Quercus Unit Trust3 Jersey Unit Trust 50 RAC Pension Trustees Limited United Kingdom Ordinary Shares 100 Regional Properties Limited United Kingdom Ordinary Shares 100 Regional Properties Management Limited United Kingdom Ordinary Shares 100 Reim Eurocore France Property Fund 22 Rendement Diversifie M France Mutual Fund 96 Renewable Clean Energy Limited United Kingdom Ordinary Shares 100 Reschop Carré Hattingen GmbH Germany Ordinary Shares 95 Reschop Carré Marketing GmbH Germany Ordinary Shares 100 Retirement Housing Property Partnership United Kingdom Limited Partnership 100 River & Mercantile UK Equity Smaller Companies2 United Kingdom OEIC 38 Rugby Radio Station (General Partner) Limited3 United Kingdom Ordinary 'B' Shares 50 Rugby Radio Station (Nominee) Limited3 United Kingdom Ordinary Shares 50 S&Y Insurance Company Canada Common Shares 100 SachsenFonds Asset Management Czech s.r.o. Czech Republic Ordinary Shares 100 SachsenFonds Asset Management GmbH Germany Ordinary Shares 100 Sachsenfonds GmbH Germany Ordinary Shares 100 Sapphire Actipark 1 S.à r.l. Luxembourg Ordinary Shares 100 Sapphire Actipark 2 S.à r.l. Luxembourg Ordinary Euro 25 each Shares 100 Sapphire Actipark S.C.I. France Ordinary Shares 100 Sapphire Ile de France 1 S.à.r.l. Luxembourg Ordinary Shares 100 Sapphire Ile de France 2 S.à r.l. Luxembourg Ordinary Shares 100 Sapphire Ile de France SCI France Ordinary Euro 1 each Shares 100 Sapphire Lyon 1 S.à r.l. Luxembourg Ordinary Shares 100 Sapphire Lyon 2 S.à r.l. Luxembourg Ordinary Shares 100 Sapphire Lyon S.C.I. France Ordinsary Shares 100 SAS Core + Metz France Ordinary Shares 100 SAS Core + Tour Franklin France Ordinary Shares 100 SAS Core + Tour Franklin 2 France Ordinary Shares 100 SB Mortgage Network Limited United Kingdom Ordinary Shares 82 SC ASPC Domnesti Business Park SRL Romania Nominative Shares 100 Schroder Diversified Growth2 United Kingdom OEIC 100 Schroder Institutional International Bond X Acc2 United Kingdom Unit Trust 54 Schroder Institutional Qep Us Core I United Kingdom Unit Trust 32 Schroder Institutional Sterling Bond X Acc United Kingdom Unit Trust 29 SCI Aix en Provence France Ordinary Shares 100 SCI Bondy Nord France Ordinary Shares 100 SCI Buchelay 78 France Ordinary Shares 100 SCI Campus Medics St Denis France Ordinary Shares 30 SCI Campus Rimbaud St Denis France Ordinary Shares 30 SCI Capimmo France Property Fund 24 SCI Cormontreuil France Ordinary Shares 100 SCI Fli France Property Fund 30 SCI Pesaro France Ordinary Shares 90 Scottish & York Insurance Co. Limited Canada Common Shares 100 SE11 PEP Limited United Kingdom Ordinary Shares 100 Select.Premium C France Mutual Fund 85 Selectinvie - Societe Civile Immobiliere France Ordinary € 0.04 Shares 100 Selectipierre - Société Civile France Ordinary Shares 99 Selectipierre 1 France Ordinary Shares 30 Selectipierre 2 France Ordinary Shares 22 Sequin Holding GmbH Austria Ordinary Shares 100 Serviced Offices UK (Services) Limited3,4 United Kingdom Ordinary Shares 50 Serviced Offices UK GP Limited3,4 United Kingdom Ordinary 'A' Shares 50 Serviced Offices UK LP3 United Kingdom Limited Partnership 50 Serviced Offices UK Nominee Limited3,4 United Kingdom Ordinary Shares 50 Serviced Offices Unit Trust3 Jersey Unit Trust 50 Services D'Assurance Youville Inc. Canada Class A Common Shares 100 Sesame Bankhall Group Limited United Kingdom Ordinary Shares 100 Sesame Bankhall Specialist Lending Services Limited United Kingdom Preference Shares 51 Sesame Bankhall Valuation Services Limited United Kingdom Ordinary 'A' Shares 62 Sesame Desktop Services Limited United Kingdom Ordinary Shares 82 Sesame General Insurance Services Limited United Kingdom Ordinary Shares 82 Sesame Group India Private Limited India Ordinary Shares 82 Sesame Investment Services Limited United Kingdom Ordinary £1 Shares 100 Sesame Limited United Kingdom Ordinary £1 Shares 100 Sesame Mortgage Services Limited United Kingdom Ordinary Shares 82 Sesame Mortgages Limited United Kingdom Ordinary Shares 82 Sesame Network Limited United Kingdom Ordinary Shares 82 Sesame Regulatory Services Limited United Kingdom Ordinary £1 Shares 100 Sesame Select Services Limited United Kingdom Ordinary Shares 82 Sesame Services Limited United Kingdom Ordinary Shares 82 Silicon Properties Limited United Kingdom Ordinary Shares 100 Sinfonia Asset Management Limited United Kingdom Ordinary Shares 47 SIRIUS (SICAV) France Ordinary Shares 97 SLAS Topsail Limited Partnership United Kingdom Limited Partner 100 Société Civile Immobilière France Ordinary € 20 Shares 50 Société Civile Immobilière « CARPE DIEM » France Ordinary €20 shares 50 Société Civile Immobilière Charles Hermite France Ordinary Shares 62 Société Civile Immobilière Montaigne France Ordinary Shares 100 Societe Concessionaire des Immeubles de la Pepiniere France Ordinary € 76.23 Shares 100 Société Française de Gestion et d'Investissement France Ordinary Shares 57 Sofragi France Mutual Fund 57 Solar Clean Energy Limited United Kingdom Ordinary Shares 100 Solus (London) Limited United Kingdom Ordinary Shares 100 Southampton Street LP3 United Kingdom Limited Partnership 50 Southampton Street Nominee 1 Limited3 United Kingdom Ordinary Shares 50 Southampton Street Nominee 2 Limited3 United Kingdom Ordinary Shares 50 Southampton Street Unit Trust3 Jersey Unit Trust 50 Southgate General Partner Limited United Kingdom Ordinary 'A' Shares 50 Southgate LP United Kingdom Limited Partnership 50 Southgate LP (Nominee 1) Limited United Kingdom Ordinary Shares 50 Southgate LP (Nominee 2) Limited United Kingdom Ordinary Shares 50
Southgate Unit Trust Jersey Unit Trust 50 St Christopher's Place Limited United Kingdom Ordinary Shares 100 Staff Schemes Save from Pay Ltd United Kingdom Ordinary Shares 100 Stonebridge Cross Management Limited United Kingdom Guarantee transferred pursuant to the Part VII
SUE Developments Limited Partnership3 United Kingdom Limited Partnership 50 SUE GP LLP3 United Kingdom Limited Liability Partnership 50 SUE GP Nominee Limited3 United Kingdom Ordinary Shares 50 Sunrise Renewables (Barry) Limited United Kingdom Ordinary Shares 100 Sunrise Renewables (Hull) Limited United Kingdom Ordinary Shares 75 Suntrust Limited United Kingdom Ordinary Shares 100 Surian Life & Financial Inc. Canada Common Shares 100 Synergy Financial Products Limited United Kingdom Ordinary Shares 29 Synergy Sunrise (Bowthorpe) Limited United Kingdom Ordinary Shares 100 Synergy Sunrise (Broadlands) Limited United Kingdom Ordinary Shares 100 Synergy Sunrise (Scarles Yard) Limited United Kingdom Ordinary Shares 100 Synergy Sunrise (Sentinel House) Limited United Kingdom Ordinary Shares 100 Synergy Sunrise (Yorkshire House) Limited United Kingdom Ordinary Shares 100 Tenet Business Solutions Limited United Kingdom Ordinary Shares 47 Tenet Client Services Limited United Kingdom Ordinary Shares 47 Tenet Group Limited United Kingdom Ordinary 'B' Shares 47 Tenet Limited United Kingdom Ordinary Shares 47 Tenet Valuation Services Limited United Kingdom Ordinary 'A' Shares 47 TenetConnect Limited United Kingdom Ordinary Shares 47 TenetConnect Services Limited United Kingdom Ordinary Shares 47 TenetFinancial Solutions Limited United Kingdom Ordinary Shares 47 TenetLime Limited United Kingdom Ordinary Shares 47 TenetSelect Limited United Kingdom Ordinary Shares 47 TGHC Limited United Kingdom Ordinary Shares 100 The Designer Retail Outlet Centres (General Partner) Limited United Kingdom Ordinary 'A' Shares 50 The Designer Retail Outlet Centres (Livingston) General Partner Limited United Kingdom Ordinary Shares 100 The Designer Retail Outlet Centres (Livingston) LP United Kingdom Limited Partnership 97 The Designer Retail Outlet Centres (Mansfield) General Partner Limited United Kingdom Ordinary Shares 100 The Designer Retail Outlet Centres (Mansfield) LP United Kingdom Limited Partnership 100 The Designer Retail Outlet Centres (York) General Partner Limited United Kingdom Ordinary Shares 100 The Designer Retail Outlet Centres (York) LP United Kingdom Limited Partnership 97 The Employee Benefits Corporation Limited United Kingdom Ordinary A Shares
VAM Driehaus A USD Acc Luxembourg SICAV 25 Vanwall 2 Management Company Limited United Kingdom Sole Member 100 Vauban Developpement SARL France Ordinary Shares 42 Vauban Properties SARL France Ordinary Shares 42 VH German Mandate Luxembourg Ordinary Shares 100 Victoire Immo 1- Société Civile France Ordinary Shares 100 Victor Hugo 1 S.à r.l. Luxembourg Ordinary Each Eur 25 Shares 100 Victor Hugo 2 S.à r.l. Luxembourg Ordinary Shares 100 Victoria Reinsurance Company Ltd. Barbados Common Shares 100 Vietinbank Aviva Life Insurance Company Limited3 Vietnam Non-listed Shares 50 Vip Conseils France Ordinary Shares 34 Vitus Luxembourg FCP 100 Voltaire S.A.S France Ordinary € 15.25 Shares 100 W Nine LP3 United Kingdom Limited Partnership 50 W Nine Nominee 1 Limited3 United Kingdom Ordinary Shares 50 W Nine Nominee 2 Limited3 United Kingdom Ordinary Shares 50 W Nine Unit Trust3 Jersey Unit Trust 50 Wayfarer Insurance Brokers Limited Canada Common Shares 100 Wealth Limited United Kingdom Ordinary Shares 100 Westmount Guarantee Services Inc. Canada Class A Common Shares 33 Whitgift Shop Unit Trust United Kingdom Unit Trust 100 Winslade Investments Inc. United States Common Stock WPV Shares 100 Wood Lane (Stadium) Limited United Kingdom Ordinary Shares 100 Wroclaw BC sp. z.o.o Poland Ordinary Shares 100 Yatra Capital Limited Jersey Ordinary Shares 27 1 Investment Company with Variable Capital (‘ICVC’) Fond Common de Placement (‘FCP’) Open Ended Investment Fund (‘OEIC’) Société d'Investissement à Capital Variable (‘SICAV’) Undertakings for Collective Investments in Transferrable Securities (‘UCIT’) 2 Management have determined that these entities have been excluded from the consolidation in the Group accounts as these entities do not meet the definition of subsidiaries in accordance with IFRS 10. Please refer to accounting policies (D) Consolidation principles. 3 Please refer to accounting policies (D) Consolidation principles, for further detail on Joint Ventures and the factors on which joint management is based. 4 These joint ventures have a 30 June financial year-end.
63 – Subsequent events Note 24 details subsequent events relating to securitised mortgages. Subsequent events relating to the acquisition and disposal of subsidiaries are detailed in Note 3.
Profit for the year before tax 562 496 Tax credit C 115 67
Items that will not be reclassified to income statement Remeasurements of pension schemes E — (1)
Statement of changes in equity For the year ended 31 December 2015
Balance at 1 January 736 200 1,165 735 8,902 54 3,158 14,950 1,382 16,332 Profit for the year — — — — — — 563 563 — 563 Other comprehensive income/(expense) — — — — 866 — (1) 865 — 865 Total comprehensive income for the year — — — — 866 — 562 1,428 — 1,428 Dividends and appropriations 15 — — — — — — (551) (551) — (551) Employee trust shares distributed in the year — — — — — — (18) (18) — (18) Reserves credit for equity compensation plans — — — — — 39 — 39 — 39 Shares issued under equity compensation plans 1 — 7 — — (28) 24 4 — 4 Redemption of direct capital
Assets Non-current assets Investments in subsidiaries A 42,452 33,930 Investment in joint venture 18a, A 322 208 Loans owed by subsidiaries I 553 1,330 Deferred tax assets C 188 201 Current tax assets C 130 65 43,645 35,734 Current assets Loans owed by subsidiaries I — 388 Other amounts owed by subsidiaries I 233 274 Other assets 12 18 Cash and cash equivalents 188 33
Liabilities Non-current liabilities Borrowings F 5,202 4,794 Loans owed to subsidiaries I 10,256 10,366 Provisions 40 48 15,498 15,208 Current liabilities Borrowings F 485 516 Other amounts owed to subsidiaries I 3,962 3,885 Other creditors 125 132
Cash flows from financing activities Funding provided from subsidiaries 721 597 New borrowings drawn down, net of expenses 2,027 2,382 Repayment of borrowings (1,554) (2,070) Net drawdown of borrowings 473 312 Redemption of direct capital instrument — (547) Preference dividend paid (17) (17) Ordinary dividend paid (635) (447) Interest paid on the direct capital instrument and tier 1 notes (72) (88) Interest paid on borrowings (328) (301) Receipts under equity compensation plans — 5 Proceeds from issue of ordinary shares 16 8 Treasury shares purchased for employee trusts (1) —
Cash and cash equivalents at 1 January 33 223 Exchange gains/(losses) on cash and cash equivalents 3 (9)
A – Investments in subsidiaries and joint venture (i) Movements in the Company’s investments in its subsidiaries are as follows: Fair value as at 1 January 33,930 33,095 Acquisition of Friends Life 5,975 — Issuance of shares in Aviva Group Holdings 1,566 — Movement in fair value 981 835
(iii) At 31 December 2015, the Company’s investment in the joint venture, Aviva-COFCO Life Insurance Co. Limited has a fair value of £322 million (2014: £208 million).
(iii) Equity compensation plans All transactions in the Group’s equity compensation plans involve options and awards for ordinary shares of the Company. Full disclosure of these plans is given in the Group consolidated financial statements, note 31. The cost of such options and awards is borne by all participating businesses and, where relevant, the Company bears an appropriate charge. As the majority of the charge to the Company relates to directors’ options and awards, for which full disclosure is made in the Directors’ Remuneration Report, no further disclosure is given here.
Unrecognised tax losses and temporary differences of previous years were used to reduce the deferred tax expense by £8 million (2014: £nil).
Balance at 31 December 2014 735 9,768 65 3,137 Arising in the year: Profit for the year — — — 677 Fair value gains on investments in subsidiaries and joint ventures — 1,095 — — Premium gained as part of Friends Life acquisition 5,703 — — — Dividends and appropriations — — — (724) Reserves credit for equity compensation plans — — 40 — Trust shares distributed in the year — — — — Issue of share capital under equity compensation scheme — — (35) 19 Redemption of direct capital instrument — — — — Aggregate tax effect — — — 15
The issue of new shares in the Company in exchange for shares of Friends Life has attracted merger relief under section 612 of the Companies Act 2006. Of the £5,975 million, £272 million (25 pence per ordinary share) has been credited to share capital and the remaining £5,703 million has been credited to the merger reserve within equity, increasing the reserve from £735 million to £6,438 million.
F – Borrowings The Company’s borrowings comprise: Subordinated debt 5,202 4,594 9.5% guaranteed bonds 2016 — 200 Commercial paper 485 516
Total contractual undiscounted cash flows 5,733 8,039 13,772 5,346 7,039 12,385
H – Risk management Risk management in the context of the Group is considered in the Group consolidated financial statements, note 57.
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 57. Such investments are held by the Company at fair value in accordance with accounting policy D.
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.
All the Company’s long-term external borrowings are at fixed rates of interest and are therefore not exposed to changes in these rates. However, for short-term commercial paper, the Company is affected by changes in these rates to the extent the redemption of these borrowings is funded by the issuance of new commercial paper or other borrowings. Further details of the Company’s borrowings are provided in note F and the Group consolidated financial statements, note 49.
Within 1 year — 388 1-5 years 369 1,136 Over 5 years 184 194
Within 1 year — 132 132 — 132 132 1-5 years 10,256 132 10,388 10,366 264 10,630 Over 5 years — — — — — —
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 60.
Financial and operating performance 280 Selected consolidated financial data 294 Information on the Company 296 Analysis of investments 303 Contractual obligations 307 Risk and capital management 308 Corporate responsibility key performance indicators 312 Corporate responsibility assurance statement 314
• The Group’s UK general insurance business completed an outwards reinsurance contract that provides significant protection against claims volatility from mesothelioma, industrial deafness and other long-tail risks. This gave rise to a day one loss of £53 million, comprising £712 million in premiums ceded less £659 million in reinsurance recoverables recognised.
• There was an adverse movement of £235 million (2014: £1,662 million favourable) relating to the Group’s staff pension schemes which has been recognised in other comprehensive income. This was principally due to the main UK staff pension scheme. The surplus has decreased over the period largely as a result of a rise in interest rates and narrowing credit spreads. See ‘IFRS Financial statements – note 48 – Pension obligations’ for further details.
Economic conditions Our results are affected by the economic conditions in our geographic markets and, consequently, by economic cycles in those markets. High levels of general economic activity typically result in high levels of demand for, and sales of, our products and services. Economic activity in turn is affected by government monetary and fiscal policy as well as by global trading conditions and external shocks such as terrorist activity, war and oil price movements.
2015 saw continued uneven global economic activity, leading to subdued global growth overall.
The economies where the Group has operations that were impacted in 2015 by estimated low growth include: Italy 0.8%1, France 1.1%1 and Canada 1.2%1. Economic growth in the UK was 2.2%1. Some of our other markets experienced stronger growth, for example c.3%2 in Turkey, c.3.5%2 in Poland, and 6.9%1 in China.
The world economy is expected to grow c.3.4%1 in 2016 and 3.6%1 in 2017, slightly higher than the previous two years (growth was 3.1%1 in 2015 and 3.3% in 2014). Advanced economies, led by the US and UK, are expected to continue their modest and uneven recovery, with the eurozone continuing to grow slowly. Growth in emerging markets is expected to be mixed, impacted by the slowdown in China, lower commodity prices and strains in some large emerging economies. Risks remain weighted to the downside.
Capital and credit market conditions An important part of our business involves investing client, policyholder and shareholder funds across a wide range of financial investments, including equities, fixed income securities and properties. Our results are sensitive to volatility in the market value of these investments, either directly because we bear some or all of the investment risk, or indirectly because we earn management fees for investments managed on behalf of policyholders. Investment market conditions also affect the demand for a substantial portion of our life insurance products. In general, rising equity price levels have a positive effect on the demand for equity-linked products, such as unit trusts and unitlinked life insurance products, and conversely have a negative effect on the demand for products offering fixed or guaranteed minimum rates of return. Declining equity price levels tend to have the opposite effects.
With-profits business With-profits products are mainly written in our UK & Ireland operating segment, with small funds in France and Singapore. These funds enable policyholders to participate in a large pool of diverse investments, therefore reducing their exposure to individual securities or asset classes. The investment pool is managed by us with returns to with-profits policyholders paid through bonuses which are added to the value of their policy. In order to provide an element of stability in the returns to policyholders, bonuses are designed to reduce policyholders’ exposure to the volatility of investment returns over time and to provide an equitable share of surplus earned, depending on the investment and operating performance of the fund. Shareholders also have a participating interest in the with-profits funds and any declared bonuses. Further details on the policyholder and shareholder participation in with-profits funds in the UK is set out in ‘IFRS Financial Statements – Note 40 – Insurance Liabilities’.
Shareholders’ profits arising on with-profits business under IFRS depend on the total bonuses declared to policyholders on an annual basis.
During 2015, the UK personal motor market saw prices start to rise, following 3 years of premium reductions which had resulted from intense competition combined with regulatory changes designed to reduce the cost of claims. Challenging market conditions apply to other UK classes of business as insurers seek opportunities to gain share in segments with better margin, putting pressure on rates and extent of cover.
In 2015 our UK general insurance business suffered losses due to severe flooding in December 2015 (see ‘Market performance – United Kingdom and Ireland’ below for further details).
During 2015, sterling strengthened against a number of currencies including the euro and the Canadian dollar. This resulted in a foreign currency loss in other comprehensive income of £378 million (2014: £396 million loss).
Activity in 2015 On 10 April 2015, the Group completed the acquisition of 100% of the outstanding shares of Friends Life Group Limited (‘Friends Life‘) through an all share exchange. 1,086,326,606 Group shares were issued for a consideration of £5,975 million. During 2015 the Group also completed other minor acquisitions, undertook a further sale of shares in our Turkey Life business, and sold some small reinsurance operations in Asia.
On 30 June 2014, Finoa Srl, an Italian holding company in which the Group owns a 50% share, disposed of its entire interest in Eurovita Assicurazioni S.p.A for gross cash consideration of £36 million.
Also on 30 June 2014, the Group completed the sale of US equity manager River Road Asset Management, LLC (‘River Road‘) to Affiliated Managers Group, Inc. for consideration of £75 million.
In October 2013, the Group completed the sale of its US Life subsidiary. In 2014, the Group paid a settlement of £20 million related to the purchase price adjustment. 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.
On 13 November 2014 the Group and its joint venture partner Sabanci Holdings completed an initial public offering of a minority share of their Turkish life and pensions joint venture AvivaSA Emeklilik ve Hayat A.s (‘Aviva SA’). The sale reduced the Group’s holding in Aviva SA from 49.8% to 41.3% which continued to be recognised as a joint venture. The Group received cash proceeds of £40 million from the share sale resulting in a £23 million gain.
On 11 December 2014, the Group completed the disposal of its 50% holding in Spanish subsidiary CXG Aviva Corporacion Caixa Galicia de Seguros y Reaseguros, S.A. for cash consideration of £221 million.
On 18 December 2014, the Group completed the sale of its Turkish general insurance operations resulting in a £17 million loss on sale.
The unallocated divisible surplus consists of future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the inherited estate. The inherited 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.
Investment type business, which accounts for most of our non-profit business, includes predominantly unit-linked life and 282 | Aviva plc Annual report and accounts 2015
pensions business where the risk of investing policy assets is borne entirely by the policyholder. Operating earnings arise from unit-linked 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.
Risk cover business includes term assurance, or term life insurance business. Annuity business includes immediate annuities purchased for individuals or on a bulk purchase basis for groups of people. The risk of investing policy assets in this business is borne entirely by the shareholders. Operating earnings arise when premiums, and investment return earned on assets supporting insurance liabilities and shareholder capital, exceed claims and benefit costs, costs of acquiring new business and administration costs.
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.
Financial highlights The following analysis is based on our consolidated financial statements and should be read in conjunction with those statements. In order to fully explain the performance of our business, we discuss and analyse the results of our business in terms of certain financial measures which are based on ‘nonGAAP measures’ and which we use for internal monitoring purposes. We review these in addition to GAAP measures, such as profit before and after tax.
– This includes traditional life insurance, long-term health, annuity business and with-profits business.
PVNBP is equal to total single premium sales received in the year plus the discounted value of annual premiums expected to be received over the terms of newly incepted contracts and is calculated as at the date of sale. We adjust annual premiums to reflect the expected stream of business coming from this new business over future years. In the view of management, this performance measure better recognises the relative economic value of regular premium contracts compared with single premium contracts. PVNBP is a European insurance industry standard measure of new business.
General insurance and health sales General insurance and health (excluding long-term health business) sales are defined as IFRS net written premiums2, which are premiums written during the year net of amounts reinsured with third parties. For sales reporting, we use the GAAP measure for this business.
General insurance and health sales (excluding long-term health) 7,510 7,760 8,173
Total sales 40,632 34,859 34,185 Less: Effect of capitalisation factor on regular premium long-term business (10,357) (7,314) (6,807) Share of long-term new business sales from
JVs and associates (427) (473) (660) Annualisation impact of regular premium long-term business (451) (214) (203) Deposits taken on non-participating investment contracts and equity release contracts (6,560) (5,641) (4,389)
Retail sales of mutual fund type products (investment sales) (6,437) (4,977) (4,875)
Analysed as: Long-term insurance and savings net written premiums 11,658 11,756 11,769 General insurance and health net written 1 2015 represents a reinsurance premium ceded of £712 million relating to an outwards reinsurance contract completed by the UK General Insurance business.
The discounted value reflects the expected income streams over the life of the contract, adjusted for expected levels of persistency, discounted back to present value. The discounted value can also be expressed as annualised regular premiums multiplied by a weighted average capitalisation factor (WACF). The WACF varies over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions.
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.
operating profit’. Management has changed the definition of adjusted operating profit during 2015 to exclude amortisation and impairment of acquired value of in-force business and comparatives have been restated accordingly. We now 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 long-term and non-long-term business, impairment of goodwill, associates, and joint ventures and other amounts expensed, amortisation and impairment of acquired value of in-force business, amortisation and impairment of other intangibles, profit or loss on the disposal and remeasurement of subsidiaries, joint ventures and associates and integration and restructuring costs and other items.
Whilst these excluded items are significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of adjusted operating profit enhances the understanding and comparability of the underlying performance of our segments by highlighting net income attributable to on-going segment operations.
Adjusted operating profit for long-term insurance and savings business is based on expected investment returns on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. The expected rate of return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return and asset classification. Where assets are classified as fair value through profit and loss, expected return is based on the same assumptions used under embedded value principles for fixed income securities, equities and properties. Where fixed interest securities are classified as available for sale the expected return comprises interest or dividend payments and amortisation of the premium or discount at purchase. Adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, such as market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed as non-operating items.
Adjusted operating profit for non-long-term insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The longer-term return for other investments is the actual income receivable for the period. Changes due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed as non-operating items. The impact of changes in the discount rate applied to claims provisions is also treated outside adjusted operating profit.
Adjusted operating profit is not a substitute for profit before income taxes and non-controlling interests in earnings or net income as determined in accordance with IFRS. Our definition of adjusted operating profit may differ from similar measures used by other companies, and may change over time.
The table below presents our consolidated adjusted operating profit for the three years ended 31 December 2015, 2014 and 2013, as well as the reconciliation of adjusted operating profit to profit before tax attributable to shareholders’ profits under IFRS.
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 14 72 (49)
Short-term fluctuation in return on investments on non long-term business (84) 261 (336)
Economic assumption changes on general insurance and health business (100) (145) 33
Impairment of goodwill, associates and joint ventures and other amounts expensed (22) (24) (77)
Profit before tax attributable to shareholders’ profits – discontinued operations — 58 1,538
Profit before tax attributable to shareholders’ profits 1,390 2,339 2,819 1 Adjusted operating profit has been restated to exclude amortisation and impairment of acquired value of inforce business, which is now shown as a non-operating item. There is no impact on the result or the total equity for any period presented as a result of this restatement.
Short-term fluctuations on non-long term business were £84 million negative (2014: £261 million positive). The adverse movement in short-term fluctuations during 2015 compared with 2014 is mainly due to an increase in risk-free rates reducing fixed income security market values.
Economic assumption changes of £100 million adverse (2014: £145 million adverse) arise as a result of an increase in the expected future inflation rates used to calculate reserves for periodic payment orders (PPOs), and a decrease in the swap rates used to discount latent claims reserves and PPOs.
Amortisation and impairment of intangibles was a charge of of £155 million (2014: £90 million charge), and amortisation and impairment of acquired value of in-force business (AVIF) was a charge of £498 million (2014: £40 million). The higher charges during 2015 were driven by amortisation of the AVIF and intangibles arising on the acquisition of Friends Life.
Other items, a charge of £53 million, represents a day one loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
Further details on significant movements are outlined in the market performance sections below.
The total charge for impairment of goodwill, joint ventures and associates for the year was £24 million (2013: £77 million).
Income Gross written premiums 21,925 21,670 22,035 Premiums ceded to reinsurers (2,890) (1,614) (1,546)
Premiums written net of reinsurance 19,035 20,056 20,489 Net change in provision for unearned
General insurance and health premiums were £7,377 million (2014: £8,300 million). Excluding the outwards reinsurance premium described above, premiums decreased by £211 million, or 3%, to £8,089 million (2014: £8,300 million). Higher sales in the UK were more than offset by lower premiums in Europe and Canada mainly due to adverse foreign exchange.
Year ended 31 December 2014 Net written premiums for continuing operations decreased by £433 million, or 2%, to £20,056 million (2013: £20,489 million). Long-term insurance and savings remained broadly flat at £11,756 million (2013: £11,769 million) with lower sales in the UK and Spain (mainly due to the disposal of Aseval in 2013)
offset by higher sales in France, Poland, Italy and Asia. General insurance and health premiums decreased by £420 million, or 5%, to £8,300 million (2013: £8,720 million), mainly reflecting lower sales in the UK and Ireland.
Net investment income (from continuing operations) Year ended 31 December 2015 Net investment income from continuing operations was £2,825 million (2014: £21,889 million). Compared to 2014, unrealised gains were significantly lower in 2015 reflecting market movements, including lower fixed income security market values arising from higher risk-free interest rates.
Other income (from continuing operations) Year ended 31 December 2015 Other income, which consists of fee and commission income, share of profit after tax of joint ventures and associates, and profit on disposal and remeasurement of subsidiaries, joint ventures and associates, increased by £428 million, or 28%, to £1,979 million in 2015 (2014: £1,551 million).
Fee and commission income increased by £567 million, or 46% to £1,797 million (2014: £1,230 million), mainly due to the contribution from the acquired Friends Life businesses.
Year ended 31 December 2014 Other income, which consists of fee and commission income, share of profit/(loss) after tax of joint ventures and associates, and profit/(loss) on disposal and remeasurement of subsidiaries, joint ventures and associates, increased by £37 million, or 2%, to £1,551 million in 2014 (2013: £1,514 million). This was mainly due to profits on disposal and remeasurement of subsidiaries of £174 million (2013: £115 million profit), including profits on disposal of CxG in Spain (£132 million) and River Road (£35 million) in the United States.
Fee and commission income was broadly stable and the share of profits from joint ventures and associates was £147 million (2013: £120 million).
Year ended 31 December 2014 Claims and benefits paid net of reinsurance in 2014 decreased by £2,619 million, or 12% to £19,474 million (2013: £22,093 million) mainly due to lower claims payments in our life businesses and the strengthening of sterling during 2014. In particular there were lower bond and pensions claims in the UK compared with prior year.
The change in unallocated divisible surplus (‘UDS’) was a charge of £3,364 million (2013: £280 million credit) primarily driven by Italy and France as a result of lower corporate and government bond yields during 2014.
Fee and commission expense, other expenses and finance costs decreased by £896 million to £5,908 million (2013: £6,804 million) mainly as a result of the Group’s cost savings programme, lower fee and commission expenses primarily in the UK and lower finance costs due to the repayment of debt during the year. See ‘IFRS Financial Statements – note 6 – Details of expenses’ for further details.
It also includes a credit of £218 million (2014: £382 million charge) in relation to tax attributable to policyholders’ returns. See ‘IFRS Financial Statements – note 13 – Tax’ for further details.
UK and Ireland IFRS net written premiums were up 15% to £4,042 million (2014: £3,515 million) mainly due to the post acquisition contribution from Friends Life.
Overall UK & Ireland Life operating profit increased to £1,432 million (2014 (restated): £1,049 million). UK life operating profit was £1,408 million (2014 (restated): £1,025 million), including a contribution of £358 million from Friends Life following its acquisition in April 2015. Excluding Friends Life, UK profits increased 2% to £1,050 million (2014 (restated): £1,025 million), benefitting from lower operating expenses as well as improved new business profitability. In Ireland, adjusted operating profit was stable at £24 million (2014 (restated): £24 million).
Adjusted operating profit from other operations resulted in a £29 million loss (2014: £4 million loss) reflecting continued investment into the UK Life Platform business.
In Ireland, sales fell 7% to £435 million (2013: £469 million). IFRS net written premiums were down 17% to £3,515 million (2013: £4,228 million) primarily due to the impact of lower individual annuities sales.
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 2015, 2014 and 2013.
Adjusted operating profit before tax from general insurance and health business was down 16% to £409 million (2014: £488 million).
In the UK, adjusted operating profit was £368 million (2014: £455 million). Within this, longer term investment return reduced by £45 million to £215 million (2014: £260 million) mainly as a result of the lower intercompany loan balance (which is neutral at an overall Group level). The underwriting result was £154 million (2014: £199 million) with the adverse weather experience due to the December floods in the UK being partly offset by the benefit of expense savings and more favourable prior year claims development.
In Ireland, general insurance and health adjusted operating profit increased to £41 million (2014: £33 million) mainly driven by favourable weather experience partly offset by lower prior year claims reserve releases.
IFRS profit before tax 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.
Profit before tax attributable to shareholders’ profits 420 462 457 1 Adjusted operating profit has been restated to exclude amortisation and impairment of acquired value of inforce business, which is now shown as a non-operating item.
Adjusted operating profit before tax was 4% lower at £449 million (2014 (restated): £470 million) but improved by 6% on a constant currency basis. Within this, life adjusted operating profit decreased by 4% to £395 million (2014 (restated): £412 million) but improved by 7% on a constant currency basis, mainly from portfolio growth and a change in mix towards unitlinked products and protection products, together with strong results from UFF, our majority owned broker business. General insurance and health adjusted operating profit was lower at £71 million (2014: £78 million), but up 2% on a constant currency basis due to better weather experience compared with the prior year, partly offset by higher large losses and lower investment returns.
Profit before tax attributable to shareholders’ profits decreased to £420 million (2014: £462 million), which includes the lower adjusted operating profits discussed above, lower favourable investment variances of £15 million (2014: £41 million favourable) and higher integration and restructuring costs of £19 million (2014: £15 million) partially offset by a lower amortisation and impairment of AVIF charge of £5 million (2014: £18 million).
IFRS profit before tax increased to £462 million (2013: £457 million), which includes the higher adjusted operating profits discussed above. The increase in IFRS profit includes lower integration and restructuring costs of £15 million (2013: £25 million) which offset less favourable investment variances of £41 million (2013: £55 million).
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 2015, 2014 and 2013.
Sales Long-term insurance and savings business 448 573 486 General insurance and health net written
Profit before tax attributable to shareholders’ profits 139 196 178 1 Adjusted operating profit has been restated to exclude amortisation and impairment of acquired value of inforce business, which is now shown as a non-operating item.
Year ended 31 December 2014 Life and pensions sales on a PVNBP basis were up 18% to £573 million (2013: £486 million), mainly benefitting from changes in pensions legislation in Lithuania and an increase in sales of higher margin protection products. General insurance net written premiums were £57 million (2013: £69 million). Total net written premiums increased 1% to £482 million (2013: £475 million) due to improved sales of life products partially offset by decreased sales in general insurance business.
Adjusted operating profit before tax Long-term insurance and savings business Italy 139 148 150 Spain 92 126 150 Other 11 13 13 242 287 313 General insurance and health Italy & Other 33 26 19 Other operations (7) (9) (7)
Profit before tax attributable to shareholders’ profits 191 489 509 1 Adjusted operating profit has been restated to exclude amortisation and impairment of acquired value of inforce business, which is now shown as a non-operating item.
Year ended 31 December 2015 The weakening of the euro affected all metrics from a Group perspective.
In Italy (excluding Eurovita), life sales decreased by £326 million, or 13%, to £2,147 million (2014: £2,473 million) or 3% on a constant currency basis, reflecting lower unit linked and with-profit sales.
General insurance sales which in 2015 were only made by our operation in Italy decreased by £63 million, or 16%, to £330 million (2014: £393 million) mainly due to the sale of our Turkish general insurance operations in late 2014. Excluding this disposal, premiums grew by 3% on a constant currency basis mainly due to growth in the creditor business in Italy.
Profit before tax attributable to shareholders’ profits decreased by £298 million to £191 million (2014: £489 million). This includes lower adjusted operating profit as described above and adverse investment variances of £45 million (2014: £88 million positive). The prior year also included profit on disposal of subsidiaries, including CxG and Eurovita, of £125 million.
Total long-term insurance and savings sales increased by £243 million, or 6%, to £4,246 million (2013: £4,003 million) mainly due to increased sales in Italy.
Other life sales, which mainly includes sales in our Turkey Life joint venture, decreased by £49 million, or 9%, to £495 million (2013: £544 million).
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 2015, 2014 and 2013.
General insurance net written premiums decreased by 5% to £1,992 million (2014: £2,104 million). On a constant currency basis, net written premiums increased by 1%, mainly due to improved rates and retention on personal lines.
Year ended 31 December 2014 The weakening of the Canadian dollar affected all metrics from a Group perspective.
General insurance net written premiums decreased by 6% to £2,104 million (2013: £2,250 million). On a constant currency basis, net written premiums increased by 6% mainly due to new business growth in Western Canada along with rating increases on commercial lines and improved retention on personal lines.
Sales Long-term insurance, savings and health business Singapore 1,498 1,336 914 Other Asia – excluding Malaysia & South
General insurance and health Singapore (6) (3) (3) Other Asia — 1 4
Year ended 31 December 2015 Long-term insurance and savings sales in Asia increased by 38% to £2,694 million (2014: £1,951 million) mainly reflecting higher protection sales in Singapore and China and £582 million sales contributed by Friends Provident International (‘FPI’), following the Friends Life acquisition in April 2015. General insurance and health net written premiums, excluding long-term health, were £56 million (2014: £65 million).
Adjusted operating profits were £223 million (2014: £78 million) including a £151 million contribution from FPI (£15 million adjusted operating profit net of amortisation of acquired value of in-force business). Excluding FPI, adjusted operating profit was £72 million (2014: £78 million). Within this, higher life adjusted operating profits were more than offset by lower non-life profits.
Profit before tax attributable to shareholders’ profits was £70 million (2014: £38 million). As described above, this included adjusted operating profits partly offset by a higher AVIF amortisation charge. In addition, there were favourable life investment variances of £11 million (2014: £11 million adverse) and lower goodwill impairment charges.
Long-term insurance and saving business (including UK retail collectives) 1,647 881 58
Adjusted operating profit before tax Fund management operating profit1 105 79 68 Long-term insurance and savings business –
Profit before tax attributable to shareholders’ profits was broadly flat at £81 million (2014: £83 million profit). This included higher fund management adjusted operating profits and higher integration and restructuring costs of £11 million (2014: £4 million). The 2014 result included a profit on disposal of River Road of £35 million and the provision for the FCA fine of £17.6 million as described below.
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.
Adjusted operating profit before tax General Insurance 13 9 (51) Corporate centre (180) (132) (150) Group debt costs and other interest (361) (463) (502) Other Group operations (46) (56) (90)
Group debt costs and other interest decreased to £361 million (2014: £463 million), mainly due to lower internal debt costs of £92 million (2014: £186 million) and an increase in the net finance income on the main UK pension scheme to £94 million (2014: £33 million), partially offset by higher external debt costs reflecting the inclusion of Friends Life external debt. The impact of internal debt costs is neutral at an overall Group level.
Year ended 31 December 2014 Net written premiums from our reinsurance business were £18 million (2013: £46 million). The decrease is primarily as a result of reinsurance previously written with Aviva Re being written in the external market.
Corporate centre costs were £132 million (2013: £150 million). Group debt costs and other interest decreased to £463 million (2013: £502 million), mainly due to lower internal debt costs. The impact of this is neutral at an overall Group level.
Loss before tax attributable to shareholders’ profits was £626 million (2012: £1,080 million loss). The improvement in 2014 was mainly due to lower operating losses, lower integration and restructuring costs, and positive investment variances.
Net earned premiums 18,924 20,057 20,623 21,157 24,471 Fee and commission income 1,797 1,230 1,279 1,273 1,465 Net investment income 2,825 21,889 12,509 21,135 4,373 Share of profit/(loss) after tax of joint ventures and associates 180 147 120 (255) (123) Profit/(loss) on the disposal and re-measurement of subsidiaries, joint ventures and associates 2 174 115 (164) 565
Expenses Claims and benefits paid, net of recoveries from reinsurers (21,985) (19,474) (22,093) (23,601) (24,380) Change in insurance liabilities, net of reinsurance 6,681 (5,570) 2,493 (430) (2,284) Change in investment contract provisions (1,487) (6,518) (7,050) (4,450) 1,478 Change in unallocated divisible surplus 984 (3,364) 280 (6,316) 2,721 Fee and commission expense (3,347) (3,389) (3,975) (4,457) (4,326) Other expenses (2,784) (1,979) (2,220) (2,843) (2,779) Finance costs (618) (540) (609) (653) (711)
Profit/(loss) after tax from continuing operations 1,079 1,680 878 (86) 489 Profit/(loss) after tax from discontinued operations — 58 1,273 (2,848) (357)
Profit/(loss) per share attributable to equity shareholders: Basic (pence per share) 22.6p 50.4p 65.3p (109.1)p 8.3p Diluted (pence per share) 22.3p 49.6p 64.5p (109.1)p 8.1p
Number of shares in issue at 31 December 4,048 2,950 2,947 2,946 2,906 Weighted average number of shares in issue for the year1 3,741 2,943 2,940 2,910 2,845 1 Weighted average number of shares in issue for the year is calculated after deducting treasury shares.
Business overview Our strategic framework Our strategic framework increases the focus on the things that really matter and put the customer clearly at the centre. It provides clear direction across all our markets for how we run our business. Our overarching purpose is to free people from the fear of uncertainty. And we have a clear strategy to deliver our investment thesis of cash flow growth by always putting our customers first. Our Strategic Anchor is the ‘what we do, how we do it and where we do it’ of our strategy – True Customer Composite, Digital First and Not Everywhere. • True Customer Composite
• Digital First Emphasising customer experience driven by digital – online and mobile.
This is all underpinned by our values of kill complexity, care more, never rest and create legacy, the core beliefs at the heart of how we do business.
The activities of the acquired Friends Life business are included within the UK & Ireland Life, Asia and Aviva Investors segments.
Brands and products In 2010, we brought all our businesses together under the Aviva brand, which remains the case for the vast majority of our products and services.
Our long-term insurance and savings businesses offer a broad range of life insurance and savings products. Our products are split into the following categories: • Pensions – a means of providing income in retirement for an individual and possibly his or her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.
• Annuities – a type of policy that pays out regular amounts of benefit, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are asset accumulation contracts, which may be used to provide benefits in retirement, and may be guaranteed, unit-linked or indexlinked.
• Bonds and savings – accumulation products with single or regular premiums and unit-linked or guaranteed investment returns. Our product ranges include single premium investment bonds and regular premium savings plans.
Some of our insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as ‘participating’ contracts.
1 See ‘financial and operating performance’ for further details. 2 Association of British Insurers (ABI) Stats published Q3 2015.
General insurance and health insurance General insurance and health insurance accounted for 18% of our total worldwide sales for the year ended 31 December 2015. In the year ended 31 December 2015, we reported general and health insurance net written premiums of £7.5 billion1, 5.
Market position We are a leading general insurer in the United Kingdom and Canada with 12.4%3 and 8.4%4 market share respectively. We also have general insurance operations in France, Italy, Ireland, and Poland. We sell health products in the UK, Ireland, France, Singapore and Indonesia. In the year ended 31 December 2015, 52%5 of our total general insurance and health new business was written in the UK.
Brands and products Our general insurance business operates under the Aviva brand globally and concentrates on the following products: • Personal lines – motor, household, travel and creditor; • Commercial lines – fleet, liability and commercial property insurance; • Health insurance – private health insurance, income protection and personal accident insurance, as well as a range of corporate healthcare products; and
Market position Aviva Investors was ranked 48th globally by assets under management6. Total worldwide funds managed by Aviva Investors, at 31 December 2015, was £290 billion. The substantial majority of this relates to Aviva’s insurance and savings operations.
• Direct sales force – in some of our European and Asian markets we operate direct sales forces that only sell Aviva’s 3 Datamonitor UK Insurance Competitor Analytics 2015. 4 Market Security Analysis & Research Inc, 2014 online database. 5 Excludes the impact of an outwards quote share reinsurance agreement in the UK. 6 Towers Watson World 500 largest asset manager’s study 2014.
The UK business is a leading long-term insurance and savings provider with an overall market share of 13.3%7, based on annual premium equivalent (APE) data as at 30 September 2015. The Irish business is a large life and pensions provider in Ireland.
Our strategy in the UK is to offer great value to our customers through our market leading expertise in Retirement, Corporate Benefits, Protection and Health products, continue to improve cash generation and deliver profitable growth whilst continuing to integrate Friends Life and realise synergies.
Market and competition Over the last few years, Auto-Enrolment, pension freedoms and the Department of Work and Pensions (DWP) charge cap have transformed the way that long-term savings products are bought and sold in the UK.
The changes to annuities announced by the UK Chancellor of the Exchequer in the Budget in March 2014 have given increased flexibility to how customers can access their pension since coming into effect in April 2015. These changes are having a significant impact across the market and have seen many customers defer their decision regarding their pension, driving a general decline in the market for individual annuities.
Products In the UK, we provide a comprehensive product range focused on both the consumer and corporate markets. The pensions and retirement products we offer include personal pensions, equity release, annuities and income drawdown. Our annuity offerings include immediate life, enhanced, fixed-term annuities and with-profits pension annuities. We provide a number of traditional life insurance products, including level-term, decreasing-term (with or without critical illness), guaranteed whole of life insurance, over 50s life cover and income protection. Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, investments with guarantees and with-profits products. A direct to consumer platform was launched in June 2015, offering new retirement propositions and investment products
In 2015 we also launched Aviva Life Protection Solutions to advisers and customers in the UK, which offers flexible cover with all policy documents stored online.
UK & Ireland General Insurance Business overview and strategy We are a leading general insurer in both the UK and Ireland with market shares of 12.4%8 and 13.3%9 respectively. We employ around 6,700 people and operate from a number of locations throughout the UK and Ireland, including Norwich, Perth, Glasgow, London and Dublin.
Market and competition The UK is the 4th largest non-life insurance market in the world10. In 2014, the top four companies had a 36.9%8 share of the UK general insurance market.
During 2015, the UK personal motor market saw prices start to rise, following 3 years of premium reductions which had resulted from intense competition combined with regulatory changes designed to reduce the cost of claims. However, market conditions continue to be challenging in other UK classes of business as insurers seek opportunities to gain share in segments with better margin, putting pressure on rates and extent of cover. In Ireland, the market remains challenging, with low market growth at 3.2% in 20149 and continued marketwide pressure on profitability.
Our UK personal products include motor, home and travel insurance. Our UK commercial products include motor, property and liability insurance for small and medium size enterprises (SMEs) and larger UK corporate customers as well as products in the specialty risks market.
We are expanding our digital capability through allowing customers to view their policies as well as purchase new products using the MyAviva app. In addition, we have made major investments in Fast Trade, our online tool for brokers and implemented Guidewire, which is a new policy and claims system, across our commercial lines business.
France Business overview and strategy France is the second largest insurance market in Europe11. We have a significant presence in the French Life insurance market and we operate through two main companies: Aviva Vie and Antarius (JV structure with Crédit Du Nord). On 25 February 2015, Crédit du Nord, the Group’s partner in Antarius S.A (‘Antarius’), exercised its call option to purchase Aviva France’s 50% share of Antarius. In accordance with the shareholders agreement, the exercise of the call option starts a period of approximately two years to complete the disposal. In accordance with IFRS 5, the subsidiary will be classified as held for sale from the date when the transaction is expected to complete within 12 months.
10 Swiss Re Sigma Study (World Insurance 2014). 11 Insurance Europe: European Insurance — Key Facts , August 2015.
Market and competition The life insurance market is driven by individual savings and dominated by bancassurance, which has accounted for around 60% of the life insurance market over the past decade according to FFSA12. We believe the long-term insurance and savings market in France has longer-term growth potential due to the ageing population and the growing need for private pensions. We also believe that multi-funds policies and unitlinked funds are the best saving vehicles for performance over a longer period.
The general insurance market in France is mature. In personal lines, the digital transformation occurring in the market is increasing competition through multi-access and direct distribution models, whereas in commercial lines the market still mainly relies on local physical distribution networks.
We have a longstanding relationship with the Association Française d’Epargne et de Retraite (AFER) which is the largest retirement savings association in France with over 720,000 members as at December 2014, to manufacture and distribute the AFER savings product.
12 Fédération Française des Sociétés d’Assurance (dated 12 June 2015). 13 Polish Financial Supervision Authority (‘KNF’) report as at 30 June 2015. 14 BZ WBK bank Zachodni 31 December 2015 results.
Products Our life business in Poland provides a broad range of protection, savings and pension products as well as health insurance. For institutions we offer group life insurance and employee pension programmes, which are both unit-linked products. We offer a standard product as part of our privately managed Pillar II pensions business. We offer general insurance products to both commercial entities and individuals. For individuals, our offer consists of home, accident and travel insurance, which are primarily sold by tied agents, as well as motor insurance, which is sold primarily through our direct operation. For institutions, we offer selected commercial lines risks.
Distribution The direct sales force and bancassurance are the main distribution channels for most of the Polish business and is made up of over 2,100 tied insurance agents. Our biggest relationship is with Bank Zachodni WBK (a subsidiary of Banco Santander) that sells both life and general insurance products through the bank’s network of 723 branches14. In addition, on 3 July 2015, we acquired Expander Advisors, the second largest network of IFAs in Poland15. We also co-operate with independent insurance agencies and brokers. Our mutual funds are also sold in brokerage houses and our individual products are supported by call centre and website sales.
• Accelerate general insurance organic growth of our Agents network with specific focus on protection and accident and health.
Distribution Our products are distributed through bancassurance partnerships with Unicredit Group (life), Banco Popolare Group (life and general insurance) and UBI Banca (life). These partnerships give us access to more than 3,500 branches. In addition, we also have approximately 1,500 active financial advisors (life), and a retail network of c.700 insurance (multimandate ) agents and brokers (general insurance and life) as at 30 June 2015.
Spain Business overview and strategy We are Spain’s 11th largest long-term insurer by gross written premiums with a market share of 3% as at 30 September 201517. We sell protection, long-term savings and pensions, health and accident insurance through a bancassurance network based on four joint ventures with three banks. We also sell through Aviva Vida y Pensiones, the wholly-owned Aviva branded long-term insurance company and through our Spanish mutual insurance company Pelayo.
Market and competition We have seen the Spanish insurance market recover with improved lending conditions, and expect this to benefit our credit linked insurance product sales.
The top positions in the long-term life insurance market are dominated by bank-owned or bank-insurer joint ventures, with the overall bancassurance channel accounting for more than 65% of gross written premiums at the end of 2014 in the Spanish life insurance market17.
Customers in Spain are accustomed to receiving advice through banking channels, and we continue to use our relationship with our partners to capitalise on this whilst developing our retail agents and broker distribution network.
valuable tax advantages. We offer a flexible range of individual and group pension plans with alternative investment choices. We also offer protection products, covering both mortgages and credit loans, typically providing cover for the family.
Distribution Through bancassurance partnerships we have established subsidiaries to distribute our products with each of the banks as set out below: • Unicorp Vida – in conjunction with Unicaja since 2001. • Caja España Vida – in conjunction with Caja España since 2001 • Caja Granada Vida – in conjunction with Caja Granada (now part of Banco Mare Nostrum (BMN)) since 2002 • Cajamurcia Vida – in conjunction with Cajamurcia (now part of Banco Mare Nostrum (BMN)) since 2007
Other The Italy, Spain, and Other segment includes our business in Turkey.
AvivaSA has an exclusive bancassurance agreement with Akbank until 2029. Akbank sells AvivaSA’s life and pensions products on an exclusive basis through its banking network in Turkey.
We believe the transformation of our commercial lines business over the last few years has ensured the business is highly competitive. We expect that continued refinement to our models will allow us to leverage this position to positively react to market opportunities. We will continue to address increasing customer demand for choice, simplicity and self-service by working with our broker partners on processes and technology solutions in order to help them compete with other channels.
The Canadian general insurance industry is highly fragmented with many small players and no dominant consumer brand. Steady consolidation has resulted in the top five companies representing 42% of the market and the top two companies, Intact Financial and Aviva, controlling 23% of the market18.The rest of the industry includes several national carriers as well as smaller, provincially based or niche companies.
Products The general insurance products that we provide through our Canadian companies are: • Personal, home and motor insurance; • Small and medium-size enterprise commercial insurance, including motor, property, liability, boiler and machinery, and surety; and
In Singapore, our life business is a leading insurer in the market20, providing employee benefit and individual life insurance through diversified distribution channels. We also have general insurance and health operations in Singapore and are considered the market leader in online personal motor insurance21.
Products Our Asian businesses offer a wide range of protection, savings, and pension products, including universal life, participating and non-participating endowments, unit-linked single and regular premium life insurance, and a range of accident and health insurance products.
On 31 December 2015, our 15 year regional bancassurance agreement with DBS Bank Ltd expired and was not renewed. Aviva retains the existing book of business, associated profits, and customer rights and relationships which were purchased in the original transaction with DBS in 2001.
302 | Aviva plc Annual report and accounts 2015 managed by Friends Life Investments (‘FLI’), as a result of the acquisition of Friends Life.
Our strategy is to offer a range of investment propositions to deliver the specific outcomes that our clients value.
Market and competition At the end of 2014, the global asset management market stood at circa USD$74 trillion in size, almost half of which was accounted for by North America, and nearly a third by Europe26. The global market is highly fragmented, with the top ten managers accounting for around a third of the total assets, and hundreds of other managers accounting for the remainder. As such, the dynamics in all large markets are highly competitive. Aviva Investors is ranked 48th in ‘The World’s 500 Largest Asset Managers27.
Our main competitors are large global asset managers including Blackrock, State Street Global, Fidelity Investments, Schroders and Aberdeen, in addition to other UK and European insurer-owned asset managers with whom we compete on a product by product basis.
Distribution Aviva Investors has a Global Business Development team based in 16 locations with clients around the world. We manage relationships with a diverse range of clients including corporate and public sector pension funds, sovereign wealth funds, financial institutions, charities, insurance companies, wealth managers and national and local government bodies.
provides Aviva Investors’ strategies to US customers in US openended mutual funds.
Analysis of investments We invest our policyholders’ funds and our own funds in order to generate a return for both policyholders and shareholders. The financial strength of the Group and both our current and future operating results and financial performance are, therefore, in part dependent on the quality and performance of our investment portfolios in the UK, Europe, North America and Asia.
Non-UK participating business, annuities and non-participating contracts in all countries, have a high level of guaranteed future payments. We endeavour to match the investments held against these types of business to future cash flows. We therefore have a policy of generally holding fixed income securities and mortgage loans with appropriate maturity dates.
We carry investments on our statement of financial position at either fair value or amortised cost. At 31 December 2015, approximately 99% of the Group’s total investments were carried at fair value on the statement of financial position.
Corporate Public utilities — 85 1,503 2,743 193 94 4,618 Convertibles and bonds with warrants — — — 150 — 8 158 Other corporate bonds 4,877 4,634 10,068 9,843 2,244 2,945 34,611 304 | Aviva plc Annual report and accounts 2015
Government UK Government — 8,940 50 — — 199 9,189 Non-UK Government 4,138 3,489 850 1,085 2 2 9,566
Of the securities not rated by an external agency 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 (2014: £2.5 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.
Wrapped credit AAA — 0.0% — 0.0% — 0.0% — 0.0% AA 24 3.1% 24 3.1% 18 3.3% — 0.0% A 543 69.8% 516 66.3% 346 64.2% 269 50.0% BBB 98 12.6% 120 15.4% 90 16.7% 135 25.0% Less than BBB 68 8.7% 68 8.7% 38 7.1% — 0.0% Non-rated 45 5.8% 50 6.5% 47 8.7% 135 25.0% Not available without insurance guarantee — 0.0% — 0.0% — 0.0% — 0.0%
Greece — — — — — — Ireland 0.6 0.6 0.1 0.2 0.7 0.8 Portugal 0.1 0.2 — — 0.1 0.2 Italy 6.1 6.7 0.5 0.5 6.6 7.2 Spain 1.1 1.2 0.6 0.6 1.7 1.8
Total Greece, Ireland, Portugal, Italy and Spain 7.9 8.7 1.2 1.3 9.1 10.0
Public utilities 2,674 688 5 3,367 Banks, trusts and insurance companies 10,603 3,270 153 14,026 Industrial, miscellaneous and all other 34,087 11,662 215 45,964 Non-redeemable preferred shares 30 7 164 201
Unit trusts and other investment vehicles 39,002 2,852 787 42,641 Derivative financial instruments 52 2,262 1,014 3,328 Deposits and credit institutions 327 28 105 460 Minority holdings in property management undertakings 114 597 249 960 Other 300 — 6 306
As of 31 December 2015, we owned and occupied land and buildings for our own use with a total book value of £337 million (2014: £316 million). We believe that these facilities are adequate for our present needs in all material respects. We also hold other properties, both directly and indirectly, for investment purposes, valued at £9,372 million at 31 December 2015 (2014: £7,521 million). The increase is primarily as a result of the acquisition of the Friends Life business.
Total contractual obligations above 389,886 Effect of discounting contractual cash flows for insurance contracts (23,805) Contractual undiscounted interest payments6 (9,795) Difference between carrying value of borrowings and undiscounted cash flows of principle (124) Contractual cash flows under operating leases and capital commitments (1,251) Difference between derivative liabilities contractual cash flows and carrying value (549) Unallocated divisible surplus7 8,811 Provisions8 1,416 Current and deferred tax liabilities 2,251 Other liabilities 2,802
4 The Group has no material finance leases for property and equipment. 5 Includes obligations for repayment of collateral received under stock lending arrangements and derivative transactions amounting to £4,855 million. 6 When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £79 million. Contractual undiscounted interest payments are calculated using fixed interest rates or prevailing market floating rates as applicable. 7 The unallocated divisible surplus represents the excess of assets over liabilities, including policyholder ‘asset share’ liabilities in the UK, which reflect the amount payable under the realistic Peak 2 reporting regime of the Prudential
Regulatory Authority. Although accounted for as a liability, as permitted by IFRS 4, there is currently no expected payment date for the unallocated divisible surplus. 8 Provisions include pension obligations, which have been excluded from the contractual obligations table above, due to the uncertainty of the amount and timing of future cash flows. The Group operates both funded defined benefit and funded defined contribution pension schemes, full details of which are provided in ‘IFRS Financial Statements – Note 48 – Pension obligations’. We have a contractual obligation to fund these schemes. However, the amount and timing of the Group’s cash contributions to these schemes is uncertain and will be affected by factors such as future investment returns and demographic changes. Our cash funding of defined contribution schemes is based on percentages of salary. Our cash contribution to defined benefit schemes is agreed in advance with scheme trustees. The Company and trustees have agreed to a long-term funding plan where contributions, together with anticipated growth on scheme investments are expected to eliminate the funding deficits over time. Contributions to these and the other schemes are regularly reviewed in light of changes in expectations of investment returns and other assumptions. The discounted scheme liabilities have an average duration of 19 years in the main UK scheme, 19 years in the RAC scheme, 19 years in the Irish scheme, 12 years in the Canadian scheme and 21 years in the Friends Provident Pension Scheme (FPPS).
Aviva’s risk management framework has been designed and implemented to support these objectives. The key elements of our risk management framework comprise our risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles & 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. These elements are expanded in the IFRS Financial statements – Note 57.
Principal risks and uncertainties In accordance with the requirements of the FCA Handbook (DTR 4.1.8) we provide a description of the principal risks and uncertainties facing the Group here and in note 57 to the IFRS Financial statements. Our disclosures covering ‘risks relating to our business’ in line with reporting requirements of the Securities Exchange Commission (SEC) provide more detail and can be found in the shareholder information section ‘Risks relating to our business’.
Risk environment The first half of 2015 saw strengthening economic growth in Europe, benefitting from accommodative monetary policy, a weak euro, continued low oil prices, while economic growth in the UK and US remained robust. Up until April, a combination of a positive macroeconomic outlook and the launch of the European Central Bank’s (ECB) quantitative easing programme in March led to global equity markets reaching all-time highs, weakening euro against the US dollar and pounds sterling, and reduced yields on eurozone sovereign bonds.
In the latter half of the year concerns over the sustainability of current growth rates in developed economies, growing evidence of an economic slowdown in China and other emerging economies, further severe falls in the price of oil and other commodities and geopolitical concerns over the Middle East have depressed equity markets reversing earlier gains. Despite these concerns the US Federal Reserve were sufficiently confident on the strength of the US economy to raise interest rates for the first time since 2006, which has underpinned the current strong US dollar.
These concerns are likely to continue into 2016 with the potential to depress equity markets and cause further financial market volatility and divergence amongst developed economies (US compared to eurozone in particular) in monetary policy, interest rates and economic growth, and exacerbate macroeconomic imbalances in the global economy. In the UK concerns over the outcome of the referendum on EU membership may depress sterling and the price of gilts. Despite the recent increase in interest rates by the US Federal Reserve the current low interest rate environment compared to historical norms is likely to persist in the intermediate future at least.
2015 also saw a number of high profile cyber security breaches for corporates in the UK and elsewhere and this risk is expected to increase in the future.
Continuing on from 2014, 2015 saw further change in UK public policy on pensions and from April 2016 annuitants will have the option to sell their annuity income to a third party for a cash lump sum. While in most of our markets conduct regulation and enforcement has received increased focus from national supervisors, as well as international supervisory bodies such as EIOPA and IAIS. This is expected to continue into the future.
The Group continued to take steps to amend its risk profile, successfully completing a number of management actions. These include: the disposal of £2.2 billion of non-core commercial mortgages, the reinsurance of £0.7 billion of latent exposures to historical UK employer’s liability business (with conditional agreement to extend coverage to £0.8 billion); the purchase of interest swaps to better cash flow match our annuity portfolio; reducing exposure to longevity risk as a result of the RAC staff pension scheme entering into a longevity swap covering £0.6 billion of pensioner in payment liabilities; and reducing our operational risk exposures through investment in our Security Transformation programme in response to the increasing cyber security risk and on-going investment in simplifying our technology estate to improve resilience and reliability of our systems. Restrictions on non-domestic investment in sovereign and corporate debt from Greece, Italy, Portugal and Spain remain in place. As described in note 57 to the IFRS Financial statements, a number of foreign exchange, credit and equity hedges are also in place. These are used to 308 | Aviva plc Annual report and accounts 2015
During 2015, the Group continued to pay-down the intercompany loan between Aviva Insurance Limited (AIL) and Aviva Group Holdings (AGH). By the end of February 2016, the balance of the loan had been reduced to £1.5 billion, below the level at which we estimate AIL would no longer rely on the loan to meet its stressed liabilities.
Low interest rate environment The Group continues to be adversely impacted by the low interest rate environment in a number of markets around the world. This has resulted in reduced interest spread on participating contracts (the difference between the amounts that we are required to pay under the contracts and the investment income we are able to earn on the investments supporting our obligations under those contracts), and current reinvestment yields being lower than the overall current portfolio yield, primarily for our investments in fixed income securities and commercial mortgage loans. We anticipate that interest rates may remain below historical averages for an extended period of time and that financial markets may continue to have periods of high volatility. As a result we continue to rebalance the Group’s revenues towards product lines, such as protection, that are not significantly sensitive to interest rate or market movements. Further information on the Group’s exposure to low interest rates is included in the sensitivity analysis in Note 57 of the IFRS Financial Statements.
Overall capital risk appetite, which is reviewed and approved by the Aviva Board, is set and managed with reference to the requirements of a range of different stakeholders including shareholders, policyholders, regulators and rating agencies. Risk appetite is expressed in relation to a number of key capital and risk measures, and includes a Solvency II capital risk appetite of holding sufficient capital resources to enable the Group to meet its liabilities in extreme adverse scenarios, on an ongoing basis. Our risk appetite is consistent with a AA range credit rating.
In managing capital we seek to: • maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength; • optimise our overall debt to equity structure to enhance our returns to shareholders, subject to our capital risk appetite and balancing the requirements of the range of stakeholders; • retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit facilities and access to a range of capital markets; • allocate capital rigorously across the Group, to drive value adding growth through optimising risk and return; and
In line with these objectives, the capital generated and invested by the Group’s businesses is a key management focus.
Accounting basis: Capital employed by segment and financing of capital The table below shows how our capital, on an IFRS basis, is deployed by segment and how that capital is funded.
Financed by: Equity shareholders’ funds 15,764 10,018 Non-controlling interests 1,145 1,166 Direct capital instrument and tier 1 notes 1,123 892 Preference shares 200 200 Subordinated debt 6,427 4,594 Senior debt 485 716
Total capital employed 25,144 17,586 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 agreement between Aviva Group Holdings and Aviva Insurance Limited (AIL).
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and other borrowings.
At the end of 2015 we had £25.1 billion (2014: £17.6 billion) of total capital employed in our trading operations measured on an IFRS basis.
Regulatory capital – UK Life with-profits fund The available capital of the with-profits funds is represented by the realistic inherited estate. The estate represents the assets of the long-term with-profits funds less the realistic liabilities for non-profits policies within the funds, less asset shares aggregated across the with-profits policies and any additional amounts expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs, guarantees and promises. Realistic balance sheet information is shown below for the four main UK with-profits funds: New With-Profits Sub-Fund (NWPSF), Old With-Profits Sub-Fund (OWPSF), With-Profits Sub-Fund (WPSF) and Friends Provident
With-Profits Fund (FP WPF). Realistic balance sheet information for the five Friends Life (FL) with-profits funds that are closed to new business have been disclosed as ‘Other FL WPFs’ including: FPLAL With-Profits Fund (FPLAL WPF), FLC New With-Profits Fund (FLC New WPF), Old With-Profits Fund (FLC Old WPF), FLAS With-Profits Fund (FLAS WPF) and WL With-Profits Fund (WL WPF). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the Group’s IFRS Statement of financial position at 31 December 2015 and 31 December 2014, with comparatives at 31 December 2014 including NWPSF, OWPSF and WPSF only.
NWPSF 14.0 (14.0) — 2.1 (0.2) 1.9 1.9 OWPSF 2.6 (2.4) 0.2 — — 0.2 0.2 WPSF4 16.7 (15.2) 1.5 — (0.3) 1.2 1.3 FP WPF5 7.2 (7.0) 0.2 — (0.2) — — Other FL
2 Estimated realistic inherited estate at 31 December 2014 was £nil, £0.3 billion and £1.6 billion for NWPSF, OWPSF and WPSF respectively.
3 The support arrangement represents the reattributed estate (RIEESA) of £2.1 billion at 31 December 2015 (31 December 2014: £2.1 billion).
4 The WPSF fund includes the Ireland With-Profits Sub-Fund (IWPSF) and the Provident Mutual (PM) Fund which have realistic assets and liabilities of £2.4 billion in total, and therefore do not contribute to the realistic inherited estate.
6 Includes FPLAL WPF, FLC New WPF, FLC Old WPF, FLAS WPF and WL WPF. For these funds it is assumed that the entire estimated realistic inherited estate is distributed to policyholders.
Investment mix The aggregate investment mix of the assets in the four main with-profit funds at 31 December 2015 and three main withprofit funds at 31 December 2014 was: Equity 30% 24% Property 10% 10% Fixed interest 54% 59% Other 6% 7%
The equity backing ratios, including property, supporting withprofit asset shares are 75% in NWPSF and OWPSF, 72% in WPSF and 45% in FP WPF.
Economic capital We use a risk-based capital model to assess economic capital requirements and to aid in risk and capital management across the Group. The model is based on a framework for identifying the risks to which business units, and the Group as a whole, are exposed. Where appropriate, businesses also supplement these with additional risk models and stressed scenarios specific to their own risk profile. When aggregating capital requirements at business unit and Group level, we allow for diversification benefits between risks and between businesses, with restrictions to allow for non-fungibility of capital where appropriate. This means that the aggregate capital requirement is less than the sum of capital required to cover all of the individual risks. The capital requirement reflects the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time 310 | Aviva plc Annual report and accounts 2015
Rating agency Credit ratings are an important indicator of financial strength and support access to debt markets as well as providing assurance to business partners and policyholders over our ability to service contractual obligations. In recognition of this we have solicited relationships with a number of rating agencies. The agencies generally assign ratings based on an assessment of a range of financial factors (e.g. capital strength, liquidity, leverage and fixed charge cover ratios) and non-financial factors (e.g. strategy, competitive position and quality of management).
Financial flexibility The Group’s borrowings are comprised primarily of long dated hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings of £1.0 billion, the majority of which was held within Aviva Group Holdings Limited at the 2015 year end, the Group also has access to unutilised committed credit facilities of £1.7 billion provided by various highly rated international banks.
% of employees who confirm that they have read, understood, and accepted the Business Ethics Code annually; and all employees in Aviva France who are obliged to comply with the Business Ethics Code as a term of their employment
% reduction of CO2e emissions relative to our 2010 baseline New KPI New KPI 32% 39% 40% reduction by 2020 and 50% reduction by 2030
CO2e emissions (tonnes) – absolute 112,763 105,317 83,924 88,698 Reduce by 5%
CO2e emissions (tonnes) – relative n/a n/a 83,924 73,373 Reduce by 5%
Water consumption (m³) – absolute 529,960 459,634 468,097 483,635 Reduce by 4%
% of employees who believe Aviva is a good corporate citizen New KPI New KPI New KPI 80% n/a
Amount of community investment £11m £6.2m £6.3m £10.8m Maintain or improve investment
% of employees participating in volunteering 18% 27% 23% 12% Increase % of employee volunteering
Total beneficiaries of corporate responsibility programmes New KPI New KPI 511,629 587,203 Increase number of beneficiaries 2015 data has been subject to independent assurance by PwC. See page 314 to 315. 1 Unless otherwise stated, 2015 data includes Friends Life from date of acquisition. Environment KPIs include Friends Life data for the whole of 2015. 2 For details on the methodology followed to report on these KPIs, please refer to our Reporting Criteria document (
= N Improve past performance Net Promoter Score ® (NPS) is the difference between the percentage of customers who are our promoters (i.e. advocates who would recommend Aviva to friends and colleagues) and those who are our detractors (i.e. customers who would not recommend Aviva or would even speak out against Aviva). The percentage figures are based on those markets within which Aviva has continued to operate from 2012, which are: UK, Ireland, Canada, France, Italy, Spain, Poland, Lithuania, Singapore, China, and India. This KPI excludes Friends Life customers.
= Y Offset 100% CO2e emissions n/a Y 40% reduction by 2020 and 50% reduction by 2030
6% * Reduce by 5% *On a relative basis, i.e. excluding Friends Life, Aviva exceeded its target and reduced its CO2e by 13%. The absolute amount only increased due to the acquisition of Friends Life which increased the size of the company significantly in 2015.
3% N Reduce by 4% On a relative basis, i.e. excluding Friends Life, Aviva reduced its water consumption by 3%. The absolute amount only increased due to the acquisition of Friends Life which increased the size of the company significantly in 2015.
The lower percentage of employees volunteering and slight increase of volunteering hours is explained by: the completion of our Global Street to School programme in 2014, which used to engage a high number of employees in volunteering activities; and an increase in the number of hours volunteered per employee in 2015. 1.5% Y Increase volunteering hours 12.9% Y Increase number of beneficiaries
Our conclusion Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe that the Selected Information for the year ended 31 December 2015 has not been prepared, in all material respects, in accordance with the Reporting Criteria.
We apply International Standard on Quality Control (UK & Ireland) 1 and accordingly maintain a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.
Understanding reporting and measurement methodologies The Selected Information needs to be read and understood together with the Reporting Criteria, which Aviva is solely responsible for selecting and applying. The absence of a significant body of established practice on which to draw to evaluate and measure non-financial information allows for different, but acceptable, measurement techniques and can affect comparability between entities and over time. The Reporting Criteria used for the reporting of the Selected Information are as at 31 December 2015.
PricewaterhouseCoopers LLP, Chartered Accountants, London 9 March 2016 1 The maintenance and integrity of Aviva’s website is the responsibility of the Directors; the work carried out by us does not involve consideration of these matters and, accordingly, we accept no responsibility for any changes that may have occurred to the reported Selected Information or Reporting Criteria when presented on Aviva’s website.
Issued share capital The Company had an aggregate issued and outstanding ordinary share capital of £1,012 million as of 31 December 2015. The following table sets out information about the issued and outstanding classes of equity as of 31 December 2015.
Ordinary shares, nominal value 25p 4,048 2,950 2,947 18 17 20 8.375% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — — 8.75% Cumulative irredeemable preference shares, nominal value £1 100 100 100 — — —
The Company is not permitted under English law to hold its own ordinary shares. Whilst the Company is presently authorised to repurchase up to 295 million ordinary shares, any shares that are repurchased must be cancelled. Details of the Company’s dividends are set out in the section ‘Dividend data’. The Company’s preference shares rank, as to the payment of dividends and capital, as set out in note 33 of the IFRS Financial statements.
Aviva France employee profit sharing scheme Aviva France operates an employee profit sharing scheme where employees are given an award based on a percentage of salary, which can be either received in cash or invested in one of four mutual funds. One of the four mutual funds is invested solely in Aviva plc ordinary shares. Any investment in a mutual fund must be held for at least five years.
Additional information For the purposes of Listing Rule (LR) 9.8.4C R, the information required to be disclosed by LR 9.8.4 R can be found in the following locations: Section in LR 9.8.4C R Topic Location in the annual report and accounts 1 Interest capitalised N/A 2 Publication of unaudited financial information N/A 3 Requirement deleted from the listing rules 4 Details of long-term incentive schemes DRR and IFRS Financial Statements – note 31 5 Waiver of emoluments by a director N/A 6 Waiver of future emoluments by a director N/A 7 Non pre-emptive issues of equity for cash N/A 8 Item (7) in relation to major subsidiary undertakings N/A 9 Parent participation in a placing by a listed subsidiary N/A 10 Contracts of significance N/A 11 Provision of services by a controlling shareholder N/A 12 Shareholder waivers of dividends IFRS Financial Statements – note 32 13 Shareholder waivers of future dividends IFRS Financial Statements – note 32 14 Agreements with controlling shareholders N/A
There were no changes to the voting rights of any class of shares during 2013, 2014 and 2015, other than issuances in connection with our various employee option schemes and in relation to the acquisition of Friends Life. The Company did not issue shares for consideration other than cash during 2013, 2014 and 2015, with the exception of the acquisition of Friends Life. Details of the acquisition through a share exchange are set out in note 3. In addition, at the Company’s general meetings in 2013, 2014 and 2015, shareholders authorised the limited dis-application of section 561 of the Companies Act 2006 to permit the Company to issue new equity securities for cash without applying shareholders’ statutory pre-emptive rights.
Various directors and key management of Aviva may from time to time purchase insurance, asset management or annuity products from Aviva Group companies in the ordinary course of business on substantially the same terms, including interest rates and security requirements, as those prevailing at the time for comparable transactions with other persons.
In addition to the amounts disclosed for associates and joint ventures above, at 31 December 2015 amounts payable at yearend were £nil (2014: £nil), and expenses incurred during the period were £7 million (2014: £2 million).
Dividend data The Company has a policy to pay a progressive dividend with reference to growth in cash flows and earnings. Under UK company law, we may only pay dividends if the Company has ‘distributable profits’ available. ‘Distributable profits’ are accumulated, realised profits not previously distributed or capitalised, less accumulated, unrealised losses not previously written off based on IFRS. Even if distributable profits are available, we pay dividends only if the amount of our net assets is not less than the aggregate of our called-up share capital and undistributable reserves and the payment of the dividend does not reduce the amount of our net assets to less than that aggregate.
Historically, the Company has declared an interim and a final dividend for each year (with the final dividend being paid in the year following the year to which it relates). Subject to the restrictions set out above, the payment of interim dividends on ordinary shares is made at the discretion of our Board, whilst payment of any final dividend requires the approval of the Company’s shareholders at a general meeting. Preference shares are irredeemable and dividends on preference shares are made at the discretion of our Board.
into US dollars according to the prevailing market rate on the date that the ADS depositary actually receives the dividends.
An interim dividend is generally paid in November of each year. A final dividend is typically proposed by the Company’s Board after the end of the relevant year and generally paid in May. The following table shows certain information regarding the dividends that we paid on ordinary shares for the periods indicated in pounds sterling and converted into US dollars at the noon buying rate in effect on each payment date.
Guarantees, securitised assets and off-balance sheet arrangements As a normal part of our operating activities, various Group companies have given financial guarantees and options, including interest rate guarantees, in respect of certain longterm assurance and fund management products, as set out in Note 42 to the IFRS Financial Statements. These are accounted for on-balance sheet as either part of the host insurance contract or as financial instruments under IFRS.
Limited liability partnerships classified as joint ventures As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLP), either directly or via property unit trusts (PUT), through a mix of capital and loans. The PLPs are managed by general partners (GP), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary.
Accounting for the PUTs and PLPs as subsidiaries, joint ventures, associates or other financial investments depends on whether the Group is deemed to have control or joint control over the PUTs and PLPs’ shareholdings in the GPs and the terms of each partnership agreement are considered along with other factors that determine control.
Note 18 to the IFRS Financial Statements provides a list of the principal PLPs accounted for as joint ventures, as well as summarised information on the income, expenses, assets and liabilities of the Group’s interests in its joint ventures in aggregate. In respect of these PLPs, there are no significant contingent liabilities to which we are exposed, nor do we have any significant contingent liabilities in relation to our interests in them. External debt raised by the PLPs is secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder and shareholders’ funds of any companies in the Aviva Group. At 31 December 2015, we had £47 million capital commitments to these PLP joint ventures.
Our principal objective in managing our liquidity and capital resources is to maximise the return on capital to shareholders, while enabling us to pay dividends, service our debt and our holding companies’ cash flows. In the context of a financial services company where our working capital is largely representative of our liquidity, we believe that our working capital is sufficient for our present operational requirements. For additional information, see ‘IFRS Financial statements – Note 57 – Risk management – liquidity risk’.
Processes for monitoring and managing liquidity risk, including liquidity stress models, have been enhanced to take into account the extraordinary market conditions, including the impact on policyholder and counterparty behaviour, the ability to sell various investment assets and the ability to raise incremental funding from various sources. Management has taken steps to strengthen liquidity in light of its assessment of the impact of market conditions and intends to continue to monitor liquidity closely.
In managing our capital, we seek to: • match the profile of our assets and liabilities, taking into account the risks inherent in each business; • maintain financial strength to support new business growth whilst still satisfying the requirements of policyholders, regulators and rating agencies; • retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines; • allocate capital efficiently to support growth and repatriate excess capital where appropriate; and
Management of debt Aviva plc is the principal financing vehicle in our centralised funding strategy. We aim to manage our external debt in line with rating agency limits applicable for entities with a rating in the AA range. We manage the maturity of our borrowings and our undrawn committed facilities to avoid bunching of maturities. We aim to maintain access to a range of funding sources, including the banking market, the commercial paper market and the long-term debt capital markets. We issue debt in a variety of currencies, predominantly sterling and euro, based on investor demand at the time of issuance and management of the Group’s foreign exchange translation exposures in the statement of financial position.
In June 2015 Aviva plc issued €900 million and £400 million of Lower Tier 2 subordinated debt callable in 2025 and 2030 respectively. This was used to repay the following instruments: £268 million Step-up Tier 1 Insurance Capital Securities at first call date in July 2015; €500 million undated subordinated debt at first call date in September 2015; and £200 million debenture loans in September 2015, ahead of the June 2016 maturity.
At 31 December 2015, our total external borrowings, including subordinated debt and securitised mortgage loans, amounted to £8.8 billion (2014: £7.4 billion). Of the total borrowings, £6.9 billion (2014: £5.3 billion) are considered to be core borrowings and are included within the Group’s capital employed. The balance of £1.9 billion (2014: £2.1 billion) represents operational debt issued by operating subsidiaries. We also have substantial committed credit facilities available for our use. At 31 December 2015, we had undrawn committed credit facilities expiring within one year of £0.6 billion (2014: £0.4 billion) and £1.1 billion in credit facilities expiring after more than one year (2014: £1.2 billion).
Further information on the maturity profile, currency and interest rate structure of our borrowings is presented in ‘IFRS Financial statements – Note 49 – Borrowings’. Commercial paper is issued for terms up to 12 months and is generally reissued at maturity. The earliest repayment date for other debt instruments is a $400 million subordinated debt instrument with a first call date of 1 December 2016 at the option of the Company. At this time Aviva will have the option of repaying the debt or deferring repayment until future coupon dates.
The table below presents our debt position for the periods indicated: Core structural borrowings Subordinated debt 6,469 4,594 Debenture loans — 200 Commercial paper 485 516
Operating borrowings Operational borrowings at amortised cost 550 696 Operational borrowings at fair value 1,308 1,372
These special purpose entities have been consolidated as we retain the residual interest in them. The transactions and reasons for consolidation are discussed further within ‘IFRS Financial statements – Note 24 – Securitised mortgages and related assets’.
Our committed central borrowing facilities have no financial covenants following the renewal of terms undertaken in 2015.
Sources of liquidity In managing our cash flow position, we have a number of sources of liquidity, including: • dividends from operating subsidiaries; • external debt issuance; • internal debt and central assets; and • funds generated by the sale of businesses.
2 Other includes Aviva Investors and Group Reinsurance. 3 Cash remittances include amounts of £351 million received from UKGI in February 2016 in respect of 2015 activity.
Excess centre cash flow of £699 million has remained broadly stable compared with the prior period. Increased internal interest received driven by Friends Life intercompany loans and foreign exchange movement gains on Group centre holdings was offset by an increase in external interest, largely due to the inclusion of Friends Life external debt, as well as higher central spend mainly relating to Friends Life and investment in our digital capability. In addition, the total excess centre cash flow is reduced as a result of the dividend payment retained in Canada to part-fund the proposed acquisition of Royal Bank of Canada General Insurance Company.
Aviva plc has also issued longer-term debt under a euro Medium Term Note (EMTN) programme. Debt issued under this programme may be senior debt or regulatory qualifying debt and may have a fixed or floating interest rate. At 31 December 2015, the outstanding debt (including equity accounted tier 1 notes) issued under this programme was £3,838 million (2014: £2,860 million).
Capital injections We make capital injections into our businesses where necessary to ensure that they meet their local solvency requirements and also to support development of their operations. Capital is provided either by equity or subordinated debt, where such debt is recognised as capital by the regulator. Each capital injection is subject to central review and needs to meet our required internal rates of return. To the extent that capital injections are provided or funded by regulated entities we consider the regulatory capital impact of the capital injection. Otherwise our ability to make capital injections into our businesses is not materially limited by applicable legal and regulatory restrictions. Total capital injections into the business units were £469 million and £567 million in 2015 and 2014 respectively. Payments during the year include capitalisation of the Group’s internal reinsurance vehicle and other restructuring activity.
Consolidated cash flows The cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.
Net cash from investing activities Net cash from investing activities (continuing operations) was £7,641 million inflow (2014: £228 million outflow). The increase of £7,869 million is mainly due to cash balances brought into the Group following the acquisition of Friends Life.
Net cash outflow on financing activities Net cash used in financing activities (continuing operations) decreased by £590 million to an outflow of £1,365 million (2014: £1,955 million outflow). The decrease is mainly due to the redemption of a direct capital instrument in 2014.
Net cash from investing activities Net cash used in investing activities (continuing operations) decreased by £562 million to £228 million outflow (2013: £334 million inflow). The decrease in cash is mainly due to lower inflows from disposals and higher purchases of property and equipment.
Net cash and cash equivalents At 31 December 2014, total consolidated net cash and cash equivalents, net of bank overdrafts, amounted to £22,564 million, a decrease of £3,425 million over £25,989 million in 2013.
The IGD regulatory capital solvency surplus has increased by £2.8 billion since 2014 to £6.0 billion. The key drivers of the increase are the acquisition of Friends Life (£1.6 billion), operating profits (£1.6 billion) and the net issue of hybrid debt (£0.4 billion), offset by dividend payments and pension scheme funding (£0.5 billion).
2 Outward quota share reinsurance agreement completed in 2015 in Aviva Insurance Limited (AIL).
Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property, property and equipment and intangible assets, which have not been recognised in our consolidated financial statements, are as follows: Investment property 71 97 3 Property and equipment 61 8 24 Other investment vehicles 202 — —
The European Union In addition to its UK businesses, Aviva is active in other EU member states through wholly owned subsidiary and joint venture companies. These companies are subject to the laws and regulations of the EU member state in which they are based, but are also affected by higher level EU legislation, which will continue to have a significant influence on the legislative environment in the UK and other EU markets.
The EU operates by promulgating directives that must be implemented into local national legislation within each EU member country. These directives can either be framed as minimum or maximum harmonisation for the standards for national legislatures to meet. National governments may not pass laws which fail to meet the standards set out in a directive, but are generally free to impose legal requirements which go beyond those required other than where a directive on a maximum harmonisation basis applies. Even greater detail may be imposed through the rules and regulations of national regulators and, for financial services businesses these rules can be extensive.
• The introduction of solo supervision requirements, including rules as to internal control within the insurance undertaking regarding the production of information relevant to supplementary supervision, the exchange of information within the Group and the supervision of intra-group transactions.
From 1 January 2016 EU-based insurance groups are no longer required to disclose their solvency position under the European Insurance Groups Directive, as the regulatory framework has been replaced by the new Solvency II regime. As such, after 31 December 2015 Aviva Group will no longer disclose its capital solvency surplus under the IGD rules.
Solvency II The Solvency II Directive which governs insurance industry regulation and prudential capital requirements within the European Union, including associated Implementing Technical Standards and guidelines became effective from 1 January 2016. This replaces the directives listed above (Third Life and Non Life Directives, Reinsurance Directive and Insurance Groups Directive). Solvency II is a harmonised European prudential framework that reflects risk management practices to define required capital and manage risk. The framework has three main pillars: • Pillar 1 consists of the quantitative requirements (for example the amount of capital an insurer should hold); • Pillar 2 sets out requirements for the governance and risk management of insurers, as well as their supervision; and • Pillar 3 focuses on disclosure and transparency requirements.
Markets in Financial Instruments Directive (MIFID2) MIFID2, which superseded the earlier Investment Services Directive, builds on the home country control principle, extending the range of ‘core’ investment services and activities that may be passported from one member state to another, clarifying the allocation of responsibilities between home and host country jurisdictions, and introducing greater harmonisation governing the organisation and conduct of business of investment firms.
The FCA is a company limited by guarantee, accountable to the UK Treasury, and through the Treasury, to the UK Parliament. It is operationally independent of government and entirely funded by the firms it regulates. The FCA’s strategic objective as set out in the Financial Services Act 2012 is to ensure that markets “function well” and it is responsible for the conduct regulation of all financial services firms (including those prudentially 326 | Aviva plc Annual report and accounts 2015
Aviva plc, although not directly authorised, does come within the scope of some regulation as the ultimate insurance holding company in the Group. The PRA and FCA have powers under the FS Act in relation to unregulated parent undertakings (‘qualifying parent undertakings’) that control and exert influence over regulated firms. The powers include the ability to make directions imposing requirements on parent undertakings, take enforcement action where such directions are breached and gather information from parent undertakings.
Aviva Life & Pensions UK Ltd Aviva Investors UK Fund Services Ltd
328 | Aviva plc Annual report and accounts 2015 breached a statement of principle, regardless of which regulator gave approval.
Capital and solvency rules for insurers The PRA rules require that a UK insurer (including those within the Group) must hold capital resources equal to at least the Minimum Capital Requirement (MCR). Insurers with with-profits liabilities of more than £500 million (which is the case with Aviva’s with-profits funds) must hold capital equal to the higher of MCR and the Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure of a with-profits insurer’s capital requirements, whereas the MCR is broadly equivalent to the previous required minimum margin, and satisfies the minimum EU standards.
Determination of the ECR involves the comparison of two separate measurements of the Authorised Firm’s financial resources requirements, which the PRA refers to as the ‘twin peaks’ approach. The two separate peaks are: • the requirement comprised by the mathematical reserves plus the ‘long term insurance capital requirement’ (the LTICR), together known as the ‘regulatory peak’; and
All UK insurers must also carry out an Individual Capital Assessment (ICA) to calculate the amount of capital needed to back their business. If the PRA decides that the final ICA amount is insufficient, it may draw up its own Individual Capital Guidance (ICG) for the firm, which can be imposed as a requirement on the scope of the Authorised Firm’s permission. From 1 January 2016, Aviva is subject to the new Solvency II regulatory regime.
The UK regulators aim to play a leading role in the development of both EU and international regulation.
In addition to applying sanctions for market abuse, the FCA has the power to prosecute criminal offences arising under FSMA and insider dealing under Part V of the Criminal Justice Act 1993, and breaches of money laundering regulations. The FCA’s stated policy is to pursue criminal prosecution in all appropriate cases.
Restrictions on business UK regulatory rules restrict an insurance company from carrying on any commercial business other than insurance business and activities directly arising from that business. Therefore, authorised insurance companies in the Group are bound by this restriction.
The extent to which long-term fund assets may be used for purposes other than long-term business is restricted by the PRA rules. Only the ‘established surplus’, which is the excess of assets over liabilities in the long-term fund as determined by actuarial investigation, may be transferred so as to be available for other purposes. Following the transition to Solvency II at 1 January 2016, only the ‘eligible own funds’, which are the funds available for covering the regulatory capital requirements of the long-term business, may be transferred so as to be available for other purposes, although a waiver from the PRA is required before any transfer is performed. Restrictions also apply to the payment of dividends by the insurance company, as described below. PRA rules also require insurers to maintain sufficient assets in the separate long-term insurance fund to cover the actuarially determined value of the insurance liabilities.
• following the sixth annual investigation after 1 October 2009 or later investigation and provided that investigation and investigations made in the previous 2 years determined that the Reattributed Inherited Estate exceeded the Permitted Release Threshold.
The AVLAP Board set aside £189 million as at 31 December 2014 to enhance the with-profits benefits for customers as they leave the AVLAP With-Profits Sub Fund (“AVLAP WPSF”), with effect from 1 July 2015.
FSMA provides further protection to policyholders of insurance companies effecting or carrying out contracts of longterm insurance. Unless the court orders otherwise, a liquidator and/or administrator must carry on the insurer’s business so far as it consists of carrying out the insurer’s contracts of long-term insurance with a view to it being transferred as a going concern to a person who may lawfully carry out those contracts. In carrying on the business, the liquidator/administrator may agree to the variation of any contracts of insurance in existence when the winding-up order is made, but must not effect any new contracts of insurance.
Market conduct regulation is conducted at the provincial level through ten independent provincial regulators. Those regulators derive their powers from insurance acts enacted by provincial legislatures. Market conduct regulation focuses on personal lines products and business practices, including rating formulas, underwriting and policy terms and conditions. Commercial lines insurance is not subject to as extensive regulations.
The Asia area is made up of a number of widely differing and independent markets. The markets tend to be at various different stages in their economic and regulatory development but each has its own regulatory structures and Aviva must ensure it complies with the local regulation in each of the countries in which it operates.
Industry regulation typically focuses on financial stability and market conduct i.e. minimum capital and the basis for calculating solvency, reserves and policyholder liability. In many of the markets, regulators have the power to revoke operating licences, regulate shareholder structures and the participation in and the payment of dividends. Asia markets are moving quickly to modernise insurance regulation with an increasing focus on governance and conduct risk.
Aviva has an active programme of review of marks and watching for infringements. There are no material infringements in the UK known to us as at the date of this report, either by the Group or third parties.
Factors relating to general economic conditions (such as consumer spending, business investment, government spending, and high sovereign debt levels, exchange rates and commodity prices), uncertainty over the United Kingdom’s continued membership of and influence in the European Union (‘EU’), the volatility and strength of both debt and equity markets, and inflation, all affect the profitability of our business. In a sustained economic phase of low growth and high public debt, characterised by higher unemployment, lower household income, lower corporate earnings, lower business investment and lower consumer spending, the demand for financial and insurance products could be adversely affected. In addition, we may experience an elevated incidence of claims or surrenders of policies or claims of mis selling. Any potential material adverse effect on us will also be dependent upon customer behaviour and confidence.
As a global business, we are exposed to various local political, regulatory and economic conditions, business risks and challenges which may affect the demand for our products and services, the value of our investment portfolios and the credit quality of local counterparties. We offer our products and services in Europe (including the United Kingdom (‘UK’)), North America and the Asia Pacific region through wholly owned and majority owned subsidiaries, joint ventures, companies in which we hold non controlling equity stakes, agents and independent contractors. Our international operations expose us to different local political, regulatory, business and financial risks and challenges which may affect the demand for our products and services, the value of our investment portfolio, the required levels of capital and surplus, and the credit quality of local counterparties. These risks include, for example, political, social or economic instability in countries in which we operate, discriminatory regulation, credit risks of our counterparties, lack of local business experience in certain markets, risks associated with exposure to insurance industry insolvencies through policyholder guarantee funds or similar mechanisms set up in markets in which we are present and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially in countries in which we are conducting business through entities which we do not control. Some of our international insurance operations are, and are likely to continue to be, in emerging markets where these risks are heightened. Our overall success as a global business and our results of operations depend, in part, upon our ability to succeed in different economic, social and political conditions.
Credit risks relating to Aviva’s business Market developments and government actions regarding the sovereign debt crisis in Europe, particularly in Greece, Cyprus, Ireland, Italy, Portugal and Spain, could have a material adverse effect on our results of operations, financial condition and liquidity. The continued uncertainty over the outcome of various EU and international financial support programmes, and the possibility that other EU member states may experience similar financial pressures, could further disrupt global markets. In particular, this crisis has disrupted, and could further disrupt, equity and fixed income markets, and has resulted in volatile bond yields on the sovereign debt of EU members.
The issues arising out of the recent sovereign debt crisis may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies, and likewise affect UK and U.S. based financial institutions, the stability of the global financial markets and any economic recovery. We hold investments in both UK and non-UK securities.
More recently, economic conditions in affected EU member states seem to be stabilising or improving, as evidenced by the stabilisation of credit ratings, particularly in Spain, Portugal and Ireland. However, there can be no assurance that any stabilisation or improvement in economic conditions will continue or that the risk of default on the sovereign debt of certain countries will be reduced, all of which could have a material adverse effect on our financial condition and results of operations.
The Group has significant holdings of UK sovereign and corporate debt. Credit rating agencies have indicated that in the event of the UK leaving the EU as a result of the referendum on UK-EU membership, the credit rating of the UK government could be downgraded. In the event this occurred it could result in a fall in the price of UK sovereign and corporate debt, adversely impacting the Group’s solvency, profitability and shareholders’ equity.
Market risks relating to Aviva’s business Changes in interest rates may cause policyholders to surrender their contracts, reduce the value of our investment portfolio and may have an adverse impact on our asset and liability matching, which could adversely affect our results of operation and financial condition. Interest rates are highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations, inflationary factors, fiscal deficits, trade surpluses or deficits, regulatory requirements and other factors beyond our control.
which increases this risk. Lowering interest crediting or policyholder bonus rates can help offset decreases in investment margins on some products. However, our ability to lower these rates could be limited by competition or by contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our spread could decrease or potentially become negative. Our expectation for future spreads is an important component in the amortisation of policy acquisition costs and significantly lower spreads may cause us to accelerate amortisation, thereby reducing net income in the affected reporting period. In addition, during periods of declining interest rates, the guarantees within existing life insurance and annuity products may be more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year to year, during a period when our new investments carry lower returns. Accordingly, during periods of declining interest rates, profitability may suffer as the result of a decrease in the spread between interest rates credited to policyholders and returns on our investment portfolio.
Our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average duration approximately equal to the duration of our estimated liability cash flow profile. However, it may not be possible to hold assets that will provide cash flows to exactly match those relating to policyholder liabilities, in particular in jurisdictions with less developed bond markets and in certain markets where regulated surrender value or maturity values are set with reference to the interest rate environment prevailing at the time of policy issue. This is due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of suitable duration. This results in a residual asset/liability mismatch risk that can be managed but not eliminated. In addition, our estimate of the liability cash flow profile may be inaccurate for other reasons, such as varying mortality, morbidity or general insurance claims, and we may be forced to liquidate investments prior to maturity at a loss in order to cover the liability. Such a loss could have a material adverse effect on our results of operations and financial condition.
Changes in short or long-term inflation may cause policyholders to surrender their contracts, increase the size of our claims payments and expenses and reduce the value of our investments, which could adversely affect our results of operations and financial condition. We are subject to inflation risk through our holdings of fixed interest and other investments and as a result of the potential for the cost of claims and expenses to rise faster than anticipated in our pricing or reserving. Changes in inflation could also affect the value perceived to be offered by our policies and so adversely affect persistency levels.
Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates could result in an increase in the valuation of the future policy benefits or policyholder account balance liabilities associated with such products, resulting in a reduction to net income. We use reinsurance and derivative instruments to mitigate some of the liability exposure and the volatility of net income associated with these liabilities, and while we believe that these and other actions mitigate the risks related to these benefits, we remain liable for the guaranteed benefit in the event that reinsurers or derivative counterparties are unable or unwilling to pay.
Failure to manage risks in operating securities lending of Group and third party client assets could adversely affect our results of operations and financial condition and for our fund management operations lead to a loss of clients and a decline in revenues and liquidity. In operating securities lending of Group and third party client assets, our fund management operations must manage risks associated with (i) ensuring that the value of the collateral held against the securities on loan does not decline in value or become illiquid and that its nature and value complies with regulatory requirements and investment requirements; (ii) the potential that a borrower defaults or does not return a loaned security on a timely basis; and (iii) errors in the settlement of securities, daily mark-to-market valuations and collateral collection. The failure of our fund management controls to mitigate these risks could result in financial losses for us and third party clients that participate in our securities lending programmes.
As a holding company, Aviva plc is dependent over the medium to long-term on its operating subsidiaries to cover operating expenses and dividend payments. As a holding company, Aviva plc has no substantial operations of its own. Its principal sources of funding are dividends from subsidiaries, shareholder-backed funds and any amounts that may be raised through the issuance of debt and commercial paper. Our insurance and fund management operations are generally conducted through direct and indirect subsidiaries. Certain subsidiaries have regulatory restrictions that may limit the payment of dividends and could prompt a decision to inject capital, which in some more adverse circumstances and over the longer-term could limit our ability to pay dividends to shareholders. This could have a material adverse impact on our business.
Additionally, our management of the general insurance business requires the general insurance companies to make a number of assumptions in relation to the business written. These assumptions include the costs of writing the business and settling claims, and the frequency and severity of claims. The assumptions may turn out to be incorrect, thereby adversely impacting on our profit. Additionally, man-made disasters, including accidents and intentional events, are particularly difficult to predict with a high degree of accuracy. These would also have an adverse impact on our profit due to higher than expected claims.
Furthermore, outstanding claims provisions for the general insurance business are based on the best-estimate ultimate cost of all claims incurred but not settled at a given date, whether reported or not, together with related claims handling costs. Any provisions for re-opened claims are also included. A range of methods, including stochastic projections, may be used to determine these provisions. Underlying these methods are a number of explicit or implicit assumptions relating to the expected settlement amount and settlement pattern of claims.
AVIF reflects the estimated present value of future profit that will emerge over the remaining life of certain in-force contracts in a life insurance company, acquired either directly or through the purchase of a subsidiary, and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and investment contracts in-force at the acquisition date. AVIF is based on actuarially determined projections. Actual experience may vary from the projections. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in impairment and a charge to income. Where AVIF is amortised, an acceleration of the amortisation of AVIF would occur if the estimates of gross profit or margins were overstated in the period in which the actual experience is known and would result in a charge to net income. Such adjustments could have an adverse effect on our results of operations or financial condition.
Our life insurance operations are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. The effectiveness of external parties, including governmental and non-governmental organisations, in combating the spread and severity of such a pandemic could have a material impact on the losses experienced by us.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, pandemics, hurricanes, earthquakes and man-made catastrophes may produce significant damage in larger areas, especially those that are heavily populated. Catastrophic events could also harm the financial condition of our reinsurers and thereby increase the probability of default on reinsurance recoveries and could also reduce our ability to write new business. Furthermore, pandemics, natural disasters, terrorism and fires could disrupt our operations and result in significant loss of property, key personnel and information about our clients and our business if our business continuity plans fail to cope with the scale or nature of the catastrophe. Such events could adversely affect our business, results of operations, corporate reputation and financial condition for a substantial period of time.
Operational risks relating to Aviva’s business All of our businesses are subject to operational risks, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from malicious acts by third parties or external events. Our business is dependent on processing a large number of complex transactions across numerous and diverse products. Furthermore, the long-term nature of the majority of our business means that accurate records have to be maintained for significant periods.
Our risk management methods may leave us exposed to unidentified, unanticipated or incorrectly quantified risks, which could lead to material losses or material increases in liabilities. In particular, our risk mitigation strategies may prove less effective than anticipated, including in relation to our reinsurance arrangements. We have in place risk management policies, procedures and assessment methods to identify, assess and control risks to avoid or limit potential losses or liabilities. However, such policies, procedures and assessment methods may not be fully effective in identifying and mitigating the risk exposure of such businesses in all market environments or against all types of risk. Unanticipated or incorrectly quantified risk exposures and/or inadequate or incorrect responses to these risk exposures could result in a material adverse effect on our business, results of operations and/or financial condition.
We currently use the reinsurance markets primarily to limit our risk, to support growth and to manage our capital more efficiently. We are exposed to concentrations of risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. We operate a policy to manage our reinsurance counterparty exposures, by limiting the reinsurers that may be used and applying strict limits to each reinsurer. Reinsurance exposures are aggregated with other exposures to ensure that the overall counterparty risk is within appetite. Our asset and liability management and risk functions have an active monitoring role with escalation to the Chief Financial Officer, the Group’s asset liability committee and the Board’s risk committee as appropriate. Our largest reinsurance counterparty is BlackRock Life Ltd (including subsidiaries) arising as a result of BlackRock funds offered to UK Life customers via unit linked contracts. At 31 December 2015, the reinsurance asset recoverable, including debtor balances, from BlackRock Life Ltd was £12,660 million. Whilst the risk of default is considered remote due to the nature of the arrangement and the counterparty, the Group is currently considering alternative ways to structure the agreements with BlackRock to reduce or remove this exposure. Excluding potential exposures arising from reinsurance of unit linked funds, our largest reinsurance counterparty is Swiss Reinsurance Company Ltd. At 31 December 2015, the reinsurance asset recoverable, including debtor balances, from Swiss Reinsurance Company Ltd (including subsidiaries) was £2,863 million.
We may also face financial or other exposure in the event that any of our partners fail to meet their obligations under the agreement or encounter financial difficulty. Partnership agreements may also be terminated on certain dates or subject to certain conditions and could be subject to renewal on less favourable terms. In addition, a significant proportion of our product distribution, such as bancassurance, is carried out through arrangements with third parties not controlled by us and is dependent upon the continuation of these relationships. A temporary or permanent disruption to these distribution arrangements could affect our financial condition. Some of these arrangements require our third-party partners to participate in and provide capital to our joint venture, associate and subsidiary undertakings. Our partners may change their strategic priorities or encounter financial difficulties preventing them from providing the necessary capital to promote future growth.
338 | Aviva plc Annual report and accounts 2015 products, which could result in financial losses for our clients and impact our results of operations.
The determination of the amount of allowances and impairments varies by investment type and is based upon our periodic evaluation and assessment of known risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available and additional impairments may need to be taken or allowances provided for in the future. If the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment. There can be no assurance that management has accurately assessed the level of impairments taken and allowances reflected in our financial statements.
Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill and intangible assets with indefinite useful lives at least annually for impairment or when circumstances or events indicate there may be uncertainty over this value. We test intangibles with finite lives when circumstances or events indicate there may be uncertainty over this value. For impairment testing, goodwill and intangibles have been allocated to cash-generating units by geographical reporting unit and business segment.
The fair value of the reporting unit is impacted by the performance of the business. Goodwill, negative unallocated divisible surplus and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support our carrying value. Such write downs could have a 338 | Aviva plc Annual report and accounts 2015
We may be unable to execute, or may encounter difficulties or delays in successfully executing, our business and strategic goals which are subject to the risks set out herein and other factors that are currently unforeseen and which may be beyond their control. Failure to achieve any or all strategic goals, or the encounter of undue delay or unforeseen costs in implementing such goals, could adversely affect our results of operations and financial condition, as well as our reputation and standing in the marketplace.
During the integration period the enlarged Group may not be in a position to acquire other insurance and/or asset management related targets that it might otherwise have sought to acquire. In view of the demands the integration process may have on management time, it may also cause a delay in other projects currently contemplated by the Group.
Under any of these circumstances, the business growth opportunities, overhead functions consolidation benefits, purchasing and distribution benefits and other synergies anticipated to result from the acquisition of Friends Life Group may not be achieved as expected, or at all, or may be delayed materially. To the extent that the enlarged Group incurs higher integration costs or achieves lower synergy benefits than expected, its results of operations, financial condition and/or prospects may be adversely affected.
business processes. If a third party were to successfully assert an intellectual property infringement claim against us, or if we were otherwise precluded from offering certain features or designs, or utilising certain processes, it could have a material effect on our business, results of operations and financial condition.
Our principal competitors in the life market include many of the major financial services businesses including, in particular, Axa, Allianz, CNP, Generali, Prudential, Legal & General, Standard Life, Unum and Zurich. Our principal competitors in the general insurance market include Direct Line Insurance, Intact, RSA, Zurich, Axa and Allianz. Our principal competitors in the fund management market include BlackRock, State Street Global, Fidelity Investments, Schroders and Aberdeen, as well as the fund management divisions of our principal competitors in the life market.
New legislation that took effect from April 2015, has given retirees greater flexibility in accessing defined contribution pensions at retirement. Under the new legislation, inter alia, consumers approaching retirement have the freedom to take their whole pension pot as cash (the first 25% remaining tax free, with the balance taxed at the individual’s marginal rate), which removes the compulsion for customers to buy an annuity.
Subsequent to the UK Government’s announcement of its intention to pass the new legislation in March 2014 and its coming into effect in April 2015, sales of individual annuities have been and continue to be adversely impacted, and there continues to be uncertainty over the longer-term impact, in particular with the possibility that the UK Government might further liberalise the restrictions on customers accessing their pension funds on retirement adversely impacting sales of individual annuities.
In response, within the UK, we have refocused our retirement solutions business to use our existing broad product universe (for example, individual annuities, investment platform and equity release products) to help customers through their retirement journey and we also seek to deliver profitable growth from our ‘Bulk Purchase Annuities’ products. However, at this stage it remains too early to assess the full impact of these changes on our adjusted operating profit and the extent to which these impacts can be mitigated by substitution of annuity sales with alternative products offered or being developed by us.
Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. We are subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental agencies, including the PRA, the FCA and other regulators. In light of wider financial and economic conditions, some of these authorities are considering, or may in the future consider, enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manage our capital, and may require us to satisfy increased capital requirements.
Our insurance subsidiaries and branches worldwide are subject to detailed and comprehensive government regulation in each of the jurisdictions in which they conduct business. Regulatory agencies have broad administrative power over many aspects of the insurance business, which may include premium rates, marketing and selling practices, advertising, licensing agents, policy forms, capital adequacy and permitted investments. Government regulators are concerned primarily with the protection of policyholders rather than our shareholders or creditors.
342 | Aviva plc Annual report and accounts 2015 material adverse effect on our business, results of operations and financial condition.
A determination that we have failed to comply with applicable regulation could have a negative impact on our results of operations or on our relations with current and potential customers. Regulatory action against a member of the Group could result in adverse publicity for, or negative perceptions regarding, the Group, or could have a material adverse effect on our business, our results of operations and financial condition and divert management’s attention from the day-to-day management of the business.
We will not always be able to predict the impact of future legislation or regulation or changes in the interpretation or operation of existing legislation or regulation on our business, results of operations and financial condition. Changes in government policy, legislation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which we operate, which may be applied retrospectively, may adversely affect the range of products offered, the terms and conditions applicable to these products (including retrospectively), distribution channels, capital requirements, dividends payable by subsidiaries and, consequently, results and financing requirements.
Similarly, the FCA has conducted a number of thematic reviews and market studies of the annuity and retirement income markets. Initially, a review was conducted by the FCA of annuity pricing data, which concluded in February 2014 that the market was not working well for most consumers. This pricing review looked at whether and to what extent prospective customers are not purchasing the best value annuities, or exercising the open market option (‘OMO’) to buy their annuity from a firm other than the one providing the pension policy. The FCA conducted its own pricing research to determine which groups of consumers are most likely to be affected. This involved a pricing survey of major annuity providers, and compared the rates available through a range of distribution channels, including rates available through the OMO and those only available to existing pension policyholders. This pricing review was followed up by the related Thematic Review of Annuity Sales Practices, which was published by the FCA on 11 December 2014. The FCA has highlighted that its work on this review has revealed that firms needed to make improvements in relation to the way consumers are informed about shopping around for enhanced annuities.
The FCA has followed-up with further work in the field of pension market reform and on 26 March 2015 published findings and proposed remedies in relation to its retirement income market study. The FCA suggested the following remedies to support consumer choice in the market: (i) requiring firms to provide an annuity quotation ranking so that consumers can easily identify if they could be getting a better deal by shopping around; (ii) redesigning and behaviourally trialling the information that consumers receive from their providers, such as wake-up packs, in the run up to their retirement; and (iii) in the longer-term, the creation of a pensions dashboard which will allow consumers to see all their pension pots in one place. In addition, the FCA noted that they want to see firms framing the options available to help consumers make good decisions, rather than to drive sales of certain products. On 1 October 2015 the FCA published a consultation paper setting out proposed changes to FCA rules and guidance in relation to pension reforms. The purpose of the paper is to consult on the FCA’s expectations about how existing rules and guidance will operate in the new environment as well as bring forward proposals for further changes to the FCA’s rules. Following receipt of feedback, the FCA is scheduled to publish its rules at the beginning of Q2 2016 which will come into effect in stages, within one year of the end of the consultation.
The consequences of the FCA’s work in this area remains uncertain but could include requirements to pay redress to customers who could have obtained a more favourable annuity rate by exercising their OMO or purchasing an enhanced annuity and/or the imposition of greater obligations on annuity 342 | Aviva plc Annual report and accounts 2015
providers to treat customers fairly and provide increased levels of information on alternative options available to customers at retirement. Regulatory action of this type could have consequences for the Group and have a material adverse effect on our business, results of operations and/or financial condition.
Following a market study by the Office of Fair Trading (‘OFT’) and the Department of Work and Pensions (‘DWP’), since April 2015, a 0.75% charge cap has come into effect on autoenrolment schemes. The cap covers member-borne deductions which include all charges on member savings other than transaction costs. Other measures arising out of the recommendations from the OFT and DWP’s market study will be implemented in coming years, but how these will be implemented remains uncertain. The extent of the measures, including the impact of the charge cap on providers of workplace pensions, together with any requirement to remove commission payments, remain uncertain and the industry response to these measures could have a range of possible impacts on the Group’s trading and financial performance.
We are involved in various legal proceedings, regulatory investigations and examinations and may be involved in more in the future. We have been named as defendants in lawsuits, including class actions and individual lawsuits. We have been subject to regulatory investigations or examinations in the various jurisdictions in which we operate. These actions arise in various contexts, including in connection with our activities as an insurer, securities issuer, employer, investment adviser, investment manager, investor and taxpayer.
Lawsuits and investigations may also arise which could seek significant or unspecified amounts of damages, including punitive damages, and certain of the regulatory authorities involved in these proceedings have substantial powers over the conduct and operations of our business.
In the course of conducting insurance business, we receive general insurance liability claims, and become involved in actual or threatened related litigation arising therefrom, including claims in respect of pollution and other environmental hazards. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents that they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty.
In 2005 the European Court Justice judgement in the case of Arthur Andersen highlighted that the UK and some other EU member states were granting a VAT exemption for wider range of insurance related services than the VAT Directive allowed. The EU Commission then initiated a project to update the insurance VAT exemption in light of current market conditions, which was discontinued in late 2015. On 23 December 2015 the EU Advocate General in the case of Aspiro SA confirmed the ECJ’s 2005 judgement. Subject to final judgement and consultation on its implementation the effect could be that services outsourced to parties who have no contractual relationship with the insured will not benefit from the VAT exemption for insurance services. Any restriction is expected to be applied prospectively and not until 2017 at the earliest, and may increase the irrecoverable VAT incurred by the Group negatively impacting our results of operations or financial condition.
The design of life insurance products by our life insurance companies takes into account a number of factors, including risks and taxation and is based on the tax legislation in force at that time. Changes in tax legislation or in the interpretation of tax legislation may therefore, when applied to such products, have a material adverse effect on the financial condition of the relevant long-term business fund of the company in which the business was written.
We may face increased compliance costs as a result of legislation passed in the United States and globally The U.S. Foreign Account Tax Compliance Act (‘FATCA’) requires 30% withholding on payments of U.S. source dividends, interest, and other fixed payments (including, no earlier than 1 January 2019, payments of gross proceeds) made to a non-United States financial institution (‘FFI’) unless the FFI has entered into an agreement with the Internal Revenue Service to report account information for any of the FFI’s U.S. accountholders. An intergovernmental agreement between the U.S. and certain other jurisdictions will allow FFIs in those jurisdictions to report U.S. accountholder information only to local revenue authorities, rather than to the IRS.
Changes to IFRS generally or specifically for insurance companies may materially adversely affect the reporting of our financial results Changes to IFRS for insurance companies have been proposed in recent years and further changes may be proposed in the future. The International Accounting Standards Board published proposals that would introduce significant changes to the statutory reporting of insurance entities that prepare financial statements according to IFRS. The accounting proposals, which are not expected to be finalised until later in 2016 at the earliest with an effective date still to be determined, will change the presentation and measurement of insurance contracts, including the effect of technical reserves and reinsurance on the value of insurance contracts. It is uncertain whether and how the proposals may affect the Group should they become definitive standards. Current proposals may have an adverse effect on the manner in which we report insurance provisions and, therefore, identify and report revenues, costs and distributable reserves. The changes could, therefore, have an adverse effect on our financial performance and condition (including through changes affecting the calculation of taxation). These and any other changes to IFRS if endorsed by the EU, that may be proposed in the future, whether or not specifically targeted at insurance companies, could materially adversely affect our reported results of operations and financial position.
• the US dollar equivalent of the pound sterling trading price of our ordinary shares on the London Stock Exchange which may consequently cause the trading price of our ADRs in the US to also decline; • the US dollar equivalent of the proceeds that a holder of our ADSs would receive upon the sale in the UK of any our ordinary shares withdrawn from the depositary; and
Shareholder rights under English law differ from the US. Individual shareholders of an English company (including US persons) have the right under English law to bring lawsuit on behalf of the company in which they are a shareholder, and on their own behalf against the company, in certain limited circumstances. English law does not permit class action lawsuit by shareholders, except in limited circumstances.
Equity Release Equity Release Mortgages allow a homeowner to receive a lump sum in return for a mortgage secured on their house. No interest is payable on the loan; instead, interest is rolled-up on the loan, and the loan and accrued interest are repayable at redemption (upon death or moving into long-term care).
General insurance Also known as non-life or property and casualty insurance. Property insurance covers loss or damage through fire, theft, flood, storms and other specified risks. Casualty insurance primarily covers losses arising from accidents that cause injury to other people or damage the property of others.
Health insurance Provides cover against loss from illness or bodily injury. Can pay for medicine, visits to the doctor, hospital stays, other medical expenses and loss of earnings, depending on the conditions covered and the benefits and choices of treatment available on the policy.
Individual savings account (ISAs) Tax-efficient plans for investing in stocks and shares, cash deposits or life insurance investment funds, subject to certain limits.
Personal pension A pension plan tailored to the individual policyholder, which includes the options to stop, start or change their payments.
Single premium A single lump sum is paid by the policyholder at commencement of the contract.
General terms Annual premium equivalent (APE) Used as a measure of annual sales, taking the annual premium of regular premium contracts plus 10% of single premium contracts.
Available for sale (AFS) Securities that have been acquired neither for short-term sale nor to be held to maturity. These are shown at fair value on the statement of financial position and changes in value are taken straight to equity instead of the income statement.
Acquired value of in force business (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary.
Big data Large volumes of data which are a valuable source of information used to identify customer behaviours.
Best Estimate Liabilities (BEL) The expected present value of future cash flows for a company’s current insurance obligations, calculated using best estimate assumptions, projected over the contract’s run-off period, taking into account all up-to-date financial market and actuarial information.
Independent Financial Advisers (IFAs) A person or organisation, authorised under the FCA, to give independent advice on financial matters.
Minimum capital requirement (MCR) The Minimum Capital Requirement is the minimum amount of capital that an insurer needs to hold to cover its risks under the Solvency II regulatory framework. If an insurer's capital falls below the MCR then authorisation will be withdrawn by the regulator unless a firm is able to meet the MCR within a short period of time.
Operating expense ratio The Group operating expense ratio is calculated as the Group’s operating expenses from continuing operations expressed as a percentage of the Group’s operating profit from continuing operations before Group debt costs and operating expenses.
Operating profit This is a non-GAAP financial performance measure also referred to as adjusted operating profit or operating profit (IFRS basis). It is based on expected investment returns and stated before tax and before non-operating items including impairment of goodwill and amortisation and impairment of acquired value of in-force business and other items.
Own Funds The amount of capital a firm actually holds under Solvency II on a market value basis. This is the sum of the economic value of assets less the economic value of liabilities. Basic own funds are calculated as the difference between the assets (including transitional measure on technical provisions) and liabilities (including subordinated liabilities) calculated on a combination of best estimate and market consistent assumptions. Available own funds are calculated as basic own funds with any adjustments including off-balance sheet own funds approved by the regulator (known as ancillary own funds). Eligible own funds reflect any tiering restrictions and are the amount of own funds eligible to cover the SCR and MCR.
Risk-adjusted returns Adjusting profits earned and investment returns by how much risk is involved in producing that return or profit.
Solvency Capital Requirement (SCR) The Solvency Capital Requirement is the amount of capital the Regulator requires an insurer to hold to meet the requirements under the Solvency II regulatory framework. Holding capital in excess of the SCR demonstrates an insurer has adequate financial resources in place to meet all its liabilities as and when they fall due and that there is sufficient capital to absorb significant losses. Firms may use their own internal model, the European Insurance and Occupational Pensions Authority (EIOPA) prescribed standard formula or a partial internal model to determine SCR.
1–1,000 553,644 91.21 138,713,646 3.43 1,001–5,000 47,387 7.81 89,801,821 2.22 5,001–10,000 3,258 0.54 22,643,173 0.56 10,001–250,000 2,075 0.34 89,084,399 2.20 250,001–500,000 169 0.03 58,295,300 1.44 500,001 and above 470 0.08 3,609,400,848 89.15 American Depositary Receipts (ADRs)+ 1 0.00 40,525,986 1.00
+ The number of registered ordinary shares represented by ADRs. Please note that each Aviva ADR represents two (2) ordinary shares. * Percentages do not necessarily add up due to rounding.
Annual General Meeting 11am on 4 May 2016 * The full financial calendar will be available at www.aviva.com/investor-relations/financial-calendar 2015 final dividend dates – ordinary shares
Dividends • Ordinary Dividends – are normally paid in May and
• Direct payment of dividends – receive your payments directly into your UK bank or building society account on the dividend payment date. Using this option will prevent any postal delay, risk of loss or having to visit your bank or building society to deposit cheques
• Global payment service – provided by the Company’s Registrar, Computershare Investor Services PLC (Computershare), this service enables shareholders living overseas to elect to receive their dividends in a choice of over 60 international currencies. For further details and fees for this service please visit www.investorcentre.co.uk/faq and select the Dividends and Payments tab, followed by Global Payment Service
• Further information – including the 2016 dividend timetable can be found at www.aviva.com/dividends or by contacting Computershare using the details on the next page
Annual General Meeting (AGM) • The 2016 AGM will be held at The Queen Elizabeth II Centre,
• The strategic report forms part of the annual report and accounts. However, shareholders can also choose to receive Aviva’s standalone strategic report as an alternative to the full annual report and accounts. Please view the Aviva plc strategic report at www.aviva.com/2015ar
Ordinary and preference shares – Contact: For any queries regarding your shareholding, or to make changes to your personal details, please contact the Company’s Registrar, Computershare: By Telephone: 0371 495 0105 – Lines are open 8.30am to 5.30pm (UK time), Monday to Friday (excluding public holidays). Please call +44 117 378 8361 if calling from outside of the UK
This announcement contains, and we may make other verbal or written “forward-looking statements” with respect to certain of Aviva’s plans and current goals and expectations relating to future financial condition, performance, results, strategic initiatives and objectives. Statements containing the words “believes”, “intends”, “expects”, “projects”, “plans”, “will,” “seeks”, “aims”, “may”, “could”, “outlook”, “likely”, “target”, “goal”, “guidance”, “trends”, “future”, “estimates”, “potential” and “anticipates”, and words of similar meaning, are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. Aviva believes factors that could cause actual results to differ materially from those indicated in forward-looking statements in the announcement include, but are not limited to: the impact of ongoing difficult conditions in the global financial markets and the economy generally; the impact of simplifying our operating structure and activities; the impact of various local political, regulatory and economic conditions; market developments and government actions regarding the referendum on UK membership of the European Union; the effect of credit spread volatility on the net unrealised value of the investment portfolio; the effect of losses due to defaults by counterparties, including potential sovereign debt defaults or restructurings, on the value of our investments; changes in interest rates that may cause policyholders to surrender their contracts, reduce the value of our portfolio and impact our asset and liability matching; the impact of changes in short or long-term inflation; the impact of changes in equity or property prices on our investment portfolio; fluctuations in currency exchange rates; the effect of market fluctuations on the value of options and guarantees embedded in some of our life insurance products and the value of the assets backing their reserves; the amount of allowances and impairments taken on our investments; the effect of adverse capital and credit market conditions on our ability to meet liquidity needs and our access to capital; changes in, or restrictions on, our ability to initiate capital management initiatives; changes in or inaccuracy of assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, lapse rates and policy renewal rates), longevity and endowments; a cyclical downturn of the insurance industry; the impact of natural and man-made catastrophic events on our business activities and results of operations; our reliance on information and technology and third-party service providers for our operations and systems; the inability of reinsurers to meet obligations or unavailability of reinsurance coverage; increased competition in the UK and in other countries where we have significant operations; regulatory approval of extension of use of the Group’s internal model for calculation of regulatory capital under the European Union’s Solvency II rules; the impact of actual experience differing from estimates used in valuing and amortising deferred acquisition costs (“DAC”) and acquired value of in-force business (“AVIF”); the impact of recognising an impairment of our goodwill or intangibles with indefinite lives; changes in valuation methodologies, estimates and assumptions used in the valuation of investment securities; the effect of legal proceedings and regulatory investigations; the impact of operational risks, including inadequate or failed internal and external processes, systems and human error or from external events (including cyber attack); risks associated with arrangements with third parties, including joint ventures; our reliance on third-party distribution channels to deliver our products; funding risks associated with our participation in defined benefit staff pension schemes; the failure to attract or retain the necessary key personnel; the effect of systems errors or regulatory changes on the calculation of unit prices or deduction of charges for our unit-linked products that may require retrospective compensation to our customers; the effect of fluctuations in share price as a result of general market conditions or otherwise; the effect of simplifying our operating structure and activities; the effect of a decline in any of our ratings by rating agencies on our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products and services; changes to our brand and reputation; changes in government regulations or tax laws in jurisdictions where we conduct business, including decreased demand for annuities in the UK due to changes in UK law; the inability to protect our intellectual property; the effect of undisclosed liabilities, integration issues and other risks associated with our acquisitions; and the timing/regulatory approval impact, integration risk and other uncertainties, such as non-realisation of expected benefits or diversion of management attention and other resources, relating to announced acquisitions and pending disposals and relating to future acquisitions, combinations or disposals within relevant industries, the policies, decisions and actions of government or regulatory authorities in the UK, the EU, the US or elsewhere, including the implementation of key legislation and regulation. For a more detailed description of these risks, uncertainties and other factors, please see Item 3d, “Risk Factors”, and Item 5, “Operating and Financial Review and Prospects” in Aviva’s most recent Annual Report on Form 20-F as filed with the SEC.
This Annual Report and Accounts has been prepared for, and only for, the members of the Company, as a body, and no other persons. The Company, its directors, employees, agents or advisers do not accept or assume responsibility to any other person to who this document is shown or into whose hands it may come, and any such responsibility or liability is expressly disclaimed.
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View our online summary and download the full report at www.aviva.com/AR15