Financial and operating performance continued allocation of trades which favoured external hedge funds to the detriment of certain Aviva UK Life funds. The relevant regulatory authorities were notified at an early stage and have been kept fully apprised of the issue. A thorough review of internal control processes relating to the dealing policy was carried out by management and reviewed by PwC. Measures to improve controls were implemented. The total adverse impact on Group adjusted operating profit from this activity was £132 million. This reflected the compensation of £126 million expected to be claimed in respect of these breaches and other associated costs of £6 million. Of this total, £96 million reflected compensation expected to be claimed from, and other associated costs within, Aviva Investors. Compensation of £36 million relating to this matter was expected to be claimed from a group holding company. These amounts are shown in 2013 operating profit in ‘Other operations’.
Other Group activities (from continuing operations) The table below presents net written premiums, adjusted operating losses and loss before tax attributable to shareholders’ profits from other group activities for the three years ended 31 December 2014, 2013 and 2012.
Adjusted operating profit before tax General Insurance 9 (51) 22 Corporate centre (132) (150) (136) Group debt costs and other interest (463) (502) (537)
Year ended 31 December 2014 Net written premiums from our reinsurance business were £18 million (2013: £46 million). This is primarily as a result of reinsurance previously written with Aviva Re being written in the external market. Adjusted operating profit from general insurance was £9 million (2013: £51 million loss). The improvement compared to prior year was mainly due to the impact of the floods in Canada on our reinsurance business in prior year. 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 of an overall Group level. Losses from other operations were £56 million (2013: £90 million). 2013 included a non-recurring amount of £36 million for compensation expected to be claimed from a group holding company (see Aviva Investors above). 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.
Year ended 31 December 2013 Net written premiums from our reinsurance business were £46 million (2012: £77 million). Adjusted operating loss from general insurance was £51 million (2012: £22 million profit). The decrease was mainly due to a £67 million impact from the floods in Canada in our reinsurance business. Corporate centre costs were £150 million (2012: £136 million). Group debt costs and other interest decreased to £502 million (2012: £537 million), mainly due to lower internal debt costs following the revision of terms to an internal loan (the impact of this is neutral at an overall Group level).
Losses from other operations were £90 million (2012: £132 million), which included £36 million of compensation claimed from a group holding company (see Aviva Investors above). Loss before tax attributable to shareholders’ profits was £1,080 million (2012: £1,420 million). The improvement in 2013 was mainly due to the disposal of the Delta Lloyd Associate.
Discontinued operations United States The table below presents IFRS net written premiums, adjusted operating profit and profit/(loss) before tax attributable to shareholders for the three years ended 31 December 2014, 2013 and 2012. On 2 October 2013 the Group completed the sale of its United States life and related internal asset management businesses (US Life) to Athene Holding. See ‘IFRS Financial Statements – note 4 – Subsidiaries’ for further details. The results of US Life are presented as discontinued operations for all periods presented.
Restatements Amendments to IAS 32 resulted in the grossing up of certain assets and liabilities related to derivatives and repurchase arrangements in the statement of financial position that were previously reported net. The statement of financial position comparatives have been restated to reflect this. There is no impact on results or total equity for any period presented as a result of the restatement. For further details please see note 1.
Premiums written net of reinsurance 20,056 20,489 21,173 24,707 25,586 Net change in provision for unearned premiums 1 134 (16) (236) (72)
Share of profit/(loss) after tax of joint ventures and associates 147 120 (255) (123) 141 Profit/(loss) on the disposal and re-measurement of subsidiaries, joint ventures and associates 174 115 (164) 565 163
Expenses Claims and benefits paid, net of recoveries from reinsurers (19,474) (22,093) (23,601) (24,380) (22,240) Change in insurance liabilities, net of reinsurance (5,570) 2,493 (430) (2,284) (2,837) Change in investment contract provisions (6,518) (7,050) (4,450) 1,478 (9,212) Change in unallocated divisible surplus (3,364) 280 (6,316) 2,721 362
Tax attributable to policyholders' returns (382) (191) (221) 178 (394) Profit before tax attributable to shareholders' profits 2,281 1,281 175 648 1,444 Tax attributable to shareholders' profits (601) (403) (261) (159) (358) Profit/(loss) after tax from continuing operations 1,680 878 (86) 489 1,086 Profit/(loss) after tax from discontinued operations 58 1,273 (2,848) (357) 841
Profit/(loss) per share attributable to equity shareholders: Basic (pence per share) 50.4p 65.3p (109.1)p 8.3p 51.7p
Continuing operations - Basic (pence per share) 48.4p 22.0p (11.2)p 13.6p 38.9p Continuing operations - Diluted (pence per share) 47.7p 21.8p (11.2)p 13.4p 38.2p
Our thinking was encapsulated in our Strategic Framework. This framework has helped provide clear direction for turning around our business. Our Strategic Anchor builds on this framework to provide a clear statement of our business strategy to help us make decisions to compete in our rapidly evolving world. It comprises the “what we do, how we do it and where we do it” of our business strategy. Aviva’s long-term strategic anchor has three elements: • True Customer Composite
Aviva is the only composite of scale in the United Kingdom and one of the few in the world that can offer a full range of insurance and asset management products, underpinned by one of the most recognised insurance brands in the United Kingdom.
Our business Overview Our business operates across four main market sectors - life insurance and savings; general insurance, health insurance and fund management, providing services to over 29 million customers worldwide. We operate in 16 different countries and have approximately 26,000 employees. The Group's operating segments are determined along market reporting lines. The operating segments are: UK & Ireland; France; Poland; Italy, Spain and Other; Canada; Asia; and Aviva Investors. These reflect the management structure whereby a member of the Executive Management team is accountable to the Group Chief Executive Officer (CEO) for the operating segment for which they are responsible. Due to the size of the UK & Ireland segment, it has been split into separate life and general insurance segments, which undertake long-term insurance and savings business and general insurance respectively. Aviva Investors, our fund management business, operates across most markets providing fund-management services to third-party investors and to our long-term insurance businesses and general insurance operations. In October 2013 the Group completed the sale of its United States life, savings and related internal fund management business, which has been classified as a discontinued operation for the purposes of reporting financial performance.
Brands and products We have operated under the “Aviva” brand globally since 2010. 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 – is 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.
1 See ‘financial and operating performance’ for further details. 2 Association of British Insurers (ABI) Stats published Q3 2014.
• Protection – is an insurance contract that protects the policyholder or his or her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole life and critical illness cover.
• Bonds and savings – are 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.
• Investment sales – comprise retail sales of mutual fund type products such as unit trusts, individual savings accounts (ISAs) and open ended investment companies (OEICs).
• Other – includes equity release. 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.
Market position We are a leading general insurer in the United Kingdom and Canada with 10.5%3 and 7.8%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 2014, 50% of our total general insurance and health new business was written in the UK.
• Corporate and specialty risks - products for large clients or where the risk is specialised.
Fund management Aviva Investors, our fund management business, provides fund management services to Aviva's long-term insurance and savings, and general insurance operations as well as to thirdparty investors. The fund management operations are in the UK, Europe, Asia and North America. All sales of retail fund management products are included in our long-term insurance and savings business sales. The sale of the Aviva Group’s U.S. based boutique asset management company, River Road Asset Management LLC, was announced in March 2014 and completed on 30 June 2014.
Market position Aviva Investors was ranked 46th5 globally by assets under management. Total worldwide funds managed by Aviva Investors at 31 December 2014 was £246 billion. The substantial majority of this relates to Aviva's insurance and savings operations.
3 Datamonitor UK Insurance Competitor Analytics 2014. 4 Market Security Analysis & Research Inc, 2013 online database. 5 Towers Watson World 500 largest asset manager’s study 2013.
• Direct sales force - In some of our European and Asian markets we operate direct sales forces that only sell Aviva's products and the sales forces receive commission on the products they sell.
• Intermediaries - We offer a range of long-term insurance, savings, retirement, general insurance and health insurance products which can be bought through an intermediary, such as an independent financial adviser or an insurance broker. Intermediaries receive a commission on sales of Aviva's products.
• Corporate partnerships, bancassurance and joint ventures - Aviva is a corporate partner for many organisations, including banks and other financial institutions, who wish to offer their customers insurance products. We have various distribution agreements with bancassurance partners and joint ventures across the markets in which we operate. In return for offering our products to their customers, the bank or joint venture partners receive a commission as a percentage of sales and in some cases achieve extra commission if agreed target levels of sales are met. Certain agreements have a profit sharing element based on a predetermined percentage. In some cases, if the agreed targets are not met, certain terms of the contract can be renegotiated. Under the joint venture agreements, the cost of running the venture are often split between the partners.
Distribution We have a multi-distribution strategy, which means we sell our products through intermediaries, corporate partners, in the workplace, and directly to customers. We are a leading provider in the UK intermediary market with 10.7%2 share. The direct to consumer platform is due to be launched in early 2015, offering new retirement propositions and investment products. In the UK, we have exclusive distribution deals for the sale of protection products with Royal Bank of Scotland, Barclays, Santander, Tesco and the Post Office. We remain committed to building on our existing relationships and distribution partnerships as well as to growing our workplace and direct channels.
France Business overview and strategy France is the second largest insurance market in Europe7. 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. We are ranked 10th in general insurance as measured by gross written premiums according to L’Argus de l’Assurance as at 31 December 2013. Our strategy is to deliver sustainable dividends to Group by increasing profitability in our life business and targeted growth in profitable general insurance segments.
Products We provide a wide range of insurance solutions: life and longterm savings, general insurance and asset management through Aviva Investors France. The products sold through our life channel are long-term savings, pensions and regular premium products, with a focus on the unit-linked market and a broad range of protection products, primarily for individuals. 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 700,000 members as at December 2013, to manufacture and distribute the AFER savings product. In the general insurance market our product range includes household, motor, health and legal protection products and also a range of insurance products for small to medium sized entities, farms, craftsmen and tradesmen, and specific products for building firms and motor fleets.
Distribution We have developed a multi-distribution model combining retail, direct and bancassurance networks through owned distribution channels, independent networks and partnerships. Our retail network sell through 900 tied agents, a direct sales force made up a direct sales force made up of approximately 1,100 Union Financiere de France (UFF) consultants and direct advisors (Aviva France also holds a majority stake in UFF), and through brokers in the life, health and construction markets. Direct distribution is managed through the Eurofil brand for personal general insurance, the Aviva Direct brand for protection and Epargne Actuelle for the AFER product. We operate in the bancassurance market through our partnership with Crédit du Nord, a subsidiary of Société Générale, selling life, savings and protection products.
Market and competition The Polish market for protection products has seen significant growth since 1999, although penetration rates remain relatively low according to KNF statistics. We expect the insurance market in Poland to continue to grow as its economy matures. In December 2013, the Polish parliament passed a new Pension Act following the government review of the Pillar II Pensions System which came in force in February 2014. This Act gave the state-run pension system a prominent role in managing the country's pension funds and has significant implications for the private pension providers which include a decrease in assets under management and lower contributions received from pension fund members. Our pension business remains second largest in the Polish market9.
Italy, Spain and Other Italy Business overview and strategy We are Italy's 10th largest life insurer, with a market share of 2.99%11 based on 2013 premiums (excluding Eurovita Assicurazioni S.p.A ("Eurovita")) and the 12th largest general insurance company with a market share of 1.37%11. We have approximately 2.2 million customers across both the Life and General Insurance businesses11. In Protection, we have11%12 market share.
During 2014 we continued with our transformation plan in order to: • Transform the operating and business model; • Improve the product pricing and mix as well as combined operating ratio; and • Rationalise the group structure and capital employed.
During 2014 Aviva Italy restructured its joint venture arrangements with UBI Banca and UniCredit. In addition, the respective distribution agreements with UBI and Unicredit have been renegotiated to 2020. In November 2013, Aviva announced a conditional agreement to sell its entire 39% stake in Eurovita to JC Flowers. The sale completed on 30 June 2014.
Market and competition The Italian life market is dominated by the top 10 providers which represented around 82% of the total market share in 201311. The life insurance industry in Italy reported an increase in volumes as of 30 June 2014, with gross written premiums up by 24% compared to the same period in 201311. The general insurance segment decreased by 3.70% in the same period, mainly driven by a 7% decline in Motor11.
Distribution Our products are distributed through bancassurance partnerships with UniCredit Group, Banco Popolare Group and Unione di Banche Italiane (UBI). These partnerships give us access to more than 3,500 branches. In addition, we also have approximately 1,500 active financial advisers, and 600 insurance (multi-mandate) agents and brokers as at 30 June 2014.
Market and competition The Spanish market is significantly affected by the current economic climate and the financial sector continues to be under pressure as a result of the ongoing banking restructuring process and mergers taking place. Any opportunities arising from these will be considered on their merits. In relation to distribution agreements with bancassurance partners, we are protected financially within our contracts with Spain's savings banks (the cajas) from any detrimental effect arising from these mergers. 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 69% of gross written premiums at the end of 2013 in the Spanish life insurance market13. Customers in Spain are accustomed to receiving advice through banking channels, and we continue to use our 13 Investigación Co-operativa entre Entidades Asegurados y Fordos de Pensionies (“ICEA”)
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 since 2002 • Cajamurcia Vida – in conjunction with Cajamurcia since 2007
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Information on the Company continued 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.
• Niche personal insurance products including holiday and park model trailers, hobby farms, boats as well as antique, classic and custom cars.
14 Latest available competitor results (30 June 2014) 15 The General Insurance Association of Singapore 16 APE data released by National Insurance Industry Communication Club
In Indonesia, we signed an agreement in January 2014 to form a 50% joint venture with PT Astra International Tbk which completed in May 2014. As part of this agreement, we entered into a bancassurance distribution arrangement with Permata Bank which was launched in December 2014. In Hong Kong, our wholly owned subsidiary operates through the bancassurance, IFA, and agency channels, with a focus on Bancassurance through its preferred relationship with DBS Bank. In Taiwan and Vietnam, through our joint ventures with First Financial Holding and VietinBank, respectively, we aim to grow our bancassurance businesses and diversify our distribution networks over the next few years. In India, with a distribution network of 121 branches, we operate in partnership with the Dabur Group through a 26% interest in Aviva Life Insurance Company India Ltd. As at 31 October 2014, we ranked 9th among the private life insurance companies in India based on Total APE (including Group Business)17. During 2014 we completed the disposal of our South Korean business.
Market and competition The Asian markets are strategically important to Aviva, owing to large populations in fast-growing economies, coupled with relatively low insurance penetration rates and social coverage. Life insurance penetration (as measured by insurance premium as a proportion of GDP) in most Asian countries is typically less than 5% (1.6% in China and Indonesia, 0.6% in Vietnam, and 4.4% in Singapore) 7. The Asian markets are expected to deliver GDP growth of 6.4%18 in 2015, ranging from 3% in Singapore to 7% in China19.
Aviva Investors Business overview and strategy Aviva Investors offers a range of fund management services, operating in the UK, Europe, North America and Asia and had £246 billion in assets under management as at 31 December 2014 (31 December 2013: £241 billion). Our largest clients are the long-term insurance, savings, and general insurance businesses of Aviva, to whom we provide bespoke asset management services across a broad spectrum of asset classes. We provide external clients with bespoke segregated solutions or offer access to a variety of fund ranges. Our principal target clients for the larger segregated solutions tend 17 18 Asian Development Bank, Asian Development Outlook 2014 update 19 IMF World Economic Outlook, October 2014 268 | Aviva plc Annual report and accounts 2014
to be large pension funds and financial institutions such as insurance companies and banks. During 2014 we sold our holding in US equity manager River Road Asset Management, LLC (“River Road”). Our strategy is to offer a range of investment propositions that deliver outcomes that our clients value. Our key objectives are to significantly improve profitability by focusing on capabilities and propositions that build on our heritage in managing long-term savings.
Market and competition At the end of 2013, the global asset management market stood at circa USD$69 trillion in size, almost half of which was accounted for by North America, and nearly a third by Europe20. 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 46th in ‘The World’s 500 Largest Asset Managers’5. Our main competitors are large global asset managers, 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 15 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. Our distribution model for our open-ended collective investment schemes focuses on wholesale distributors, asset allocators and small to mid-size institutional investors. In the UK, our retail products are promoted to investors via independent financial advisors, fund platforms, fund supermarkets and discretionary asset managers. Our property funds are targeted at specialist real estate buyers and large institutions (mostly pension funds and local authorities), and our money market funds are sold by a specialist sales team and target corporate treasury functions.
Analysis of investments We distinguish between policyholder, participating fund and shareholder investments, which are terms used to reflect the differing exposure to investment gains and losses. Policyholder assets are connected to our unit-linked business, where the policyholder bears the investment risk on the assets in the unit-linked funds. Our exposure to loss on policyholder assets is limited to the extent that income arising from asset management charges is based on the value of assets in the funds. Participating fund assets relate to some of our insurance and investment contracts which contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. Our exposure to investment losses on participating funds is generally limited to our participation in the fund. Shareholder assets are other assets held within our businesses that are not backing unit-linked liabilities or participating funds.
Investments held at 31 December 2014 and 31 December 2013 are listed below: Policyholder assets £m
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We grade debt securities according to external credit ratings issued at the balance sheet date. The credit rating used for each individual security is the median rating of the available ratings from the major credit rating agencies. If a credit rating is available from only one of these rating agencies then this rating is used. If an individual security has not been given a credit rating by any of the major rating agencies, the security is classified as ‘non-rated’. For the table above we have expressed our rating using a rating scale whereby investment grade debt securities are classified within the range of AAA (extremely strong) to BBB (good) ratings, with AAA being the highest possible rating. Debt securities which fall outside this range are classified as less than BBB. This rating scale is analogous with that used by major rating agencies. At 31 December 2014, the proportion of our shareholder debt securities that are investment grade increased to 91.3% (2013: 90.2%). The remaining 8.7% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows: • 0.8% are debt securities that are rated as below investment grade; and • 7.9% are not rated by the major rating agencies.
Fair value £m % of total Fair value £m % of total Fair value £m
Exposures to peripheral European countries Included in our debt securities and other financial assets are exposures to peripheral European countries. All of these assets are valued on a mark to market basis under IAS 39, and therefore our statement of financial position and income statement already reflect any change in value between the date of purchase and the balance sheet date. The significant majority of these holdings are within our participating funds where the risk to our shareholders is governed by the nature and extent of our participation within those funds. Net of non-controlling interests, our direct shareholder and participating fund asset exposure to the government (and local authorities and agencies) of Italy is £4.9 billion (2013: £4.9 billion). Gross of non-controlling interests, 98% of our shareholder asset exposure to Italy arises from investment exposure of our Italian business. Direct sovereign exposures to Greece, Ireland, Portugal, Italy and Spain (net of non-controlling interests, excluding policyholder assets)
At 31 December 2014, shareholder investment in equity securities amounted to £482 million, and of our £7,275 million exposure to equity investments in banks, trusts and insurance companies, £133 million relates to shareholder investments.
Deposits and credit institutions 373 56 110 539 Minority holdings in property management undertakings — 609 145 754
As of 31 December 2014, we owned and occupied land and buildings for our own use with a total book value of £316 million (2013: £257 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 £7,521 million at 31 December 2014 (2013: £8,207 million). The decrease is due mainly to deconsolidation of certain property limited partnerships in 2014.
Contractual obligations Contractual obligations with specified payment dates at 31 December 2014 included the following: Less than one year £m
Insurance and investment contracts Long-term business – Insurance contracts - non-linked1 7,879 14,412 11,802 77,937 112,030 – Investment contracts - non-linked2 56,212 — — — 56,212 – Linked business2 75,341 — — — 75,341
Payables and other financial liabilities5 8,893 498 296 4,292 13,979 Net assets attributable to unit holders 9,482 — — — 9,482
Total contractual obligations above 298,167 Effect of discounting contractual cash flows for insurance contracts (27,341) Contractual undiscounted interest payments6 (8,045) Difference between carrying value of borrowings and undiscounted cash flows of principal (344) Contractual cash flows under operating leases and capital commitments (908) Difference between derivative liabilities contractual cash flows and carrying value (1,967) Liabilities of operations classified as held for sale 2 Unallocated divisible surplus7 9,467 Provisions8 879 Current and deferred tax liabilities 1,260 Other liabilities 2,273
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 £5,577 million. 6. When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £72 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 49 – 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 20 years in the main UK scheme, 19 years in the RAC scheme, 20 years in the Irish scheme and 12 years in the Canadian scheme.
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 58.
Risk environment The benign financial market conditions experienced in 2013 continued during 2014, albeit with increased volatility in the second half of the year as a result of concerns over eurozone growth and deflation, China economic slowdown, the severe fall in the price of oil and other commodities, the prospect of an end to US monetary policy easing and geopolitical concerns over Russia, Ukraine and the Middle East. These concerns are likely to continue into 2015 with the potential to 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. However, even for those western economies (including the UK) expected to grow strongly, high levels of debt will continue to act as a brake on growth and the low interest rate environment compared to historic norms is likely to persist in the intermediate future at least. 2014 saw significant changes in UK public policy over long term savings and pension provision, most notably the announcement in March 2014 in the Budget ending compulsory annuitisation. In 2015 general elections in the UK, Poland, Spain and Canada will exacerbate uncertainty over public policy and, in the UK, uncertainty over continued membership of the European Union. In November 2014 the Group’s designation as a Global Systemically Important Insurer (G-SII) was re-confirmed. Among other policy requirements, this will result in additional loss absorbency capital requirements, which are still under development, to be applied from January 2019, if the Group remains a G-SII. In April 2014 the implementation date of Solvency II was finally confirmed in law as 1 January 2016, with the formal approval of the Omnibus II amendments. On-going work on the “Level 2” Delegated Acts, Implementing Technical Standards and Supervisory Guidelines, to be finalised in 2015, have reduced the level of uncertainty over the final capital impact on the Group. However, some uncertainty remains including over the outcome of the Group’s application to use an internal model to calculate its capital requirement.
• declare dividends with reference to factors including growth in cash flows and earnings.
Total capital employed is financed by a combination of equity shareholders’ funds, preference capital, subordinated debt and borrowings. At 2014 we had £17.6 billion (2013: £16.1 billion) of total capital employed in our trading operations measured on an IFRS basis. In July 2014 we issued €700 million of Lower Tier 2 subordinated debt. This bond has a 30 year term and may be called from July 2024. The proceeds were used to redeem a €700 Direct Capital Instrument at its first call date in November 2014.
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Less: capital resources requirement (6.0) (5.2) (11.2) (10.8) Insurance Group Directive (IGD)
The EU Insurance Groups Directive (IGD) regulatory capital solvency surplus has decreased by £0.4 billion since FY13 to £3.2 billion. This total includes an adverse impact of £0.4 billion from recognising the proposed final dividend for 2014 that was announced on 2 December 2014 as part of the announcement of the Group’s offer to acquire Friends Life Group Limited. The dividend is subject to approval by shareholders at the AGM, but is considered foreseeable and is therefore deducted from the 31 December 2014 IGD surplus. In contrast, the 2013 final dividend of £0.3 billion was not foreseeable as at 31 December 2013, and was not deducted from the 2013 year-end IGD surplus. The key movements over the period are set out in the following table: £bn
IGD solvency surplus at 31 December 2013 3.6 Operating profits net of other income and expenses 1.2 Dividends and appropriations (0.6) Market movements including foreign exchange1 0.2 Hybrid debt redemption (0.2) Internal reinsurance (0.3) Pension scheme funding (0.2) Acquisitions and disposals 0.2 Increase in capital resources requirement (0.3) Estimated IGD solvency surplus at 31 December 2014 (excluding foreseeable dividend) 3.6 Foreseeable dividend (0.4) Estimated IGD solvency surplus at 31 December 2014 3.2 1 Market movements include the impact of equity, credit spread, interest rate and foreign exchange movements net of the effect of hedging instruments. In the period market movements also include positive variances in the UK due to a change in the model used to value certain equity release assets and the consequential impact on the liabilities that they back, offset by the higher cost of replacing mortgages after a fall in the risk free interest rate.
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-profit 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 three main UK with-profit funds: Old With-Profit Sub-Fund (OWPSF), New With-Profit Sub-Fund (NWPSF) and With-Profit Sub-Fund (WPSF). These realistic liabilities have been included within the long-term business provision and the liability for insurance and investment contracts on the consolidated IFRS statement of financial position at 31 December 2014 and 31 December 2013.
Estimated excess available capital £bn 1 These realistic liabilities include the shareholders' share of accrued bonuses of £(0.2) billion (31 December 2013: £0.1 billion). Realistic liabilities adjusted to eliminate the shareholders' share of accrued bonuses are £33.1 billion (31 December 2013: £33.4 billion). These realistic liabilities make provision for guarantees, options and promises on a market consistent stochastic basis. The value of the provision included within realistic liabilities is £1.4 billion, £0.3 billion and £3.0 billion for NWPSF, OWPSF and WPSF respectively (31 December 2013: £1.4 billion, £0.2 billion and £2.5 billion for NWPSF, OWPSF and WPSF respectively).
2 Estimated realistic inherited estate at 31 December 2013 was £nil, £0.4 billion and £1.5 billion for NWPSF, OWPSF and WPSF respectively.
3 The support arrangement represents the reattributed estate (RIEESA) of £2.1 billion at 31 December 2014 (31 December 2013: £1.1 billion). The increase arises mainly from the transfer of non-profit business from RIEESA to NWPSF and recognition of the value of this business in RIEESA.
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 horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial tests. The financial modelling techniques employed in economic capital enhance our practice of risk and capital management. They enable understanding of the impact of the interaction of different risks allowing us to direct risk management activities appropriately. These same techniques are employed to enhance product pricing and capital allocation processes. Unlike more traditional regulatory capital measures, economic capital also recognises the value of longer-term profits emerging from inforce and new business, allowing for consideration of longerterm value emergence as well as shorter-term net worth volatility in our risk and capital management processes. We continue to develop our economic capital modelling capability for all our businesses as part of our development programme to increase the focus on economic capital management and meeting the emerging requirements of the Solvency II framework and external agencies.
Solvency II In April 2014, the implementation date of Solvency II was confirmed in law as 1 January 2016, with the formal approval of the Omnibus II amendments. Following the approval of Omnibus II in a plenary vote of the European Parliament on 11 March 2014, Solvency II is fully expected to come into effect on 1 January 2016. The text of the Solvency II Delegated Act (Level 2) was published in the Official Journal of the European Union on 17 January 2015 and the regulation entered into force on the following day. Aviva continues to actively participate in the consultation on the Level 3 text through the key European industry working groups and respond on the relevant PRA consultation papers through the ABI, whilst engaging with the PRA and HM Treasury throughout. This includes consideration of the role of transitionals once Solvency II comes into effect.
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). Certain rating agencies have proprietary capital models which they use to assess available capital resources against capital requirements as a component in their overall criteria for assigning ratings. Managing our capital and liquidity position in accordance with our target rating levels is a core consideration in all material capital management and capital allocation decisions. The Group’s overall financial strength is reflected in our credit ratings. The Group’s rating from Standard and Poor’s is A+ (strong) with a Stable outlook; A1 (good) with a Stable outlook1 from Moody’s; and A (excellent) with the outlook under review with developing implications from A.M. Best. These ratings incorporate the rating agency views on the proposed acquisition of Friends Life.
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 £0.8 billion, the majority of which was held within Aviva Group Holdings Limited at the 2014 year end, the Group also has access to unutilised committed credit facilities of £1.6 billion provided by a range of leading international banks.
1 Note that Moody’s assign a Negative outlook to Aviva Life & Pensions UK Limited.
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Water consumption (m³) – absolute 509,657 529,960 459,634 468,097 Reduce by 4%
% of employees who feel Aviva is a place where people from diverse backgrounds can succeed 78% 76% 75% 76% *Improve from previous year
Total beneficiaries of corporate responsibility programmes. New KPI New KPI New KPI 511,629 n/a
% of business that are in or above the upper quartile relative to the local market average (NPS score)
(2.4)% N Increase volunteering hours n/a n/a Increase number of beneficiaries 280 | Aviva plc Annual report and accounts 2014
Therefore, the restated figures are based on those markets within which Aviva has continued to operate from 2011, which are: UK, Ireland, Canada, France, Italy, Spain, Poland, Lithuania, Singapore, China, and India.
France who are obliged to comply with the Business Ethics Code as a term of their employment
Number of employee hours spent volunteering 60,390 56,357 41,223 40,220 Increase volunteering hours
Business ethics: All employees are required to complete annual training of the Code except in France where the
17% Y Improve past performance Customers: The percentage figures from previous years have been restated to provide a like for like comparison.
The CO2e emissions baseline and annual absolute CO2e emissions have been restated. We removed the previously reported UK outsourced data centre emissions from our footprint due to data integrity issues.
People: The data reflected here comes from our annual employee survey. The survey provider changed for 2014 to Karian and Box. The only 2015 target relates to our engagement index due to a review with our KPIs while the strategy evolves.
Selected Information The scope of our work was limited to assurance over the information marked with the symbol in Aviva’s Annual Report and Accounts 2014 (the “Selected Information” as found on pages 280 and 281). The Selected Information was assessed against the Reporting Criteria found at responsibility/reports/1. Our assurance does not extend to information in respect of earlier periods or to any other information included in the Annual report and accounts 2014.
Independent Limited Assurance Report to the Directors of Aviva plc The Board of Directors of Aviva plc (“Aviva”) engaged us to provide limited assurance on the information described below and set out in Aviva’s Annual Report and Accounts for the year ended 31 December 2014.
Information that is free from material misstatement, whether due to fraud or error; • establishing objective Reporting Criteria for preparing the Selected Information; • measuring and reporting the Selected Information based on the Reporting Criteria; and • the content of the Annual Report and Accounts 2014.
This report, including our conclusions, has been prepared solely for the Board of Directors of Aviva in accordance with the agreement between us, to assist the Directors in reporting Aviva’s corporate responsibility performance and activities. We permit this report to be disclosed in the Annual Report and Accounts for the year ended 31 December 2014, to assist the Directors in responding to their governance responsibilities by obtaining an independent assurance report in connection with the Selected Information. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Board of Directors and Aviva for our work or this report except where terms are expressly agreed between us in writing.
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Share capital The Company has two classes of shares in issue: • Ordinary shares of £0.25 each which constitute equity security and hold voting rights; • Cumulative irredeemable preference shares of £1 each, which entitle holders to attend and vote at general meetings only when dividends on such shares are in arrears. Cumulative irredeemable preference shareholders may also attend general meetings and vote on particular proposals when such proposals relate to an alteration of the rights attaching to such shares, a reduction of capital (other than through a redemption or repurchase of shares) or a winding up of business. On a winding up, they carry a preferential right of return of capital ahead of the ordinary shares.
The matching share plan Under the Aviva all employee share ownership plan (AESOP), eligible employees can invest up to statutory limits, currently £150 per month out of their gross salary in the Company’s shares. A matching element was introduced in April 2013 through which the Company matches every purchased share with two matching shares for the first £40 of a participant’s monthly contribution. Matching shares are subject to forfeiture if purchased shares are withdrawn from the AESOP within three years of purchase, as long as the employee remains employed by the Company. Participants are also eligible to receive dividend shares through the AESOP.
Shares to satisfy options and awards From July 2008 until 2014, it was the Company’s practice to satisfy all awards and options using shares purchased in the market and held by employee trusts except where local regulations made it necessary to issue new shares. During 2014 the Company has moved to a general practice of issuing new shares except where it is necessary to use shares held by an employee share trust. At 31 December 2014, 2,585,824 shares were held by the employee share trusts as compared to 8,561,382 at 31 December 2013, in both instances following the share purchases and distributions to individual employees throughout the year. These shares have an aggregate nominal value of £646,456 and market value £12,528,317 as of 31 December 2014, compared to £2,140,346 and £38,500,535 at 31 December 2013, respectively. Shares held by separate employee share trusts on behalf of specific individuals have not been included in these amounts. Further details are given in ‘IFRS Financial statements – Note 33 – Shares held by employee trusts.’
Shares issued under the Group’s Employee and Executive Share Option Schemes1 3,335,566 Shares issued in lieu of dividends2 36,923,757
Shares issued under the Group’s Employee and Executive Share Option Schemes1 3,547,718 1. For more information on our various option schemes, see note 32 in the financial statements. 2. The issue of shares in lieu of cash dividends is considered a bonus issue under the terms of the Companies Act 2006 and the nominal value of the shares is charged to the share premium account.
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Related party disclosures Related party transactions For more information relating to related party transactions, including more information about the transactions described below, please see ‘IFRS Financial Statements – note 61 – Related party transactions’.
Our UK fund management companies manage most of the assets held by the Group’s main UK staff pension scheme, for which they charge fees based on the level of funds under management. The main UK scheme holds investments in Groupmanaged funds and insurance policies with other Group companies, as explained in note 49(b)(ii). The related parties’ receivables are not secured and no guarantees were received in respect thereof. The receivables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties provided on behalf of related parties are given in note 53(f).
Loans to joint ventures We make loans to our property management joint ventures to fund property developments which we undertake with our joint venture partners. Movements in these loans may be found in ‘IFRS Financial Statements – Note 19 – Interests in, and loans to, joint ventures’. Total loans at 31 December 2014 and at the end of each of the last three financial years are shown in the table below: £m £m
May1. 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 43 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. Information on operating lease commitments can be found in Note 54(b) to the IFRS Financial Statements. It is standard business practice for our Group companies to give guarantees, indemnities and warranties in connection with disposals of subsidiaries, joint ventures and associates to third parties. As of 31 December 2014, we believe no material loss will arise in respect of these guarantees, indemnities and warranties. Principal warranties include the accuracy and completeness of the statement of financial position at an agreed specified date, details of outstanding litigation, regulatory matters, material contractual commitments, the position on tax filings and other customary matters together with any specific items identified during due diligence. In addition, specific clauses cover such items as regulatory approvals and licences, the basis of calculation regarding actuarial insurance liabilities, reinsurance contracts and the status of employee pension plans. Their exact terms are tailored to each disposal and are set out in the respective sale and purchase agreement. Similarly, the open warranty periods, within which the purchaser could claim, and limits on the maximum amount potentially recoverable will vary for each item covered in each disposal. We have received notice of a number of claims on recent disposals, and where appropriate, hold provisions in respect of such claims. There are also open claim periods on other recent disposals in respect of which we have neither received, nor have any reason to believe we will receive, any claims. Accordingly, as of 31 December 2014, we believe that appropriate provisions have been made regarding known and expected material warranty and indemnity claims relating to recent disposal activity. We have loans receivable, secured by mortgages, which have then been securitised through non-recourse borrowings by special purpose entities in our UK Life business, as set out in Note 25 to the IFRS Financial Statements. These special purpose entities have been consolidated and included in the statement of financial position, as we retain the residual interest in them.
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 1 In December 2014, the directors proposed a final dividend subject to shareholder approval.
Extraordinary market conditions Starting in mid-September 2008, the global financial markets experienced unprecedented disruption, adversely affecting the business environment in general, as well as financial services companies in particular. Markets have improved but continue to be fragile. A return to adverse financial market conditions could significantly affect our ability to meet liquidity needs and obtain capital, although management believes that we have liquidity and capital resources to meet business requirements under current and stressed market conditions. At 31 December 2014, total consolidated cash and cash equivalents net of bank overdrafts amounted to £22,564
Shareholder information continued million, a decrease of £3,425 million from £25,989 million in 2013. 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.
We are subject to a number of regulatory capital tests and employ realistic scenario tests to allocate capital and manage risk. The impact of these regulatory capital tests on our ability to transfer capital around the Group through dividends and capital injections is discussed later in this section under the headings ‘Sources of liquidity’ and ‘Capital injections’. At 31 December 2014, the Group had £17.6 billion (31 December 2013: £16.1 billion) of total capital employed on an IFRS basis in our trading operations which is financed by a combination of equity shareholders’ funds, preference capital, a direct capital instrument, subordinated debt and internal and external borrowings. In addition to external funding sources, we have a number of internal debt arrangements in place. All internal loans satisfy arm’s length criteria and all interest payments have been made when due.
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 aim to maintain a balance of fixed and floating rate debt, and 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 euros, 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 July 2014, we issued €700 million of Lower Tier 2 subordinated debt callable in 2024. In November 2014, we repaid a €700 million direct capital instrument at its first call date.
At 31 December 2014, our total external borrowings, including subordinated debt and securitised mortgage loans, amounted to £7.4 billion (2013: £7.8 billion). Of the total borrowings, £5.3 billion (2013: £5.1 billion) are considered to be core borrowings and are included within the Group’s capital employed. The balance of £2.1 billion (2013: £2.7 billion) represents operational debt issued by operating subsidiaries. We also have substantial committed credit facilities available for our use. At 31 December 2014, we had undrawn committed credit facilities expiring within one year of £0.4 billion (2013: £0.4 billion) and £1.2 billion in credit facilities expiring after more than one year (2013: £1.1 billion). Of these facilities, £750 million was allocated in 2014 (2013: £750 million) to support our commercial paper programme. Further information on the maturity profile, currency and interest rate structure of our borrowings is presented in ‘IFRS Financial statements – Note 50 – 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 €500 million subordinated debt instrument with a first call date of 29 September 2015 at the option of the Company. At this time Aviva will have the option of repaying the debt or accepting a step-up in the coupon credit margin and deferring repayment until future coupon dates. This debt is perpetual, with no fixed redemption date. The table below presents our debt position for the periods indicated: £m £m
Core structural borrowings Subordinated debt 4,594 4,370 Debenture loans 200 199 Commercial paper 516 556
Operating borrowings Operational borrowings at amortised cost 696 1,410 Operational borrowings at fair value 1,372 1,313
In the UK, we have raised non-recourse funding secured against books of mortgages. This funding has been raised through the use of special-purpose entities. The beneficial interest in the books of mortgages has been passed to these special-purpose entities. These entities, which are owned by independent trustees, have funded this transfer through the issue of loan notes. The value of the secured assets and the corresponding nonrecourse funding was £1,372 million (2013: £1,313 million). We continue to receive fees from these special purpose entities in respect of loan administration services. 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 25 – Securitised mortgages and related assets’.
Expiring within one year 350 400 Expiring beyond one year 1,200 1,100
• Total shareholders’ funds to exceed 32% of non-life net written premiums for the previous 12 months. At 31 December 2014, total shareholders funds were 190% of nonlife net written premiums.
Total shareholders’ funds are defined as the aggregate of nominal share capital of Aviva and the IFRS retained profits and reserves, plus the value of in-force long-term business, on a consolidated basis.
Excess centre cash flow represents cash remitted by business units to the Group centre less central operating expenses and debt financing costs. It is an important measure of the cash that is available to pay dividends, reduce debt, pay exceptional charges or invest back into our business units. It does not include nonoperating cash movements such as disposal proceeds or capital injections.
Excess centre cash flow2 692 420 1 Other operating cash flows include central investment income and group tax relief payments. 2 Before non-operating items and capital injections.
Application of funds We use funds to pay dividends to our shareholders, to service our debt and to pay our central Group cash flows. In 2014, total cash paid by the Company as ordinary and preference dividends and coupon payments on direct capital instruments and Fixed Rate Tier 1 notes amounted to £554 million, compared with £538 million in 2013. In 2014, our total interest costs on central borrowings were £310 million. This compared with £328 million of interest paid
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, where a local holding company is in place, may be via loans with the holding company subsequently injecting equity capital in the regulated operating company. Each capital injection is subject to central review and approval by the Board of the relevant holding company and needs to meet our required internal rates of return. To the extent that capital injections are provided or funded by regulated entities, then we have to consider the impact on regulatory capital 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 £567 million and £157 million in 2014 and 2013 respectively. Payments during the year include initial capitalisation of the Group’s internal reinsurance vehicle and other restructuring activity.
Consolidated cash flows1 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. For the purposes of the cash flow statement, cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the balance sheet.
Net cash and cash equivalents At 31 December 2013, total consolidated net cash and cash equivalents, net of bank overdrafts, amounted to £25,989 million, an increase of £1,425 million over £24,564 million in 2012 (restated for IAS 32).
of the Group’s offer to acquire Friends Life Group Limited. The dividend is subject to approval by shareholders at the AGM, but is considered foreseeable and is therefore deducted from the 31 December 2014 IGD surplus. In contrast, the 2013 final dividend of £0.3 billion was not foreseeable as at 31 December 2013, and was not deducted from the 2013 year-end IGD surplus. The key movements over the period are set out in the following table: £bn
Estimated IGD solvency surplus at 31 December 2014 (excluding foreseeable dividend) 3.6
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: £m 2013 £m £m
Contractual obligations for future repairs and maintenance on investment properties are £nil (2013: £nil, 2012: £nil). We have capital commitments to joint ventures of £70 million (2013: £140 million, 2012: £41 million). These commitments are expected to be funded through operational cash flow without recourse to core structural borrowings.
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 EU may also impose requirements directly on countries through regulation. EU financial services regulation is based on the principle of ‘home country control’, which makes the home country regulator responsible for monitoring compliance with all applicable regulation. Key directives of particular relevance to the financial services industry, and so to Aviva’s businesses in the EU include: European System for Financial Supervision The European System for Financial Supervision comprises European Supervisory Authorities, including the European Insurance and Occupational Pensions Authority (EIOPA). Its aims include achieving consistent regulation and supervision within the European Union. In this respect it is able to issue supervisory guidelines on a comply or explain basis to National Competent Authorities and where European Directives provide Delegated Acts, it may propose Regulatory Technical Standards to the Commission.
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Reinsurance Directive Adopted on 16 November 2005, this directive requires that all reinsurance undertakings be authorised in their home member state. To obtain that authorisation, they need to meet strict requirements, but are then free to operate anywhere in the EU through the single market passport process.
Solvency II From 1 January 2016 the Solvency II will replace the directives listed above (Third Life and non Life Directives, Insurance Groups Directive and Reinsurance Directive). Solvency II will be a new 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.
Insurance Capital Standard (ICS) The Financial Stability Board (FSB) has stated that a sound capital and supervisory framework for the insurance sector is essential for supporting financial stability. In this respect the IAIS will develop a work plan to develop a comprehensive, group wide supervisory and regulatory framework for Internationally Active Insurance Groups (IAIGs), including a quantitative capital standard. The ICS will be incorporated into the global framework for the supervision of internationally active insurance groups (ComFrame) that the IAIS is developing. The IAIS plans to develop the ICS by 2016 for implementation from 2019 along with the rest of ComFrame.
Future EU developments There are a number of European dossiers that are expected to continue to progress during 2015, including Packaged Retail and Insurance-based Investment Products (PRIIPs) that will introduce common product disclosure standards, the review of the Insurance Mediation Directive (IMD) and MiFID.
United Kingdom The regulatory structure On 1 April 2013 the Financial Services Authority was replaced by the Prudential Regulation Authority (the “PRA”) and the Financial Conduct Authority (the “FCA”). The reforms were implemented under the Financial Services Act 2012 (the “FS Act”) which made extensive amendments to existing legislation including the Financial Services and Markets Act 2000 (“FSMA”). The FS Act also contains some standalone provisions. The PRA is a subsidiary of the Bank of England and is responsible for the micro-prudential regulation of banks, building societies, credit unions, insurers and major investment firms. The PRA has two statutory objectives: • to promote the safety and soundness of regulated firms; and • in the case of insurers, to contribute to securing an appropriate degree of protection for policyholders.
Within their respective jurisdictions, the PRA and FCA have authority to make rules and issue guidance, taking into account relevant EU directives, impacting individuals and firms authorised to conduct regulated activities (“Authorised Persons” and “Authorised Firms”). Under the FSMA no person may carry on, or purport to carry on, a regulated activity by way of business in the UK unless he is an Authorised Person or an exempt person. A firm granted 294 | Aviva plc Annual report and accounts 2014
UK Regulation of the Aviva Group A number of the Groups’ UK subsidiaries are “dual regulated” (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation)) whilst others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). 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. As Aviva is a UK-based group, the PRA has the responsibility of acting as lead regulator (i.e. the cross-sector supervisory coordinator ) for the Group within the EU. Aviva was designated as a Global Systemically Important Insurer (G-SII) by the IAIS. The IAIS has developed a framework of policy measures for G-SIIs. The policy framework includes: • The recovery and resolution planning requirements under the
Financial Stability Board’s Key Attributes of Effective Resolution Regimes; • Enhanced group-wide supervision; and • Higher loss absorbency requirements (HLA).
The enhanced group wide supervision of G-SIIs introduces more tailored regulation, greater supervisory resources and more thorough use of existing supervisory tools compared to the supervision of non-systemically important insurers. For G-SIIs, the group-wide supervisor has specific powers over holding companies to ensure that a direct approach to group-wide supervision can be applied. In addition, other involved supervisors may have direct or indirect powers over holding companies in their jurisdiction.
Aviva Life & Pensions UK Ltd Aviva Investors UK Funds Ltd
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Control over a UK Authorised Firm is acquired if the acquirer: • holds 10% (or 20% if the Authorised Firm is an insurance intermediary) or more of the shares, or voting power, in that firm, or a parent undertaking of the firm; or
Increases in control require the consent of the appropriate regulator when they reach thresholds of 20%, 30% and 50% of the shares or voting power of the firm (or its parent). In order to determine whether a person or a group of persons is a ‘controller’ for the purposes of FSMA, the holdings (shares or voting rights) of the person and any other person ‘acting in concert’, if any, are aggregated.
Conduct of business rules The FCA’s Conduct of Business (COB) and Insurance: Conduct of Business (ICOB) Rules apply to every Authorised Firm carrying on relevant regulated activities, and regulate the day-to-day conduct of business standards to be observed by all Authorised Persons in carrying out regulated activities. The COB and ICOB Rules are principle based, and the scope and range of obligations imposed on an Authorised Firm will vary according to the scope of its business and range of the Authorised Firm’s clients. Generally speaking, however, the obligations imposed on an Authorised Firm by the COB and ICOB Rules will include the need to classify its clients according to their level of sophistication, provide them with information about the Authorised Firm, meet certain standards of product disclosures (including fee and remuneration arrangements), ensure that promotional material which it produces is clear, fair and not misleading, assess suitability when advising on certain products, control the range and scope of advice given, manage conflicts of interest, report appropriately to its clients and provide certain protections in relation to client assets. The PRA’s COB rule book is limited to with-profits business and linked long-term insurance business as these classes of business are regulated by both the PRA and FCA. For withprofits business the FCA is concerned with ensuring fairness between policyholders and shareholders whilst the PRA has ultimate responsibility in respect of decisions which have material consequences for both affordability and fairness. For linked long-term business, the FCA is concerned with ensuring benefits are determined by reference to an approved index, whilst the PRA is concerned with linked assets being capable of being realised in time to meet obligations to policyholders and the matching of linked assets with linked liabilities.
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 fund) 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.
Release Threshold as defined in the Scheme; • the AVLAP Board (based on appropriate actuarial advice including that of the With-Profits Actuary) are of the opinion that the Release will not give rise to a significant risk that the New with-profits sub-fund (including the RIEESA) would be unable to meet its obligations to policyholders and its capital requirements or the Old WPSF would be unable to meet its obligations to policyholders; and
UK winding up rules The general insolvency laws and regulations applicable to UK companies are modified in certain respects in relation to UK insurance companies where direct insurance claims will have priority over the claims of other unsecured creditors (with the exception of preferred creditors), including reinsurance creditors, on a winding up by the court or a creditors’ voluntary winding up of the insurance company. Furthermore, instead of making a winding-up order when an insurance company has been proved unable to pay its debts, a UK court may reduce the amount of one or more of the insurance company’s contracts on terms and subject to conditions (if any) which the court considers fit. Where an insurance company is in financial difficulties but not in liquidation, the FSCS may take measures
United States Aviva plc reached agreement, in December 2012, to sell Aviva USA Corporation (Aviva USA) and its subsidiaries and the sale was completed in October 2013. Aviva USA was domiciled in Iowa and was the holding company for Aviva Life and Annuity Company which was licensed to conduct business in all states except New York and Washington D.C. In New York it operated a wholly owned subsidiary, Aviva Life Insurance Company of New York. Further details of the sale of Aviva USA and the settlement in 2014 of the purchase price adjustments related to the sale can be found in the sections “Financial and operating performance - Activity in 2014” and “ - Discontinued Operations, United States”.
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 the our products and services, the value of the 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 the 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 depends, in part, upon our ability to succeed in different economic, social and political conditions.
Shareholder information continued up entirely, the impact on the financial and currency markets would be significant and could impact materially all financial institutions, including the Group. Past political negotiations in the United States over raising the U.S. debt ceiling indicate that a risk of sovereign debt default and the potential adverse impact on global markets which could result from this is not limited to the eurozone. Such events could adversely affect our business and results of operations, financial condition and liquidity.
Failure to comply with client contractual requirements and/or guidelines could result in damage awards against us and our fund management operations and loss of revenues due to client terminations. When clients retain us to manage assets on their behalf, we must comply with contractual obligations and guidelines agreed with such clients in the provision of our services. A failure to comply with these guidelines or contractual requirements could result in damage to our reputation or in our clients seeking to recover losses, withdrawing their funds or terminating their contracts, any of which could cause our revenues and earnings to decline.
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 our 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-tomarket 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.
Liquidity risks relating to Aviva’s business Adverse capital and credit market conditions may adversely affect our financial flexibility in addressing liquidity needs, as well as access to and the cost of capital which could adversely affect our results of operations or financial condition. At Group level, we need some of our invested assets to be liquid to pay our operating expenses, taxes, interest on our debt, dividends on our capital stock and to repay maturing debt. At an operational level we also need liquidity to meet insurance claims. Without sufficient liquidity, we could be forced to curtail our operations and our business would suffer. The principal sources of our liquidity are insurance premiums, annuity considerations, deposit funds and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short and long-term instruments, including repurchase agreements, commercial paper, medium and long-term debt, junior subordinated debt, securities, capital securities and stockholders’ equity. We hold certain investments that may lack liquidity such as privately placed fixed-maturity securities, and unlisted equities. The valuations of such assets are based on inputs which are not directly observable in the market. The inputs used reflect the assumptions that we consider market participants would normally use based on a combination of independent third party evidence and internally developed models, intended to be calibrated to market observable data where possible. These are known as Level 3 asset classes in our fair value hierarchy and represented 17% of total financial assets and investment properties held at fair value as of 31 December 2014. As has been the case across the industry, even some higher-quality assets have been more illiquid as a result of the recent challenging market conditions. The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above and, at times, our higher-quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no certainty that we would be able to sell them for the prices at which we have recorded them and we may be forced to sell them at significantly lower prices. We may refinance existing financing arrangements and may, in exceptional circumstances, need to seek additional financing to supplement liquidity available from internal resources. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry and the market’s perception of our financial condition. Disruptions and uncertainty or volatility in the capital and credit markets, as has been experienced in the last few years, in particular throughout the eurozone, may exert downward pressure on availability of liquidity and credit capacity for certain issuers and, if access to liquidity is constrained for a prolonged period of time, may limit our access to capital required to operate and grow our business at a sustainable cost. Although we do not currently anticipate any severe disruptions to the capital and credit markets, there can be no assurance that any 302 | Aviva plc Annual report and accounts 2014
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. Our 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.
A requirement to pay down intercompany indebtedness early could have negative consequences for our business and results of operations An intercompany loan from Aviva Group’s UK general insurance company, Aviva Insurance Limited, to the Aviva Group’s holding company, Aviva Group Holdings Limited, was established in February 2013 (the balance of which was £3.2 billion as at 31 December 2014 and £2.8 billion at the end of February 2015). The Aviva Group has agreed with the board of Aviva Insurance Limited an appropriate target for the long-term level of this loan as part of Aviva Insurance Limited’s capital structure. That level has been set such that Aviva Insurance Limited places no reliance on the loan to meet its stressed insurance liabilities, as assessed on a 1:200 basis. The Aviva Group’s prudential regulator, the PRA, has agreed to this approach. This objective is not expected to change as a result of the proposed acquisition of Friends Life by Aviva (the “Proposed Acquisition”) and plans to reduce the internal loan to approximately £2.2 billion by the end of 2015 currently satisfy this objective. However, a requirement to reduce the loan more rapidly or to a greater extent than planned, including accelerating the cash repayment of the loan, for example following a loss or deterioration in the capital position of Aviva Insurance Limited, could have negative consequences for our business and results of operations and, in particular, could impact on the ability of Aviva Insurance Limited to remit dividends to Aviva plc.
The use of inaccurate assumptions in pricing and reserving for insurance business may have an adverse effect on our business profitability. Our life insurance companies are required to make a number of assumptions in relation to the business written, including the mortality and morbidity rates of our customers (the proportion of customers dying or falling sick or recovering from illness), the development of interest rates, persistency rates (the proportion of customers retaining existing policies and continuing to pay premiums up to their maturity dates), the exercise by customers of options included within their policies and future levels of expenses. By their nature, these assumptions may prove to be incorrect. When establishing their liabilities, our life insurance companies allow for changes in the assumptions made, monitor their experience against the actuarial assumptions used and assess the information gathered to refine their long-term assumptions, together with taking actual claims experience into account. However, it is not possible to determine precisely the total amounts that will ultimately be paid under the policies written by the business as amounts may vary from estimates. Changes in assumptions may also lead to changes in the level of capital required to be maintained, meaning that we may need to increase the amount of our reserves. This could have a material adverse impact on our value, the results of our operations and financial condition. 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. If the assumptions underlying the reserving basis were to prove incorrect, we might have to increase the amount of the general insurance provisions, which would adversely impact our financial condition or results of operations.
We have a significant exposure to annuity business and a significant life insurance risk is associated with longevity. Longevity statistics are monitored in detail, compared with emerging industry trends, and the results are used to inform both the reserving and pricing of annuities. It is likely that uncertainty will remain in the development of future longevity that cannot be mitigated. A strengthening in the longevity assumption, either to reflect changes in the underlying life expectancy (for example, as a result of healthier lifestyles, improved screening programmes or increased availability or effectiveness of medical treatments) of the population or of our particular portfolio used to calculate our long-term business liabilities, would result in an increase in these reserves and reduce shareholders’ equity.
If our business does not perform well or if actual experience versus management estimates used in valuing and amortising Deferred Acquisition Costs (“DAC”) and Acquired value of inforce business (“AVIF”) varies significantly, we may be required to accelerate the amortisation and/or impair the DAC and AVIF which could adversely affect the results of operations or financial condition. We incur significant costs in connection with acquiring new and renewal business. Those costs that vary with and are driven by the production of new and renewal business are deferred and referred to as DAC. The recovery of DAC is dependent upon the future profitability of the related business. The amount of future profit or margin is dependent principally on investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency and expenses to administer the business. Of these factors, investment margins and general insurance underwriting profit are most likely to impact the rate of amortisation of such costs. The aforementioned factors enter into management’s estimates of gross profit or margins, which generally are used to amortise such costs. If the estimates of gross profit or margins were overstated, then the amortisation of such costs would be accelerated in the period the actual amount is known and would result in a charge to income. Significant or sustained equity market declines could result in an acceleration of amortisation of the DAC related to unit-linked business, resulting in a charge to income. Such adjustments could have a material adverse effect on the results of operations or financial condition. 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.
Catastrophic events, which are often unpredictable by nature, could result in material losses and abruptly and significantly interrupt our business activities. Our business is exposed to volatile natural and man-made disasters such as pandemics, hurricanes, windstorms, earthquakes, terrorism, riots, fires and explosions. Such events may not only affect insurance claims, but could also adversely impact investment markets and cause declines in the value of our investment portfolio. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposure. 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.
We operate in several markets through arrangements with third parties, and this may expose us to additional risks. Our ability to exercise management control over our partnership operations, our joint ventures and our investment in them depends on the terms of the legal agreements. In particular, the relationships depend on the allocation of control among, and continued co-operation between, the participants. 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. For example, DBS Bank is a significant distribution partner of the Group in Hong Kong and Singapore and the current agreement with DBS Bank, which is subject to renewal in 2015, is not guaranteed to be renewed. 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. In addition, we outsource certain customer service, technology and legacy policy administration functions to third parties and may do so increasingly in the future. If we do not effectively develop, implement and maintain our outsourcing strategy, third-party providers do not perform as anticipated or we experience technological or other problems with a transition to or between such providers, we may not realise the full extent of productivity improvements or administration and cost efficiencies and, as a result, may experience operational difficulties, increased costs and a loss of business. In particular, failings by our outsource partners to perform outsourced functions, or to perform them to the required standards, may adversely affect our reputation and lead to the loss of customers and operating profit or to regulatory fines. Our fund management operation depends on a number of key vendors, for various fund administration, accounting, valuations, custody and transfer agent roles and other operational needs. The failure or inability to diversify sources for key services or the failure of any key vendors to fulfil their obligations could lead to operational issues for us and in certain products, which could result in financial losses for us and our clients.
The determination of the amount of allowances and impairments taken on our investments is highly subjective. Our process for valuing investments may include methodologies, estimations and assumptions which require judgement and could result in changes to investment valuations. If our business does not perform well, we may be required to recognise an impairment of our goodwill or intangibles with indefinite and finite useful lives, which could adversely affect our results of operations or financial condition. 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.
We value our fair value securities using designated methodologies, estimations and assumptions. These securities, which are reported at fair value on the consolidated statement of financial position, represent the majority of our total cash and invested assets. We have categorised the measurement basis for assets carried at fair value into a ‘fair value hierarchy’ in accordance with the valuation inputs and consistent with IFRS 13: Fair Value Measurement. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1); the middle priority to fair values other than quoted prices based on observable market information (Level 2); and the lowest priority to unobservable inputs that reflect the assumptions that we consider market participants would normally use (Level 3). The majority of our financial assets are valued based on quoted market information (Level 1) or observable market data (Level 2). At 31 December 2014, 17% of total financial investments, loans and investment properties at fair value were classified as Level 3, amounting to £40,459 million. Where estimates were used for inputs to Level 3 fair values, these were based on a combination of independent third-party evidence and internally developed models, intended to be calibrated to market observable data where possible. An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to our valuation. 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 unit 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 material adverse effect on our results of operations or financial condition.
Moves to simplify the operating structure and activities of the Group increases the reliance placed on core businesses and is subject to execution risk. As part of our move to a more simplified structure, a number of business disposals and operational restructures have taken place, and may continue to occur in the future. This includes the 306 | Aviva plc Annual report and accounts 2014
potential sale of a number of non-core businesses. These changes are expected to reduce the operational costs of the Group and allow resources to be re-deployed in more capital efficient businesses. There is a risk that these expected benefits may not be realised. These changes may reduce operating profit in the short-term and will lead to changes in the geographical and product risk profile of the Group. The execution risk including the risks relating to securing the regulatory approvals necessary to complete our planned business disposals, could result in the failure to achieve cost savings, the loss of key staff, and disruption to core business activities and governance structures which could have a material adverse effect on our business, results of operations and financial condition. Execution risk is inherent in the completion of all strategic transactions. Such risks include uncertainty in relation to obtaining the required regulatory approvals on satisfactory terms for the change of control envisaged by such transactions. Such execution risk gives rise to a corresponding potential impact on capital requirements and liquidity.
We are reliant on IT systems and there are risks that our current and legacy systems cannot be made to adapt to growth in the business or new styles of doing business. Key IT initiatives may not deliver what is required either on time or within budget or provide the performance levels required to support the current and future needs of the business. Significant resources are devoted to maintaining and developing IT systems to keep pace with developments within the insurance and fund management industries and to maintain service levels and availability at acceptable levels. Failure to do so could result in the inability to gather information for pricing, underwriting and reserving, to attract and retain customers or meet regulatory requirements or only to do so at excessive cost.
The Proposed Acquisition may be delayed or fail to complete as it is subject to a number of conditions which may not be satisfied or waived. Alternatively a third party may be able to obtain a large enough shareholding in either Aviva or Friends Life Group to delay or prevent completion. Completion of the Proposed Acquisition is conditional upon, among other things, obtaining the relevant regulatory clearances from the PRA, FCA and other regulators; obtaining clearances from appropriate competition authorities; the approval of the scheme of arrangement proposed to be made under Part VIII of the Guernsey Company Law (the “Scheme”) by a majority in number of the qualifying Friends Life shareholders (or the relevant class or classes thereof, if applicable) present and voting, either in person or by proxy, at the Court Meeting representing not less than 75% in value of the eligible Friends Life shares voted by such qualifying Friends Life shareholders; all resolutions necessary to approve and implement the Scheme and to approve certain related matters being duly passed by the requisite majority or majorities at any General Meeting of Friends Life or at any adjournment of that meeting; the sanction of the Scheme with or without modification (but subject to any such modification being acceptable to us and Friends Life) by the Court; and the passing of the required resolutions at the General Meeting of Aviva. Although the Directors of Aviva believe that the clearances should be forthcoming, it is possible that the parties may not obtain these clearances, or that they may not be obtainable within a timescale acceptable to the parties, or that they may only be obtained subject to certain conditions or undertakings which may not be acceptable to the parties. In the event that the FCA, PRA or any other required clearance is not obtained on terms reasonably satisfactory to us or if any other condition is not fulfilled or waived, the Proposed Acquisition may not be completed. Further, it is possible that the FCA, the PRA or other overseas regulators may attach conditions to their approval of the Proposed Acquisition, which might delay or prevent the realisation of certain synergies identified by the parties or otherwise impact the our strategy and operations. If this were to happen it is possible that our business, results of operations and/or financial condition may be materially adversely affected. Both the Group and Friends Life are listed companies whose ordinary shares are freely traded on the London Stock Exchange. It is possible that an existing or new shareholder with a significant shareholding in either the Group or Friends Life could use, or could threaten to use, its shareholding to vote against the Proposed Acquisition when shareholder consent is sought. Such an action could materially delay or prevent the implementation of the Scheme and therefore deprive the parties of some or all of the anticipated benefits of the Proposed Acquisition.
The implementation of our strategy may not proceed as expected. Our strategy, which may be revised from time to time, may involve carrying on business in new markets, developing capabilities to carry out new business activities, expanding or reducing the scope of certain types of business activities or products and reorganising the Group in a manner which is
Shareholder information continued appropriate for such business development changes, taking into account legal, regulatory, operational, capital and other requirements. The implementation of any strategy, changes in strategy, adoption of any new strategy and/or entry into new markets could entail significant changes in our business which may entail higher levels of risk or could adversely affect the results of operations, the financial condition and/or the credit and financial strength ratings of the Group. 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.
Brand and reputation risks relating to Aviva’s business We are rated by several rating agencies, and a decline in any of these ratings could affect our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products and services and cause our sales and earnings to decrease. A rating downgrade, or the perceived potential for such a downgrade, of Aviva plc or any of our rated insurance subsidiaries may, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies. The outcome of such activities may be cash payments requiring the sale of invested assets, including illiquid assets, at a price that may result in realised investment losses. These cash payments to policyholders would result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals may also cause us to accelerate amortisation of policy acquisition costs, which would reduce net income. A rating downgrade may also impact sales volumes, particularly in Canada, where there is more focus by brokers on ratings when evaluating similar products. The ratings provided by AM Best and Standard & Poor’s (“S&P”) are considered to be the most important for distribution in Canada, and a downgrade could lead to a significant loss of sales. A significant rating downgrade may also increase our cost of borrowing or limit our access to some forms of financing. With regard to the impact of the Proposed Acquisition of Friends Life Group on our ratings, both S&P and Moody’s affirmed Aviva’s ratings and outlooks at their current levels (on 21 November 2014 and 2 December 2014 respectively) indicating that the Proposed Acquisition of Friends Life Group would not immediately impact Aviva’s ratings, while AM Best placed Aviva’s rating “Under Review with Developing Implications” indicating that the rating could be either positively or negatively impacted. Therefore, we are not aware of any specific possibility of a downgrade from any agency at present. Given the nature of the Proposed Acquisition, a downgrade would not be expected to impact the availability of finance directly. Furthermore, neither Aviva’s issued debt instruments nor its revolving credit facilities contain restrictive covenants or other provisions that might be breached or triggered by rating downgrades. Accordingly, rating agency downgrades would not be expected to have a materially adverse impact on our existing financing arrangements.
Our businesses are conducted in highly competitive environments. There are many factors which affect our ability to sell our products, including fiscal incentives, price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, service levels to customers, fund management performance and historical bonus levels. In some of our markets, we face competitors that are comparable in size, scope and brand recognition. In some markets, competitors have greater financial resources or greater market share, offer a broader range of products, benefit from more advantageous tax treatments, or have higher bonus rates or claims paying ratios. Further, heightened competition for talented and skilled employees with local experience, particularly in the emerging, high-growth markets, may limit our ability to grow businesses as quickly as planned. In certain non-UK markets, we face intense competition from local and international financial institutions, which may be more established in these markets and may have other competitive advantages, such as greater size and breadth, which may limit our ability to be successful in these markets. In addition, local laws and regulations may be tailored to domestic providers, which may pose additional challenges to our business. 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. We also face competitors who specialise in many of the niche markets in which we operate. We believe that competition will intensify across all regions in response to consumer demand, technological advances, the impact of consolidation, regulatory actions and other factors. Our ability to generate an appropriate return depends significantly upon our capacity to anticipate and respond appropriately to these competitive pressures.
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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. Insurance regulation in the UK is largely based on the requirements of EU directives. Inconsistent application of directives by regulators in different EU member states may place us at a competitive disadvantage to other European financial services groups. In addition, changes in the local regulatory regimes of designated territories could affect the calculation of our solvency position. 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. The failure of any of our subsidiaries to meet minimum capital and surplus requirements could subject us to further examination or corrective action imposed by insurance regulators, including limitations on our ability to write additional business, increased supervision by regulators or the implementation of resolution plans. Any corrective action imposed could have a material adverse effect on our business, results of operations and financial condition. A decline in minimum capital and surplus amounts may also limit the ability of an insurance subsidiary to make dividend payments or distributions and could be a factor in causing rating agencies to downgrade our financial strength ratings, which could have a material adverse effect on our business, results of operations and financial condition. In the UK, our business is subject to regulation by both the PRA and the FCA, which have broad powers, including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation, to investigate marketing and sales practices, to make product intervention rules and to require the maintenance of adequate financial resources. The PRA and the FCA have the power to undertake a range of investigative, disciplinary or enforcement actions, including public censure, restitution, fines or sanctions and to require firms to pay compensation. The PRA and the FCA may make enquiries of the companies which they regulate regarding compliance with regulations governing the operation of business and, similar to the other UK regulated financial services companies, we face the risk that the PRA or the FCA could find that we have failed to comply with applicable regulations or have not undertaken corrective action as required. Issues and disputes may arise from time to time from the way in which the insurance industry or fund management industry has sold or administered an insurance policy or other product or in the way in which they have treated policyholders or customers, either individually or collectively, which may result in investigative, disciplinary or enforcement actions by the FCA or PRA or require the making of redress to customers. There has been an increased focus in the UK on the fair treatment of customers, in particular on the way in which the insurance industry or fund management industry sells and administers insurance policies or other products. This has included the implementation of the recommendations of the Retail Distribution Review (“RDR”) from 31 December 2012. The RDR banned product providers from paying commission to advisers on new sales and also required certain changes to the way advisers describe their services to customers. The new distribution landscape has altered the way in which retail investment products are sold to customers and presents challenges to our UK distribution and advisory activities in adapting to the new rules. The European Commission is currently in the process of reviewing the Insurance Mediation Directive 2002/92/EC (the “IMD”) and has also been working on an initiative in relation to Packaged Retail and Insurance-based Investment Products (“PRIIPs”) with the aim of harmonising pre-contractual disclosures and selling practices for such products. There is a risk that the rules implementing the RDR, any new rules required in due course to implement the revised IMD and any new rules relating to PRIIPs will lead to a decline in the number and/or size of distribution firms. Among other things, this is because financial advisers may decide to consolidate or to leave the sector in response to anticipated increased compliance costs that may be realised and the higher professional standards required by the RDR. In the lead up to the introduction to the RDR, the number of retail investment advisers in the UK reduced. If a reduction in the capacity of the intermediary distribution sector does occur, this may result in fewer opportunities for our products to be distributed by intermediary firms, which could have a material adverse effect on our results, operations, and/or costs or otherwise negatively impact on our distribution arrangements. Where larger groups or matters of public policy are concerned, the PRA and the FCA may intervene directly to provide redress to customers. There have been several industrywide issues in recent years in which the PRA or the FCA (or previously the FSA) has intervened directly, including the sale of personal pensions, the sale of mortgage-related endowments and investments in split capital investment trusts and sale of payment protection insurance. Outside of the UK, our businesses are regulated by local regulators that often have similar powers to the PRA and the FCA and the exercise of these powers could therefore have a similar negative impact on perceptions of our businesses or have a material adverse effect on our business. Furthermore, various jurisdictions in which we operate, including the UK, have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of another market participant. As a major participant in the majority of our chosen markets, circumstances could arise where we, along with other companies, may be required to make such contributions. We (like all other groups in which an entity is PRA and/or FCA regulated) contribute to the Financial Services Compensation Scheme and the levels of contribution to the Financial Services Compensation Scheme may change over time. 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 of the annuity market. 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 Thematic Review of Annuity Sales Practices looked at four desired outcomes: (i) Customers are actively encouraged to shop around; (ii) Consumers are provided with relevant and timely information about the potential benefits of any guaranteed annuity rate or risks of a market value reduction that exists in their existing pension contract; (iii) Consumers are provided with appropriate and timely information about (a) the benefits of enhanced annuities and their potential eligibility (b) an enhanced annuity being available on the open market and (c) the potential for variation between different providers’ underwriting and its impact on the income offered; and (iv) Consumers are provided with appropriate information about the different annuity options available to them (for example, joint as opposed to single life, level as opposed to escalating, guaranteed periods etc.) and the implications of selecting different annuity types. The FCA has highlighted that its work on this review has revealed that firms need to make improvements in relation to the way consumers are informed about shopping around for enhanced annuities. The FCA has asked the majority of firms in the review, including the Group, to do further work to determine if its findings in relation to enhanced annuities are indicative of a more widespread problem and/or have led to poor consumer outcomes. The consequences of the review are 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 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. We may face increased compliance costs due to the need to set up additional compliance controls or the direct cost of such compliance because of changes to financial services legislation or regulation. The Solvency II Directive, an insurance industry regulation agreed by the European Parliament in 2009, will require European domiciled insurers to move to more risk-based capital requirements. The implementation date for the Solvency II
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
Shareholder information continued 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. Due to the nature of certain of these lawsuits and investigations, we cannot make an estimate of loss or predict with any certainty the potential impact of these lawsuits or investigations. 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. Additionally, it is possible that a regulator in one of our major markets may conduct a review of products previously sold, either as part of an industry-wide review or specific to it. The result of this review may be to compensate customers for losses they have incurred as a result of the products they were sold. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. Examples of emerging claims and coverage issues include adverse changes in loss trends, judicial expansion of policy coverage and the impact of new theories of liability; growth of claims culture; legislative or judicial action that affects policy coverage or interpretation, claim quantification, or pricing; a growing trend of plaintiffs targeting property and casualty insurers in purported class action litigation relating to claims-handling and other practices; new causes of liability or mass claims; claims in respect of directors’ and officers’ coverage, professional indemnity and other liability covers; and climate change-related litigation. All of the above could adversely impact our results of operations or financial condition.
shares in a non-US corporation, quoted and traded in US dollars in the US securities market. Any dividends are paid to investors in US dollars. ADRs are specifically designed to facilitate the purchase, holding and sale of non-US securities by US investors. The term ADR is often used to mean both the certificates and the securities themselves. Fluctuations in the exchange rate for converting pound sterling into US dollars may affect the value of our ADRs. Specifically, as the relative value of the pound sterling against the US dollar declines, each of the following values will also decline: • 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
If the Proposed Acquisition is completed, ADR holders and ordinary shareholders in the enlarged Group may earn a negative or no return on their investment in the Company. If the Proposed Acquisition is completed, the Company’s results of operations and financial condition will be dependent on the trading performance of the members of the enlarged Group. There can be no assurance that the Company will pay dividends in the future. Any decision to declare and pay dividends in the future will be made at the discretion of the Board and will depend on, among other things, applicable law, regulation, restrictions, the Company’s and the enlarged Group’s financial position, regulatory capital requirements, working capital requirements, finance costs, general economic conditions and other factors the Directors deem significant from time to time. The ability of the enlarged Group to pay dividends on the ordinary shares or ADRs of the enlarged Group will be dependent upon the availability of distributable reserves and therefore, amongst other things, upon receipt by it of dividends and other distributions of value from its subsidiaries and companies in which it has an investment.
The issue of additional shares in the Company in connection with the Proposed Acquisition or future acquisitions, any share incentive or share option plan or otherwise may dilute all other holdings. The enlarged Group is issuing ordinary shares of the Company in connection with the Proposed Acquisition and may seek to raise financing to fund future acquisitions and other growth opportunities. The Company may, for these and other purposes, such as in connection with share incentive and share option plans, issue additional equity or convertible equity securities. As a result, the Company’s existing shareholders and ADR holders would suffer dilution in their percentage ownership.
As a ‘foreign private issuer’ in the US we are exempt from certain rules under the US securities laws and are permitted to file less information with the SEC than US companies. As a ‘foreign private issuer’ we are exempt from certain rules under the US Securities Exchange Act of 1934, as amended (the ‘Exchange Act’), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and ‘shortswing ’ profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares and ADRs. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as US companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. Although we must comply with UK Listing Rules on insider reporting of share ownership and on protection of inside information, there may be less publicly available information concerning us than there is for US public companies.
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Bonds and savings These are accumulation products with single or regular premiums and unit-linked or guaranteed investment returns.
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).
Mortgage life insurance A protection contract designed to pay off the outstanding amount of a mortgage or loan in the event of death of the insured.
Protection An insurance contract that protects the policyholder or his/her dependants against financial loss on death or ill-health.
Regular premium A series of payments are made by the policyholder, typically monthly or annually, for part of or all of the duration of the contract.
Combined operating ratio (COR) COR is calculated as incurred claims expressed as a percentage of net earned premiums, plus written commissions and written expenses expressed as a percentage of net written premiums.
Financial Conduct Authority (FCA) One of the two bodies (along with the PRA) which replaced the Financial Services Authority from 1 April 2013. The FCA is a company limited by guarantee and is independent of the Bank of England. It is responsible for the conduct business regulation of all firms (including those firms subject to prudential regulation by the PRA) and the prudential regulation of firms not regulated by the PRA. The FCA has three statutory objectives: securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK financial system and promoting effective competition in the interests of consumers.
New business strain (NBS) The name given to the initial impact on shareholders' net assets when an insurance contract is sold. This “strain” arises because, in addition to meeting costs associated with the sale of contracts, insurance companies must meet capital and reserving requirements at the outset of a contract that are often significantly higher than the premiums received.
Operating expenses The day-to-day expenses involved in running a business, such as sales and administration, as opposed to production costs.
Risk-adjusted returns Adjusting profits earned and investment returns by how much risk is involved in producing that return or profit
Total shareholder return A measure of company performance based on the overall value to shareholders of their investment in a stock over a given period of time. Includes movement in the share price and dividends paid and reinvested, expressed as a percentage of the initial value of the investment or share price at the beginning of the period.
2015 financial calendar Aviva General Meeting in respect of the proposed Acquisition of Friends Life 11am on 26 March 2015 Annual General Meeting 11am on 29 April 2015 Announcement of first quarter Interim Management Statement 7 May 2015 * The full financial calendar will be available at www.aviva.com/investor-relations/financial-calendar 2014 final dividend dates – ordinary shares Ex-dividend date (ordinary)* 8 April 2015 Record date (ordinary and ADR) 9 April 2015 Last day for Dividend Reinvestment Plan election 23 April 2015 Dividend payment date* 15 May 2015 * Please note that the ADR local payment date will be approximately five business days after the proposed dividend date for ordinary shares. The ex-dividend date for ADR holders will be 7 April 2015.
Sanctuary, Westminster, London SW1P 3EE on Wednesday, 29 April 2015 at 11am.
• Shareholders can vote electronically at www.investorcentre.co.uk/eproxy, in person by attending the meeting, or by completing and returning the relevant voting card(s) by post.
• The voting results for the 2015 AGM will be accessible on the Company’s website at www.aviva.com/agm shortly after the meeting.
• If you are unable to attend the AGM but would like to ask the directors a question in connection with the business of the meeting, please e-mail the group company secretary at aviva.shareholders@aviva.com.
• Friday, 24 April 2015 at 11am for members of the Aviva Share Account and participants in the Vested Share Account and the Aviva All Employee Share Ownership Plan.
Dividends • Dividends on ordinary shares are normally paid in May and
November – please see the table above for the key dates in respect of the 2014 final dividend.
• Dividends on preference shares are normally paid in March, June, September and December - please visit www.aviva.com/preferenceshares for the latest dividend payment dates.
Contact details Ordinary and preference shares – Computershare For any queries regarding your shareholding, or to advise of changes to your personal details, please contact the Company’s Registrar, Computershare: By telephone: 0871 495 0105 Lines are open from 8.30am to 5.30pm (UK time), Monday to Friday (excluding public holidays). Please call +44 117 378 8361 if calling from outside the UK.
American Depositary Receipts (ADRs) – Citibank For any queries regarding Aviva ADRs, please contact Citibank Shareholder Services (Citibank): By telephone: 1 877 248 4237 (1 877-CITI-ADR), or +1 781 575 4555 if you are calling from outside the US. (Lines are open from 8.30am to 6pm, Monday to Friday US Eastern Standard Time).
Group company secretary Shareholders may contact the group company secretary as follows: By email: aviva.shareholders@aviva.com
In writing: Kirstine Cooper, Group Company Secretary, St Helen’s, 1 Undershaft, London EC3P 3DQ
Aviva plc Strategic report The Aviva plc Strategic report can be found within the Aviva plc Annual report and accounts and includes the current strategy and business model of the Board of Directors. In addition, it forms part of a useful, easy to read summary document, together with certain supplementary material which makes the Aviva plc Strategic report fair, balanced and understandable. If you would prefer to receive a hard copy of the Aviva plc Strategic report instead of the full Aviva plc Annual report and accounts, please contact Computershare. Please view the Aviva plc Strategic report at www.aviva.com/2014ar.
ShareGift ShareGift is a UK registered charity (No.1052686) which specialises in realising the value locked up in small shareholdings for charitable purposes. The resulting proceeds are donated to a wide range of charities, reflecting suggestions received from donors. Should you wish to donate your Aviva plc shares in this way, please visit www.ShareGift.org/donate-shares for more information about how to proceed. Further details about ShareGift can be found at www.ShareGift.org.
Be on your guard – beware of fraudsters! Please be very wary of any unsolicited telephone calls or correspondence offering to buy shares at a discount or offering free financial advice or company reports.
For more information please visit the warning to shareholders page at www.aviva.com/shareholderservices.
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