator data to help monitor the status of the risk and control environment. They also identify and capture loss events, taking appropriate action to address actual control breakdowns and promote internal learning.
Assurance mortality/morbidity (life insurance only) The impact of an increase in mortality/morbidity rates for assurance contracts by 5%.
Notes to the consolidated financial statements continued 58 – Risk management continued Long-term business Sensitivities as at 31 December 2014 2014 Impact on profit before tax (£m)
Assets backing life shareholders' funds (75) 45 (60) 20 (20) — — —
Assets backing life shareholders' funds (115) 80 (65) 20 (20) — — —
Assets backing life shareholders' funds (35) 55 (25) 40 (45) — — —
Assets backing life shareholders' funds (75) 100 (35) 45 (45) — — —
Changes in sensitivities between 2014 and 2013 reflect movements in market interest rates, portfolio growth, changes to asset mix and the relative durations of assets and liabilities and asset liability management actions. The sensitivities to economic movements relate mainly to business in the UK. In general, a fall in market interest rates has a beneficial impact on non-participating business, due to the increase in market value of fixed interest securities and the relative durations of assets and liabilities. Similarly a rise in interest rates has a negative impact. Mortality and expense sensitivities also relate primarily to the UK.
General insurance and health business sensitivities as at 31 December 2014 2014 Impact on profit before tax (£m)
59 – Derivative financial instruments and hedging continued (ii) The contractual undiscounted cash flows in relation to non-hedge derivative liabilities have the following maturities: £m
(a) Offsetting arrangements Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously. Aviva mitigates credit risk in derivative contracts by entering into collateral agreements, where practical, and in ISDA master netting agreements for each of the legal entities to facilitate Aviva’s 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 59. Aviva participates in a number of stock lending and repurchase arrangements. In some of these arrangements cash is exchanged by Aviva for securities and a related receivable is recognised within ‘Loans to Banks’ (Note 24). These arrangements are reflected in the tables below. In instances where the collateral is recognised on the statement of financial position, the obligation for its return is included within ‘payables and other financial liabilities’. In other arrangements, securities are exchanged for other securities. The collateral received must be in a readily realisable form such as listed securities and is held in segregated accounts. Transfer of title always occurs for the collateral received. In many instances, however, no market risk or economic benefit is exchanged and these transactions are not recognised on the statement of financial position in accordance with our accounting policies, and accordingly not included in the tables below.
Financial Assets Derivative Financial Assets 4,467 (1,065) 3,402 (1,846) (931) (404) 221 Loans to banks and repurchase arrangements 3,763 — 3,763 — — (3,763) —
1 Restated for the adoption of amendments to IAS32 – Financial Instruments:Presentation’ – See note 1 for details
61 – Related party transactions This note gives details of the transactions between Group companies and related parties which comprise our joint ventures, associates and staff pension schemes. The Group undertakes transactions with related parties in the normal course of business. Loans to related parties are made on normal arm’s-length commercial terms.
Key management compensation The total compensation to those employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the executive and non-executive directors is as follows: £m 2013 £m
Salary and other short-term benefits 8.9 6.7 Other long-term benefits 4.1 1.6 Post-employment benefits 1.0 1.1 Equity compensation plans 1.9 3.3 Termination benefits — 1.1
Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration Report.
A complete list of the Group’s subsidiaries is contained in the Group’s annual return to Companies House.
France Aviva France SA (99.99%) and its principal subsidiaries: Antarius S.A. (50%) Aviva Assurances S.A. (99.9%) Aviva Investors France S.A. (99.9%) Aviva Vie SA (99.9%) Aviva Epargne Retraite (99.9%) Union Financière de France Banque (Banking) (75.9%)
Ireland Aviva Health Group Ireland Limited (71%) Aviva Life & Pensions Ireland Limited1 1 On 1 January 2015, following approval from the High Court of Ireland in December 2014, the Ireland life business previously with Aviva Life & Pensions Ireland Limited was transferred to Aviva Life & Pensions UK Limited.
Poland Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A. (90%) Aviva Towarzystwo Ubezpieczen na Zycie SA (90%) Aviva Towarzystwo Ubezpieczen Ogolnych SA (90%)
Associates and joint ventures The Group has ongoing interests in the following operations that are classified as associates or joint ventures. Further details of those operations that were most significant in 2014 are set out in notes 19 and 20 to the financial statements.
63 – Subsequent events In February 2015, Aviva Investors reached a settlement with the FCA for certain systems and controls failings that happened between August 2005 to June 2013 and agreed to pay a fine of £17.6 million. The impact of this has been fully provided for within the FY14 result. Note 4 details subsequent events relating to the acquisition and disposal of subsidiaries.
Dividends received from subsidiaries I 1,172 1,450 Interest receivable from Group companies I 60 103
Net investment expense (2) (5) Operating expenses B (162) (326) Interest payable to Group companies I (258) (326) Interest payable on borrowings (314) (332) Realised loss on loan — (78)
Fair value gains on investments in subsidiaries and joint ventures E 866 2,108
Total comprehensive income for the year 1,428 2,708 238 | Aviva plc Annual report and accounts 2014
Profit for the year — — — — — — 563 563 — 563
Profit for the year — — — — — — 602 602 — 602
Aggregate tax effect — — — — — — 22 22 — 22
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 117 to 129. The notes identified alphabetically on pages 242 to 246 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 137 to 237.
Ordinary share capital 31 737 736 Preference share capital 34 200 200 Called up capital 937 936 Share premium account 31b 1,172 1,165 Merger reserve E 735 735 Investment valuation reserve E 9,768 8,902 Equity compensation reserve E 65 54 Retained earnings E 3,137 3,158 Direct capital instruments and fixed rate tier 1 notes 35 892 1,382
Loans owned to subsidiaries I — 9,975 Other amounts owed to subsidiaries I 3,885 3,722 Other creditors 132 90
Cash and cash equivalents at 1 January 223 152 Exchange (losses)/gains on cash and cash equivalents (9) 15
Fair value as at 1 January 33,095 31,023 Movement in fair value 835 2,072
Fair values are estimated using applicable valuation models underpinned by the Company’s market capitalisation, and are classified as Level 2 in the fair value hierarchy described in note 23 to the Group consolidated financial statements.
Wages and salaries 35 84 Social security costs 5 8 Post-retirement obligations
Defined contribution schemes 6 11 Equity compensation plans (see (iii) below) 11 11 Termination benefits 8 80
(iii) Tax credited to equity Tax credited to equity comprises £19 million (2013: £22 million) in respect of coupon payments on the direct capital instruments and fixed rate tier 1 notes.
(iv) Tax reconciliation The tax on the Company’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: £m £m
UK legislation was substantively enacted in July 2013 to reduce the main rate of corporation tax from 23% to 21% from 1 April 2014, resulting in an effective rate for the year ended 31 December 2014 of 21.5%. A further reduction to 20% was also enacted with effect from 1 April 2015. The 20% rate has been used in the calculation of the Company’s deferred tax assets and liabilities as at 31 December 2014.
Arising in the year: Profit for the year — — — 602 Fair value gains on investments in subsidiaries and joint ventures — 2,108 — — Remeasurements of pension schemes — — — (2) Dividends and appropriations — — — (538) Reserves credit for equity compensation plans — — 37 — Trust shares distributed in the year — — — (33) Issue of share capital under equity compensation scheme — — (43) 47 Aggregate tax effect — — — 22
Details of the Merger reserve are given in the Group consolidated financial statements, note 36.
The remeasurement of pension schemes relates to a small unfunded defined benefit scheme which is closed to new entrants.
Total contractual undiscounted cash flows 5,346 7,039 12,385 5,163 7,157 12,320
Where subordinated debt is undated, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £72 million (2013: £73 million). The fair value of the subordinated debt at 31 December 2014 was £5,188 million (2013: £4,707 million), calculated with reference to quoted prices. The fair value of the 9.5% guaranteed bonds 2016 at 31 December 2014 was £223 million (2013: £236 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 50, with details of the fair value hierarchy in relation to these borrowings in note 23.
H – Risk management Risk management in the context of the Group is considered in the Group consolidated financial statements, note 58. The business of the Company is managing its investments in subsidiary and joint venture operations. Its risks are considered to be the same as those in the operations themselves and full details of the major risks and the Group’s approach to managing these are given in the Group consolidated financial statements, note 58. Such investments are held by the Company at fair value in accordance with accounting policy D. The fair values of the subsidiaries and joint ventures are estimated using applicable valuation models, underpinned by the Company’s market capitalisation. This uses the Company’s closing share price at year end. Given that the key input into the valuation model is based on an observable current share price, and therefore sensitive to movements in that price, the valuation process is not sensitive to non-observable market assumptions. Financial assets, other than investments in subsidiaries and the joint venture, largely consist of amounts due from subsidiaries. As at the balance sheet date, these receivable amounts were neither past due nor impaired. Financial liabilities owed by the Company as at the balance sheet date are largely in respect of borrowings (details of which are provided in note F and the Group consolidated financial statements, note 50) and loans owed to subsidiaries. Loans owed to subsidiaries were within agreed credit terms as at the balance sheet date.
The related parties’ payables are not secured and no guarantees were received in respect thereof. The payables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties given by the Company on behalf of related parties are given in note 53(f). The directors and key management of the Company are considered to be the same as for the Group. Information on both the Company and Group key management compensation can be found in note 61.
J – Subsequent event Refer to note 4(a) for further details on the proposed acquisition of Friends Life.
K – Statement of cash flows Following a review of the classification of the cash flows, additional disclosure in respect of the receipts under equity compensation plans has been provided and comparative amounts have been amended from amounts previously reported. This has no impact on the total cash and cash equivalents balance.
In this section Page Financial and operating performance 248 Selected consolidated financial data 261 Information on the Company 263 Analysis of investments 270 Contractual obligations 275 Risk and capital management 276 Corporate responsibility key performance indicators 280 Corporate responsibility assurance statement 282
O ther inform ation Aviva plc Annual report and accounts 2014 | 247
The economies where the Group has operations that were impacted in 2014 by estimated low or negative growth include: France 0.4%1 and Italy (0.4)% 1. Economic growth in the UK was encouraging at 2.6%1 and the Canadian economy remained solid with estimated growth of 2.4%1 in 2014. Some of our other markets experienced stronger growth, for example c.3%1 in both Poland and Turkey, and 7.4%1 in China.
UK with-profits business With-profits products are designed to pay policyholders smoother investment returns through a combination of regular bonuses and final bonuses. Shareholders' profit emerges from this business in direct proportion to policyholder bonuses, as shareholders receive up to one-ninth of the value of each year's bonus declaration to policyholders. Accordingly, the smoothing inherent in the bonus declarations provides for relatively stable annual shareholders' profit from this business. The most significant factors that influence the determination of bonus rates are the return on the investments of the with-profits funds and expectations about future investment returns. Actual and expected investment returns are affected by, among other factors, the mix of investments supporting the with-profits fund, which in turn is influenced by the extent of the inherited estate within the with-profits fund. The annual excess of premiums and investment return over operating expenses, benefit provisions and claims payments within our with-profits funds that are not distributed as bonuses and related shareholders' profit is transferred from the income statement to the unallocated divisible surplus. Conversely, if a shortfall arises one year, for example because of insufficient investment return, a transfer out of the unallocated divisible surplus finances bonus declarations and related shareholders' profit. The unallocated divisible surplus consists of future (as yet undetermined) policyholder benefits, associated shareholders' profit and the orphan estate. The orphan estate serves as working capital for our with-profits funds. It affords the withprofits funds a degree of freedom to invest a substantial portion of the funds' assets in investments yielding higher returns than might otherwise be obtainable without being constrained by the need to demonstrate solvency.
Other long-term insurance and savings business Non-profit business falls into two categories: investment type business and risk cover and annuity business. Investment type business, which accounts for most of our nonprofit business, includes predominantly unit-linked life and pensions business where the risk of investing policy assets is borne entirely by the policyholder. Operating earnings arise from unitlinked business when fees charged to policyholders based on the value of the policy assets exceed costs of acquiring new business and administration costs. Shareholders bear the risk of investing shareholder capital in support of these operations.
Fund management Fund management operating earnings consist of fees earned for managing policyholder funds and external retail and institutional funds on behalf of clients, net of operating expenses. Arrangements for the management of proprietary funds are conducted on an arm's length basis between our fund management and insurance businesses. Such arrangements exist mainly in the UK, France, Ireland and Canada. Proprietary insurance funds in most other countries are externally managed.
Other operations Other operations includes our operations other than insurance and fund management, including Group Centre expenses.
• Better reflection of the relative economic value of regular premium contracts compared to single premium contracts: Sales recognise the economic value of all expected contractual cash flows for regular premium contracts in the year of inception, whereas IFRS net written premiums only recognise premiums received in the year.
• Better reflection of current management actions in the year: IFRS net written premiums include premiums on regular premium contracts which incepted in prior years, and therefore reflect the actions of management in prior years.
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Long-term insurance, savings and health new business sales 27,099 26,012 26,150
Deposits taken on non-participating investment contracts and equity release contracts (5,641) (4,389) (4,607) Retail sales of mutual fund type products (investment
Less: long-term insurance and savings business premiums ceded to reinsurers (970) (905) (930)
United Kingdom & Ireland Life 12,444 12,393 13,690 United Kingdom & Ireland GI 4,028 4,200 4,490
Sales (from continuing operations) Year ended 31 December 2014 Total sales from continuing operations increased to £34,859 million (2013: £34,185 million) for the reasons set out in the market performance sections below.
Total sales from continuing operations were stable at £34,185 million (2012: £34,516 million) for the reasons set out in the market performance sections below.
Adjusted operating profit We report to our chief operating decision makers in the businesses the results of our operating segments using a nonGAAP financial performance measure we refer to as ‘adjusted operating profit’. We define our segment adjusted operating profit as profit before income taxes and non-controlling interests in earnings, excluding the following items: investment return variances and economic assumption changes on longterm and non-long-term business, impairment of goodwill, joint ventures and associates, amortisation and impairment of other intangibles (excluding the acquired value of in-force business), profit or loss on the disposal and remeasurement of subsidiaries, 252 | Aviva plc Annual report and accounts 2014
Adjusted operating profit before tax attributable to shareholders' profit (excluding Delta Lloyd as an associate) 2,173 2,049 1,926
Adjusted operating profit before tax attributable to shareholders' profit 2,173 2,049 2,038
Share of Delta Lloyd's non-operating items (before tax) as an associate — — (523)
Non-operating items before tax 248 (405) (1,509) Share of Delta Lloyd's tax expense, as an
Profit/(loss) before tax attributable to shareholders' profits – discontinued operations 58 1,538 (2,696)
Adjusting items (from continuing operations) Year ended 31 December 2014 Life investment variances were £72 million positive (2013: £49 million negative) mainly driven by lower risk free rates and narrowing credit spreads on government and corporate bonds in Italy and Spain. Adverse variances in the UK were due to the adverse impact of falling reinvestment yields net of improved underlying property values on commercial mortgages partly offset by a change to the model used to value certain equity release assets and the consequential impact on the liabilities that they back. Short-term fluctuations on non-long term business were £261 million positive (2013: £336 million negative). The favourable movement in short-term fluctuations during 2014 compared with 2013 is mainly due to a decrease in risk free rates increasing fixed income security market values and other market movements impacting Group centre investments and the centre hedging programme.
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Year ended 31 December 2013 Life investment variances were £49 million negative (2012: £620 million negative). Negative variances in the UK resulting mainly from increasing the allowance for credit defaults on commercial mortgages were partly offset by narrowing spreads on government and corporate bonds in Italy and Spain. Short term fluctuations on non-long term business of £336 million negative (2012: £7 million positive) mainly reflected lower fixed income security market values. Goodwill impairment charges were £48 million and there were impairment charges of £29 million on joint ventures and associates. The total charge for the year was £77 million (2012: £60 million). Profit on disposal and remeasurement of subsidiaries, joint ventures and associates was £115 million (2012: £164 million loss). See ‘IFRS Financial Statements – note 4 – Subsidiaries’ for further details. Integration and restructuring costs from continuing operations were £363 million (2012: £461 million) and mainly included expenses associated with the Group’s transformation programme. Integration and restructuring costs reduced by 21% as the level of transformation activity in UK and Ireland’s general insurance business in 2012 was not repeated and Solvency II implementation costs reduced to £79 million (2012: £117 million).
Income Gross written premiums 21,670 22,035 22,744 Premiums ceded to reinsurers (1,614) (1,546) (1,571)
Year ended 31 December 2013 Net written premiums for continuing operations decreased by £684 million, or 3%, to £20,489 million (2012: £21,173 million). Long-term insurance and savings decreased by £510 million, or 4%, to £11,769 million (2012: £12,279 million) with lower sales in the UK, Ireland, Spain and Asia partly offset by higher sales in France, Poland and Italy. General insurance and health premiums decreased by £174 million, or 2%, to £8,720 million (2012: £8,894 million), mainly reflecting lower sales in the UK and Ireland, partly offset by higher sales in Canada and Europe.
Year ended 31 December 2013 Claims and benefits paid net of reinsurance in 2013 decreased by £1,508 million, or 6%, to £22,093 million (2012: £23,601 million) mainly reflecting lower claims payments in our life businesses. Change in insurance liabilities in 2013 was a credit of £2,493 million (2012: £430 million charge), resulting from changes in economic and non-economic assumptions. The change in investment contract provisions was a charge of £7,050 million (2012: £4,450 million charge) as a result of improved investment market conditions causing an increase in contract liabilities. The change in unallocated divisible surplus (“UDS”) was a credit of £280 million (2012: £6,316 million charge). Fee and commission expense, other expenses and finance costs decreased by £1,149 million to £6,804 million (2012: £7,953 million) mainly as a result of the Group’s cost savings programme. See ‘IFRS Financial Statements – note 7 – Details of expenses’ for further details.
Year ended 31 December 2013 Profit before tax attributable to shareholders was £1,281 million (2012: £175 million). The increase was primarily lower expenses and positive investment variances.
Adjusted operating profit before tax United Kingdom 1,016 930 887 Ireland 23 22 5
UK & Ireland general insurance and health The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our UK and Ireland general insurance and health businesses for the three years ended 31 December 2014, 2013 and 2012.
Adjusted operating profit before tax United Kingdom 455 431 459 Ireland 33 40 29
Year end 31 December 2014 UK & Ireland general insurance and health NWP decreased by 4% to £4,028 million (2013: £4,200 million). Within this, UK general insurance sales fell 4% to £3,663 million (2013: £3,823 million): personal lines NWP was down 5% to £2,152 million (2013: £2,276 million) reflecting underwriting discipline in a soft market, and commercial lines NWP was down 2% to £1,511 million (2013: £1,547 million) reflecting management actions to focus on profitability. Ireland general insurance and health NWP was £365 million (2013: £377 million). Adjusted operating profit before tax from general insurance and health business was up 4% to £488 million (2013: £471 million). An improvement in the underwriting result to £204 million (2013: £123 million), driven by expense savings and favourable prior year claims development, was partly offset by the fact that 2013 benefitted from benign large loss experience and lower interest income on an internal loan ( see ‘Other Group Activities’ below). IFRS profit before tax has increased to £406 million (2013: £387 million). This included adjusted operating profits of £492 million (2013: £465 million), which increased for the reasons set out above. The increase in IFRS profit before tax is mainly due to lower integration and restructuring costs of £11 million (2013: £24 million). The impact of positive short term fluctuations in investments was £82 million (2013: £74 million negative) and in 2014 this mainly arose due to a decrease in risk free rates increasing fixed income security market values. This was offset by an adverse impact from a decrease in the swap rate used to discount latent claims reserves and periodic payment orders.
Year end 31 December 2013 UK & Ireland general insurance and health NWP decreased by 6% to £4,200 million (2012: £4,490 million). Within this, UK general insurance sales fell 6% to £3,823 million (2012: £4,062 million): personal lines NWP was down 5% to £2,276 million (2012: £2,397 million) reflecting underwriting discipline in a soft market, and commercial lines NWP was down 7% to £1,547 million (2012: £1,665 million) reflecting management actions to focus on profitability. Ireland general insurance and health NWP was £377 million (2012: £428 million). Adjusted operating profit before tax from general insurance and health business was down 3% to £471 million (2012: £488 million). An improvement in the underwriting result to £123 million (2012: £42 million), which benefited from benign weather, favourable large loss experience and lower expenses, was more than offset by lower longer-term investment returns due mainly to the revised terms of an internal loan (the impact of this is neutral at an overall Group level).
IFRS profit before tax has increased to £387 million (2012: £248 million). This included adjusted operating profits of £465 million (2012: £480 million), which decreased for the reasons set out above. The increase in IFRS profit before tax is mainly due to lower integration and restructuring costs of £24 million (2012: £170 million). The impact of negative short-term fluctuations in investments was £74 million (2012: £17 million positive) and in 2013 this arose mainly due to an increase in risk free rates reducing fixed income security market values. This was partly offset by a favourable impact from an increase in the swap rate used to discount latent claims.
Adjusted operating profit before tax Long-term insurance and savings business 394 385 335 General insurance and health 78 84 95
Poland The table below presents sales, net written premiums, adjusted operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in Poland for the three years ended 31 December 2014, 2013 and 2012.
O ther inform ation Aviva plc Annual report and accounts 2014 | 257
Canada The table below presents sales, net written premiums, adjusted operating profit and IFRS profit before tax attributable to shareholders for the three years ended 31 December 2014, 2013 and 2012.
Year ended 31 December 2013 General insurance net written premiums increased by 3% to £2,250 million (2012: £2,176 million) driven by rating increases in personal and commercial property and growth in new business volumes across most lines. Adjusted operating profit was £246 million (2012: £277 million), an 11% reduction compared to the prior year. The reduction was driven by a negative £62 million impact from the severe flooding in Alberta and Toronto during the year (there was also a further adverse impact of £67 million from these 258 | Aviva plc Annual report and accounts 2014
Total general insurance and health sales (excluding long-term health) 65 89 120
Year ended 31 December 2014 Long term insurance and savings sales in Asia (excluding Malaysia) increased by 12% to £1,951 million (2013: £1,739 million) due to higher health sales in Singapore and higher protection sales in China partly offset by lower sales in other markets. General insurance and health net written premiums excluding long-term health were £65 million (2013: £89 million), down 27%. Total net written premiums were £781 million (2013: £532 million), up £249 million or 47%, for the same reasons. Adjusted operating profits decreased by 10% to £78 million (2013: £87 million), mainly due to the disposal of the Group’s South Korean business and investment in the Group’s Indonesian joint venture. Profit before tax attributable to shareholders was £38 million (2013: £98 million) including negative investment variances of £11 million (2013: £29 million positive).
Year ended 31 December 2013 Long term insurance and savings sales in Asia decreased by 1% to £1,739 million (2012: £1,765 million). Higher sales in Singapore were more than offset by lower sales in other Asian markets. General insurance and health net written premiums were £89 million (2012: £120 million), down 26%, with the decrease reflecting the withdrawal of some unprofitable health products in Singapore and the disposal of our Sri Lankan business in 2012. Total net written premiums were £532 million (2012: £636 million), down £104 million or 16%, for the same reasons. Adjusted operating profits increased by 64% to £87 million (2012: £53 million), mainly due to higher life profits of £96 million (2012: £69 million) driven by higher earnings on the inforce portfolio and favourable experience in China. Profit before tax attributable to shareholders was £98 million (2012: £62 million).
Aviva Investors The table below presents the sales, adjusted operating profit, profit before tax attributable to shareholders’ profits under IFRS and assets under management of Aviva Investors for the three years ended 31 December 2014, 2013 and 2012. As set out in ‘IFRS Financial statements – note 4 – subsidiaries’, River Road was sold during 2014. The results of the internal asset management operations of Aviva Investors North America which were sold during 2013 with the US life business have been classified within discontinued operations.
Long-term insurance and saving business (including UK retail collectives)1 881 58 92
Adjusted operating profit before tax Fund management operating profit1 79 68 39 Long-term insurance and savings business –
Assets under management (continuing operations) 245,898 240,507 236,336 1 The UK Retail fund management business was transferred from UK Life to Aviva Investors on 9 May 2014 and hence is included in Aviva Investors from 9 May 2014 onwards.
Year ended 31 December 2014 Fund management operating profits were £79 million (2013: £68 million), mainly due to the transfer of UK retail fund management business from UK Life and higher performance fees, partly offset by the impact of the disposal of River Road. Assets under management increased by £5.4 billion to £245.9 billion, driven by favourable market returns which more than offset net redemptions and the impact of the disposal of River Road. Profit before tax was £83 million (2013: £89 million loss), which included a £35 million profit on disposal of River Road and lower integration and restructuring costs. In February 2015, Aviva Investors reached a settlement with the FCA for certain systems and controls failings that happened between 2005-2013 and agreed to pay a fine of £17.6 million. Provision for this expected cost was made at the year end and is fully reflected within Aviva Investors’ adjusted operating profit from other operations.
Year ended 31 December 2013 Fund management operating profits were £68 million (2012: £39 million) driven by higher revenues, reflecting positive market movements and performance fees, and lower costs. Assets under management were up £4.2 billion to £240.5 billion, driven by capital appreciation which more than offset negative net flows. Loss before tax was £89 million (2012: £2 million profit), mainly due to the reasons set out below. In 2013 we found evidence of improper allocation of trades in fixed income securities in Aviva Investors. This occurred between 2005- 2013. These breaches of our dealing policy involved late