Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the statement of financial position with a corresponding liability for the repayment in financial liabilities (note 58). However, where the Group has a currently enforceable legal right of set-off and the ability and intent to net settle, the collateral liability and associated derivative balances are shown net. Non-cash collateral received is not recognised in the statement of financial position unless the transfer of the collateral meets the derecognition criteria from the perspective of the transferor. Such collateral is typically recognised when the Group either (a) sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability; or (b) the counterparty to the arrangement defaults, at which point the collateral is seized and recognised as an asset.
(Y) Statement of cash flows Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other shortterm highly liquid investments that are readily convertible to
part of shareholders’ funds. In certain jurisdictions, awards must be settled in cash instead of shares, and the credit is taken to liabilities rather than reserves. The fair value of these cashsettled awards is recalculated each year, with the income statement charge and liability being adjusted accordingly.
Where loan notes have been issued in connection with certain securitised mortgage loans, the Group has taken advantage of the fair value option under IAS 39 to present the mortgages, associated liabilities and derivative financial instruments at fair value, since they are managed as a portfolio on a fair value basis. This presentation provides more relevant information and eliminates any accounting mismatch which would otherwise arise from using different measurement bases for these three items.
Accounting policies continued consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders’ equity. Gains and losses on own shares are charged or credited to the treasury share account in equity.
Earnings per share has also been calculated on operating profit attributable to ordinary shareholders, net of tax, noncontrolling interests, preference dividends, the direct capital instrument (the DCI) and tier one notes as the directors believe this figure provides a better indication of operating performance. Details are given in note 14.
Treasury shares Where the Company or its subsidiaries purchase the Company’s share capital or obtain rights to purchase its share capital, the
Tax expense AC & 13 (974) (98) Less: tax attributable to policyholders’ returns 13d 640 (218) Tax attributable to shareholders’ profits 13d (334) (316)
Attributable to: Equity holders of Aviva plc 703 936 Non-controlling interests 38 156 161
Other comprehensive income: Items that may be reclassified subsequently to income statement Investments classified as available for sale Fair value gains/(losses) 12 (9) Fair value losses transferred to profit on disposals (2) — Share of other comprehensive income of joint ventures and associates (6) (14) Foreign exchange rate movements 1,128 (378) Aggregate tax effect – shareholder tax on items that may be reclassified subsequently to income statement (34) 13
Items that will not be reclassified to income statement Owner-occupied properties – fair value gains 4 27 Remeasurements of pension schemes 48b(i) 311 (235) Aggregate tax effect – shareholder tax on items that will not be reclassified subsequently to income statement (70) 93
Gross written premiums 25,442 21,925 Premiums ceded to reinsurers (2,364) (2,890)
Premiums written net of reinsurance 23,078 19,035 Net change in provision for unearned premiums (210) (111)
Refer to note 40 (c)(iii) for further details. Other items also include a charge of £23 million (2015: £53 million charge), which represents the recognition of the loss upon the completion of an outwards reinsurance contract, written in 2015 by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premiums ceded, less £78 million in reinsurance recoverables recognised and £6 million claims handling provisions released (2015: £53 million charge comprises £712 million in premiums ceded, less £659 million reinsurance recoverables recognised).
Operating profit can be further analysed into the following segments (details of segments can be found in note 4): Year ended 31 December 2016
Total 2,688 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
5 On 1 October 2015 Aviva plc replaced Friends Life Holdings plc as issuer of the 2003 STICS issuance which resulted in a reclassification of the STICS from non-controlling interests to DCI and tier 1 notes.
Operating profit before tax attributable to shareholders’ profits after integration and restructuring costs 2,798 2,309
Profit for the year 859 1,097 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details. 2 Other items include an exceptional charge of £475 million (2015: £nil) relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the Lord Chancellor on 27 February 2017.
United Kingdom & Ireland 1,555 471 — (4) 2,022 France 429 70 — (18) 481 Poland 132 8 — 6 146 Italy, Spain and Other 283 42 — (7) 318 Canada — 269 — 1 270 Asia 241 (13) (1) (26) 201 Aviva Investors 2 — 139 19 160 Other Group activities — (14) — (65) (79)
United Kingdom & Ireland 1,455 430 — (24) 1,861 France 395 71 — (17) 449 Poland 129 10 — 2 141 Italy, Spain and Other 242 33 — (7) 268 Canada — 214 — — 214 Asia 244 (6) 1 (16) 223 Aviva Investors 1 — 105 — 106 Other Group activities (24) 13 — (22) (33)
Dividends and appropriations — — — — — — (973) — (973) — (973) Non-controlling interests share of dividends declared in the year — — — — — — — — — (135) (135) Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — (7) — — (7) — (7) Capital contributions from non-controlling interests — — — — — — — — — 9 9 Changes in non-controlling interests in subsidiaries — — — — — — — — — 105 105 Treasury shares held by subsidiary companies — — — — 13 — — — 13 — 13 Reserves credit for equity compensation plans — — — — — 38 — — 38 — 38 Shares issued under equity compensation plans 3 — 12 — 1 (30) 26 — 12 — 12 Aggregate tax effect – shareholder tax — — — — — — 17 — 17 — 17 1 Refer to note 36 for further details of balances included in Other reserves.
Balance at 1 January as reported 737 200 1,172 3,271 (8) 229 4,617 892 11,110 1,166 12,276 Prior period adjustment1 — — — — — — 20 — 20 — 20
Balance at 1 January as restated 737 200 1,172 3,271 (8) 229 4,637 892 11,130 1,166 12,296
Life 272 — — 5,703 — — — — 5,975 — 5,975 Non-controlling interests in acquired subsidiaries3 — — — — — — — — — 504 504 Reclassification of non-controlling interests to financial liabilities4 — — — — — — — — — (272) (272) Reclassification of non-controlling interests to tier 1 notes5 — — — — — — — 231 231 (231) — Owner-occupied properties fair value gains transferred to retained earnings on disposals — — — — — (33) 33 — — — —
Ordinary share capital 30 1,015 1,012 Preference share capital 33 200 200 10,171 10,159 Treasury shares 32 (15) (29) Other reserves 36 797 (114) Retained earnings 37 4,835 4,774
Equity excluding non-controlling interests 18,126 17,125 Non-controlling interests 38 1,425 1,145
Total equity and liabilities 440,419 387,831 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
Cash flows from investing activities Acquisitions of, and additions to, subsidiaries, joint ventures and associates, net of cash acquired 55b (432) 7,783 Disposals of subsidiaries, joint ventures and associates, net of cash transferred 55c 42 (3) New loans to joint ventures and associates 18a(i) (3) (21) Net repayment of/(new) loans to joint ventures and associates 18 & 19 97 — Net new loans to joint ventures and associates 94 (21) Purchases of property and equipment (67) (58) Proceeds on sale of property and equipment 75 51 Purchases of intangible assets (119) (111)
Liabilities Gross insurance liabilities L & 40 151,183 140,556 Gross liabilities for investment contracts M & 41 197,095 181,082 Unallocated divisible surplus L & 45 9,349 8,811 Net asset value attributable to unitholders D 15,638 11,415 Provisions AA, AB & 47 1,510 1,416 Deferred tax liabilities AC & 46 2,413 2,084 Current tax liabilities 421 177 Borrowings AD & 49 10,295 8,770 Payables and other financial liabilities S & 50 17,751 12,448 Other liabilities 51 2,719 2,802 Liabilities of operations classified as held for sale AH & 3c 12,494 —
The accounting policies (identified alphabetically) on pages 134 to 147 and notes (identified numerically) on pages 154 to 267 are an integral part of the financial statements.
Cash flows from financing activities Proceeds from issue of ordinary shares 15 16 Treasury shares purchased for employee trusts 32 — (1) New borrowings drawn down, net of expenses 3,526 2,049 Repayment of borrowings2 (2,340) (1,979) Net drawdown of borrowings 49 1,186 70 Interest paid on borrowings (595) (588) Preference dividends paid 15 (17) (17) Ordinary dividends paid 15 (871) (635) Coupon payments on direct capital instrument and tier 1 notes 15 (85) (72) Capital contributions from non-controlling interests of subsidiaries 38 9 5 Dividends paid to non-controlling interests of subsidiaries3 38 (135) (142) Changes in controlling interest in subsidiaries 38 105 (1)
Total net increase in cash and cash equivalents 3,952 11,031 Cash and cash equivalents at 1 January 33,170 22,564 Effect of exchange rate changes on cash and cash equivalents 1,283 (425)
Profit before tax 1,172 23 1,195 Tax expense (93) (5) (98) Profit for the period 1,079 18 1,097 Profit attributable to equity holders of Aviva plc 918 18 936 Operating earnings per share
Total equity Balance at 1 January 12,276 20 12,296 Total comprehensive income for the period 576 18 594 Other equity movements 5,380 — 5,380
(a) Acquisitions (i) RBC General Insurance On 1 July 2016, Aviva plc announced its Canadian business, Aviva Canada had completed the acquisition of 100% of the outstanding shares of RBC General Insurance Company (‘RBC’), the existing home and motor insurance business of RBC Insurance, and entered into a 15-year strategic agreement with RBC Insurance. Through this agreement, Aviva Canada will provide policy administration and claims services, and RBC Insurance customers will access Aviva Canada’s full suite of property and casualty (P&C) products. The acquisition extends Aviva’s presence in the Canadian general insurance market and brings diversification to existing distribution channels.
Assets Intangible assets 210 Financial investments 749 Reinsurance assets 29 Receivables 189 Other assets 6 Cash and cash equivalents 26
Consideration Cash 345 Deferred cash consideration — Directly attributable costs 7
Other intangible assets of £20 million were recognised upon acquisition representing the fair value of future profits from the general insurance book as at 1 July 2016. This will be amortised based on its useful life of approximately two years in accordance with the Group’s accounting policies.
Basic (pence per share) 49.2p 0.5p 49.7p Diluted (pence per share) 48.7p 0.5p 49.2p
Total liabilities 369,642 (81) 369,561 Effect analysed as: Gross liabilities for investment contracts 181,173 (91) 181,082 Deferred tax liabilities 2,074 10 2,084
2 – Exchange rates The Group’s principal overseas operations during the year were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into sterling at the average rates for the year and the assets and liabilities have been translated at the year end rates as follows: Eurozone Average rate (€1 equals) £0.82 £0.72 Period end rate (€1 equals) £0.85 £0.74 Canada Average rate ($CAD1 equals) £0.56 £0.51 Period end rate ($CAD1 equals) £0.60 £0.49 Poland Average rate (PLN1 equals) £0.19 £0.17 Period end rate (PLN1 equals) £0.19 £0.17
3 – Subsidiaries continued Goodwill The residual goodwill on acquisition of £58 million, none of which is expected to be deductible for tax purposes, is attributable to the future synergies expecting to arise from combining the operations of the Aviva Canada insurance entities with that of RBC. Refer to note 16 for changes to the carrying amount of goodwill during the year.
If the acquisition had been effective on 1 January 2016, on a pro-forma basis the Group’s net earned premiums is estimated at £23.3 billion and profit before tax attributable to shareholders is estimated at £1,200 million. In determining this amount, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 January 2016. The pro-forma results are provided for information purposes only and do not necessarily reflect the actual results that would have occurred had the acquisition taken place on 1 January 2016, nor are they necessarily indicative of the future results of the combined Group.
The total Group loss on disposal and remeasurement of subsidiaries, joint ventures and associates is £11 million (2015: £2 million profit). This primarily relates to the Group’s sale in its entire stake in its Irish private medical insurance business and a closed book of offshore bonds business which both completed in the third quarter of 2016.
France The principal activities of our French operations are long-term business and general insurance. The long-term business offers a range of long-term insurance and savings products, primarily for individuals, with a focus on the unit-linked market. The general insurance business predominantly sells personal and small commercial lines insurance products through agents and a direct insurer. As set out in note 3, the operations of Antarius are classified as held for sale as at 31 December 2016.
Italy, Spain and Other These countries are not individually significant at a Group level, so have been aggregated into a single reporting segment in line with IFRS 8. The principal activities of our Italian operations are long-term business and general insurance. The life business offers a range of long-term insurance and savings products, and the general insurance business provides motor and home insurance products to individuals, as well as small commercial risk insurance to businesses. The principal activity of the Spanish operation is the sale of long-term business, accident and health insurance and a selection of savings products. Our ‘Other’ operations include our life operations in Turkey.
Liabilities Insurance liabilities (4,448) — Liability for investment contracts (7,175) — Unallocated divisible surplus (859) — Other liabilities (12) —
(d) Subsequent events (i) Aviva Hong Kong On 20 January 2017, it was announced that Aviva, Hillhouse Capital (‘Hillhouse’) and Tencent Holdings Limited (‘Tencent’) had agreed to develop an insurance company in Hong Kong, which will focus on digital insurance. As part of the agreement, Hillhouse and Tencent will acquire shares in Aviva Life Insurance Company Limited (‘Aviva Hong Kong’). Following completion of the transaction, which is expected in the fourth quarter of 2017, Aviva and Hillhouse will each hold 40% and Tencent will hold 20% shareholdings in Aviva Hong Kong. The transaction is subject to customary closing conditions, including regulatory approval. Aviva Hong Kong remains a consolidated subsidiary of Aviva at the balance sheet date.
Asia Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan and the international operations of Friends Life. This segment also includes general insurance and health operations in Singapore and health operations in Indonesia.
Aviva Investors Aviva Investors operates in most of the markets in which the Group operates, in particular the UK, France, North America, Asia Pacific and other international businesses, managing policyholders’ and shareholders’ invested funds, providing investment management services for institutional pension fund mandates and managing a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs.
Other Group activities Investment return on centrally held assets and head office expenses, such as Group treasury and finance functions, together with certain taxes and financing costs arising on central borrowings are included in ‘Other Group activities’, along with central core structural borrowings and certain tax balances in the segmental statement of financial position. The results of our internal reinsurance operations are also included in this segment.
Gross written premiums 5,458 4,750 6,624 496 4,652 2,542 920 — — 25,442 Premiums ceded to reinsurers (1,509) (498) (86) (9) (39) (89) (134) — — (2,364) Internal reinsurance revenue (7) (2) — — (3) — (11) — 23 —
Premiums written net of reinsurance 3,942 4,250 6,538 487 4,610 2,453 775 — 23 23,078 Net change in provision for unearned premiums (2) (132) (8) (16) (11) (33) (8) — — (210)
Claims and benefits paid, net of recoveries from reinsurers (11,200) (2,680) (5,397) (315) (2,230) (1,521) (399) — (40) (23,782)
Profit/(loss) before tax attributable to shareholders’ profits 1,637 (247) 325 141 268 164 23 130 (1,248) 1,193
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest — (5) 46 — — 17 — 5 (63) — Investment return variances and economic assumption changes on long-term business (503) — 86 1 27 — 10 — — (379) Short-term fluctuation in return on investments backing non-long-term business (135) (79) (2) (1) 13 42 — — 680 518 Economic assumption changes on general insurance and health business — 229 13 — — — — — — 242 Impairment of goodwill, joint ventures and associates and other amounts expensed — — — — — — — — — — Amortisation and impairment of intangibles 71 24 2 3 7 29 9 6 24 175 Amortisation and impairment of AVIF 387 — 3 2 2 — 142 — 4 540 Loss/(profit) on the disposal and remeasurement of subsidiaries, joint ventures and associates 3 8 — — — — — — — 11 Integration and restructuring costs 119 15 8 — 1 18 17 19 15 212 Other4 — 498 — — — — — — — 498
Refer to note 40 (c)(iii) for further details. Other items also include a loss upon the completion of an outwards reinsurance contract by the UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £23 million loss comprises £107 million in premiums ceded less £78 million in reinsurance recoverables recognised and £6 million claims handling provisions released.
Notes to the consolidated financial statements continued 4 – Segmental information continued (a) (ii) Segmental income statement for the year ended 31 December 2015 – restated1
Gross written premiums 5,402 4,503 5,777 484 2,733 2,109 917 — — 21,925 Premiums ceded to reinsurers (1,355) (1,163) (75) (6) (42) (117) (132) — — (2,890) Internal reinsurance revenue (5) (1) — (1) (4) — (2) — 13 —
Adjusted for non-operating items: Reclassification of corporate costs and unallocated interest 7 (1) 20 — — 6 — 4 (36) — Investment return variances and economic assumption changes on long-term business — — (17) — 14 — (11) — — (14) Short-term fluctuation in return on investments backing non-long-term business 53 84 2 (2) 31 47 — — (131) 84 Economic assumption changes on general insurance and health business — 98 — — — 2 — — — 100 Impairment of goodwill, joint ventures and associates and other amounts expensed — — — — 9 — 13 — — 22 Amortisation and impairment of intangibles 84 14 — 2 14 10 9 10 12 155 Amortisation and impairment of AVIF 350 — 5 2 5 — 136 — — 498 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates (2) — — — 1 — (1) — — (2) Integration and restructuring costs 215 26 19 — 3 7 7 11 91 379 Other5 — 53 — — — — — — — 53
4 – Segmental information continued Measurement basis The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are subject to normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of: (i) profit or loss from operations before tax attributable to shareholders (ii) profit or loss from operations before tax attributable to shareholders, adjusted for non-operating items outside the segment management’s control, including investment market performance and fiscal policy changes.
Net earned premiums 4,041 3,286 5,691 464 2,680 1,977 769 — 16 18,924 Fee and commission income 810 160 232 40 115 28 134 281 (3) 1,797 4,851 3,446 5,923 504 2,795 2,005 903 281 13 20,721 Net investment income/(expense) 448 159 1,949 (1) 444 49 (325) 155 (53) 2,825 Inter-segment revenue — — — — — — — 195 — 195 Share of profit of joint ventures and associates 149 — 7 5 8 — 11 — — 180 Profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates 2 — — — (1) — 1 — — 2
2 Total reported income, excluding inter-segment revenue, includes £9,031 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written.
3 Aviva Investors operating profit includes £1 million profit relating to Aviva Investors Pooled Pensions business. 4 Other Group activities include Group Reinsurance. 5 Other items represents a loss upon the completion of an outwards reinsurance contract by the UK0 General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks. The £53 million loss comprises £712 million in premiums ceded less £659 million in reinsurance recoverables recognised.
Goodwill 663 1,026 5 23 172 21 45 — — 1,955 Acquired value of in-force business and intangible assets 3,600 139 86 12 539 69 1,206 15 65 5,731 Interests in, and loans to, joint ventures and associates 1,291 — 138 39 72 7 372 — — 1,919 Property and equipment 130 27 225 3 5 10 8 1 40 449 Investment property 7,483 198 2,089 — 1 — — 1,146 384 11,301 Loans 21,502 5 733 1 26 135 31 — — 22,433 Financial investments 163,987 4,715 65,413 2,575 19,176 3,187 9,684 515 4,965 274,217 Deferred acquisition costs 1,351 418 227 32 77 255 57 4 — 2,421 Other assets 42,636 5,301 9,678 239 1,480 860 1,351 901 4,959 67,405 Assets of operations classified as held for sale — — — — — — — — — —
Fund management Our fund management business invests policyholders’ and shareholders’ funds and provides investment management services for institutional pension fund mandates. It manages a range of retail investment products, including investment funds, unit trusts, OEICs and ISAs. Clients include Aviva Group businesses and third-party financial institutions, pension funds, public sector organisations, investment professionals and private investors.
4 – Segmental information continued (a) (iii) Segmental statement of financial position as at 31 December 2016
Insurance liabilities Long-term business and outstanding claims provisions 104,194 6,098 15,932 2,698 10,241 3,248 3,750 — 12 146,173 Unearned premiums 227 2,136 463 68 281 1,527 64 — — 4,766 Other insurance liabilities — 72 51 — — 118 — — 3 244
Liability for investment contracts 125,198 — 49,929 2 12,000 — 8,395 1,571 — 197,095 Unallocated divisible surplus 2,858 — 5,151 60 1,074 — 206 — — 9,349 Net asset value attributable to unitholders 76 — 2,349 — 509 — — — 12,704 15,638 External borrowings 1,793 — 1 — 46 — — — 8,455 10,295 Other liabilities, including inter-segment liabilities 15,701 (404) 4,694 139 758 1,107 645 396 1,778 24,814 Liabilities of operations classified as held for sale — — 12,494 — — — — — — 12,494
Premiums written net of reinsurance 14,051 9,027 — — 23,078 Net change in provision for unearned premiums — (210) — — (210)
Claims and benefits paid, net of recoveries from reinsurers (18,026) (5,756) — — (23,782) Change in insurance liabilities, net of reinsurance (6,249) (644) — — (6,893) Change in investment contract provisions (14,039) — — — (14,039) Change in unallocated divisible surplus (381) — — — (381) Fee and commission expense (1,369) (2,299) (33) (184) (3,885) Other expenses (1,887) (521) (396) (1,049) (3,853) Inter-segment expenses (222) (12) — (5) (239) Finance costs (183) (5) — (438) (626)
Profit/(loss) before tax 2,834 (16) 108 (1,093) 1,833 Tax attributable to policyholder returns (640) — — — (640)
(b) (ii) Segmental income statement – products and services for the year ended 31 December 2015 – restated1
Premiums written net of reinsurance 11,658 7,377 — — 19,035 Net change in provision for unearned premiums — (111) — — (111)
Notes to the consolidated financial statements continued 4 – Segmental information continued (b) (iii) Segmental statement of financial position – products and services as at 31 December 2016
(b) (iv) Segmental statement of financial position – products and services as at 31 December 2015 – restated1
4 – Segmental information continued (b) (i) Segmental income statement – products and services for the year ended 31 December 2016
Operating profit/(loss) before tax attributable to shareholders’ profits 2,642 833 138 (603) 3,010 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £138 million, of which £54 million relates to property and liability insurance and £84 million relates to long-term business. 2 General insurance and health business segment includes gross written premiums of £1,030 million relating to health business. The remaining business relates to property and liability insurance.
Operating profit/(loss) before tax attributable to shareholders’ profits 2,442 765 106 (625) 2,688 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
Gross insurance liabilities 127,050 13,506 — — 140,556 Gross liabilities for investment contracts 181,082 — — — 181,082 Unallocated divisible surplus 8,811 — — — 8,811 Net asset value attributable to unitholders 3,479 — — 7,936 11,415 External borrowings 1,857 — — 6,913 8,770 Other liabilities, including inter-segment liabilities 15,397 (307) 346 3,491 18,927 Liabilities of operations classified as held for sale — — — — —
5 – Details of income This note gives further detail on the items appearing in the income section of the consolidated income statement.
General insurance and health 9,694 8,738 25,442 21,925 Less: premiums ceded to reinsurers (note 4a and 4b) (2,364) (2,890) Gross change in provision for unearned premiums (note 40e) (191) (125) Reinsurers’ share of change in provision for unearned premiums (note 43ciii) (19) 14 Net change in provision for unearned premiums (210) (111)
Insurance contracts 12,875 12,443 Participating investment contracts 6,030 5,270 Non-participating investment contracts 548 368
Impairments Net impairment on loans 1 2 Net impairment on financial investments (note 26 (c)) (9) — Net impairment on receivables and other financial assets 8 3 Net impairment on non-financial assets — 2
Integration and restructuring costs Integration and restructuring costs were £212 million (2015: £379 million), which has decreased mainly due to lower integration spend following the Friends Life acquisition and lower Solvency II project costs, partially offset by costs related to the acquisition of RBC.
Realised gains/(losses)on disposals 66 1,264 Unrealised gains and losses (policy K)
Realised gains on disposals 1,457 2,150 Unrealised gains and losses (see policy K)
Gains/(losses) arising in the year 21,179 (6,279) (Gains) recognised now realised (1,457) (2,150)
19,722 (8,429) 21,179 (6,279) Realised gains and losses on AFS investments
Losses/(gains) recognised in prior periods as unrealised in equity 2 —
Commission expenses for insurance and participating investment contracts 2,567 2,220 Change in deferred acquisition costs for insurance and participating investment contracts (195) (127) Deferrable costs for non-participating investment contracts 24 30 Other acquisition costs 846 819 Change in deferred acquisition costs for non-participating investment contracts 98 (34)
Staff costs (note 10b) 1,059 944 Central costs and sharesave schemes 186 181 Depreciation 25 24 Impairment of goodwill on subsidiaries (note 16) — 22 Amortisation of acquired value of in-force business on insurance/investment contracts 539 496 Amortisation of intangible assets 155 131 Impairment of intangible assets 14 18 Integration and restructuring costs (see below) 212 379 Other expenses 1,089 764
7 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 49) and similar charges. Finance costs comprise: Interest expense on core structural borrowings Subordinated debt 387 335 Long term senior debt 1 14 Commercial paper — 1
Interest on collateral received 10 13 Net finance charge on pension schemes (note 48(b)(i)) 29 25 Unwind of discount on GI reserves 2 2 Extinguishment of debt — 13 Other similar charges 74 83
Investment variances and economic assumption changes were £379 million positive (2015: £14 million positive). Positive variances in the UK reflect lower interest rates and narrowing credit spreads, which increase asset values more than liabilities. In the first half of 2016 the Group revised its expectation of future property prices and rental income in light of the UK referendum vote for the UK to leave the European Union. The adverse impact of this adjustment on the Group’s equity release and commercial mortgage portfolios has been broadly offset in the second half of the year as expectations for future property price and rental growth have increased. In addition, in the UK the investment variance reflects the refined approach of assuming best estimate expected credit defaults on corporate bonds with a resulting increase in operating profit in the period. The positive variance in the UK has been partially offset by negative variances in France and Italy. The negative variance in France reflects losses on equity hedges managed on an economic basis rather than an IFRS basis and falling interest rates, while the negative variance in Italy reflects widening credit spreads.
Notes to the consolidated financial statements continued 8 – Long-term business economic volatility continued (c) Methodology The expected investment returns and corresponding expected movements in long-term business liabilities are calculated separately for each principal long-term business unit.
(b) Economic volatility The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows: Life business 2016 £m
The actual investment return is affected by differences between the actual and expected funds under management and changes in asset mix, as well as movements in interest rates. To the extent that these differences arise from the operating experience of the long-term business, or management decisions to change asset mix, the effect is included in the operating profit. The residual difference between actual and expected investment return is included in investment variances, outside operating profit but included in profit before tax.
The principal assumptions underlying the calculation of the expected investment return for equities and properties are: Equities Properties
The 10 year mid-price swap rates as at the start of the period are set out in the table below: For fixed interest securities classified as fair value through profit or loss, the expected investment returns are based on average prospective yields for the actual assets held less an adjustment for credit risks (assessed on a best estimate basis); this includes an adjustment for credit risk on all eurozone sovereign debt. Where such securities are classified as available for sale, the expected investment return comprises the expected interest or dividend payments and amortisation of the premium or discount at purchase.
Short-term fluctuations in investment return (see (b) below) (518) (84) Economic assumption changes (see (g) below) (242) (100)
Analysed between: Longer-term investment return, reported within operating profit 347 401 Short-term fluctuation in investment return, reported outside operating profit General insurance and health 5 (166) Other operations1 (523) 82 (518) (84)
1 Represents short-term fluctuations on assets backing non-long-term business in Group centre investments, including the centre hedging programme and Group external borrowings.
The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year. Actual income and longer-term investment return both contain the amortisation of the discounts/premium arising on the acquisition of fixed income securities. For other operations, the longer-term return reflects assets backing non-long-term business held in Group centre investments.
Total assets supporting non-long-term business 15,325 14,675 1 Includes the internal loan. 2 Represents assets backing non-long-term business in Group centre investments, including the centre hedging programme.
Actual return attributable to shareholders 1,853 2,527 Longer-term return credited to operating results (2,523) (2,945)
Equities 1% higher/lower Group operating profit before tax 2 3 Properties 1% higher/lower Group operating profit before tax 3 2
The adverse movement in short-term fluctuations during 2016 compared to 2015 is mainly due to foreign exchange losses on Group centre holdings, including the centre hedging programme, and Group external borrowings.
(g) The economic assumption changes arise as a result of a decrease in the real interest rates used to discount claim reserves for periodic payment orders and latent claims. Market interest rates used to discount periodic payment orders and latent claims have reduced and the estimated future inflation rate used to value periodic payment orders has been increased to be consistent with market expectations. This has, in part, been offset by a change in estimate for the interest rate used to discount periodic payment orders to allow for the illiquid nature of these liabilities.
Profit sharing and incentive plans 214 188 Equity compensation plans (note 31d) 37 48 Termination benefits 20 19
Staff costs are charged within: Acquisition costs 433 447 Claims handling expenses 145 131 Central costs and sharesave schemes 90 76 Other operating expenses 1,059 944 Integration and restructuring costs 37 30
Total audit fees 17.6 16.7 Audit related assurance 6.3 2.6 Other assurance services 8.1 13.3
Fees payable to PwC LLP and its associates for services to Group companies 33.3 34.5
Audit related assurance comprises services in relation to statutory and regulatory filings. These include fees for the audit of the Group’s Solvency II regulatory returns from 2016, services for the audit of other regulatory returns of the Group’s subsidiaries and review of interim financial information under the Listing Rules of the UK Listing Authority. Total audit fees (excluding additional fees relating to the prior year audits of Group subsidiaries) and audit-related assurance fees were £23.2 million (2015: £20.2 million). This increase is mainly driven by Solvency II audit related assurance of £3.7 million in 2016 as a formal audit requirement was implemented by the regulator during the year.
10 – Employee information This note shows where our staff are employed throughout the world, excluding staff employed by our joint ventures and associates, and analyses the total staff costs.
United Kingdom & Ireland 15,175 16,222 15,828 16,695 France 4,154 4,161 4,144 4,122 Poland 1,542 1,677 1,544 1,706 Italy, Spain and Other 958 950 955 958 Canada 4,232 3,558 3,937 3,542 Asia 1,533 1,486 1,483 1,517 Aviva Investors 1,316 1,204 1,238 1,095 Other Group Activities 620 381 524 372 1 Average employee numbers have been calculated using a monthly average that takes into account recruitment, leavers, transfers, acquisitions and disposals of businesses during the year.
Wages and salaries 1,123 1,047 Social security costs 215 190 Post-retirement obligations
Audit of Group subsidiaries 14.1 12.4 Additional fees related to the prior year audit of Group subsidiaries 0.7 0.5
(ii) The Group, as a proxy for policyholders in the UK, Ireland and Singapore, is required to record taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK, Irish and Singapore life insurance policyholder returns is included in the tax charge. The tax charge attributable to policyholder returns included in the charge above is £640 million (2015: credit of £218 million).
(ii) The tax charge attributable to policyholders’ returns included above is £nil (2015: £nil).
Different basis of tax – policyholders — 513 513 — (174) (174) Adjustment to tax charge in respect of prior periods (34) — (34) (46) — (46) Non-assessable income and items not taxed at the full statutory rate 39 — 39 19 — 19 Non-taxable loss/(profit) on sale of subsidiaries and associates 1 — 1 1 — 1 Disallowable expenses 49 — 49 67 — 67 Different local basis of tax on overseas profits 97 (1) 96 126 — 126 Change in future local statutory tax rates (36) — (36) (82) — (82) Movement in deferred tax not recognised (13) — (13) (52) — (52) Tax effect of profit from joint ventures and associates (6) — (6) (6) — (6) Other (2) — (2) 3 — 3
Total tax charged/(credited) to income statement 334 640 974 316 (218) 98 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. As a result, the tax charge increased by £5 million to £98 million. See note 1 for further details.
Different basis of tax – policyholders per tax reconciliation 513 (174)
Profit before tax attributable to shareholders’ profits 3,010 (1,817) 1,193 2,688 (1,275) 1,413 Tax attributable to shareholders’ profit (706) 372 (334) (603) 287 (316)
Profit for the year 2,304 (1,445) 859 2,085 (988) 1,097 Amount attributable to non-controlling interests (147) (9) (156) (152) (9) (161) Cumulative preference dividends for the year (17) — (17) (17) — (17) Coupon payments in respect of direct capital instrument (DCI) and tier 1 notes (net
Integration and restructuring costs (212) (170) (4.2) (379) (259) (6.9) Other3 (498) (398) (9.8) (53) (42) (1.1)
2 DCI includes the direct capital instrument and tier 1 notes 3 Other items include an exceptional charge of £475 million (2015: £nil), £380 million net of tax (2015: £nil), relating to the impact of the change in the Ogden discount rate from 2.5% set in 2001 to minus 0.75% announced by the
Ordinary dividends declared and charged to equity in the year Final 2015 – 14.05 pence per share, paid on 17 May 2016 570 — Final 2014 – 12.25 pence per share, paid on 15 May 2015 — 362 Interim 2016 – 7.42 pence per share, paid on 17 November 2016 301 — Interim 2015 – 6.75 pence per share, paid on 17 November 2015 — 273 871 635 Preference dividends declared and charged to equity in the year 17 17 Coupon payments on direct capital instrument and tier 1 notes 85 72
Operating profit attributable to ordinary shareholders 3,010 2,072 51.1 2,688 1,859 49.7 Non-operating items: Investment return variances and economic assumption changes on long-term business 379 313 7.8 14 (37) (1.0) Short-term fluctuation in return on investments backing non-long-term business (518) (398) (9.8) (84) (62) (1.7) Economic assumption changes on general insurance and health business (242) (193) (4.8) (100) (80) (2.1) Impairment of goodwill, joint ventures and associates and other amounts expensed — — — (22) (22) (0.6) Amortisation and impairment of intangibles (175) (137) (3.4) (155) (121) (3.2) Amortisation and impairment of acquired value of in-force business (540) (455) (11.2) (498) (376) (10.1)
Diluted operating profit per share 2,072 4,089 50.7 1,859 3,780 49.2 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
Notes to the consolidated financial statements continued 14 – Earnings per share This note shows how we calculate earnings per share, based both on the present shares in issue (the basic earnings per share) and the potential future shares in issue, including conversion of share options granted to employees (the diluted earnings per share). We have also shown the same calculations based on our operating profit as we believe this gives a better indication of operating performance.
Profit attributable to ordinary shareholders 2,072 (1,454) 618 1,859 (997) 862 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
(ii) Basic earnings per share is calculated as follows: Before tax £m
Accumulated impairment At 1 January (215) (201) Impairment losses charged to expenses — (22) Foreign exchange rate movements (32) 8
United Kingdom – long-term business 663 663 — — 663 663 United Kingdom – general insurance and health 924 924 — — 924 924 Ireland – general insurance and health 94 102 — — 94 102 France – long-term business — 5 53 46 53 51 Poland 26 23 6 6 32 29 Italy – long-term business 8 7 — — 8 7 Italy – general insurance and health 28 24 — — 28 24 Spain – long-term business 163 141 183 157 346 298 Canada 88 21 — — 88 21 Asia 51 45 — — 51 45 * Restated for the transfer of a Spanish finite life intangible asset of £157 million to indefinite life Intangible asset.
Notes to the consolidated financial statements continued 16 – Goodwill continued Future new business profits beyond the initial three years are extrapolated using a steady growth rate. Growth rates and expected future profits are set with regards to management estimates, past experience and relevant available market statistics.
Gross amount At 1 January 2,170 1,503 Acquisitions and additions 59 694 Disposals (28) — Foreign exchange rate movements 91 (27)
Long-term business Following the cessation of full MCEV reporting from 1 January 2016, value in use has been calculated based on a shareholder value of the business calculated in accordance with Solvency II principles, adjusted where Solvency II does not represent a best estimate of shareholders’ interests. The principal adjustments relate to the exclusion of the benefit of transitional measures on technical provisions and the volatility adjustment under Solvency II, modification of the Solvency II risk margin to an economic view and removal of restrictions on contract boundaries or business scope.
Expected profits from future new business are discounted using a risk adjusted discount rate. The discount rate is a combination of a risk-free rate and a risk margin to make prudent allowance for the risk that experience in future years for new business may differ from that assumed.
Key Assumptions The Solvency II non-economic assumptions in relation to mortality, morbidity, persistency and expenses and other items are derived actively, based on management’s best estimate assumptions. Economic assumptions are based on market data as at the end of each reporting period. The basic risk-free rate curves used to value the technical provisions reflect the curves, credit risk adjustment and fundamental spread for the matching adjustment published by EIOPA on their website. For the purposes of calculating value in use, the Solvency II risk margin has been modified to an economic view, with a cost of capital rate of 2%.
Spain long-term business Adjusted 1 The 2015 pre-tax discount rates for Italy and Spain were 12.3% and 13.3%, respectively.
France The recoverable amount of the indefinite life intangible asset has been assessed based on the fair value less costs to sell of the cash generating unit to which it relates. The fair value less costs to sell was determined based on the quoted market value of Aviva’s share of the subsidiary to which it relates.
1 On insurance and participating investment contracts. 2 On non-participating investment contracts.
(a) AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total AVIF of £3,847 million (£1,750 million on insurance contracts, £2,097 million on investment contracts), £3,368 million (2015: 3,962 million) is expected to be recovered more than one year after the statement of financial position date. In 2015, the additions relate to the acquisition of Friends Life. Non-participating investment contract AVIF is reviewed for evidence of impairment, consistent with reviews conducted for other finite life intangible assets. Insurance and participating investment contract AVIF is reviewed for impairment at each reporting date as part of the liability adequacy requirements of IFRS 4. AVIF is reviewed for evidence of impairment and impairment tested at product portfolio level by reference to the value of future profits in accordance with Solvency II principles, adjusted where Solvency II does not represent a best estimate of shareholders’ interests, consistent with the impairment test for goodwill for long-term business (see note 16(b)). No impairment charges for AVIF were recognised in the year.
Share of results after tax — 178 — 178 — 170 — 170 Amortisation of intangibles1 (8) — — (8) (8) — — (8)
Share of (loss)/profit after tax (8) 178 — 170 (8) 170 — 162 Reclassification (to)/from subsidiary — — — — — (1) — (1) Reclassification from associate — — — — — 9 — 9 Additions — 307 3 310 21 587 21 629 Disposals — (346) — (346) — (292) — (292) Reduction in Group interest — — — — (1) (1) — (2) Share of gains/(losses) taken to other comprehensive income — (6) — (6) — (14) — (14) Loans repaid — — (97) (97) — — — — Dividends received from joint ventures — (53) — (53) — (28) — (28) Foreign exchange rate movements 10 26 — 36 (9) (4) — (13)
(ii) The carrying amount at 31 December comprised: Goodwill and intangibles £m
Accumulated Impairment At 1 January 2015 (43) (24) (65) (62) (194) Impairment losses charged to expenses — — (18) — (18) Disposals — — 5 — 5 Foreign exchange rate movements — — — 3 3
* Restated for the transfer of a Spanish finite life intangible asset of £157 million to indefinite life Intangible asset.
The property management undertakings perform property ownership and management activities, and are incorporated and operate in the UK. All such investments are held by subsidiary entities.
The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted with the exception of Aviva SA Emklilik ve Hayat A.S. which has issued publicly a minority portion of shares. All investments in such undertakings are held by subsidiaries, except for the shares in the Chinese joint venture, Aviva-COFCO Life Insurance Co. Limited, which are held by Aviva plc. The Group’s share of net assets of that company is £251 million (2015: £214 million) and has a fair value of £511 million (2015: £322 million), the increase in fair value being driven primarily by a significant increase in the risk-free rates used to discount the liabilities within the Chinese market.
(b) Impairment testing Interest in Joint ventures are tested for impairment when there is an indicator of impairment. They are tested for impairment by comparing the carrying value of the cash generating unit to which the goodwill or intangible relates to the recoverable value of that cash generating unit. Recoverable amount for Life and General Insurance businesses is calculated on a consistent basis with that used for impairment testing of goodwill, as set out in note 16 (b). The recoverable amount of property management undertakings is the fair value less costs to sell of the joint venture, measured in accordance with the Group’s accounting policy for Investment Property (see accounting policy Q).
(c) Subsequent events During December 2016, Aviva and Santander agreed changes to the shareholders’ agreement in respect of their joint venture insurance operations in Poland, with an effective date of 1 January 2017. Following these changes, Aviva controls the companies and will consolidate them in 2017.
Share of results after tax — 46 46 — 18 18 Acquisitions — — — — 4 4 Additions 39 44 83 26 6 32 Reduction to Group interest — (4) (4) — (94) (94) Reclassification to joint venture — — — — (9) (9) Dividends received from associate — (13) (13) — (17) (17) Foreign exchange rate movements — 40 40 — (9) (9)
The additions in the year primarily relate to the acquisition of a further 26% holding in Aviva Life Insurance Company India Limited (‘Aviva India’), increasing the associate share to 49%.
The Group’s share of total comprehensive income related to associates is £46 million (2015: £18 million).
18 – Interests in, and loans to, joint ventures continued (iii) No joint ventures are considered to be material from a Group perspective (2015: none). The Group’s principal joint ventures are as follows: Proportion of ownership interest
Airport Property Partnership Property management UK 50.00% 50.00% Ascot Real Estate Investments LP Property management UK 50.00% 50.00% 2-10 Mortimer Street Limited Partnership Property management UK 50.00% 50.00% BZ WBK-Aviva Towarzystwo Ubezpieczen Ogolnych SA General insurance Poland 51.00% 51.00% BZ WBK-Aviva Towarzystwo Ubezpieczen na Zycie SA Life insurance Poland 51.00% 51.00% Aviva-COFCO Life Insurance Co. Ltd Life insurance China 50.00% 50.00% PT Astra Aviva Life Life and Health insurance Indonesia 50.00% 50.00% First-Aviva Life Insurance Co. Ltd Life insurance Taiwan 49.00% 49.00% AvivaSA Emeklilik ve Hayat A.S Life insurance Turkey 40.00% 40.00% Vietinbank Aviva Life Insurance Co. Ltd Life insurance Vietnam 50.00% 50.00%
(iv) The joint ventures have no significant contingent liabilities to which the Group is exposed. The Group has commitments to provide funding to property management joint ventures of £6 million (2015: £47 million).
At 1 January 26 303 329 — 404 404 Share of results before tax — 57 57 — 18 18 Share of tax — (11) (11) — — —
There is no impairment of goodwill and intangibles in 2016 (2015: £nil).
20 – Property and equipment This note analyses our property and equipment, which are primarily properties occupied by Group companies.
At 31 December 2015 — (23) (2) (248) (147) (420) Charge for the year — — (1) (11) (13) (25) Disposals — 3 1 12 19 35 Impairment charge — — — — — — Foreign exchange rate movements — — — 1 — 1 1 Disposals of computer equipment primarily comprise exhausted assets within Aviva Corporate Services.
Total net fair value losses of £18 million on owner occupied properties consist of £23 million of losses in the year (2015: £1 million losses) which have been taken to the income statement and £1 million reversal of losses (2015: £13 million reversal) taken to the income statement in previous years and £4 million gains (2015: £27 million gains) which have been taken to other comprehensive income.
Carrying value At 1 January 9,372 1,929 11,301 7,521 1,404 8,925 Additions1 566 1 567 2,813 685 3,498 Capitalised expenditure on existing properties 119 36 155 94 22 116 Fair value (losses)/gains (77) (52) (129) 638 140 778 Disposals (1,133) (307) (1,440) (1,549) (318) (1,867) Transfers (to)/from property and equipment (note 20) (39) — (39) (42) — (42) Foreign exchange rate movements 361 40 401 (103) (4) (107)
Less: Assets classified as held for sale (48) — (48) — — —
Cost or valuation At 1 January 2015 — 343 3 563 159 1,068 Additions 3 53 — 8 30 94 Disposals1 — (51) — (300) (2) (353) Transfers (to)/from investment property (note 21) — (13) — — 55 42 Fair value gains — 39 — — — 39 Foreign exchange rate movements — (11) — (4) (6) (21)
(c) Comparison of the carrying amount and fair values of financial instruments Set out below is a comparison of the carrying amounts and fair values of financial assets and liabilities, excluding those classified as held for sale. These amounts may differ where the assets or liabilities are carried on a measurement basis other than fair value, e.g. amortised cost.
Notes to the consolidated financial statements continued 22 – Fair value methodology continued Fair value hierarchy £m
Non-recurring fair value measurement1 Properties occupied by group companies — — 337 337 1 Non-recurring fair value measurements of assets or liabilities are those fair value measurements that other IFRSs permit or require in particular circumstances.
Transfers between Level 1 and Level 2 For the year ended 31 December 2016, enhanced understanding of pricing vendor methodologies used for fair value hierarchy classification have resulted in transfers of debt securities in the UK from Level 1 to Level 2 of £0.2 billion.
Fixed maturity securities 96,102 62,987 16,447 175,536 — 175,536 Equity securities 67,435 — 913 68,348 — 68,348 Other investments (including derivatives) 45,710 6,240 4,001 55,951 — 55,951
Financial liabilities of operations classified as held for sale — 4 — 4 — 4 1 In addition to the balances in this table, included within Reinsurance assets in the Statement of financial position and note 43 are £18,366 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
Financial liabilities measured at fair value Non-participating investment contracts- restated1,2 (note 41 (a)) 99,368 245 3,421 103,034 — 103,034 Net asset value attributable to unit holders 11,393 — 22 11,415 — 11,415 Borrowings (note 49 (a)) — 781 527 1,308 7,462 8,770 Derivative liabilities (note 57 (b)) 304 2,484 1,093 3,881 — 3,881 1 In addition to the balances in this table, included within Reinsurance assets in the Statement of financial position and note 43 are £13,967 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as level 1 assets.
2 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. See note 1 for further details.
• £1.5 billion of debt securities held in the UK and £0.4 billion held in France transferred due to the unavailability of significant observable market data or sufficiently significant differences between the valuations provided by the counterparty and broker quotes and the validation models.
Transfers of liabilities into Level 3 of £0.9 billion relate mainly to securitised mortgage loan notes, presented within borrowings which have been transferred as these loans are valued using an internal model in place of the previous discounted cash flow model similar to the method used to value related Level 3 securitised mortgage assets.
1 Total net gains/(losses) recognised in the income statement includes realised gains/(losses) on disposals. 2 Settlements include effective settlements of Group holdings.
(ii) Loans • Commercial mortgage loans, Primary Healthcare, Infrastructure and Private Finance Initiative (PFI) loans held by our UK Life business amounting to £12.3 billion (2015: £10.8 billion), were valued using a Portfolio Credit Risk Model (PCRM). This model calculates a Credit Risk Adjusted Value (CRAV) for each loan. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve and global assumptions for the liquidity premium. Loans valued using this model have been classified as Level 3 as the liquidity premium is deemed to be non-market observable. The liquidity premium used in the discount rate ranges between 125 bps to 215 bps. Furthermore, assumptions regarding property growth and rental income forecasts are based on commercial real estate market views which take into account market volatility following the UK referendum vote for the UK to leave the European Union in 2016.
(iii) Debt securities • Privately placed notes held by our UK Life business of £3.1 billion (2015: £3.3 billion) have been valued using broker quotes or a discounted cash flow model using discount factors based on swap curves of similar maturity, plus internally derived spreads for credit risk. As these spreads have been deemed to be unobservable these notes have been classified as Level 3.
Opening balance at 1 January 2015 8,925 17,000 11,309 159 3,066 — — (19) (991) (560) Total net gains/(losses) recognised in the income statement1 898 (467) 172 29 236 — 42 4 26 (60) Purchases2 3,627 — 4,909 993 2,227 — (3,644) (5) (145) — Issuances — 2,464 — — — — (79) (2) — — Disposals (2,042) (2,275) (1,916) (242) (1,373) — 253 — 16 1 Settlements3 — (1,461) (161) — — — 69 — — 92 Transfers into Level 3 — 2,868 1,302 6 75 — (62) — — — Transfers out of Level 3 — — (624) (2) (22) — 13 — — — Reclassification to held for sale — — — — — — — — — — Foreign exchange rate movements (107) — (388) (7) (56) — (13) — 1 —
• Structured bond-type and non-standard debt products held by our business in France amounting to £7.4 billion (2015: £5.8 billion) and bonds held by our UK business of £2.6 billion (2015: £2.2 billion) have no active market. These debt securities are valued either using counterparty or broker quotes and validated against internal or third-party models. These bonds have been classified as Level 3 because either (i) the third-party models included a significant unobservable liquidity adjustment, or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently significant to result in a Level 3 classification.
(iv) Equity securities • Equity securities which primarily comprise private equity holdings of £0.8 billion (2015: £0.8 billion) held in the UK are valued by a number of third party specialists. These are valued using a range of techniques, including earnings multiples, forecast cash flows and price/earnings ratios which are deemed to be unobservable.
Remaining Level 3 investments amount to £0.3 billion (2015: £0.7 billion) within debt securities, equity securities and other investments held by a number of businesses throughout the Group.
(vi) Liabilities The principal liabilities classified as Level 3, and the valuation techniques applied to them, are: • £3.4 billion (2015: £3.4 billion) of non-participating investment contract liabilities are classified as Level 3, either because the underlying unit funds are classified as Level 3 or because the liability relates to unfunded units or other non-unit adjustments which are based on a discounted cash flow analysis using unobservable market data and assumptions.
Policy loans 1 881 882 1 778 779 Loans to banks 569 2,010 2,579 572 2,151 2,723 Healthcare, infrastructure & PFI other loans 2,460 — 2,460 1,246 — 1,246 UK securitised mortgage loans (see note 24) 7,416 — 7,416 2,452 — 2,452 Non-securitised mortgage loans 10,837 1 10,838 14,808 — 14,808 Loans to brokers and other intermediaries — 170 170 — 135 135 Other loans — 514 514 — 290 290
Non-securitised mortgage loans include £3.3 billion (2015: £3.3 billion) relating to UK primary healthcare and PFI businesses which are secured against General Practitioner premises, other primary health-related premises or other emergency services related premises. For all such loans, government support is provided through either direct funding or reimbursement of rental payments to the tenants to meet income service and provide for the debt to be reduced substantially over the term of the loan. Although the loan principal is not government-guaranteed, the nature of these businesses and premises provides considerable comfort of an ongoing business model and low risk of default.
On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for £6 billion of the Group’s Level 3 liabilities. For these Level 3 liabilities, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair value by approximately ± £0.7 billion.
(h) Assets and liabilities not carried at fair value for which fair value is disclosed The table below shows the fair value and fair value hierarchy for those assets and liabilities not carried at fair value.
Assets and liabilities not carried at fair value Loans — 1,300 2,122 3,422 Borrowings 9,113 300 403 9,816
Loans at fair value Fair values have been calculated by discounting the future cash flows using appropriate current interest rates for each portfolio of mortgages. Further details of the fair value methodology are given in note 22. The cumulative change in fair value of loans attributable to changes in credit risk to 31 December 2016 was a £1,735 million loss (2015: £1,994 million loss).
During 2016, £4,614 million of non-securitised loans were transferred to securitised residential mortgage loans. Refer to note 24 for details of securitised mortgages and related assets as at 31 December 2016.
The movements in the impairment provisions on these loans for the years ended 31 December 2016 and 2015 were as follows: £m
23 – Loans continued (c) Collateral Loans to banks include cash collateral received under stock lending arrangements (see note 58 for further discussion regarding these collateral positions). The obligation to repay this collateral is included in payables and other financial liabilities (note 50).
In all of the above transactions, the Company and its subsidiaries are not obliged to support any losses that may be suffered by the note holders and do not intend to provide such support. Additionally, the notes were issued on the basis that note holders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that note holders have no recourse whatsoever to other companies in the Aviva Group. During 2016, £4,614 million of non-securitised residential loans were securitised internally by transferring them to a wholly owned subsidiary, Aviva ERFA 15 UK Limited in exchange for £4,586 million of loan notes. Any losses arising from the credit risk of the underlying mortgages on the internally securitised mortgage loans are borne by the Group. The Group recognises the securitised mortgage loans at fair value but the other assets of £223 million and liabilities of £5,215 million associated with the arrangement are intercompany and are eliminated on Group consolidation. As at 31 December 2016, securitised mortgage loans of £7,416 million comprised £2,424 million (2015: £2,452 million) relating to the ERF companies which are externally securitised and £4,992 million (2015: £nil) relating to Aviva ERFA 15 UK Limited which are internally securitised.
(b) Carrying values The following table summarises the ERF companies’and Aviva ERFA 15 UK Limited securitisation arrangements: Securitised assets £m
Securitised mortgage loans At fair value (note 23) 7,416 (1,327) 2,452 (1,564) Other securitisation assets/(liabilities)1 476 (6,565) 297 (1,185)
24 – Securitised mortgages and related assets The Group, in its UK Life business has loans receivable, secured by mortgages, which have then been securitised through nonrecourse borrowings. This note gives details of the relevant transactions.
AER has purchased subordinated notes and granted subordinated loans to some of the ERF companies. In addition, Group companies have invested £217 million in loan notes issued by the ERF companies. These have been eliminated on consolidation through offset against the borrowings of the ERF companies in the consolidated statement of financial position.
Notes to the consolidated financial statements continued 25 – Interests in structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. The Group has interests in both consolidated and unconsolidated structured entities as described below.
The Group has also given support to the consolidated structured entity Aviva Equity Release UK Limited (AER). As set out in note 24, at the inception of the securitisation vehicle, the UK subsidiary, Aviva Equity Release UK Limited (AER), has granted subordinated loan facilities to some of the ERF companies. AER receives various fees in return for the services provided to the entities. Aviva receives cash management fees based on the outstanding loan balance at the start of each quarter for the administration of the loan note liabilities. AER receives portfolio administration fees as compensation for managing the mortgage assets. Refer to note 24 for details of securitised mortgages and related assets as at 31 December 2016.
Specialised investment vehicles: 3,726 14 2,886 11 Analysed as: OEICs 1,536 5 812 6 PLPs 2,155 9 2,042 5 SICAVs 35 — 32 —
Notes to the consolidated financial statements continued 26 – Financial investments This note analyses our financial investments by type and shows their cost and fair value. These will change from one period to the next as a result of new business written, claims paid and market movements.
Equity securities Ordinary shares Public utilities — 4,328 — 4,328 — 3,367 — 3,367 Banks, trusts and insurance companies — 15,392 1 15,393 — 14,016 10 14,026 Industrial miscellaneous and all other — 48,980 6 48,986 — 45,961 3 45,964
Of the above total, £192,776 million (2015: £174,362 million) is due to be recovered in more than one year after the statement of financial position date.
Fixed maturity securities — — (7,738) (7,738) — — — — Equity securities — — (664) (664) — — — — Other investments — — (2,304) (2,304) — — — —
Unit trusts and other investment vehicles 46,002 3,484 704 50,190 41,620 2,155 (1,134) 42,641 Derivative financial instruments 1,313 5,381 (575) 6,119 928 2,698 (298) 3,328 Deposits with credit institutions 325 — — 325 460 — — 460 Minority holdings in property management undertakings 1,126 138 (78) 1,186 938 132 (110) 960 Other investments – long-term 432 32 (30) 434 316 20 (31) 305 Other investments – short-term 1 — — 1 1 — — 1
Notes to the consolidated financial statements continued 26 – Financial investments continued (d) Financial investment arrangements (i) Stock lending arrangements The Group has entered into stock lending arrangements in the UK and overseas in accordance with established market conventions. The majority of the Group’s stock lending transactions occur in the UK, where investments are lent to EEA-regulated, locally domiciled counterparties and governed by agreements written under English law.
(e) Non-UK Government Debt Securities (gross of non-controlling interests) The following is a summary of non-UK government debt by issuer as at 31 December 2016, analysed by policyholder, participating and shareholder funds.
The participating funds exposure to (non-UK) government debt amounts to £35.8 billion (2015: £30.5 billion). The primary exposures, relative to total (non-UK) government debt exposures included within our participating funds, are to the (non-UK) government debt securities of France (37%), Italy (21%), Germany (5%), Belgium (4%), Spain (4%) and Netherlands (3%).
Net of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £6.6 billion (2015: £5.9 billion). The majority of our holding (82%) is in senior debt. The primary exposures are to UK (29%), US (20%) and Spanish (11%) banks.
Gross of non-controlling interests, our direct shareholder assets exposure to worldwide bank debt securities is £6.7 billion (2015: £6.0 billion). The majority of our holding (82%) is in senior debt. The primary exposures are to UK (28%), US (19%) and Spanish (12%) banks.
Deferred acquisition costs in respect of: Insurance contracts – Long-term business 694 610 Insurance contracts – General insurance and health business 1,037 812 Participating investment contracts – Long-term business 19 20 Non-participating investment contracts – Long-term business1 861 974 Retail fund management business 3 5
Surpluses in the staff pension schemes and £1 million (2015: £1 million) of other assets are recoverable more than one year after the statement of financial position date.
(b) Deferred acquisition costs – movements in the year The movements in deferred acquisition costs (DAC) during the year were: Long-term business £m
Carrying amount at 1 January 1,604 812 5 2,421 1,453 852 7 2,312 Acquisition costs deferred during the year 283 2,264 — 2,547 263 1,952 — 2,215 Amortisation (377) (2,118) (2) (2,497) (167) (1,950) (2) (2,119) Impact of assumption changes 40 — — 40 73 — — 73 Effect of portfolio transfers, acquisitions and disposals (29) (8) — (37) — — — — Foreign exchange rate movements 53 87 — 140 (18) (42) — (60)
Assets of operations classified as held for sale — — — 0.9 0.2 1.1
Gross of non-controlling interests, the participating fund exposures to worldwide bank debt securities, where the risk to our shareholders is governed by the nature and extent of our participation within those funds, is £19.5 billion (2015: £17.1 billion). The majority of the exposure (83%) is in senior debt. Participating funds are most exposed to French (24%), UK (14%) and US (11%) banks.
Amounts owed by contract holders 2,012 1,546 Amounts owed by intermediaries 1,202 1,132 Deposits with ceding undertakings 1,430 1,244 Amounts due from reinsurers 400 376 Amounts due from brokers for investment sales 93 223 Amounts receivable for cash collateral pledged 2,410 992 Amounts due from government, social security and taxes 532 437 Dividends receivable 64 56 Other receivables 1,055 869
28 – Deferred acquisition costs, other assets, prepayments and accrued income (a) Deferred acquisition costs and other assets – carrying amount The carrying amount comprises: £m £m
Total deferred acquisition costs 2,614 2,421 Surpluses in the staff pension schemes (note 48(a)) 3,190 2,523 Other assets 89 74 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. See note 1 for further details.
Deferred acquisition costs (DAC) on long-term business are generally recoverable in more than one year whereas such costs on general insurance and health business are generally recoverable within one year. Of the above total, £1,262 million (2015: £1,426 million) is expected to be recovered more than one year after the statement of financial position date. For long-term business where amortisation of the DAC balance depends on projected profits, the amount expected to be recovered is estimated and actual experience will differ.
30 – Ordinary share capital This note gives details of Aviva plc’s ordinary share capital and shows the movements during the year.
(a) Details of the Company’s ordinary share capital are as follows: The allotted, called up and fully paid share capital of the Company at 31 December 2016 was: 4,061,539,206 (2015: 4,048,465,173) ordinary shares of 25 pence each 1,015 1,012
Ordinary shares in issue in the Company rank pari passu with any new ordinary shares issued in the Company. All the ordinary shares in issue carry the same right to receive all dividends and other distributions declared, made or paid by the Company.
(ii) Aviva long-term incentive plan awards These awards have been made under the Aviva long term incentive plan 2011 (LTIP), and are described in section (b) below and in the directors’ remuneration report.
(c) Prepayments and accrued income Prepayments and accrued income of £2,996 million (2015: £3,094 million) include assets classified as held for sale of £114 million (2015: £nil) and includes £8 million (2015: £88 million) that is expected to be recovered more than one year after the statement of financial position date.
No new Aviva plc ordinary shares will be issued to satisfy awards made under plans iv, v or vi.
(b) Outstanding options and awards (i) Share options At 31 December 2016, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: Aviva savings related share option scheme
• Shares which vest in 2019: – 103,652 are subject to the same performance conditions that apply to the 2016 LTIP grant
The comparative figures as at 31 December 2015 were: Range of exercise prices
(d) Expense charged to the income statement The total expense recognised for the year arising from equity compensation plans was as follows: Equity-settled expense 38 40 Cash-settled expense (1) 8
1 For awards with market-based performance conditions. 2 The majority of awards with market based performance conditions include additional shares being provided to employees equal to dividend rights before vesting. As a result, no dividend yield assumption is required on these awards.
Notes to the consolidated financial statements continued 31 – Group’s share plans continued The following table summarises information about options outstanding at 31 December 2016: Range of exercise prices
Notes to the consolidated financial statements continued 31 – Group’s share plans continued (c) Movements in the year A summary of the status of the option plans as at 31 December 2015 and 2016, and changes during the years ended on those dates, is shown below.
Outstanding at 1 January 18,152,399 338.00 17,241,534 310.77 Granted during the year 13,679,774 351.00 7,810,302 380.00 Exercised during the year (4,709,978) 286.71 (5,011,905) 275.90 Forfeited during the year (591,727) 370.87 (323,950) 341.43 Cancelled during the year (2,038,503) 383.14 (1,446,795) 401.38 Expired during the year (238,756) 368.09 (116,787) 383.40
(e) Fair value of options and awards granted after 7 November 2002 The weighted average fair values of options and awards granted during the year, estimated by using the Binomial option pricing model and Monte Carlo Simulation model, were £0.96 and £3.72 (2015: £0.88 and £4.49) respectively.
(i) Share options The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions: Weighted average assumption 2016 2015
(ii) Share awards The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions: Weighted average assumption 2016 2015
Cost debited to shareholders’ funds At 1 January 1,918,088 2 2,585,824 8 Acquired in the year — — 5,790,872 1 Distributed in the year (790,615) (1) (6,458,608) (7)
These shares were either purchased in the market or, in 2015, new shares were issued to the trust and are carried at weighted average cost. At 31 December 2016, they had an aggregate nominal value of £281,868 (2015: £479,522) and a market value of £5,484,028 (2015: £9,987,334). The trustees have waived their rights to dividends on the shares held in the trusts.
(b) Shares held by subsidiary companies During 2015, the Group acquired Friends Life, which holds shares in Aviva plc. The cost of these shares is included within Treasury shares and deducted from total shareholders’ equity in accordance with accounting policy AE. At 31 December 2016, the balance of 2,577,362 shares (2015: 5,258,525 shares) had an aggregate nominal value of £644,340 (2015: £1,314,631) and a market value of £12,536,289 (2015: £27,133,991).
The preference share capital of the Company at 31 December was: £m
The fixed rate tier 1 notes (the FxdRNs) were issued on 3 May 2012. The FxdRNs are perpetual but the Company may, at its sole option, redeem all (but not part) of the FxdRNs at their principal amounts on 3 November 2017, or on any respective coupon payment date thereafter.
The Step-up Tier one Insurance Capital Securities (‘STICS’) were issued on 21 November 2003 by Friends Life Holdings plc. The STICS are irrevocably guaranteed on a subordinated basis by Friends Life Limited. On 1 October 2015 Aviva plc replaced Friends Life Holdings plc as issuer which resulted in a reclassification of the STICS from non-controlling interests. The STICS have no fixed redemption date but the Company may, at its sole option, redeem the instrument (in whole or in part) on 21 November 2019, or on the coupon payment date falling on successive fifth anniversaries from this date. For each coupon period beginning 21 November 2019, the STICS will bear interest reset every five years at the rate per annum which is the aggregate of 2.97% and the Gross Redemption Yield of the Benchmark Gilt.
At the end of 2016 the fair value of the DCI, FxdRNs and the STICS was £1,286 million (2015: £1,223 million).
The balance of the merger reserve at 31 December 2016 is £8,974 million (2015: £8,974 million). In 2015, the balance of the merger reserve increased by £5,703 million due to the acquisition of Friends Life which attracted merger relief under section 612 of the Companies Act 2006.
Shares held by employee trusts 1,127,473 1 1,918,088 2 Shares held by subsidiary companies 2,577,362 14 5,258,525 27
Notional amount 2016 £m 5.9021% £500 million direct capital instrument – Issued November 2004 500 500 8.25% $650 million fixed rate tier 1 notes – Issued May 2012 392 392 6.875% £210 million STICS – Issued November 2003 (note 38) 231 231
The merger reserve is also used where more than 90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting merger relief under the Companies Act 1985 and, from 1 October 2009, the Companies Act 2006.
Total other comprehensive income for the year (370) 27 (17) 44 — (316) Tax transferred to income statement — — — — — — Fair value gains transferred to retained earnings on disposals — (33) — — — (33) Transfer to profit on disposal of subsidiaries, joint ventures and associates 1 — — — — 1 Reserves credit for equity compensation plans — — — — 40 40 Shares issued under equity compensation plans — — — — (35) (35)
Long-term business Insurance contracts (137,218) 6,186 (131,032) (125,348) 5,018 (120,330) Participating investment contracts (89,739) 2 (89,737) (78,048) 11 (78,037) Non-participating investment contracts (114,531) 18,366 (96,165) (103,034) 13,967 (89,067)
Less: Amounts classified as held for sale 11,623 (411) 11,212 — — —
Balance at 31 December 2015 165 71 58 (478) 70 (114) Arising in the year through other comprehensive income: Fair value gains — 4 12 — — 16 Fair value gains transferred to profit on disposals — — (2) — — (2) Share of other comprehensive income of joint ventures and associates — — (6) — — (6) Impairment losses on assets previously revalued through other comprehensive income now taken to income statement — — — — — — Foreign exchange rate movements 1,019 — — (36) — 983 Aggregate tax effect – shareholders’ tax (31) (1) (3) — — (35)
Non-controlling interests at 31 December comprised: Equity shares in subsidiaries 519 447 Share of earnings 392 222 Share of other reserves 264 226
(ii) Change in insurance liabilities recognised as an expense The purpose of the following table is to reconcile the change in insurance liabilities, net of reinsurance, shown on the income statement, to the change in insurance liabilities recognised as an expense in the relevant movement tables in this note. The components of the reconciliation are the change in provision for outstanding claims on long-term business (which is not included in a separate movement table), and the unwind of discounting on general insurance reserves (which is included within finance costs in the income statement). For general insurance and health business, the change in the provision for unearned premiums is not included in the reconciliation as, within the income statement, this is included within earned premiums.
– The Friends Life Limited FLC New With-Profits Fund (FLC New WPF), the Friends Life Limited FLC Old With-Profits Fund (FLC Old WPF), the Friends Life Limited WL With-Profits Fund (WL WPF) and Friends Life Limited FLAS With-Profits Fund (FLAS WPF) which are closed to new business and where policyholders are entitled to 90% of the distributed profits aside from certain policies in the FLC New WPF and the FLC Old WPF with guaranteed bonus rates, and certain policies in the WL WPF which are reinsured into the fund where the shareholders do not receive one-ninth of the bonus.
Long-term business Change in long term business provisions (note 40b(iv)) (6,640) 252 (6,388) Change in provision for outstanding claims 179 4 183
1 Reinsurance assets at 31 December 2015 for General insurance and health business include the impact of the £659 million reinsurance asset relating to an outwards reinsurance contract completed by the UK General Insurance business.
Notes to the consolidated financial statements continued 40 – Insurance liabilities continued (b) Long-term business liabilities (i) Business description The Group underwrites long-term business in a number of countries as follows: • In the UK mainly in: – New With-Profits Sub-Fund (NWPSF) of Aviva Life & Pensions UK (UKLAP), where the with-profit policyholders are entitled to at least 90% of the distributed profits, with the shareholders receiving the balance. Any surplus or deficit emerging in NWPSF that is not distributed as bonus will be transferred from this sub-fund to the Reattributed Inherited Estate External Support Account (RIEESA) (see below).
– ‘Non-profit’ funds of Aviva Annuity UK, UKLAP, Friends Life Limited and Friends Life and Pensions Limited, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by WPSF and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.
For UK with-profit life funds falling within the scope of FRS 27, which was grandfathered from UK regulatory requirements under IFRS4 prior to the adoption of Solvency II, an amount may be recognised for the present value of future profits (PVFP) on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value. For our UK with-profit funds, (excluding Friends Life), no adjustment for this value is made to the participating insurance and investment contract liabilities or the unallocated divisible surplus. For Friends Life with profit funds the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits and hence no additional explicit adjustment is required for this value.
The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract. For a small proportion of business, a prospective valuation approach is used, including allowance for anticipated future regular and final bonuses.
On 1 January 2016 the Solvency I Pillar 1 regulatory regime was replaced with Solvency II, under which realistic liabilities were replaced with Best Estimate Liabilities (BEL). Key differences between the realistic liabilities and the Solvency II BEL are that BEL excludes the shareholder’s share of future bonuses, excludes certain planned and approved enhancements to benefits (part of Solvency II surplus funds) and uses a higher yield (EIOPA specified) for future investment returns and discounting. Adjusting the yield used in the calculation of the BEL by removing the volatility and credit risk adjustments, including planned enhancements that are part of Solvency II surplus funds and making other less significant adjustments, results in a valuation in accordance with FRS 27. Consequently, for periods subsequent to 31 December 2015, the with-profit business is valued based on an adjusted Solvency II BEL assessment, which represents a change in estimate of the liabilities.
The above valuation discount rates are after reduction for credit risk. For conventional immediate annuity business the allowance for credit risk comprises long-term assumptions for defaults, which vary by asset category and rating. The credit risk allowance made for corporate bonds (including non-Private Finance Initiative infrastructure assets) and mortgages (including healthcare and commercial and infrastructure mortgages, but excluding equity release), held by Aviva Annuity UK Limited equated to 46 bps and 50 bps respectively at 31 December 2016 (2015: 58 bps and 59 bps respectively) and for Friends Life Limited equated to 37 bps and 42 bps respectively at 31 December 2016 (2015: 56 bps for the corporate bonds, no mortgages at 2015). For corporate bonds, the allowance represented approximately 31% of the average credit spread for the portfolio for both Aviva Annuity UK Limited and Friends Life Limited (2015: 32% and 40% respectively). The total valuation allowance held by Aviva Annuity UK Limited in respect of corporate bonds and mortgages, including healthcare mortgages, was £1.3 billion (2015: £1.5 billion) over the remaining term of the portfolio while for Friends Life Limited it was £0.5 billion (2015: £0.7 billion). Total liabilities for the annuity business were £50 billion at 31 December 2016 (2015: £47 billion).
Mortality assumptions for non-profit business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality tables used 2016 2015
Non-profit business The valuation of non-profit business is based on grandfathered regulatory requirements under IFRS 4 prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business. Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience with an allowance for prudence. For Friends Life with profit funds the non-participating liabilities are measured on a realistic basis with implicit recognition of the present value of future profits.
Non-unit reserves on Unit Linked business Life 0.7% to 1.3% 1.5% to 2.8% Pensions 0.7% to 1.6% 1.5% to 3.5%
Income Protection Active lives 1.0% to 2.6% 1.5% to 3.3% Claims in payment (level and index linked) (0.2)% to 1.6% 0.0% to 2.3%
The impact of operating assumption changes of £(0.5) billion in 2016 reduces the carrying value of insurance liabilities and relates mainly to mortality releases in the UK business (with the impact on profit partially offset by a corresponding reduction in reinsurance assets).
For participating business, a movement in liabilities is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact on profit. Where assumption changes do impact on profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 44, together with the impact of movements in related nonfinancial assets.
Notes to the consolidated financial statements continued 40 – Insurance liabilities continued (c) General insurance and health liabilities (i) Provisions for outstanding claims Delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the statement of financial position date. The reserves for general insurance and health business are based on information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
The table below shows the split of total general insurance and health outstanding claim provisions and IBNR provisions, gross of reinsurance, by major line of business.
Any change in discount rates between the start and the end of the accounting period is reflected outside of operating profit as an economic assumption change.
(iii) Assumptions Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are set by skilled claims technicians and established case setting procedures. Claims technicians apply their experience and knowledge to the circumstances of individual claims. They take into account all available information and correspondence regarding the circumstances of the claim, such as medical reports, investigations and inspections. Claims technicians set case estimates according to documented claims department policies and specialise in setting estimates for certain lines of business or types of claim. Claims above certain limits are referred to senior claims handlers for estimate authorisation.
40 – Insurance liabilities continued For the largest portfolio of pensions annuity business in Aviva Annuity UK Limited, the underlying mortality assumptions for Males are 98.5% of PCMA00 (2015: 101.5% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 91.5% of PCFA00 (2015: 96.5% of PCFA00) with base year 2000. For the largest portfolio of pensions annuity business in Friends Life Limited, the underlying mortality assumptions for Males are 100.0% of PCMA00 (2015: 102.5% of PCMA00) with base year 2000; for Females the underlying mortality assumptions are 100.0% of PCFA00 (2015: 97.5% of PCFA00) with base year 2000. For all the main portfolios of annuities, improvements are based on CMI_2015 (2015: CMI_2013) with a long-term improvement rate of 1.75% (2015: 1.75%) for males and 1.5% (2015: 1.5%) for females, both with an addition of 0.5% (2015: 0.5%) to all future annual improvement adjustments. For pension annuity business in Aviva Annuity UK limited, year-specific adjustments are made to allow for potential selection effects due to the development of the Enhanced Annuity market and covering possible selection effects from pension freedom reforms.
TD73-77, TD88-90,TH00-02 TF00-02, H_AVDBS, F_AVDBS Life assurances 0% to 4.5% H_SSDBS, F_SSDBS Annuities 0% to 4.5% TGF05/TGH05
40 – Insurance liabilities continued Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.
Incurred claims losses and expenses 7,020 5,541 Less: Payments made on claims incurred in the current year (3,505) (3,153) Payments made on claims incurred in prior periods (2,893) (2,650) Recoveries on claim payments 234 281
Claims payments made in the period, net of recoveries (6,164) (5,522) Unwind of discounting 11 10
Changes in claims reserve recognised as an expense (note 40a(ii)) 867 29 Effect of portfolio transfers, acquisitions and disposals 430 (64) Foreign exchange rate movements 966 (395)
Key elements of the release from prior accident year general insurance and health net provisions during 2016 were: • £208 million strengthening from UK & Ireland due to the impact of the change in the Ogden discount rate in the UK partly offset by other favourable developments on personal motor and commercial liability claims. • £154 million release from Canada mainly due to continued favourable experience on motor, following the legislative changes in
There was also a £659 million reduction in net claim reserves relating to an outwards reinsurance contract completed by the UK General Insurance business.
Estimate of gross ultimate claims At end of accident year 8,530 9,508 7,364 6,911 6,428 6,201 6,122 5,896 5,851 6,947 One year later 8,468 9,322 7,297 7,006 6,330 6,028 6,039 5,833 5,930 Two years later 8,430 9,277 7,281 6,950 6,315 6,002 6,029 5,865 Three years later 8,438 9,272 7,215 6,914 6,292 5,952 6,067 Four years later 8,409 9,235 7,204 6,912 6,262 6,002 Five years later 8,446 9,252 7,239 6,906 6,265 Six years later 8,381 9,213 7,217 6,926 Seven years later 8,381 9,207 7,256 Eight years later 8,378 9,202 Nine years later 8,380
Notes to the consolidated financial statements continued 40 – Insurance liabilities continued (iii) Net of reinsurance After the effect of reinsurance, the loss development table is: Accident year
Present value recognised in the statement of financial position 798 117 184 203 272 418 646 886 1,282 1,812 3,206 9,824
There was also a £78 million reduction in net claim reserves relating to an outwards reinsurance contract completed by the UK General Insurance business.
• There was also a £659 million reduction in net claim reserves relating to an outwards reinsurance contract completed by the UK
Gross cumulative claim payments At end of accident year (4,393) (4,915) (3,780) (3,502) (3,420) (3,055) (3,068) (3,102) (2,991) (3,534) One year later (6,676) (7,350) (5,464) (5,466) (4,765) (4,373) (4,476) (4,295) (4,285) Two years later (7,191) (7,828) (6,102) (5,875) (5,150) (4,812) (4,916) (4,681) Three years later (7,513) (8,304) (6,393) (6,163) (5,457) (5,118) (5,221) Four years later (7,836) (8,607) (6,672) (6,405) (5,712) (5,376) Five years later (8,050) (8,781) (6,836) (6,564) (5,864) Six years later (8,144) (8,906) (6,958) (6,649) Seven years later (8,224) (8,986) (7,043) Eight years later (8,257) (9,012) Nine years later (8,278)
(a) Carrying amount The liability for investment contracts (gross of reinsurance) at 31 December comprised: £m £m
Of the non-participating investment contracts measured at fair value, £113,307 million in 2016 are unit-linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as ‘Level 1’ in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.
Carrying amount at 1 January 103,034 49,922 Provisions in respect of new business 3,222 2,644 Expected change in existing business provisions (3,481) (2,726) Variance between actual and expected experience 11,105 (2,906) Impact of operating assumption changes 17 32 Impact of economic assumption changes 2 3 Other movements 334 38 Change in liability 11,199 (2,915) Effect of portfolio transfers, acquisitions and disposals2 (757) 56,401 Foreign exchange rate movements 1,065 (374) Other movements (10) —
Long-term business Participating contracts 89,739 78,048 Non-participating contracts at fair value 114,531 103,034
Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost. We currently have no non-participating investment contracts measured at amortised cost.
Carrying amount at 31 December 89,739 78,048 1 Total interest expense for participating investment contracts recognised in profit or loss is £3,111 million (2015: £1,931 million). 2 The movement during 2015 relates to the acquisition of Friends Life.
Notes to the consolidated financial statements continued 41 – Liability for investment contracts continued For many types of long-term business, including unit-linked and participating funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit.
The material guarantees and options to which this provision relates are: (i) Maturity value and death benefit guarantees Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum maturity (and in some cases death benefit) values reflecting the sums assured including declared annual bonuses. In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products. For some unitised with-profit life contracts the amount paid after the fifth policy anniversary is guaranteed to be at least as high as the premium paid increased in line with the rise in RPI/CPI.
(v) Guaranteed minimum maturity payments on mortgage endowments In addition, the with-profit fund companies have made promises to certain policyholders in relation to their with-profit mortgage endowments. Top-up payments will be made on these policies at maturity to meet the mortgage value up to a maximum of the 31 December 1999 illustrated shortfall. For UKLAP with profit policyholders, these payments are subject to certain conditions.
(iii) Return of Premium guarantees German Pension products sold in Friends Life between 2006 and 2014 are subject to a Return of Premium guarantee whereby the product guarantees to return the maximum of the unit fund value or total premiums paid (before deductions). Provisions for this guarantee are calculated using a market-consistent stochastic model and amount to £145 million at 31 December 2016 (2015: £102 million).
(c) Overseas life businesses In addition to guarantees written in the Group’s UK and Ireland life businesses, our overseas businesses have also written contracts containing guarantees and options. Details of the significant guarantees and options provided by overseas life businesses are set out below.
(i) France Guaranteed surrender value and guaranteed minimum bonuses Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, ‘Provision pour Aléas Financiers’ (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. No PAF was established at full year 2016.
The most significant of these contracts is the AFER Eurofund which has total liabilities of £37 billion at 31 December 2016 (2015: £31 billion). The guaranteed minimum bonus is agreed between Aviva France and the AFER association at the end of each year, in respect of the following year. The bonus was 2.65% for 2016 (2015: 3.05%) compared with an accounting income from the fund of 3.14% (2015: 3.54%).
Non-AFER contracts with guaranteed surrender values had liabilities of £19 billion at 31 December 2016 (2015: £16 billion) and all guaranteed annual bonus rates are between 0% and 4.5%. For non-AFER business the accounting income return exceeded guaranteed bonus rates in 2016.
Notes to the consolidated financial statements continued 42 – Financial guarantees and options continued Guaranteed death and maturity benefits In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated statement of financial position at the end of 2016 for this guarantee is £59 million (2015: £29 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2016, total sums at risk for these contracts were £38 million (2015: £44 million) out of total unit-linked funds of £19 billion (2015: £16 billion). The average age of policyholders was approximately 54. It is estimated that this liability would increase by £51 million (2015: £45 million) if yields were to decrease by 1% (subject to a minimum of 0%) per annum and by £10 million (2015: £10 million) if equity markets were to decline by 10% from year end 2016 levels. These figures do not reflect our ability to review the tariff for this option.
(i) Guaranteed annuity options Similar options to those written on with-profit business have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £121 million at 31 December 2016 (2015: £112 million).
(ii) Spain and Italy Guaranteed investment returns and guaranteed surrender values The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy. Traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and up to 4% in Italy on existing business, while on new business the maximum guaranteed rate is lower. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2016, total liabilities for the Spanish business were £1 billion (2015: £1 billion) with a further reserve of £15 million (2015: £14 million) for guarantees. Total liabilities for the Italian business were £18 billion (2015: £14 billion), with a further provision of £47 million (2015: £41 million) for guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would need to increase by £14 million (2015: £12 million) in Spain and decrease by £5 million (2015: £1 million decrease) in Italy if interest rates fell by 1% from end 2016 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-term market interest rate of 0.39% and no lapses or premium discontinuances. In the local valuation there is no allowance for stochastic modelling of guarantees and options.
(a) Carrying amounts The reinsurance assets at 31 December comprised: Long-term business Insurance contracts 6,186 5,018 Participating investment contracts 2 11 Non-participating investment contracts1,2 18,366 13,967
Carrying amount at 1 January 18,996 6,568 Assets in respect of new business 941 664 Expected change in existing business assets 300 197 Variance between actual and expected experience 3,149 (1,007) Impact of operating assumption changes (182) (351) Impact of economic assumption changes 171 (177) Other movements1 1,003 636
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets and mainly relates to business in the UK, with corresponding movements in gross insurance contract liabilities. For participating businesses, a movement in reinsurance assets is generally offset by a corresponding adjustment to the unallocated divisible surplus and does not impact profit. Where assumption changes do impact profit, these are included in the effect of changes in assumptions and estimates during the year shown in note 44, together with the impact of movements in related liabilities and other non-financial assets.
Reinsurers’ share of incurred claim losses and expenses 542 828 Less: Reinsurance recoveries received on claims Incurred in current year (195) (121)
Notes to the consolidated financial statements continued 44 – Effect of changes in assumptions and estimates during the year Certain estimates and assumptions used in determining our liabilities for insurance and investment contract business were changed from 2015 to 2016, affecting the profit recognised for the year with an equivalent effect on liabilities. This note analyses the effect of the changes. This note only allows for the impact on liabilities and related assets, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and AVIF, and does not allow for offsetting movements in the value of backing financial assets.
43 – Reinsurance assets continued (c) Movements The following movements have occurred in the reinsurance assets during the year: (i) In respect of long-term business provisions £m
Carrying amount at 1 January 1,595 1,097 Impact of changes in assumptions 80 14 Reinsurers’ share of claim losses and expenses
Change in reinsurance asset recognised as income (note 40a(ii)) 222 504 Effect of portfolio transfers, acquisitions and disposals (25) (4) Foreign exchange rate movements 97 (2) Other movements (4) —
Carrying amount at 31 December 250 289 1 For 2016 includes £107 million (2015: £712 million) of ceded premiums relating to an outwards reinsurance contract completed by the UK General Insurance business.
Long-term insurance business Interest rates (4,490) 2,053 Expenses 48 248 Persistency rates (80) (2) Mortality for assurance contracts (11) 1 Mortality for annuity contracts 294 17 Tax and other assumptions 97 48 Investment contracts Expenses — (4) General insurance and health business Change in discount rate assumptions (242) (100) Change in expense ratio and other assumptions — 1
Tax and other assumptions include the profit arising from a change in estimate related to the recoverability testing of the deferred acquisition cost assets (DAC) in the UK. The allowance for risk for non-participating investment contracts and the level of prudence for insurance contracts has been re-assessed, resulting in amortisation or impairment of DAC in prior reporting periods being reversed (subject to the original amortisation profile).
Carrying amount at 1 January 8,811 9,467 Change in participating fund assets 4,977 (1,625) Change in participating fund liabilities (4,596) 641 Change in liability recognised as an expense 381 (984) Effect of portfolio transfers, acquisition and disposals2 — 724 Foreign exchange rate movements 1,016 (396)
Notes to the consolidated financial statements continued 46 – Tax assets and liabilities continued (ii) The net deferred tax liability arises on the following items: £m
Charge/(release) to income statement 60 17 77 376 (17) 359 Utilised during the year (118) (63) (181) (307) (108) (415) Acquisition/(disposal) of subsidiaries — — — — 297 297 Foreign exchange rate movements 3 29 32 — (2) (2)
Movements during 2015 primarily relate to the acquisition of Friends Life. Of the total restructuring and other provisions, £188 million (2015: £199 million) is expected to be settled more than one year after the statement of financial position date.
(i) UK schemes In the UK, the Group operates three main pension schemes, the Aviva Staff Pension Scheme (ASPS), the smaller RAC (2003) Pension Scheme which was retained after the sale of RAC Limited in September 2011 and the Friends Provident Pension Scheme (FPPS) which was acquired as part of the Friends Life acquisition in 2015. As the defined benefit section of the UK schemes is now closed to both new members and future accrual, existing deferred members in active service and new entrants participate in the defined contribution section of the ASPS. The UK schemes operate within the UK pensions’ regulatory framework.
Return on scheme assets excluding amounts in interest income 3,454 — 3,454 Losses from change in financial assumptions — (3,944) (3,944) Gains from change in demographic assumptions — 363 363 Experience gains — 438 438
Net IAS 19 surpluses/(deficits) in the schemes 2,672 (238) (87) 2,347 2,101 (189) (75) 1,837
The assets of the UK, Irish and Canadian schemes are held in separate trustee-administered funds to meet long-term pension liabilities to past and present employees. In all schemes, the appointment of trustees of the funds is determined by their trust documentation, and they are required to act in the best interests of the schemes’ beneficiaries. The long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes.
The number of scheme members was as follows: United Kingdom Ireland Canada
Net IAS 19 surplus in the schemes at 31 December 16,161 (14,324) 1,837 1 Administrative expenses are expensed as incurred. 2 Net interest income of £105 million has been credited to investment income and net interest expense of £25 million has been charged to finance costs (see note 7). 3 The gross surplus of £68 million on acquisition relates to the FPPS. As the FPPS assets include an insurance policy of £631 million at acquisition date, issued by a Group company that is not transferable under IAS 19, it is eliminated from the scheme assets.
Bonds Fixed interest 3,697 3,788 7,485 2,796 3,095 5,891 Index-linked 11,141 485 11,626 5,436 436 5,872
Net IAS 19 surplus in the schemes at 1 January 15,474 (13,170) 2,304 Past service costs – amendments — 1 1 Administrative expenses1 — (15) (15)
Acquisitions – gross surplus 1,701 (1,633) 68 Acquisitions – consolidation elimination for non-transferable Group insurance policy3 (631) — (631)
Bonds Fixed interest 7,085 249 151 7,485 5,542 216 133 5,891 Index-linked 11,469 157 — 11,626 5,758 114 — 5,872
Equities 71 — — 71 70 — — 70 Property 338 — — 338 377 7 — 384 Pooled investment vehicles 3,433 200 96 3,729 2,904 143 96 3,143 Derivatives 86 1 — 87 96 — — 96 Cash and other1 (3,046) 3 34 (3,009) 1,244 4 3 1,251
IAS 19 plan assets include investments in Group-managed funds in the consolidated statement of financial position of £1,428 million (2015: £1,115 million) and transferable insurance policies with other Group companies of £174 million (2015: £163 million) in ASPS. Where the investment and insurance policies are in segregated funds with specific asset allocations, they are included in the appropriate line in the table above, otherwise they appear in ‘Cash and other’.
(iii) Assumptions on scheme liabilities The valuations used for accounting under IAS 19 have been based on the most recent full actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2016.
Canada Canadian Pensioners’ Mortality 2014 Private Table 65 86.6 87.7 89.0 90.0 (21.6) (22.7) (24.0) (25.0)
Sensitivity analysis Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivities analyses below have been determined based on reasonably possible changes of the respective assumptions, holding all other assumptions constant. The following table summarises how the defined benefit obligation would have increased/(decreased) as a result of the change in the respective assumptions: Impact on present value of defined benefit obligation
The sensitivity analyses presented above may not be representative as in practice it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, the present value of the defined benefit obligation has been calculated using the projected unit credit method, which is the same as that applied in calculating the defined benefit obligation liability recognised within the consolidated statement of financial position. In addition, the sensitivities shown are for liabilities only and ignore the impact on assets, which would significantly mitigate the net interest rate and inflation sensitivity impact on the net surplus.
Maturity profile of the defined benefit obligation The discounted scheme liabilities have an average duration of 21 years in ASPS, 21 years in FPPS, 20 years in the RAC scheme, 19 years in the Irish scheme and 12 years in the Canadian scheme. The expected undiscounted benefits payable from the main UK defined benefit scheme, ASPS, is shown in the chart below: Notes to the consolidated financial statements continued 48 – Pension obligations continued (iv) Risk management and asset allocation strategy As noted above, the long-term investment objectives of the trustees and the employers are to limit the risk of the assets failing to meet the liabilities of the schemes over the long-term, and to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of these schemes. To meet these objectives, the schemes’ assets are invested in a portfolio, consisting primarily (approximately 75%1) of debt securities as detailed in section (b)(ii). The investment strategy will continue to evolve over time and is expected to match the liability profile increasingly closely with swap overlays to improve interest rate and inflation matching. The schemes are generally matched to interest rate risk relative to the funding bases.
For ASPS, following the latest formal actuarial valuation (with an effective date of 31 March 2012) a deficit recovery plan was agreed, to make good the deficit over a period of time, consistent with the requirements of the UK pension regulations. As at 31 December 2016, the ASPS was fully funded. The Company is currently undergoing a triennial actuarial valuation as at 31 March 2015.
(d) Charge to staff costs in the income statement The total pension charge to staff costs for all of the Group’s defined benefit and defined contribution schemes were: Continuing operations UK defined benefit schemes 16 12 Overseas defined benefit schemes 1 1
The mortality tables, average life expectancy and pension duration used at 31 December 2016 for scheme members are as follows: Life expectancy/(pension duration) at NRA of a male Life expectancy/ (pension duration) at NRA of a female
UK– ASPS Club Vita pooled experience, including an allowance for future improvements 60 89.0 91.4 90.2 92.8 (29.0) (31.4) (30.2) (32.8) – RAC SAPS, including allowances for future improvement 65 87.4 89.9 89.2 91.5 (22.4) (24.9) (24.2) (26.5) – FPPS SAPS, including allowances for future improvement 60 89.1 91.2 89.7 92.0 (29.1) (31.2) (29.7) (32.0)
(c) Defined contribution (money purchase) section of the ASPS The trustees have responsibility for selecting a range of suitable funds in which the members can choose to invest and for monitoring the performance of the available investment funds. Members are responsible for reviewing the level of contributions they pay and the choice of investment fund to ensure these are appropriate to their attitude to risk and their retirement plans. Members of this section contribute at least 2% of their pensionable salaries and, depending on the percentage chosen, the Company contributes up to a maximum 14%, together with the cost of the death-in-service benefits. These contribution rates are unchanged for 2017. The amount recognised as an expense for defined contribution schemes is shown section (d) below.
Total defined benefit schemes (note 10b) 17 13 UK defined contribution schemes 117 108 Overseas defined contribution schemes 21 15
There were no significant contributions payable or prepaid in the consolidated statement of financial position as at either 31 December 2016 or 2015.
Senior notes 0.100% €350 million senior notes 2018 298 — 0.625% €500 million senior notes 2023 424 —
Within one year 642 426 1,068 485 394 879 1 to 5 years 733 1,683 2,416 — 1,577 1,577 5 to 10 years 927 1,769 2,696 662 1,731 2,393 10 to 15 years 1,265 1,732 2,997 1,190 1,668 2,858 Over 15 years 4,898 3,499 8,397 4,448 3,496 7,944
Borrowings are considered current if the contractual maturity dates are within a year. Where subordinated debt is undated or loan notes are perpetual, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £82 million (2015: £79 million).
Within one year 45 60 105 204 60 264 1 to 5 years 469 246 715 204 269 473 5 to 10 years 555 269 824 551 283 834 10 to 15 years 666 128 794 652 185 837 Over 15 years 448 113 561 498 132 630
(ii) Senior notes All senior notes are at fixed rates and their total fair value at 31 December 2016 was £720 million (2015: £nil).
(iii) Commercial paper The commercial paper consists of £642 million issued by the Company (2015: £485 million) and is considered core structural funding.
The fair value of the commercial paper is considered to be the same as its carrying value and all issuances are repayable within one year.
In 2016 the Group issued two subordinated debt instruments and two sets of senior notes. Additionally one subordinated debt instrument was redeemed in full at its first call date. Further details set out below: • May 2016 – Aviva plc issued C$450 million of subordinated debt at 4.50% which matures in May 2021. • September 2016 – Aviva plc issued £400 million of subordinated debt at 4.375%, with final maturity in September 2049 and first call in September 2029, and €350 million of senior debt at 0.100% which matures in December 2018. • October 2016 – Aviva plc issued €500 million of senior debt at 0.625% with a maturity in October 2023. • December 2016 – Aviva plc redeemed, at first call, the 8.25% $400 million subordinated debt originally issued in 2011.
Total contractual undiscounted cash flows 8,465 9,109 17,574 6,785 8,866 15,651
Net cash inflow/(outflow) 1,094 92 1,186 209 (139) 70 Foreign exchange rate movements 574 33 607 (106) (2) (108) Borrowings acquired/(loans repaid) for non-cash consideration — — — 1,568 11 1,579 Fair value movements — (220) (220) — 37 37 Amortisation of discounts and other non-cash items (34) (16) (50) (27) (17) (44) Movements in debt held by Group companies2 31 (29) 2 (42) (100) (142)
All movements in fair value in 2015 and 2016 on securitised mortgage loan notes designated as fair value through profit or loss were attributable to changes in market conditions.
Expiring within one year — 575 Expiring beyond one year 1,650 1,075
Payables arising out of direct insurance 1,201 1,106 Payables arising out of reinsurance operations 263 443 Deposits and advances received from reinsurers 150 110 Bank overdrafts (see below) 558 506 Derivative liabilities (note 57) 6,795 3,881 Amounts due to brokers for investment purchases 64 341 Obligations for repayment of cash collateral received 7,433 4,855 Other financial liabilities 1,296 1,206
Expected to be settled within one year 12,016 9,300 Expected to be settled in more than one year 5,744 3,148
(a) Uncertainty over claims provisions Note 40 gives details of the estimation techniques used by the Group to determine the general insurance business outstanding claims provisions and of the methodology and assumptions used in determining the long-term business provisions. These approaches are designed to allow for the appropriate cost of policy-related liabilities, with a degree of prudence, to give a result within the normal range of outcomes. However, the actual cost of settling these liabilities may differ, for example because experience may be worse than that assumed, or future general insurance business claims inflation may differ from that expected, and hence there is uncertainty in respect of these liabilities.
(v) Securitised mortgage loan notes Loan notes have been issued by special purpose securitisation companies in the UK. Details are given in note 24.
Movements in the year 1,665 (140) 1,525 1,602 (210) 1,392 Balance at 1 January 6,912 1,858 8,770 5,310 2,068 7,378 1 Gross issuances of commercial paper were £2,006 million in 2016 (2015: £982 million), offset by repayments of £1,964 million (2015: £985 million). 2 Certain subsidiary companies have purchased issued subordinated notes and securitised loan notes as part of their investment portfolios. In the consolidated statement of financial position, borrowings are shown net of these holdings but movements in such holdings over the year are reflected in the tables above.
Notes to the consolidated financial statements continued 50 – Payables and other financial liabilities This note analyses our payables and other financial liabilities at the end of the year.
The Group’s regulated businesses have compliance resources to respond to regulatory enquiries in a constructive way, and take corrective action when warranted. However, all regulated financial services companies face the risk that their regulator could find that they have failed to comply with applicable regulations or have not undertaken corrective action as required.
In addition, in line with standard business practice, various Group companies have given guarantees, indemnities and warranties in connection with disposals in recent years of subsidiaries and associates to parties outside the Aviva Group. In the opinion of the directors, no material unprovisioned loss will arise in respect of these guarantees, indemnities and warranties.
Notes to the consolidated financial statements continued 53 – Commitments This note gives details of our commitments to capital expenditure and under operating leases.
Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases 44 45 54 – Group capital management (a) Capital management Group capital is represented by Solvency II Own Funds1. At 31 December 2016, the estimated Solvency II Own Funds (shareholder view) amounts to £24.1 billion (1 January 2016: £21.8 billion). This excludes the estimated marginal contribution to Group Own Funds of fully ring fenced with-profits funds of £2.9 billion (1 January 2016: £2.7 billion) and staff pension schemes in surplus of £1.1 billion (1 January 2016: £0.7 billion), such that the impact on the Solvency II surplus is nil. The most material fully ring fenced with-profit funds and staff pension schemes are self-supporting on a Solvency II capital basis with any surplus capital above Solvency Capital Requirements (SCR) not recognised in the Group position. The Solvency II Own Funds figure also includes the estimated adverse impact of £0.4 billion from a notional reset of transitional measure on technical provision (TMTP) to reflect interest rates at 31 December 2016. The shareholder view is considered by Management to be more representative of the shareholders’ risk exposure and the Group’s ability to cover the SCR with eligible own funds. The Group manages its capital position assuming a dynamic TMTP in respect of interest rate movements on the risk margin, to avoid step changes to the Solvency II position that arise only when a formal TMTP reset is triggered (as specified by the PRA).
Own Funds is financed by a combination of shareholders’ funds, preference share capital, direct capital instrument, tier 1 notes, subordinated debt, and deferred tax assets measured on a Solvency II basis.
52 – Contingent liabilities and other risk factors continued (c) Guarantees on long-term savings products As a normal part of their operating activities, various Group companies have given guarantees and options, including interest rate guarantees, in respect of certain long-term insurance and investment products. Note 42 gives details of these guarantees and options. In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, property values and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options, are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made. The directors continue to believe that the existing provisions for such guarantees and options are sufficient.
(a) Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property and property and equipment, which have not been recognised in the financial statements, are as follows: £m
(b) Operating lease commitments (i) Future contractual aggregate minimum lease rentals receivable under non-cancellable operating leases are as follows: Within 1 year 335 318 Later than 1 year and not later than 5 years 1,027 996 Later than 5 years 1,326 1,382
Within 1 year 103 95 Later than 1 year and not later than 5 years 336 329 Later than 5 years 423 493
54 – Group capital management continued The Group manages capital in conjunction with solvency capital requirements, and seeks to; on a consistent basis: • Match the profile of our assets and liabilities, taking into account the risks inherent in each business; • Maintain sufficient, but not excessive, financial strength in accordance with risk appetite, to support new business growth and satisfy the requirements of our regulators and other stakeholders giving both our customers and shareholders assurance of our financial strength. Refer to note 56 for more information about the Group’s risk management approach; • Retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines; • Allocate capital rigorously to support value adding growth and repatriate excess capital where appropriate; and • Declare dividends with reference to factors including growth in cash flow and earnings.
Total capital employed3 28,128 25,182 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details.
Solvency II surplus at the Group level represents the excess of the aggregate value of capital employed in our business over the aggregate solvency capital requirements calculated in accordance with Solvency II requirements. The Group maintained capital in excess of the Solvency Capital Requirement (SCR) at all times during 2016.
(b) Cash flows in respect of, and additions to, the acquisition of subsidiaries, joint ventures and associates comprised: £m
In May 2016 the Group issued C$450 million of subordinated debt to part fund the acquisition of RBC General Insurance Company. In September 2016 the Group issued £400 million of subordinated debt which was used in part to finance the redemption of $400 million of subordinated debt redeemed at its first call date in December 2016. The Group maintained strong liquidity throughout the year, which was enhanced by the issuance of €350 million and €500 million of senior debt in 2016.
Notes to the consolidated financial statements continued 56 – Risk management This note sets out the major risks our businesses and our shareholders face and describes the Group’s approach to managing these. It also gives sensitivity analyses around the major economic and non-economic assumptions that can cause volatility in the Group’s earnings and capital position.
(a) Risk management framework The risk management framework (RMF) in Aviva forms an integral part of the management and Board processes and decisionmaking framework across the Group. The key elements of our risk management framework comprise risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report (IMMMR) risks, including the use of our risk models and stress and scenario testing.
To promote a consistent and rigorous approach to risk management across all businesses we have a set of risk policies and business standards which set out the risk strategy, appetite, framework and minimum requirements for the Group’s worldwide operations. The business chief executive officers and chief risk officers, on a semi-annual basis during 2016, sign-off compliance with these policies and standards, providing assurance to the relevant oversight committees that there is a consistent framework for managing our business and the associated risks.
56 – Risk management continued (i) Financial exposures by credit ratings Financial assets are graded according to current external credit ratings issued. AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB ratings. Financial assets which fall outside this range are classified as sub-investment grade. The following table provides information regarding the aggregated credit risk exposure of the Group for financial assets with external credit ratings. ‘Not rated’ assets capture assets not rated by external ratings agencies.
(ii) Financial exposures to peripheral European countries and worldwide banks Included in our debt securities and other financial assets are exposures to peripheral European countries and worldwide banks. We continued in 2016 to limit our direct shareholder and participating assets exposure to the governments (including local authorities and agencies) and banks of Greece, Portugal, Italy and Spain. Information on our exposures to peripheral European sovereigns and banks is provided in notes 26(e) and 26(f). We continue to monitor closely the situation in the eurozone and have had additional restrictions on further investment in place since late 2009.
The majority of non-rated debt securities within shareholder assets are held by our businesses in the UK. Of these securities most are allocated an internal rating using a methodology largely consistent with that adopted by an external rating agency, and are considered to be of investment grade credit quality; these include £2.3 billion (2015: £2.2 billion) of debt securities held in our UK Life business, predominantly made up of private placements and other corporate bonds, which have been internally rated as investment grade.
(vii) Securities finance The Group has significant securities financing operations within the UK and smaller operations in some other businesses. The risks within this activity are mitigated by collateralisation and minimum counterparty credit quality requirements.
(v) Currency risk The Group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional currencies, as nearly all such holdings are backing either unit-linked or with-profit contract liabilities or hedging. As a result the foreign exchange and losses on investments (see note 5) are largely offset by changes in unit-linked and with-profit liabilities and fair value changes in derivatives attributable to changes in foreign exchange rates recognised in the income statement.
Sensitivity to changes in equity prices is given in section ‘(j) risk and capital management’ below.
As at 31 December 2016, no material derivative contracts had been entered into to mitigate the effects of changes in property prices.
(iii) Interest rate risk Interest rate risk arises primarily from the Group’s investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. A number of policyholder product features have an influence on the Group’s interest rate risk. The major features include guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. Details of material guarantees and options are given in note 42.
Other product lines of the Group, such as protection, are not significantly sensitive to interest rate or market movements. For unit-linked business, the shareholder margins emerging are typically a mixture of annual management fees and risk/expense charges. Risk and expense margins will be largely unaffected by low interest rates. Annual management fees may increase in the short term as the move towards low interest rates increases the value of unit funds. However, in the medium term, unit funds will grow at a lower rate which will reduce fund charges. For the UK annuities business interest rate exposure is mitigated by closely matching the duration of liabilities with assets of the same duration.
The UK participating business includes contracts with features such as guaranteed surrender values, guaranteed annuity options, and minimum surrender and maturity values. These liabilities are managed through duration matching of assets and liabilities and the use of derivatives, including swaptions. As a result, the Group’s exposure to sustained low interest rates on this portfolio is not material. The Group’s key exposure to low interest rates arises through its other participating contracts, principally in Italy and France. Some of these contracts also include features such as guaranteed minimum bonuses, guaranteed investment returns and guaranteed surrender values. In a low interest rate environment there is a risk that the yield on assets might not be sufficient to cover these obligations. For certain of its participating contracts the Group is able to amend guaranteed crediting rates. Our ability to lower crediting rates may be limited by competition, bonus mechanisms and contractual arrangements.
Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities, however movements may impact the value of the Group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally, against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the Group’s regulatory capital requirements by currency. Currency borrowings and derivatives are used to manage exposures within the limits that have been set. Except where the Group has applied net investment hedge accounting (see note 57(a)(i), foreign exchange gains and losses on foreign currency borrowings (see note 6) are recognised in the income statement, whereas foreign exchange gains and losses arising on consolidation from the translation of assets and liabilities of foreign subsidiaries are recognised in other comprehensive income. At 31 December 2016, the Group’s exposure to euro and Canadian dollars has decreased compared to prior year due to new debt issuance in these currencies (see note 49), capital repatriation and the increased purchase of foreign currency forward contracts to hedge planned dividends from subsidiaries. Foreign currency capital deployed (included in Other below) in the Group’s targeted high growth markets has increased in 2016 to fund future growth. At 31 December 2016 and 2015, the Group’s total equity deployment by currency including assets ‘held for sale’ was: Sterling £m
Maturity analyses The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance assets held to meet them. A maturity analysis of the contractual amounts payable for borrowings and derivatives is given in notes 49 and 57, respectively. Contractual obligations under operating leases and capital commitments are given in note 53.
(i) Analysis of maturity of insurance and investment contract liabilities For non-linked insurance business, the following table shows the gross liability at 31 December 2016 and 2015 analysed by remaining duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period, as permitted under IFRS 4, Insurance Contracts. Almost all linked business and non-linked investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. However, we expect surrenders, transfers and maturities to occur over many years, and therefore the tables below reflect the expected cash flows for these contracts, rather than their contractual maturity date. This table includes assets held for sale.
10% increase in sterling/ euro rate £m 10% decrease in sterling/ euro rate £m 10% increase in sterling/ CAD$ rate £m 10% decrease in sterling/ CAD$ rate £m
Long-term business Insurance contracts – non-linked 114,533 9,847 30,715 43,513 30,458 Investment contracts – non-linked 63,505 4,506 13,666 25,477 19,856 Linked business 130,185 15,221 41,442 51,368 22,154 General insurance and health 13,506 5,844 5,160 1,992 510
Debt securities 175,536 25,817 47,971 101,580 168 Equity securities 68,348 — — — 68,348 Other investments 55,951 48,059 2,202 4,143 1,547 Loans 24,784 1,352 5,609 17,819 4 Cash and cash equivalents 38,708 38,708 — — —
Notes to the consolidated financial statements continued 56 – Risk management continued The Group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. Approximately 63% of the Group’s premium income arises in currencies other than sterling and the Group’s net assets are denominated in a variety of currencies, of which the largest are sterling, euro and Canadian dollars. The Group does not hedge foreign currency revenues as these are substantially retained locally to support the growth of the Group’s business and meet local regulatory and market requirements. However, the Group does use foreign currency forward contracts to hedge planned dividends from its subsidiaries.
Notes to the consolidated financial statements continued 56 – Risk management continued (d) Liquidity risk Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The relatively illiquid nature of insurance liabilities is a potential source of additional investment return by allowing us to invest in higher yielding, but less liquid assets such as commercial mortgages. The Group seeks to ensure that it maintains sufficient financial resources to meet its obligations as they fall due through the application of a Group liquidity risk policy and business standard and through the development of its liquidity risk management plan. At Group and business unit level, there is a liquidity risk appetite which requires that sufficient liquid resources be maintained to cover net outflows in a stress scenario. In addition to the existing liquid resources and expected inflows, the Group maintains significant undrawn committed borrowing facilities (£1,650 million) from a range of leading international banks to further mitigate this risk.
Debt securities 162,964 21,912 46,551 93,753 748 Equity securities 63,558 — — — 63,558 Other investments 47,695 42,733 940 2,464 1,558 Loans 22,433 1,485 2,404 18,540 4 Cash and cash equivalents 33,676 33,676 — — —
• Persistency risk is managed at a business unit level through frequent monitoring of company experience, and benchmarked against local market information. Generally, persistency risk arises from customers lapsing their policies earlier than has been assumed. Where possible the financial impact of lapses is reduced through appropriate product design. Businesses also implement specific initiatives to improve the retention of policies which may otherwise lapse. The Group has developed guidelines on persistency management.
The Group cedes much of its worldwide catastrophe risk to third-party reinsurers through excess of loss and aggregate excess of loss structures. The Group purchases a group-wide catastrophe reinsurance programme to protect against catastrophe losses exceeding a 1 in 200 year return period. The total Group potential retained loss from its most concentrated catastrophe exposure peril (Northern Europe Windstorm) is approximately £150 million on a per occurrence basis and £175 million on an annual aggregate basis. Any losses above these levels are covered by the group-wide catastrophe reinsurance programme to a level in excess of a 1 in 200 year return period. In addition the Group purchases a number of GI business line specific reinsurance programmes with various retention levels to protect both capital and earnings, and has reinsured 100% of its latent exposures to its historic UK employers’ liability and public liability business written prior to 31 December 2000.
56 – Risk management continued The assets above are analysed in accordance with the earliest possible redemption date of the instrument at the initiation of the Group. Where an instrument is transferable back to the issuer on demand, such as most unit trusts or similar types of investment vehicle, it is included in the ‘On demand or within 1 year’ column. Debt securities with no fixed contractual maturity date are generally callable at the option of the issuer at the date the coupon rate is reset under the contractual terms of the instrument. The terms for resetting the coupon are such that we expect the securities to be redeemed at this date, as it would be uneconomic for the issuer not to do so, and for liquidity management purposes we manage these securities on this basis. The first repricing and call date is normally ten years or more after the date of issuance. Most of the Group’s investments in equity securities and fixed maturity securities are market traded and therefore, if required, can be liquidated for cash at short notice.
Persistency risk remains significant and continues to have a volatile outlook with underlying performance linked to some degree to economic conditions. However, businesses across the Group have continued to make progress with a range of customer retention activities. The Group has continued to write considerable volumes of life protection business, and to utilise reinsurance to reduce exposure to potential losses. More generally, life insurance risks are believed to provide a significant diversification against other risks in the portfolio. Life insurance risks are modelled within the internal economic capital model and subject to sensitivity and stress and scenario testing. The assumption and management of life and health insurance risks is governed by the group-wide business standards covering underwriting, pricing, product design and management, in-force management, claims handling, and reinsurance. The individual life and health insurance risks are managed as follows: • Mortality and morbidity risks are mitigated by use of reinsurance. The Group allows businesses to select reinsurers, from those approved by the Group, based on local factors, but retains oversight of the overall exposures and monitors that the aggregation of risk ceded is within credit risk appetite.
Notes to the consolidated financial statements continued 56 – Risk management continued (f) General insurance risk Types of risk General insurance risk in the Group arises from: • Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations; • Unexpected claims arising from a single source or cause; • Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten; and • Inadequate reinsurance protection or other risk transfer techniques.
Management of general insurance risks. Significant insurance risks will be reported under the risk management framework. Additionally, the economic capital model is used to assess the risks that each general insurance business unit, and the Group as a whole, is exposed to, quantifying their impact and calculating appropriate capital requirements.
Business units have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. The business units are assisted by the General Insurance Council which provides technical input for major decisions which fall outside individual delegated limits or escalations outside group risk preferences, group risk accumulation, concentration and profitability limits.
Insurance participating 30 (65) (30) (135) 130 (25) (10) (50) Insurance non-participating (75) 80 (495) 25 (25) (155) (115) (725) Investment participating 5 (5) — — — (5) — — Investment non-participating (20) 20 (5) 35 (35) (20) — — Assets backing life shareholders’ funds (175) 120 (70) 40 (40) — — —
The FCA regularly considers whether we are meeting the requirement to treat our customers fairly and we make use of various metrics to assess our own performance, including customer advocacy, retention and complaints. Failure to meet these requirements could also impact our brands or reputation.
General insurance and health business sensitivities as at 31 December 2016 2016 Impact on profit before tax (£m)
The fair values do not provide an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA (International Swaps and Derivatives Association, Inc.) master agreements or their equivalent. Such agreements are designed to provide a legally enforceable set-off in the event of default, which reduces credit exposure. In addition, the Group has collateral agreements in place between the individual Group entities and relevant counterparties. Refer to note 58 for further information on collateral and net credit risk of derivative instruments.
Forwards 11,976 96 (120) 7,791 50 (186) Interest rate and currency swaps 7,441 148 (982) 5,152 133 (346) Options 300 — (23) 4,800 28 (16)
Fair value assets made up of £nil (2015: £2 million) in hedge derivatives and £6,119 million (2015: £3,326 million) in non-hedge derivatives are recognised as ‘Derivative financial instruments’ in note 26(a), while fair value liabilities are recognised as ‘Derivative liabilities’ in note 50.
(ii) The contractual undiscounted cash flows in relation to non-hedge derivative liabilities have the following maturities: £m
(a) Instruments qualifying for hedge accounting The Group has formally assessed and documented the hedge effectiveness in accordance with IAS 39, Financial Instruments: Recognition and Measurement.
(i) Net investment hedges To reduce its exposure to foreign currency risk, the Group has designated a portion of its euro denominated debt as a hedge instrument to hedge a net investment in its European subsidiaries. In 2016 additional euro denominated loans were designated as hedging instruments. The carrying value of the debt at 31 December 2016 was £2,774 million (2015: £368 million) and its fair value at that date was £2,918 million (2015: £413 million). The foreign exchange loss of £34 million (2015: gain of £42 million) on translation of the debt to sterling at the statement of financial position date has been recognised in the hedging instruments reserve in shareholders’ equity. This hedge was fully effective throughout the current and prior years.
(i) The Group’s non-hedge derivatives at 31 December 2016 and 2015 were as follows: Contract/ notional amount £m
Within 1 year 1,075 484 Between 1 and 2 years 601 564 Between 2 and 3 years 578 251 Between 3 and 4 years 558 227 Between 4 and 5 years 406 291 After 5 years 4,154 2,613
58 – Financial assets and liabilities subject to offsetting, enforceable master netting agreements and similar arrangements (a) Offsetting arrangements Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously.
Financial assets Derivative financial assets 6,194 (827) 5,367 (3,577) (921) (336) 533 Loans to banks and repurchase arrangements 2,579 — 2,579 — — (2,579) —
Other financial liabilities presented above represent liabilities related to repurchase arrangements recognised within ‘Obligations for repayment of cash collateral received’ in note 50.
Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 18(a)(iii). Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earned interest on loans advanced to these entities, which were fully repaid in 2016. Movements on these loans may be found in note 18(a)(i). Our fund management companies also charge fees to these joint ventures for administration services and for arranging external finance.
Salary and other short-term benefits 14.6 13.3 Other long-term benefits 5.3 5.2 Post-employment benefits 1.5 1.7 Equity compensation plans 9.3 10.6 Termination benefits — 2.0
Notes to the consolidated financial statements continued 60 – Organisational structure The following chart shows, in simplified form, the organisational structure of the Group as at 31 December 2016. Aviva plc is the holding company of the Group.
Subsidiaries The principal subsidiaries of the Company at 31 December 2016 are listed below by country of incorporation.
60 – Organisational structure continued Italy Aviva Italia Holding S.p.A and its principal subsidiaries: Avipop Assicurazioni S.p.A (50%) Avipop Vita S.p.A (50%) Aviva S.p.A (51%) Aviva Assicurazioni Vita S.p.A (80%) Aviva Italia S.p.A Aviva Life S.p.A Aviva Vita S.p.A (80%)
Associates and joint ventures The Group has ongoing interests in the following operations that are classified as joint ventures or associates. Further details of those operations that were most significant in 2016 are set out in notes 18 and 19 to the financial statements.
Poland BZ WBK – Aviva Towarzystwo Ubezpieczen Ogolnych S.A. (51%) BZ WBK-Aviva Towarzystwo Ubezpieczeń na Życie Spółka Akcyjna (51%)
Subsequent events On 9 November 2016 the UK Life Board approved the transfer of the whole of the long-term business of Aviva Annuity UK Limited to its parent undertaking Aviva Life & Pensions UK Limited through an insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (the ‘Part VII Transfer’). The Part VII transfer was ratified by the High Court on 6 December 2016 and became effective on 1 January 2017.
Australia c/o Tmf Corporate Services (Aust) Pty Ltd, L16, 201 Elizabeth Street, Sydney 2000
Austria Praterstrasse 62-64, 1020 Vienna Sequin Holding GmbH Ordinary Shares 85
Barbados c/o USA Risk Group (Barbados) Ltd., 6th Floor, CGI Tower, Warrens, St. Michael, Bb22026
Bermuda Mintflower Place, 3rd Floor, 8 Par-LaVille Road, Hamilton, HM 08
Aviva Re Limited Ordinary Shares 100 Trinity Hall, 43 Cedar Avenue, Hamilton Hm 12
Canada 100 King Street West, Floor 49, Toronto On M5X 2A2
The definition of a subsidiary undertaking in accordance with the Companies Act 2006 is different from the definition under IFRS. As a result, the related undertakings included within the list below may not be the same as the undertakings consolidated in the Group IFRS financial statements. Refer to accounting policies (D) Consolidation principles for further detail on principles of consolidation and definition of joint ventures.
The indirect related undertakings of the Company as at 31 December 2016 are listed below. Company name Share Class % held
Bellatrix SICAV 83 Europe Israël Croissance SICAV 85 Sirius SICAV 97 Bételgeuse SICAV 92 La Défense 9, 6 place de la Pyramide, 928000, Puteaux
Axa Première Catégorie SICAV 33 91 – 93, Boulevard Pasteur, 75015 Etoile Asie Pacifique SICAV 45 Amundi Inflation Monde FCP 21 33, rue Marbeuf, 75008, Paris Equilibre Patrimoine SICAV 52 20, Place Vendôme, 75001, Paris AXA Lbo Fund Iv Feeder Private Equity Fund 39 AXA UK Infrastructure Investment SAS Ordinary Shares 100 Croissance Patrimoine A C. Mutual Fund 100 90, Boulevard Pasteur, 75015, Paris Aviva Actions S2 C. FCP 100 Aviva Couv Actions C. FCP 100 13, Avenue le Brun, 92160, Antony SCPI Pierrevenus Ordinary Shares 84 19, Avenue de Suffren, 75007, Paris SCPI UFI France Immobilier Ordinary Shares 20 OPCI Preim Retail 1 Property Fund 34 1, Boulevard Haussmann, 75009, Paris AFER Actions Patrimoine FCP 59 AFER Actions Patrimoine I FCP 100 11, Cours Valmy, 92800, Puteaux Helios Al Mutual Fund 100 14, Rue Roquépine, 75008, Paris
GEBPF Business Park (France) SARL Ordinary Shares 100 GEBPF Marseille (France) SARL Ordinary Shares 100 Vauban Developpement SARL Ordinary Shares 100 14 Rue Roquépine, 75008, Paris Aviva Investors France S.A Ordinary Shares 100 24 – 26, Rue De La Pepiniere, 75008 Paris
Kroknet S.A.R.L. Ordinary Shares 75 17 Rue Du Cirque, 75008, Paris Financiere Du Carrousel Ordinary Shares 74 9, rue du Débarcadère, CPC 03A2, 93761, Pantin Cedex
Ordinary Shares 100 c/o Wswp Weinert GmbH, Theatinerstr. 31, 80333, Munich
FLG Holdings Limited Ordinary Shares 100 Friends Life Group Limited Ordinary Shares 100 MitonOptimal Guernsey Limited, PO Box 141, La Tonnelle House, Les Banques, St Sampson, GY1 3HS
Aviva Investors Conviction FCP 100 Aviva Investors Inflation Euro FCP 95 Aviva Investors Inflation Euro FCP 97 Aviva Investors Japon FCP 100 Aviva Investors Monetaire (C) SICAV 60 Aviva Investors Monetaire (D) FCP 95 Aviva Investors Monetaire (P) FCP 100 Aviva Investors Portefeuille FCP 100 Aviva Investors Reference Div FCP 100 Aviva Investors Reserve Europe FCP 70 Aviva Investors Selection FCP 100 Aviva Investors Small & Mid Ca FCP 100 Aviva Investors Valeurs FCP 100 Aviva Investors Valeurs Europe FCP 90 Aviva Investors Valorisation FCP 100 Aviva Japon FCP 100 Aviva Messine 5 FCP 100 Aviva Monetaire Isr (A) FCP 97 Aviva Monetaire Isr (I) FCP 87 Aviva Multigestion FCP 99 Aviva Multigestion A International FCP 100 Aviva Oblig International SICAV 91 Aviva Oblirea SICAV 97 Aviva Patrimoine SICAV 96 Aviva Performance FCP 100 Aviva Performance Divers. FCP 100 Aviva Rebond Part A FCP 98 Aviva Rendement Europe SICAV 97 Aviva Repo FCP FCP 100 Aviva Selection Opportunites FCP 99 Aviva Selection Patrimoine FCP 98 Aviva Signatures Europe FCP 100 Aviva Structure Index3 Mutual Fund 100 Aviva Valeurs Francaises SICAV 99 Aviva Valeurs Immobilieres SICAV 72 Aviva Valeurs Responsable A FCP 98 Aviva Valorisation Opportunite FCP 99 Aviva Valorisation Patrimoine FCP 99 Diversifie 0-70 M FCP 86 Obligations 5-7 M FCP 70 Rendement Diversifie M FCP 96 UFF Cap Defensif FCP 100 UFF Diversifie 0-70 A FCP 100 UFF Eu-Val 0-100 A C. FCP 99 UFF Obligations 5-7 A FCP 100 UFF Rendement Diversifie A FCP 100 Afer-Sfer SICAV 100 Aviva Investors Eu Cr B 1-3 Hd FCP 75 Aviva Investors Euro Credit Bonds FCP 89 Aviva Investors Euro Crédit Bonds 1-3 Hdr FCP 63 Aviva Investors Inflation Euro Hd FCP FCP 90 Aviva Structure Index 4 C. Mutual Fund 100 Aviva Investors Eu Aggr A C. FCP 80 Aviva Investors Eur Cre Bd FCP 79 Aviva Investors Yield Curve Abs Ret FCP 93 Aviva Investors Yield Curve Abs Rt R FCP 100 Aviva Investors.E.Aggr.I FCP 99 Aviva Investors Credit Europe(C) FCP 62 Aviva Investors Credit Europe(D) FCP 81 Aviva Structure Index 2 FCP 100 Aviva Structure Index 1 C. FCP 100 Aviva Valeurs Responsible Par I FCP 100 32, avenue d’Iéna, 75116 Paris Actions France M FCP 68 Aviva Capital Planete FCP FCP 98 Capital Planete FCP 88 Croissance Patrimoine Maitre FCP 99 E Aberdeen Mix.Emer.A FCP4Dec FCP 91 E Act.Eur.0-100 Carmign.A FCP FCP 51 E Actions Environnement FCP 66 E Actions Eurozone Aviva A FCP FCP 73 E Ccr Act Pme Eur A C. FCP 64 E Echiquier Act.France A FCP FCP 43 E Multitalents A FCP FCP 49 E Schroders Acts Monde He A FCP 66 Emergence M FCP 99 Euro-Valeur Maitre FCP 64 Gestion Flexible 0-100 M FCP 100 Gestion Flexible 0-30 M FCP 100 Gestion Flexible 0-70 M FCP 100 Grande Europe 0-100 M FCP 100 Liberty M FCP FCP 100 Myria Concept Actions Europe FCP 66 Myria Concept Multistars FCP 100 UFF Action Fce A 4D C. FCP 100 UFF Actions France I FCP 100 UFF Avenir Euro-Valeur FCP 100 UFF Capital Diversifie FCP 48 UFF Capital Planete A FCP 100 UFF Croissance Patrimone A FCP 100 UFF Emergence A FCP 100 UFF Emergence I FCP 100 UFF Gde Eur 0-100 A FCP 99
Ufifrance Immobilier Ordinary Shares 20 90, Boulevard Pasteur, 75015, Paris Etoile Garanti Février 2020 FCP 89 Etoile Multi Gestion France FCP 63 Etoile Patrimoine FCP 40 Antarius Obli 1-3 Ans FCP 100 Etoile Banque Europe FCP 25 Etoile Tmt Europe FCP 22 Etoile Multi Gestion Actifs FCP 50 Etoile Multi Gestion Actifs Plus FCP 55 Etoile Patrimoine 20 FCP 24 Etoile Patrimoine 70 FCP 34 Etoile Patrimoine 50 SICAV 59 Etoile Actions Opportunités FCP 23 Etoile Actions Us FCP 38 Etoile Actions Rendement FCP 40 Etoile Multi Gestion Etats-Unis FCP 64 Etoile Actions Styles FCP 39 Etoile Consommation Europe FCP 37 Etoile Energie Europe FCP 36 Etoile Industrie Europe FCP 26 Etoile Santé Europe FCP 52 Etoile Multi Gestion Europe FCP 44 Antarius Fonds Actions Plus FCP 100 Antarius Fonds Obligataire FCP 100 Etoile Valeurs Moyennes FCP 45 Etoile Trésorerie FCP 21 Antarius Rotation Sectorielle FCP 97 Etoile Multi Gestion Monde FCP 61 Etoile Multi Gestion USA FCP 22 Etoile Obli Taux Plus FCP 54 Etoile Garanti Avril 2018 FCP 53 Etoile Garanti Juillet 2018 FCP 59 Etoile Cliquet 90 FCP 62 Etoile Convertibles FCP 38 Etoile Matières Premières FCP 56 53 avenue d’Iéna, 75116, Paris UFF Tremplin Patrimoine A FCP 100 37, Avenue des Champs Elysées, 75008, Paris
OPCI Logiprime Property Fund 100 41, Rue du Capitaine Guynemer, 92400, Courbevoie
Aviva Investors Real Estate France S.A. Ordinary Shares 100 Aviva Investors Real Estate Sgp Ordinary Shares 100 13 Rue Du Moulin Bailly, 92270, Bois Colombes 11 Rue De L’Echelle Ordinary Shares 100 Agents 3A Ordinary Shares 50 Aviva Assurances, Société Anonyme D’Assurances Incendie, Accidents Et Risques Divers
Aviva France Ordinary Shares 100 Aviva Solutions Ordinary Shares 100 Croissance Pierre Ii Ordinary Shares 100 Locamat SAS Ordinary Shares 100 Newco Ordinary Shares 100 Selectinvie – Societe Civile Immobiliere Ordinary Shares 100 Selectipierre – Société Civile Ordinary Shares 100 Societe Concessionaire Des Immeubles De La Pepiniere
Aviva Epargne Retraite Ordinary Shares 100 Aviva Investissements Ordinary Shares 100 Aviva Vie, Société Anonyme D’Assurances Vie Et De Capitalisation
Aviva Eur Corp Senior Debts Mutual Fund 100 FCT Artemid Senior Loan Mutual Fund 21 242, Rue de Rivoli, 75001, Paris Capza Priv Debt 2 A C. UCITS 100
MitonOptimal Rhodium GBP Fund Unit Trust 73 MitonOptimal Rhodium Singapore $ Fund Unit Trust 99 MitonOptimal Core Diversified US$ E Fund Unit Trust 46 MitonOptimal Core Diversified GBP E Fund Unit Trust 29 MitonOptimal Core Diversified Sing$ E Fund
Jaisingh Business Centre, Firs, 101 119/120 Passiwada Salam Road, Off Western Express Highway, Andhari East, Mumbai, 400099
Indonesia Pondok Indah Office Tower 3, 1st Floor, Jl. Sultan Iskandar Muda Kav. VTa, Pondok Indah, Jakarta Selatan, Jakarta, 12310
GAM Star Growth OEIC 23 Riverside Two, Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2
Invesco Global Health Care Fund Unit Trust 26 Invesco Global Technology Fund Unit Trust 27 Invesco Emerging Markets Equity Fund Unit Trust 26 Invesco Funds Series – Invesco UK Equity Fund
Invesco Global Select Equity Fund Unit Trust 30 2nd Floor IFSC House, International Financial Services Centre,1 Custom House Quay, North Dock, Dublin 1
Baring Korea Feeder Fund Unit Trust 24 25-28 North Wall Quay, IFSC, Dublin 1 CGWM Select Global Opportunity Fund OEIC 64 CGWM Select Global Affinity Fund OEIC 52 CGWM Select Global Diversity Fund OEIC 33 CGWM Select Opportunity Fund OEIC 45 CGWM Select Affinity Fund OEIC 22 Aviva Investors Euro Liquidity Fund ICVC 67 Aviva Investors Sterling Government Liquidity Fund
FPPE Fund Public Limited Company Shares Of No Par Value Shares, 1 Subscriber
Ordinary Shares 100 11-12 Hanover Square Ut2 Unit Trust 50 130 Fenchurch Street Ut2 Unit Trust 50 30 Warwick Street Ut2 Unit Trust 50 30-31 Golden Square Ut2 Unit Trust 50 Barratt House Ut2 Unit Trust 50 Chancery House London Ut2 Unit Trust 50 Irongate House Ut2 Unit Trust 50 New Broad Street House Ut2 Unit Trust 50 Pegasus House And Nuffield House Ut2 Unit Trust 50 W Nine Ut2 Unit Trust 50 3rd Floor Walker House, 28-34 Hill Street, St Helier, Channel Islands, JE4 8PN
1 Fitzroy Place Jersey Unit Trust2 Unit Trust 50 2 Fitzroy Place Jersey Unit Trust2 Unit Trust 50 Le Masurier House, La Rue Le Masurier, St Helier, Channel Islands, JE2 4YE
Yatra – (Saffron) Ordinary Shares 27 Lime Grove House, Green Street, St Helier, Channel Islands, JE1 2ST
20 Gracechurch Unit Trust Unit Trust 100 Cow Real Estate Investment Unit Trust Unit Trust 50 Designer Retail Outlet Centres (Livingston) Unit Trust
Encore Plus Lux Co Metzanine Ii S.À R.L. Ordinary Shares 7 Encore Plus Properties I S.À R.L. Ordinary Shares 7 Encore Plus Properties Ii S.À R.L. Ordinary Shares 7 Encore Plus Properties Iii SARL Ordinary Shares 7 Encore Plus Real Estate Bad Cannstatt S.À R.L.
Aviva Investors – European Equity Fund SICAV 36 10 Rue du Fort Bourbon, L-1249 Vh German Mandate Ordinary Shares 100 11 Rue du Fort Bourbon, L-1249 Centaurus SARL Ordinary Shares 100 12 Rue du Fort Bourbon, L-1249 Victor Hugo Ordinary Shares 100 14 Rue du Fort Bourbon, L-1249 Aviva Investors European Renewable Energy S.A.
The Fincrest Global Equity Fund OEIC 37 First Meridian Cautious Balanced Fund GBP
WSF Asian Pacific Fund OEIC 21 St Martin’s House, Le Bordage , St Peter Port
JPMorgan Indonesia Fund SICAV 35 6th Floor, Alexandra House, 18 Chater Road, Central
Equity Shares 100 2nd Floor, Prakash Deep Building 7, Tolstoy Marg, New Delhi, Delhi, 110001
Via Scarsellini 14, 20161, Milan Agenzia Aviva Srl Ordinary Shares 100 Avipop Assicurazioni Spa Ordinary Shares 50 Avipop Vita Spa Ordinary Shares 50 Aviva Italia Holding S.P.A Ordinary Shares 100 Aviva Italia S.P.A Ordinary Shares 100 Aviva Life Spa Ordinary Shares 100 Aviva Spa Ordinary Shares 51 14 Via Scarsellini, 20161, Milan Aviva Italia Servizi Scarl Ordinary Shares 85 Aviva Vita S.P.A Ordinary Shares 80 Petunia Ordinary A Shares 51 Piazzetta Guastalla 1, 20122, Milan Banca Network Investimenti Spa Ordinary Shares 25
Aviva Investors Asian Equity Income Fund SICAV 76 Aviva Investors Cells (GP) S.À R.L. Ordinary Shares 100 Aviva Investors Cells Scsp Limited Partnership 100 Aviva Investors Debt Europe Fund Ordinary Shares 100 Aviva Investors Dynamic Master Fund SICAV 100 Aviva Investors Ebc S.À R.L. Ordinary Shares 100 Aviva Investors Emerging Europe Equity Fund
Aviva Investors European Equity Fund SICAV 62 Aviva Investors European Equity Income Fund
Sachsenfonds GmbH Ordinary Shares 98 7 Rue du Fort Bourbon, L-1249 Logaxes Austria Ii S.À R.L. Ordinary Shares 85 Logaxes Austria Iii S.A R.L. Ordinary Shares 85 Logaxes Fund, FCP-Sif FCP 85 Logaxes Investment Properties S.À.R.L Ordinary Shares 85 9 Rue du Fort Bourbon, L-1249 EPI Nu SARL Ordinary Shares 100 2 Rue Du Fort Bourbon, L-1249 Aviva Investors Luxembourg Nominal Par Value Shares 100 16 Avenue De La Gare, L-1610 Aviva Investors Luxembourg Services S.À R.L.
Navigator Investment Services Limited Ordinary Shares 100 1 Raffles Quay, #27-13, South Tower, 048583
Ordinary A Shares 50 9 C/Camino Fuente De La Mora, 28050 Madrid
Aviva Gestion Sgiic Sa Ordinary Shares 100 Aviva Vida Y Pensiones, Sociedad Anonima De Seguros Y Reaseguros
Calle La Bolsa, 4, Malaga Unicorp Vida, Compania De Seguros Y Reaseguros Sociedad Anonima
Avda Andalucia, 10 -12, Malaga Ahorro Andaluz, S.A Ordinary Shares 50 Avenida Fernando De Los Rios, 6, Granada
Taiwan Rm D-1, 24F, No.7, Sec.5, Xin Yi Road, Taipei, 110, Taiwan
Blueprint (General Partner) Limited2 Ordinary Shares 25 Blueprint (Nominees) Limited2 Ordinary Shares 25 Blueprint Limited Partnership2 Limited Partnership 25 East Farmhouse, Cams Hall Estate, Fareham, PO16 8UT, United Kingdom
Axa Rosenberg American OEIC 94 50 Stratton Street, Lazard Multicap UK Income Fund OEIC 60 Exchange House, Primrose Street, F&C Global Bond Fund OEIC 31 F&C Pacific Growth Fd OEIC 32 F&C North American Fund OEIC 27 F&C Strategic Bond Fund OEIC 52 F&C Instl UK Eq OEIC 51 F&C Mm Navigator Progressive Fund OEIC 27 Calton Square, 1 Greenside Row, Baillie Gifford Managed OEIC 27 Woolgate Exchange, 25 Basinghall Street,
Actis China Investment Company Limited US$ A Shares 50 4th Floor, Raffles Tower, 19 Cybercity, Ebene
Encore + Eurocenter Ii Bv Ordinary Shares 7 Encore + Logistics Spain B.V. Ordinary Shares 7 Encore + Netherlands Bv Ordinary Shares 7 Encore + Spain I Bv Ordinary Shares 7 Poland Inflancka 4b, 00-189 Warszawa Aviva Sfio Subfundusz Aviva Oszczędnościowy
Aviva Investors Fio Nowych Spolek UCITS 81 Aviva Investors Fio Obligacji UCITS 68 Aviva Investors Fio Polskich Akcji UCITS 43 Plac Andersa 5, 61-894 Poznań Bz Wbk – Aviva Towarzystwo Ubezpieczen Ogolnych S.A.2
Ul Domaniewska 44, 02-672, Warsaw Aviva Services Spółka Z Ograniczoną Odpowiedzialnością
Aviva Asia Holdings Private Limited Ordinary Shares 100 Aviva Asia Pte Ltd Ordinary Shares 100 Aviva Financial Advisers Pte. Ltd Ordinary Shares 100 Aviva Global Services (Management Services) Private Ltd.
Catalina Islands, Slu Ordinary Shares 7 Encore Plus Logistica S.L. Ordinary Shares 7 Encore Plus Vaguada Sl Ordinary Shares 7
Avda de Bruselas – Numero 13, Edificio, America, Piso 1, Puerta d,Alcobendas 28-Madrid
Eólica Almatret S.L. Ordinary Shares 45 2 Plaza De La Fuensanta, Murcia Cajamurcia Vida Y Pensiones De Seguros Y Reaseguros Sa
Turkey Saray Mah., Adnan Büyüjdeniz Cad. No:12 34768 Umraniye, Istanbul, Turkey
United Kingdom 100 Wood Street, London. EC2V 7AN Livingbridge 4 Limited Partnership Limited Partnership 32 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ
Ordinary Shares 23 1st Floor Office Suite, 48-50 St Mary’s Gate, Lace Market, Nottinghham, England, NG1 1QA , United Kingdom
Aviva Investors Japan Equity Mom 1 Fund OEIC 78 Aviva Investors Managed High Income Fund
Aviva Investors Real Estate Limited Ordinary Shares 100 Aviva Investors Realm Energy Centres GP Limited
Nu 3Ps Limited Ordinary Shares 100 Nu Library For Brighton Limited Ordinary Shares 100 Nu Offices For Redcar Limited Ordinary Shares 100 Nu Offices For Surrey Limited Ordinary Shares 100 Nu Schools For Redbridge Limited Ordinary Shares 100 Nu Technology And Learning Centres (Hackney) Limited
Ordinary A Shares, Ordinary B Shares 41-42 Lowndes Square Management Company Limited
Ordinary A Shares Ordinary B Shares 43 Lowndes Square Management Company Limited
Ordinary A Shares, Ordinary B Shares 44-49 Lowndes Square Management Company Limited
Commercial Union Trustees Limited Ordinary Shares 100 Friends Life Funds Limited Ordinary Shares 100 Friends Life Investments Limited Ordinary Shares 100 General Accident Executor And Trustee Company Limited
Ipe Bv Ordinary Shares 100 LUC Holdings Limited Ordinary Shares 20 Opus Park Management Limited Company Limited By
Aviva Investors Cautious Pension Fund ACS 100 Aviva Investors Distribution Life Fund ACS 100 Aviva Investors Europe Equity Ex UK Fund ACS 100 Aviva Investors Global Equity Alpha Fund ACS 100
Pegasus House And Nuffield House LP2 Limited Partnership 50 Pegasus House And Nuffield House Nominee 1 Limited2
Rugby Radio Station (Nominee) Limited2 Ordinary Shares 50 Rugby Radio Station Limited Partnership2 Limited Partnership 50 Serviced Offices UK Nominee Limited2 Ordinary Shares 50 Spire Energy Limited2 Ordinary Shares 50
NU Local Care Centres (Farnham) Limited Ordinary Shares 100 NU Local Care Centres (West Park) Limited Ordinary Shares 100 NU Local Care Centres Limited Ordinary Shares 100 Nuppp Hard Services Limited Ordinary Shares 100 1 Poultry, London, EC2R 8EJ 20 Gracechurch Limited Partnership Limited Partnership 100 Aviva Investors Realm Infrastructure No.5 Limited
Aviva Special Pfi GP Limited Ordinary Shares 100 Aviva Special Pfi LP Limited Partnership 100 Barwell Business Park Nominee Limited Ordinary Shares 100 Biomass UK No. 3 Limited “Ordinary A Shares Deferred Shares” 100 Biomass UK No.1 LLP Limited Liability Partnership 100 Biomass UK No.2 Limited “A Shares B Shares C Shares Deferred Shares” 100 BMG (Mansfield) Limited Ordinary Shares 50 BMG (York) Limited Ordinary Shares 50 BMG (York) Partnership Trustco Limited Ordinary Shares 50 Boston Wood Recovery Limited Ordinary Shares 100 Capital Residential Fund Unit Trust 88 Chichester Health (Holdings) Limited Ordinary Shares 100 Chichester Health Plc Ordinary Shares 100 Church Street Nominee No.1 Limited Ordinary Shares 100 Church Street Nominee No.2 Limited Ordinary Shares 100 Church Street Nominee No.3 Limited Ordinary Shares 100 Cornerford Limited Ordinary Shares 50 Ebisu Investments Limited Ordinary Shares 100 Ees Operations 1 Limited Ordinary Shares 100 Free Solar (Stage 2) Limited Ordinary Shares 100 Free Solar Holdco Limited Ordinary Shares 100 Friends Slpm Limited Ordinary Shares 100 Gobafoss General Partner Limited Ordinary Shares 100 Gobafoss Partnership Nominee No 1 Ltd Ordinary Shares 100 Hemel Hempstead Estate Management Limited
Quarryvale One Limited Ordinary Shares 100 Quarryvale Three Limited Ordinary Shares 100 Renewable Clean Energy Limited Ordinary Shares 100 1-5 Lowndes Square Management Company Limited
Aviva Brands Limited Ordinary Shares 100 Aviva Commercial Finance Limited Ordinary Shares 100 Aviva Company Secretarial Services Limited
Aviva Credit Services UK Limited Ordinary Shares 100 Aviva Director Services Limited Ordinary Shares 100 Aviva Employment Services Limited Ordinary Shares 100 Aviva Europe Se Ordinary Shares 100 Aviva Insurance Services UK Limited Ordinary Shares 100 Aviva International Holdings Limited Ordinary Shares 100 Aviva International Insurance Limited Ordinary Shares 100 Aviva Investors UK Commercial Real Estate Senior Debt LP
Aviva Investors Global Services Limited Ordinary Shares 100 Aviva Investors Holdings Limited Ordinary Shares 100 Aviva Investors London Limited Ordinary Shares 100 Aviva Investors Pensions Limited Ordinary Shares 100 Aviva Investors Real Estate Finance Limited Ordinary Shares 100 Aviva Investors UK Fund Services Limited Ordinary Shares 100 Aviva Investors UK Funds Limited Ordinary Shares 100 Aviva Investors UK Nominees Limited Ordinary Shares 100 Aviva Overseas Holdings Limited Ordinary Shares 100 Aviva Public Private Finance Limited Ordinary Shares 100 Aviva Staff Pension Trustee Limited Ordinary Shares 100 Aviva UK Digital Ltd Ordinary Shares 100 Axcess 10 Management Company Limited Company Limited By
ORN Capital Services Limited Ordinary Shares 100 Stonebridge Cross Management Limited Company Limited By
Aviva Investors Sterling Gilt Fund ACS 100 Aviva Investors Stewardship International Equity Fund
Aviva Investors Pip Solar Pv No.1 Limited2 Ordinary Shares 100 Aviva Investors Special Pfi Spv Limited Ordinary Shares 100 Barratt House LP2 Limited Partnership 50 Barratt House Nominee 1 Limited2 Ordinary Shares 50 Barratt House Nominee 2 Limited2 Ordinary Shares 50 Aviva Investors Pip Solar Pv (General Partner) Limited2
Chancery House London LP2 Limited Partnership 50 Chancery House London Nominee 1 Limited2
Den Brook Energy Limited Ordinary Shares 100 Gw04 Pep Limited Ordinary Shares 100 New Oxford Street Limited Partnership Ordinary Shares 50 The Designer Retail Outlet Centres (General Partner) Limited
Turncole Wind Farm Limited Ordinary Shares 100 Woolley Hill Electrical Energy Limited Ordinary Shares 100 1 Fitzroy Place Limited Partnership2 Limited Partnership 50 2 Fitzroy Place Limited Partnership2 Limited Partnership 50 2-10 Mortimer Street (GP No 1) Limited2 Ordinary Shares 50 2-10 Mortimer Street GP Limited2 Ordinary Shares 50 2-10 Mortimer Street Limited Partnership2 Limited Partnership 50 Ascot Real Estate Investment LP2 Limited Partnership 50 Apia Regional Office Fund (General Partner) Limited2
Jacks Lane Energy Limited Ordinary Shares 100 c/o Anesco Limited, The Green Easter Park, Benyon Road , Reading, RG7 2PQ
Ado6 Pep Limited Ordinary Shares 100 Ce01 Pep Limited Ordinary Shares 100 Ce07 Pep Limited Ordinary Shares 100 Se06 Pep Limited Ordinary Shares 100 Pitheavlis, Perth, Perthshire, PH2 0NH Aviva (Peak No.1) UK Limited Ordinary Shares 100 Aviva Insurance Limited Ordinary Shares 100 Aviva Investors (FP) Limited Ordinary Shares 100 Aviva Investors (GP) Scotland Limited Ordinary Shares 100 Pixham End, Dorking, Surrey, RH4 1QA 21/2 Devonshire Square General Partner Limited
Atlantic Industrial Nominees Limited Ordinary Shares 100 Aviva Administration Limited Ordinary Shares 100 Aviva Investment Solutions UK Limited Ordinary Shares 100 Bankhall Investment Management Limited Ordinary Shares 100 Countrywide Independent Advisers Limited
DBS Management Limited Ordinary Shares 100 DBS Financial Management Limited Ordinary Shares 100 Financial Options Services Limited Ordinary Shares 100 FP Group Limited Ordinary Shares 100 Friends Ael Trustees Limited Ordinary Shares 100 Friends Aellas Limited Ordinary Shares 100 Friends Aelris Limited £1 Stock Shares 100 Friends Aslh Limited Ordinary Shares 100 Friends Life And Pensions Limited Ordinary Shares 100 Friends Life Assurance Society Limited Ordinary Shares 100 Friends Life Company Limited Ordinary Shares 100 Friends Life Distribution Limited Ordinary Shares 100 Friends Life FPG Limited Ordinary Shares 100 Friends Life FPL Limited Ordinary Shares 100 Friends Life FPLMA Limited Ordinary Shares 100 Friends Life Holdings Plc Ordinary Shares 100 Friends Life Investment Solutions Limited Ordinary Shares 100 Friends Life Limited Ordinary Shares 100 Friends Life Management Services Limited Ordinary Shares 100 Friends Life Marketing Limited Ordinary Shares 100 Friends Life Secretarial Services Limited Ordinary Shares 100
Sesame Desktop Services Limited Ordinary Shares 100 Sesame General Insurance Services Limited Ordinary Shares 100 Sesame Investment Services Limited Ordinary Shares 100 Sesame Limited Ordinary Shares 100 Sesame Mortgages Limited Ordinary Shares 100 Sesame Network Limited Ordinary Shares 100 Sesame Regulatory Services Limited Ordinary Shares 100 Sesame Select Services Limited Ordinary Shares 100 Sesame Services Limited Ordinary A Shares 100 Silicon Properties Limited Ordinary Shares 100 Suntrust Limited Ordinary Shares 100 The I.F.A. Training School Limited Ordinary Shares 100 United Kingdom Temperance And General Provident Institution
RAC Pension Trustees Limited Ordinary Shares 100 Solus (London) Limited Ordinary Shares 100 Synergy Sunrise (Broadlands) Limited Ordinary Shares 100 4th Floor, New London House, 6 London Street, London, EC3R 7LP
Polaris U.K. Limited Ordinary Shares 39 Wellington Row, York, YO90 1WR Aviva (Peak No.2) UK Limited Ordinary Shares 100 Aviva Annuity UK Limited Ordinary Shares 100 Aviva Client Nominees UK Limited Ordinary Shares 100 Aviva Equity Release UK Limited Ordinary Shares 100 Aviva ERFA 15 UK Ltd Ordinary Shares 100 Aviva Life & Pensions UK Limited Ordinary Shares 100 Aviva Life Holdings UK Limited Ordinary Shares 100 Aviva Life Services UK Limited Ordinary Shares 100
Friends Provident Pensions Services Limited Ordinary Shares 100 Newgate Street Properties Limited Ordinary Shares 100 Regional Properties Management Limited Ordinary Shares 100 30 Finsbury Square, London, EC2P 2YU Defined Returns Limited Ordinary Shares 29 Dextra Court Properties Limited Ordinary Shares 100 Fp Finance Limited Ordinary Shares 100 Friends Life Bha Limited Ordinary Shares 100 Friends Pensions Limited Ordinary Shares 100 Ifaengine Limited Ordinary Shares 100 NDF Administration Limited Ordinary Shares,
Sesame Mortgage Services Limited Ordinary Shares 100 Melrose House , 42 Dingwall Road , Croydon, England, CR0 2NE
Health & Case Management Limited Ordinary Shares, Preference Shares 2 Rougier Street, York, YO90 1UU Aviva Trustees UK Limited Ordinary Shares 100
Healthcode Limited Ordinary C Shares, Ordinary E Shares 1st Floor, 45 Grosvenor Road, St Albans, Hertfordshire, AL1 3AW
Broadwalk House, 5 Appold Street, London, England And Wales, EC2A 2HA
UKp Holdings Inc. Common Stock Shares 100 AI-Recap Carry I, LP Limited Partnership 100 Aviva Investors -Recap GP I, Llc Limited Partnership 100 2222 Grand Avenue, Des Moines Ia 50312
Crystal Clear Financial Advice Limited Ordinary Shares 100 Cumberland Place Management Company Limited
Friends Life Services Limited Ordinary Shares 100 Friends Life Staff Schemes Limited Ordinary Shares 100 Friends Life Wf Limited Ordinary Shares 100 Friends Life Wl Limited Ordinary Shares 100 Friends Provident Distribution Holdings Limited
Synergy Sunrise (Bowthorpe) Limited Ordinary Shares 100 Synergy Sunrise (Sentinel House) Limited Ordinary Shares 100 Synergy Sunrise (Yorkshire House) Limited Ordinary Shares 100 Undershaft (Nulla) Limited Ordinary Shares 100 5 Lister Hill, Horsforth, Leeds, England, LS18 5AZ
United States of America 2711 Centerville Road, Ste 400, Wilimington DE 19808
Common Stock Of No Par Value Shares 1209 Orange Street, City Of Wilmington, De 19801
Ai-Recc I GBP, LLC Sole Member 100 Aviva Investors Americas Llc Sole Member 100 National Corporate Research Limited, 850 New Burton Road, Suite 201, Dover, Delaware Kent County 19904
62 – Subsequent events For details of subsequent events relating to: • subsidiaries – refer to note 3 (d) • joint ventures – refer to note 18 (c) • insurance liabilities – refer to note 40 (c)(iii) • organisational structure – refer to note 60
Balance at 1 January 1,012 200 1,185 6,438 10,863 70 3,124 1,116 24,008 Profit for the year — — — — — — 1,559 — 1,559 Other comprehensive income — — — — (1,742) — (6) — (1,748) Total comprehensive income for the year — — — — (1,742) — 1,553 — (189) Dividends and appropriations 15 — — — — — — (973) — (973) Reserves credit for equity compensation plans — — — — — 38 — — 38 Shares issued under equity compensation plans 3 — 12 — — (30) 26 — 11 Novation of subsidiary company’s tier 1 notes — — — — — — — — — Issue of share capital – acquisition of Friends Life — — — — — — — — — Aggregate tax effect C — — — — — — 17 — 17
Where applicable, the accounting policies of the Company are the same as those of the Group on pages 134 to 147. The notes identified alphabetically on pages 272 to 276 are an integral part of these separate financial statements. Where the same items appear in the Group financial statements, reference is made to the notes (identified numerically) on pages 154 to 267.
Profit for the year before tax 1,464 562 Tax credit C 95 115
Other comprehensive (loss)/income Items that may be reclassified subsequently to income statement Fair value (losses)/gains on investments in subsidiaries and joint ventures E (1,742) 1,095
Balance at 1 January 737 200 1,172 735 9,768 65 3,137 892 16,706 Profit for the year — — — — — — 677 — 677 Other comprehensive income — — — — 1,095 — — — 1,095 Total comprehensive income for the year — — — — 1,095 — 677 — 1,772 Dividends and appropriations 15 — — — — — — (724) — (724) Reserves credit for equity compensation plans — — — — — 40 — — 40 Shares issued under equity compensation plans 3 — 13 — — (35) 19 — — Novation of subsidiary company’s tier 1 notes — — — — — — — 224 224 Issue of share capital – acquisition of Friends Life 272 — — 5,703 — — — — 5,975 Aggregate tax effect C — — — — — — 15 — 15
Assets Non-current assets Investments in subsidiaries A 40,521 42,452 Investment in joint venture 18a, A 511 322 Loans owed by subsidiaries I 5,941 553 Deferred tax assets C 156 191 Current tax assets C 135 130 47,264 43,648 Current assets Other amounts owed by subsidiaries I 321 233 Other assets 11 12 Cash and cash equivalents 82 188
Statement of cash flows For the year ended 31 December 2016
(iii) Employee numbers The staff costs recognised by the Company represent recharges of employee related expenses attributable to the Company. The number of persons employed by the Company was nil (2015: nil).
(iv) Equity compensation plans All transactions in the Group’s equity compensation plans involve options and awards for ordinary shares of the Company. Full disclosure of these plans is given in the Group consolidated financial statements, note 31. The cost of such options and awards is borne by all participating businesses and, where relevant, the Company bears an appropriate charge. As the majority of the charge to the Company relates to directors’ options and awards, for which full disclosure is made in the Directors’ Remuneration Report, no further disclosure is given here.
Deferred tax Origination and reversal of temporary differences 26 1 Changes in tax rates or tax laws 11 20 Recognition of unprovided deferred tax assets — (8)
(iii) Tax credited to equity Tax credited directly to equity in the year, in respect of coupon payments on the direct capital instrument and tier 1 notes, amounted to £17 million (2015: £15 million).
The reductions in rate from 20% to 19% and then to 17% have been used in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2016. The reduction in the future corporation tax rates has resulted in a reduction in the net deferred tax asset of £11 million charged to the income statement. This is offset by a rate change credit of £5 million, reflecting a partial utilisation of the deferred tax asset within current tax, resulting in a net £6 million charge noted in the tax reconciliation.
(v) Deferred tax The prior year net deferred tax asset of £188 million has been reclassified as a deferred tax asset of £191 million and a deferred tax liability of £3 million in the balance sheet, to reflect the revised disclosure required. A deferred tax asset of £156 million (2015: £191 million), arising in respect of deferred interest, and a deferred tax liability of £4 million (2015: £3 million) in respect of unremitted earnings, has been recognised at 31 December 2016 at 17% (2015: 18%). The Company does not have any unrecognised temporary differences (2015: £nil).
D – Direct capital instrument and tier 1 notes Details of the Direct Capital instrument and tier 1 notes are given in the Group consolidated financial statements, note 34. The 6.875% £210 million STICS are reflected in the Company financial statements at a value of £224 million (2015: £224 million) following the transfer at fair value from Friends Life Holdings plc on 1 October 2015.
(i) Subsidiaries Movements in the Company’s investments in its subsidiaries are as follows: Fair value as at 1 January 42,452 33,930 Acquisition of Friends Life — 5,975 Issuance of shares in Aviva Group Holdings — 1,566 Movement in fair value (1,931) 981
Finance (No 2) Act 2015 introduced legislation reducing the rate of corporation tax from 20% at 1 April 2016 to 19% from 1 April 2017 and to 18% from 1 April 2020. The Finance Act 2016, which received Royal Assent on 15 September 2016, will reduce the corporation tax rate further to 17% from 1 April 2020.
The tax effect of £17 million (2015: £15 million) is recognised in respect of coupon payments of £85 million (2015: £72 million) on the direct capital instrument and tier 1 notes.
Within 1 year 642 328 970 485 303 788 1 – 5 years 570 1,305 1,875 — 1,212 1,212 5 – 10 years 427 1,572 1,999 — 1,514 1,514 10 – 15 years 800 1,554 2,354 800 1,514 2,314 Over 15 years 4,898 3,499 8,397 4,448 3,496 7,944
Financial liabilities owed by the Company as at the balance sheet date are largely in respect of borrowings (details of which are provided in note F and the Group consolidated financial statements, note 49) and loans owed to subsidiaries. Loans owed to subsidiaries were within agreed credit terms as at the balance sheet date.
Currency risk The Company’s direct subsidiaries are exposed to foreign currency risk arising from fluctuations in exchange rates during the course of providing insurance and asset management services around the world. The exposure of the subsidiaries to currency risk is considered from a Group perspective in the Group consolidated financial statements, note 56(c)(v).
Liquidity risk Liquidity risk is the risk of not being able to make payments as they become due because there are insufficient assets in cash form. The Company’s main sources of liquidity are liquid assets held within the Company and its subsidiaries Aviva Group Holdings Limited and Friends Life Holdings plc, and dividends received from the Group’s insurance and asset management businesses. Sources of liquidity in normal markets also includes a variety of short and long-term instruments including commercial papers and medium and long-term debt. In addition to the existing liquid resources and expected inflows, the Company maintains significant undrawn committed borrowing facilities (£1,650 million) from a range of leading international banks to further mitigate this risk.
Balance at 1 January 2015 735 9,768 65 3,137 Arising in the year: Profit for the year — — — 677 Fair value gains on investments in subsidiaries and joint venture — 1,095 — — Premium gained as part of Friends Life acquisition 5,703 — — — Dividends and appropriations — — — (724) Reserves credit for equity compensation plans — — 40 — Issue of share capital under equity compensation scheme — — (35) 19 Aggregate tax effect — — — 15
Balance at 31 December 2015 6,438 10,863 70 3,124 Arising in the year: Profit for the year — — — 1,559 Fair value gains on investments in subsidiaries and joint venture — (1,742) — — Remeasurements of pension schemes — — — (6) Dividends and appropriations — — — (973) Reserves credit for equity compensation plans — — 38 — Issue of share capital under equity compensation scheme — — (30) 26 Aggregate tax effect — — — 17
F – Borrowings The Company’s borrowings comprise: Subordinated debt 5,916 5,202 Senior notes 722 — Commercial paper 642 485
Maturity analysis of contractual undiscounted cash flows: Principal Interest Total Principal Interest Total £m £m £m £m £m £m
Total contractual undiscounted cash flows 7,337 8,258 15,595 5,733 8,039 13,772
Where subordinated debt is undated, the interest payments have not been included beyond 15 years. Annual interest payments in future years for these borrowings are £49 million (2015: £49 million).
The business of the Company is managing its investments in subsidiary and joint venture operations. Its risks are considered to be the same as those in the operations themselves and full details of the major risks and the Group’s approach to managing these are given in the Group consolidated financial statements, note 56. Such investments are held by the Company at fair value in accordance with accounting policy D.
The fair values of the subsidiaries and joint ventures are estimated using applicable valuation models, underpinned by the Company’s market capitalisation. This uses the Company’s closing share price at year end. Given that the key input into the valuation model is based on an observable current share price, and therefore sensitive to movements in that price, the valuation process is not sensitive to non-observable market assumptions.
I – Related party transactions The Company receives dividend and interest income from subsidiaries and pays interest and fee expense to those subsidiaries in the normal course of business. These activities are reflected in the table below. Loans to and from subsidiaries are made on normal arm’s-length commercial terms. The maturity analysis of the related party loans is as follows: Loans owed by subsidiaries
Within 1 year — — 1 – 5 years 3,111 369 Over 5 years 2,830 184
Within 1 year 156 143 299 — 132 132 1 – 5 years 13,098 336 13,434 10,256 132 10,388 Over 5 years — — — — — —
Within the 2016 loan principal balance is £9,990 million relating to a facility provided by General Accident plc. This loan has a maturity date of 31 December 2017, however it is the intention of both parties that this facility will be renewed in full upon maturity and has been presented within 1 – 5 years maturity.
Of the related parties’ payables, £7,306 million (2015: £4,118 million) are not secured and no guarantees were received in respect thereof. The remaining £9,990 million (2015: £10,100 million) are secured against the ordinary share capital of Aviva Group Holdings Limited. The payables will be settled in accordance with normal credit terms. Details of guarantees, indemnities and warranties given by the Company on behalf of related parties are given in note 52(f).
In this section Page Financial and operating performance 278 Selected consolidated financial data 292 Information on the Company 294 Analysis of investments 301 Contractual obligations 305 Risk and capital management 306 Corporate responsibility key performance indicators 310 Corporate responsibility assurance statement 311
IN THIS SECTION 278 Financial and operating performance 292 Selected consolidated financial data 294 Information on the Company 301 Analysis of investments 305 Contractual obligations 306 Risk and capital management 310 Corporate responsibility key performance indicators 311 Corporate responsibility assurance statement
There was a favourable movement of £311 million (2015: £235 million adverse) relating to the Group’s staff pension schemes which has been recognised in other comprehensive income. This was principally due to increased asset values driven by a reduction in interest rates in the UK, partly offset by an increase in the defined benefit obligation following a decrease in the UK discount rate. See ‘IFRS Financial statements – note 48 – Pension obligations’ for further details.
The economies where the Group has operations that were impacted in 2016 by estimated low growth include: Italy 0.9%2, France 1.3%1 and Canada 1.3%1. Economic growth in the UK was at 2.0%1. Some of our other markets experienced stronger growth, for example 3.3%2 in Turkey, 3.1%2 in Poland, and 6.7%1 in China.
Capital and credit market conditions An important part of our business involves investing client, policyholder and shareholder funds across a wide range of financial investments, including equities, fixed income securities and properties. Our results are sensitive to volatility in the market value of these investments, either directly because we bear some or all of the investment risk, or indirectly because we earn management fees for investments managed on behalf of policyholders. Investment market conditions also affect the demand for a substantial portion of our life insurance products. In general, rising equity price levels have a positive effect on the demand for equity-linked products, such as unit trusts and unit-linked life insurance products, and conversely have a negative effect on the demand for products offering fixed or guaranteed minimum rates of return. Declining equity price levels tend to have the opposite effects.
• Following the change in the Ogden discount rate from 2.5% to minus 0.75% as announced by the Lord Chancellor on 27 February 2017, an exceptional charge within other nonoperating items of £475 million (2015: £nil) has been recognised by the Group.
In our long-term insurance and savings business we make assumptions about key non-economic factors, such as the mortality rate that we expect to be experienced by our policyholders. In countries where the life expectancy is growing, this will need to be reflected in our pricing models as lower mortality rates will increase profitability of life insurance products but will reduce the returns on annuity products. We review our assumptions against our own experience and industry expectations.
General insurance and health underwriting cycle Our general insurance and health business is comprised of our property and casualty insurance and health insurance operations. In 2016, general insurance and health sales accounted for 39% of Group net written premiums (NWP). Demand for general insurance is usually price-sensitive because of the limited degree of product differentiation inherent in the industry. As a result, the price of insuring property and casualty risks is subject to a cycle (called an underwriting cycle). In periods when the price of risk is high, the high profitability of selling insurance attracts new entrants and hence new capital into the market. Increased competition, however, drives prices down. Eventually the business becomes uneconomic and some industry players, suffering from losses, exit the market while others fail, resulting in lower capital invested within the market. Decreased competition leads to increasing prices, thereby repeating the cycle. Our various general insurance markets are not always at the same stage of the underwriting cycle.
Government policy and legislation Changes in government policy and legislation are applicable to our business in many of the markets in which we operate, particularly in the UK and may affect the results of our operations. These include changes to the tax treatment of financial products and services, government pension arrangements and policies, the regulation of selling practices and the regulation of solvency standards. Such changes may affect our existing and future business by, for example, requiring us to change our range of products and services, causing customers to cancel existing policies, requiring us to redesign our technology, requiring us to retrain our staff or increase our tax liability. As a global business, we are exposed to various local political, regulatory and economic conditions, and business risks and challenges which may affect the demand for our products and services, the value of our investments portfolio and the credit quality of local counterparties. Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. For details please refer to the section ‘Shareholder information – Regulation’.
Movements in exchange rates may affect the value of consolidated shareholders’ equity, which is expressed in sterling. Exchange differences taken to other comprehensive income arise on the translation of the net investment in foreign subsidiaries, associates and joint ventures. This aspect of foreign exchange risk is monitored centrally against limits that we have set to control the extent to which capital deployment and capital requirements are not aligned. We use currency borrowings and derivatives when necessary to keep currency exposures within these predetermined limits, and to hedge specific foreign exchange risks when appropriate; for example, in any acquisition or disposal activity.
Demographic trends Our results are affected by the demographic make-up of the countries in which we operate. The types of products that we sell reflect the needs of our customers. For example, in countries with a high proportion of older people, a larger proportion of our sales will reflect their needs for pre-and post-retirement planning. Our sales levels will also be impacted by our ability to help provide useful information to such policyholders on retirement planning and to offer products that are competitive and respond to such policyholders’ needs.
1 International Monetary Fund world economic outlook (January 2017) 2 International Monetary Fund world economic outlook (October 2016)
During 2016, sterling weakened against a number of currencies including the euro, Canadian dollar and Polish zloty. This resulted in a foreign currency gain in other comprehensive income of £1,128 million (2015: £378 million loss).
The impact of these fluctuations is limited to a significant degree, however, by the fact that revenues, expenses, assets and liabilities within our non-UK operations are generally denominated in local currencies.
Investment type business, which accounts for most of our non-profit business, includes predominantly unit-linked life and pensions business where the risk of investing policy assets is borne entirely by the policyholder. Operating earnings arise from unit-linked business when fees charged to policyholders based on the value of the policy assets exceed costs of acquiring new business and administration costs. Shareholders bear the risk of investing shareholder capital in support of these operations.
For long-term insurance and savings new business, we define sales as the sum of the present value of new business premiums (PVNBP) of life, pension and savings products and investment sales.