6 Maurice was appointed as Group CEO on 4 March 2019. Prior to his appointment he was CEO of International Insurance and his basic salary and benefits were set in Canadian dollars, which have been converted to sterling using an average exchange rate for 2019 of CAD 1.70 7 Jason was appointed to the Board on 26 September 2019. For 2019, the values relate to the period while he was an ED 8 Tom stepped down from the Board on 30 June 2019; values for 2019 relate to the period while he was an ED. Details of Tom’s leaving arrangements are set out on page 93. 9 Andy stepped down from the Board on 24 April 2019; values for 2019 relate to the period while he was an ED. Details of Andy’s leaving arrangements are set out on page 93. 10 Year on year decrease is primarily driven by changes in Board membership.
Additional disclosures in respect of the single total figure of remuneration table Malus and clawback As part of the annual pay review process, the Committee has considered whether any recovery or withholding under the malus and clawback provisions of Aviva’s incentive plans is required by any current circumstances. No incidents concerning the EDs are currently subject to action under Aviva’s Malus and Clawback policy.
1 This measure is derived from the Group adjusted operating profit Alternative Performance Measure APM. Further details of this measure are included in the ‘Other Information’ section of the Annual report and accounts. 2 Group adjusted operating profit is an APM which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the ‘Other Information’ section within the Annual report and accounts for further information. 3 This is an Alternative Performance Measure (APM) which provides useful information to supplement an understanding of our financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
Step I – Bonus scorecard The table below sets out performance against financial and non-financial targets under the bonus scorecard. The overall scorecard outcome percentage applies to all of the EDs.
Financial measures (70% of total) Operating EPS1,2 20.0% 54.0p 58.3p 62.6p 57.2p 17.6% Cash remittances3 25.0% £2,531m £2,736m £2,941m £2,597m 16.5% OCG3 25.0% £1,535m £1,735m £1,935m £2,259m 50.0% Total financial measures 70.0% — — — — 84.1% Strategic measures (30% of total)
EPS1,2 25% Cash remittances3 10% Multiple Product Holdings (MPH) St ra te gi c m ea su re s
Typically, any adjustments would be in the range of +/- 15%, but may be larger for major customer and/or risk & controls issues.
The assessments performed by our Risk and Internal Audit functions looked at the effectiveness and robustness of the risk framework and control environment. The outputs of the assessments were shared with the Risk and Audit Committees ahead of decisions being made on impacts to bonus. Notwithstanding improvements made in 2019, it was concluded that further work is required to embed a strong risk culture and deliver the target state risk and control environment against a backdrop of internal/external change. As a result, and to provide a clear statement of the focus on continual improvement across 2020 the Committee applied a downward adjustment of 10% to the bonus scorecard outcome in respect of this modifier.
1 Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the ‘Other Information’ section within the Annual report and accounts for further information.
• Maintained financial strength of the Group and achieved 6% Group adjusted operating profit1 growth and increased SII RoE2 to 14.3%
• Maintained financial strength of the Group with a SII cover ratio2,3 of 206% and centre liquidity4 of £2.4 billion despite macroeconomic volatility, particularly low interest rates across Europe (most notably in France) and continued uncertainty around the decision for the UK to leave the European Union
• Continued sponsorship of Aviva’s Generations community, focussing on supporting an intergenerational workplace, as well as acting as the Government’s Business Champion for Older Workers
Tom was the Group CFO until 30 June 2019. Over this period Tom played a critical role in supporting Maurice in his transition to CEO. Notable achievements in 2019 include: • Driving delivery of the overall financial objectives for the Group and delivered strong half year financial results as presented during the interim results
• Coordinated IFRS17 implementation and the Finance & Innovation programme to minimise their joint costs and managed dependencies
Strategic report Governance IFRS financial statements Other information 4 2019 bonus outcomes for Executive Directors
Bonus scorecard (0% – 200%) 100.2%1 101.1% 101.1% 101.1% – Non-financial modifiers (10.0%) (10.0%) (10.0%) (10.0%) – Individual adjustment 5.0% 10.0% 0.0% 0.0%
Final Outcome 95.2% 101.1% 91.1% 91.1% Target opportunity 100% of salary 100% of salary 100% of salary 100% of salary Maximum opportunity for 20192 192% of salary3 150% of salary 150% of salary 150% of salary
Discretion The Committee is conscious of the provisions of the 2018 Code, with remuneration committees being encouraged to review incentive outcomes against individual and company performance, together with any wider circumstances, and to exercise independent judgement and discretion in relation to remuneration outcomes. Taking into account the impact of the outcome of the quality of earnings assessment and the non-financial modifiers, and an assessment of individual performance, the Committee is of the view that these outcomes appropriately reflect the overall performance of Aviva during the year and are aligned with the experience of shareholders over this period and no discretion regarding outcomes was therefore exercised by the Committee.
3 Jason was not an ED at the time his 2019 LTIP and ABP awards were made. The 2019 LTIP award is a RSU award. This award does not have performance conditions. 4 Andy stepped down from the Board on 24 April 2019 and Tom on 30 June 2019. 5 LTIP awards for Tom and Andy have subsequently lapsed, in line with the leaving arrangements outlined on page 93.
Achievement of Operating EPS1,2 targets over the three-year performance period Percentage of shares in award that vests based on achievement of Operating EPS1 targets
1 This measure is derived from the Group adjusted operating profit Alternative Performance Measure (APM). Further details of this measure are included in the ‘Other Information’ section of the Annual report and accounts. 2 Group adjusted operating profit is an APM which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the ‘Other Information’ section within the Annual report and accounts for further information. 3 This is an Alternative Performance Measure (APM) which provides useful information to supplement an understanding of our financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts. 4 The estimated Solvency II position represents the shareholder view. Please refer to note 58 and the ‘Other Information’ section of the Annual report and accounts for more information.
TSR targets for awards made in 2019 Relative TSR performance determines the vesting of the other 50% of the LTIP award. For the 2019 grant, Aviva’s TSR performance will be assessed against that of the following companies: Aegon, Allianz, Assicurazioni Generali, AXA, CNP Assurances, Direct Line Group, Legal & General, Lloyds Banking Group, Old Mutual, Phoenix, Prudential, RSA, Standard Life Aberdeen and Zurich Insurance.
Payments to past directors (audited information) Russell Walls retired from the Board with effect from 8 May 2013. • Russell was appointed as a Non-Executive Director (NED) of Aviva Italia Holdings S.p.A on 4 December 2014 and on 30 April 2015 was appointed as Chair and subsequently stepped down on 26 September 2019 • The emoluments he received in respect of this directorship for the 2019 financial year was €67,500
We announced on 5 June 2019 that the Board and Tom Stoddard had decided that Tom would step down as CFO and as a Director of the Company from 30 June 2019. • Tom was placed on garden leave for six months with effect from 1 July 2019 to 31 December 2019. During this period, he continued to receive his salary and contractual benefits. For the period of his garden leave these totalled £531,336 • In line with his arrangements while a Director, Tom will receive tax support for the UK financial year 2019/20 and the US tax year 2019. The total value of this benefit is anticipated to be £9,000 • Tom received a pro-rated bonus in respect of 2019, reflecting the portion of the year worked prior to going on garden leave. The bonus was determined on the normal timetable and can be found in the bonus section in table 4 • Reflecting his performance during his tenure, leadership and commitment demonstrated during the Group CEO transition, the Committee exercised discretion to treat Tom as a good leaver under the ABP and LTIP – Tom’s outstanding deferred share awards under ABP will continue and will vest on the normal vesting dates – Tom’s 2017 and 2018 LTIP awards will to continue to vest, pro-rated for the time from the date of grant to his leave date and remain subject to performance vesting. His 2019 LTIP award has lapsed – All outstanding share awards will remain subject to malus and clawback
• In line with the Policy, Tom was entitled to a capped contribution of £5,000 (excluding VAT) towards legal fees incurred in connection with his departure
Total emoluments of NEDs 1,444 1,512 114 106 1,558 1,618 177 178 1,735 1,796 1 Benefits include the gross taxable value of expenses relating to accommodation, travel and other expenses incurred on Company business in accordance with our expense policy and may vary year-on-year dependent on the time required to be spent in the UK. 2 Claudia Arney and Glyn Barker retired from the Board on 31 December 2019. 3 Patrick Flynn was appointed to the Board on 16 July 2019 and George Culmer on 25 September 2019. 4 Michael Hawker stepped down from the Board on 31 March 2019 and Keith Williams on 23 May 2019.
The Aviva plc total amount paid to NEDs in 2019 was £1,558,000 which is within the limits set in the Company’s Articles of Association, as previously approved by shareholders.
Subsidiary company board memberships During the year, the following NEDs were appointed as directors of subsidiary companies to support and further enhance the flow of information between material subsidiaries and the Group. The additional emoluments received in respect of these roles are detailed below: • Claudia Arney received an additional fee of £72,500 (2018: £78,346) in respect of her duties as Non-Executive Chairman and Conduct
Committee member of Aviva UK Digital Limited. Claudia subsequently stepped down on 31 December 2019. • Patricia Cross received an additional fee of £60,000 (2018: £60,000) in respect of her duties as Senior Independent Director of Aviva Investors
Holdings Limited • Belén Romana García received an additional fee of €50,000 (2018: €44,712) in respect of her duties as a Board member of Aviva Italia Holding
S.p.A., and as a committee member of the Audit and Risk Committees • Sir Adrian Montague became a director of Aviva Group Holdings Ltd on 9 October 2018 and stepped down on 4 March 2019 as part of his transition back to his Non-Executive Chairman role. He also became a director of Aviva SA on 24 April 2019. He received no fees in respect of these appointments
% change in basic salary 2018-2019 % change in bonus 2018-2019 % change in benefits 2018-2019
Group CEO1 (8.5)% 4.7% 269.4% All UK-based employees2 3.8% (10.8)% 27.2% 1 Salary, annual bonus and benefit amounts for 2019 for the Group CEO and 2018 for the former Group CEO have been annualised up to reflect what they would have been over a full 12-month period to add comparison. The increase in benefits reflects relocation and taxable travel and subsistence. 2 The increase in benefits for UK based employees has been driven by changes in pieces of tax legislation leading to a) some car parking provision now being a taxable benefit and b) an increase in company car benefit. Without these changes, benefits increased by 4.3%.
Historical TSR performance and Group CEO remuneration outcomes Table 11 compares the TSR performance of the Company over the past ten years against the TSR of the FTSE 100. This index has been chosen because it is a recognised equity market index of which Aviva is a member. In addition, median TSR performance for the LTIP comparator group has been shown. The companies which comprise the LTIP comparator group for TSR purposes are listed above table 8.
Maurice Tulloch — — — — — — — — — 50.0% Mark Wilson — — — — — 53.0% 41.3% 36.9% — — Andrew Moss 72.3% 81.7% — — — — — — — —
1 Maurice was appointed Group CEO on 4 March 2019 2 Mark joined the Board as an ED with effect from 1 December 2012 and became Group CEO on 1 January 2013. Mark stepped down as Group CEO and left the Board on 9 October 2018 3 Andrew resigned from the Board with effect from 8 May 2012 and left the Company on 31 May 2012
Sir Adrian Montague remained on his Non-Executive Chairman remuneration arrangements while acting as Executive Chairman for the period 9 October 2018 to 4 March 2019. Given that he was not performing the role of Group CEO and did not receive a typical CEO remuneration package, he is not shown in this table.
The increase in the ratio reflects: • 2019 remuneration outcomes for the CEO include LTIP vesting, whereas there was no LTIP vesting for 2018 • Maurice Tulloch was CEO for approximately one month longer in 2019 than Mark Wilson was in 2018 • A slightly higher bonus outturn for Maurice Tulloch as a % of maximum (48% for period as CEO compared to 42% in 2018 for Mark Wilson) • An increase in benefits partly reflecting relocation costs which run for 24 months from appointment
Whilst the CEO pay ratio has increased, the salary and total remuneration for each quartile employee has also increased (median salary has increased 3.9% and median total compensation increased 4.5%).
Table 14 below provides further information on the total remuneration figure for each quartile employee, and the salary component within this.
As referred to above, we recognise that both 2019 and 2018 are unusual years for Aviva resulting in a Group CEO pay ratio which is likely to be lower than we might typically expect. Shareholders may find it helpful to consider what the ratio might have been in a more normal year, recognising that the ratio may well vary significantly from year-to-year. Specifically, we have considered the ratio if Maurice had been employed for the full year 2019 and had received an on-target annual bonus of 100% of salary (half of maximum) and LTIP vesting at 150% of salary (half of maximum).
At Aviva, we consider that we are equally focused on our colleagues as we are on our customers. We work hard to recognise the individual needs of colleagues and in this context, we are proud of the reward, benefits and overall career packages that we offer our colleagues: • In the UK, we have been an accredited Living Wage employer since April 2014 • We have a structured salary progression scheme for our frontline colleagues, providing incremental salary increases over the first few years in role as individuals develop and gain experience • We conduct regular market reviews of our salary ranges in order to maintain competitiveness to market rates, and we move everyone who is below a band to at least the minimum of that range each year • We have a comprehensive flexible benefits offering, providing colleagues with the opportunity to select the benefits that matter most to them including equal parental leave • Our competitive pension scheme provides an employer contribution of 14% of salary (subject to the level of employee contribution). Above this level, we share employer National Insurance savings with our colleagues • Our broader Wellbeing offering aims to promote health and wellness among our colleagues. Our priorities in 2019 were mental and financial wellbeing, our priorities for 2020 are mental wellbeing and menopause support • UK colleagues are eligible to participate in our SAYE and AESOP offerings with similar plans operating for many of our overseas colleagues.
Share awards and share options Details of the EDs who were in office for any part of the 2019 financial year and hold or held outstanding share awards or options over ordinary shares of the Company pursuant to the Company’s share based incentive plans are set out in table 18. EDs are eligible to participate in the Company’s broad-based employee share plans on the same basis as other eligible employees. Details of awards and options granted to EDs under these plans are also included in tables 1, 6 and 16 (and SAYE options are included in table 18). More information around HMRC taxadvantaged plans can also be found in note 34.
Maurice Tulloch LTIP3,4 2016 309,278 — 181,8939 154,639 — 456.70 — 409.90 Mar-19 2017 286,091 — — — 286,091 523.00 — — Mar-20 2018 310,863 — — — 310,863 542.60 — — Mar-21 2019 — 694,774 — — 694,774 409.00 — — Mar-22 ABP 2016 63,144 — 74,2739 — — 456.70 — 409.90 Mar-19 2017 85,564 — — — 85,564 523.00 — — Mar-20 2018 110,529 — — — 110,529 494.10 — — Mar-21 2019 — 94,717 — — 94,717 409.00 — — Mar-22 SAYE6 2019 — 6,338 — — 6,338 — 284.00 — Dec-22 – May-23 Jason Windsor5 LTIP 20165 206,185 — 121,2619 103,093 — 456.70 — 409.90 Mar-19 2017 77,358 — — — 77,358 523.00 — — Mar-20 2018 83,333 — — — 83,333 494.10 — — Mar-21 2019 — 73,634 — — 73,634 409.00 — — Mar-22 ABP 2016 50,721 — 59,6609 — — 456.70 — 409.90 Mar-19 2017 18,721 — 10,4359 — 9,361 523.00 — — Mar-20 2018 33,333 — 11,7579 — 22,222 494.10 — — Mar-21 2019 32,310 — — — 32,310 409.00 — — Mar-22 SAYE8 2019 — 6,338 — — 6,338 — 284.00 — Dec-22 – May-23
Andy Briggs6 LTIP3,4 2016 320,972 — 188,7709 160,486 — 456.70 — 409.90 Mar-19 2017 302,532 — — 302,532 — 523.00 — — Mar-20 2018 325,892 — — 325,892 — 542.60 — — Mar-21 2019 — 401,846 — 401,846 — 409.00 — — Mar-22 ABP 2016 92,510 — 108,8149 — — 456.70 — 409.90 Mar-19 2017 116,530 — — — 116,530 523.00 — — Mar-20 2018 135,185 — — — 135,185 494.10 — — Mar-21 2019 — 100,015 — — 100,015 409.00 — — Mar-22 SAYE8 2016 5,128 — — 5,128 — — 351.00 — Dec-19 – May-20
Tom Stoddard7 LTIP3,4 2016 313,144 — 184,1679 156,572 — 456.70 — 409.90 Mar-19 2017 295,153 — — 23,160 271,993 523.00 — — Mar-20 2018 317,857 — — 136,224 181,633 542.60 — — Mar-21 2019 — 391,938 — 391,938 — 409.00 — — Mar-22 ABP 2016 120,618 — 141,8769 — — 456.70 — 409.90 Mar-19 2017 118,061 — — — 118,061 523.00 — — Mar-20 2018 131,851 — — — 131,851 494.10 — — Mar-21 2019 — 97,548 — — 97,548 409.00 — — Mar-22 1 The aggregate net value of share awards granted to the EDs in the period was £8.0 million (2018: £11.1 million). The net value has been calculated by reference to the closing middle-market price of an ordinary share of the
Company at the date of grant. 2 The actual price used to calculate the ABP and LTIP awards is based on a three-day average closing middle-market price of an ordinary share of the Company, prior to grant date. These were in 2016: 485 pence, 2017: 530 pence, 2018: 504 pence and 2019: 421 pence. 3 For the 2016 and 2017 LTIP grant, the TSR comparator group consisted of the following companies: Aegon, Allianz, Assicurazioni Generali, Axa, CNP Assurances, Direct Line Group, Legal & General, MetLife, NN Group, Old Mutual,
Dilution Awards granted under Aviva employee share plans are generally met by issuing new shares as agreed by the Board. Shares are held in employee trusts, details of which are set out in note 35.
Approach to NED fees for 2020 NED fees are reviewed annually and were last increased with effect from 1 April 2014. The only change to the current fee levels is to the basic Board membership fee, as set out in the table below.
Released after 2 years 21 Implementation of Policy in 2020 The implementation of the Policy will be consistent with that outlined in table 22.
Non-financial strategic measures (30% of total): • 7.5% – RNPS • 7.5% – TNPS • 15% – Risks Inside Tolerance • A quality of earnings assessment will be undertaken by the
Committee to provide assurance that bonus payouts appropriately reflect underlying performance and the shareholder experience
50% SII RoE2 target 50% TSR target SII RoE2 % Vesting level TSR Ranking Vesting level
Below 11% 0% Below median 0% 11 % 10% Median 10% Between 11% and 13% 10-50% (straight line) Between median and upper quintile Pro rata between 10% and 50%
on a straight line basis Above 13% 50% Upper quintile and above 50%
1 Salary will be effective from 1 April 2020. 2 Group adjusted operating profit is an Alternative Performance Measure (APM) which is used by the Group to supplement the required disclosures under IFRS. Please refer to note B in the ‘Accounting Policies’ section and to the
‘Other Information’ section within the Annual report and accounts for further information. 3 This is an Alternative Performance Measure (APM) which provides useful information to supplement an understanding of our financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts. 4 This measure is derived from the Group adjusted operating profit APM. Further details of this measure are included in the ‘Other Information’ section of the Annual report and accounts. 5 2020 LTIP Comparator Group: Aegon, Allianz, Assicurazioni Generali, Axa, Direct Line Group, Intact, Legal & General, Lloyds Banking Group, M&G, Phoenix, RSA, Standard Life Aberdeen, Zurich Insurance Group. 6 The target ranges are considered by the Board to be commercially sensitive and will be disclosed in the 2020 DRR.
Approval by the Board This Directors’ Remuneration report was reviewed and approved by the Board on 4 March 2020.
Patricia Cross Chair, Remuneration Committee 1/3rd paid in cash 2-year holding period Award released 2/3rds deferred into shares vesting in three equal tranches over three years
The following section reproduces the Policy for convenience, although the original Policy referred to above remains our formally approved Policy and should be consulted where this is required. In addition, we have taken the opportunity to update the scenario charts to reflect 2020 remuneration arrangements for our EDs, as well as appointment end dates for NEDs.
Basic salary Purpose To provide core market related pay to attract and retain the required level of talent.
Annual bonus Purpose To reward EDs for achievement against the Company’s strategic objectives and for demonstrating the Aviva values and behaviours.
Form & timing of payment • One-third of any bonus is payable in cash at the end of the year • Two-thirds of any bonus awarded is deferred into shares which vest in three equal annual tranches
Outcome at threshold and on target Performance is assessed against multiple metrics. Threshold performance against a single metric would result in a bonus payment of no more than 25% of basic salary.
Purpose To reward EDs for achievement against the Company’s longer-term objectives; to align EDs’ interests with those of shareholders and to aid the retention of key personnel and to encourage focus on long-term growth in enterprise value.
Performance measures Awards will vest based on a combination of financial, strategic and TSR performance metrics. For the 2020 awards the measures and weightings will be: • 50% SII RoE1 • 50% TSR against a comparator group
Purpose To assist with mobility across the Group to ensure the appropriate talent is available to execute strategy locally.
Operation Employees who are relocated or reassigned from one location to another receive relevant benefits to assist them and their dependants in moving home and settling in-to the new location.
Maximum opportunity Dependent on location and family size, benefits are market related and time bound. They are not compensated for performing the role but to defray costs of a relocation or residence outside the home country.
Operation A requirement to build a shareholding in the Company equivalent to 300% of basic salary for the Group CEO and 200% of basic salary for other EDs.
This shareholding is normally to be built up over a period not exceeding 5 years (subject to the Committee’s discretion where personal circumstances dictate).
1 This is an Alternative Performance Measure (APM) which provides useful information to supplement an understanding of our financial performance. Further information on APMs, including a reconciliation to the financial statements (where possible), can be found in the ‘Other Information’ section of the Annual report and accounts.
Change in control In the event of a change in control, unless a new award is granted in exchange for an existing award, or if there is a significant corporate event like a demerger, awards under the LTIP would normally vest to the extent that the performance conditions have been satisfied as at the date of the change in control, and unless the Committee decides otherwise, would be pro-rated to reflect the time between the start of the performance period and the change in control event. Awards under the ABP would normally vest on the date of the change in control and may vest if there is a significant corporate event.
Legacy payments The Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above, where the terms of the payment were agreed (i) before May 2014 (the date the Company’s first Policy came into effect), (ii) before the Policy set out above came into effect, provided that the terms of the payment were consistent with the Policy in force at the time they were agreed, or (iii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for
Strategic report Governance IFRS financial statements Other information the individual becoming a director of the Company. For these purposes, ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted.
Illustration of the Policy The charts below illustrate how much EDs could earn under different performance scenarios in one financial year: • Minimum – basic salary, pension or cash in lieu of pension and benefits, no bonus and no vesting of the LTIP • Target – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 100% and an LTIP of 300% of basic salary (with notional LTIP vesting at 50% of maximum) for the Group CEO; and – A bonus of 100% and an LTIP of 225% of basic salary (with notional LTIP vesting at 50% of maximum) for the CFO.
• Maximum with share price increase – indicative maximum remuneration, assuming a notional LTIP vesting at maximum and share price appreciation of 50% on the LTIP.
Maurice Tulloch Jason Windsor Potential earnings by pay element Potential earnings by pay element
Termination Payment Pay in lieu of notice up to a maximum of 12 months’ basic salary.
Where notice of termination of a contract is given, payments to the ED would continue for the period worked during the notice period. Alternatively, the contract may be terminated and phased monthly payments made in lieu of notice for, or for the balance of, the 12 months’ notice period. During this period, EDs would be expected to mitigate their loss by seeking alternative employment. Payments in lieu of notice would be reduced by the salary received from any alternative employment, potentially to zero. The Company would typically make a reasonable contribution towards an ED’s legal fees in connection with advice on the terms of their departure.
There is no automatic entitlement to an annual bonus for the year in which loss of office occurs. The Committee may determine that an ED may receive a pro-rata bonus in respect of the period of employment during the year loss of office occurs based on an assessment of performance. Where an ED leaves the Company by reason of death, disability or ill health, or any other reason determined by the Committee, there may be a payment of a pro rata bonus for the relevant year at the discretion of the Committee.
The treatment of leavers under the ABP and LTIP is determined by the rules of the relevant plans. Good leaver status under these plans would be granted in the event of, for example, the death of an ED. Good leaver status for other leaving reasons is at the discretion of the Committee, taking into account the circumstances of the individual’s departure, but would typically include planned retirement, or their departure on ill health grounds. In circumstances where good leaver status has been granted, awards may still be subject to malus and clawback in the event that inappropriate conduct of the ED is subsequently discovered post departure. If good leaver status is not granted, all outstanding awards will lapse.
Maximum opportunity The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chairman of the Company and NEDs will be determined by the Board within the limits set by shareholders and detailed in the Company’s Articles of Association.
Chairman’s Travel Benefits Purpose To provide the Chairman with suitable travel arrangements for him to discharge his duties effectively.
Operation Reasonable costs of travel and accommodation for business purposes are reimbursed to NEDs. On the limited occasions when it is appropriate for a NED’s spouse or partner to attend, such as to a business event, the Company will meet these costs. The Company will meet any tax liabilities that may arise on such expenses.
The NEDs, including the Chairman of the Company, have letters of appointment which set out their duties and responsibilities. The key terms of the appointments are set out in table below.
Consolidated statement of changes in equity 136 Consolidated statement of financial position 137 Consolidated statement of cash flows 138
4 Subsidiaries, joint ventures and associates – disposals and held for sale 5 Segmental information 143 6 Details of income 148 7 Details of expenses 149 8 Finance costs 150 9 Life business investment variances and economic assumption changes 151 10 Non-life business: short-term fluctuations in return on investments 11 Employee information 155 12 Directors 155 13 Auditors’ remuneration 156 14 Tax 157 15 Earnings per share 159 16 Dividends and appropriations 160 17 Goodwill 161 18 Acquired value of in-force business (AVIF) and intangible assets 163 19 Interests in, and loans to, joint ventures 164 20 Interests in, and loans to, associates 166 21 Property and equipment 167 22 Investment property 168 23 Lease assets and liabilities 168 24 Fair value methodology 170 25 Loans 177 26 Securitised mortgages and related assets 178 27 Interest in structured entities 179 28 Financial investments 181 29 Receivables 184 30 Deferred acquisition costs 185 31 Pension surpluses, other assets, prepayments and accrued income 32 Assets held to cover linked liabilities 186 33 Ordinary share capital 187 34 Group’s share plans 188 35 Treasury shares 190 36 Preference share capital 190 37 Direct capital instrument and tier 1 notes 191 38 Merger reserve 192 39 Currency translation and other reserves 192 40 Retained earnings 193 41 Non-controlling interests 193 42 Contract liabilities and associated reinsurance 193 43 Insurance liabilities 195 44 Insurance liabilities methodology and assumptions 200 45 Liability for investment contracts 204 46 Financial guarantees and options 206 47 Reinsurance assets 208 48 Effect of changes in assumptions and estimates during the year 210 49 Unallocated divisible surplus 211 50 Tax assets and liabilities 212 51 Pension deficits and other provisions 213 52 Pension obligations 214 53 Borrowings 220 54 Payables and other financial liabilities 223 55 Other liabilities 224 56 Contingent liabilities and other risk factors 224 57 Capital commitments 225 58 Group capital management 225 59 Statement of cash flows 227 60 Risk management 228 61 Derivative financial instruments and hedging 241 62 Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements 63 Related party transactions 245 64 Organisational structure 246 65 Related undertakings 248 66 Subsequent events 263
1 The maintenance and integrity of the Aviva plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly the auditors accept no responsibility for any changes that may have occurred to the full annual financial statements since they were initially presented on the website.
Report on the audit of the financial statements Opinion In our opinion, Aviva plc’s Group financial statements and Company financial statements (the ‘financial statements’): • give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2019 and of the Group’s and the
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other than those disclosed in note 13 to the financial statements, we have provided no non-audit services to the Group or the Company in the period from 1 January 2019 to 31 December 2019.
• Significant changes in our approach: In our 2019 report the following changes to the key audit matters identified have been made, compared with our 2018 report: – The key audit matter regarding the valuation of a specific UK Life provision has been updated to include an additional provision identified at UK Life during the period; and – We no longer consider the implementation of a new actuarial modelling system at UK Life to be a key audit matter as its implementation was a one-off event in the prior year.
Capability of the audit in detecting irregularities, including fraud Based on our understanding of the Group, Company and their industries, we identified that the principal risks of non-compliance with laws and regulations related to breaches of UK and European regulatory principles, such as those governed by the Prudential Regulation Authority and the Financial Conduct Authority, and we considered the extent to which non-compliance might have a material effect on the financial statements of the Group and Company. We also considered those laws and regulations that have a direct impact on the financial statements of the Group and Company such as the Companies Act 2006, the Listing Rules, the Prudential Regulation Authority’s regulations, the Pensions Regulator legislation, UK tax legislation and equivalent local laws and regulations applicable to in-scope components.
The work to address the valuation of the life insurance contract liabilities included the following procedures: • We understood the governance process in place to determine the insurance contract liabilities, including testing the associated financial reporting control framework; • We tested the design and operating effectiveness of controls over the accuracy and completeness of the data used; • Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices; • We tested the key judgements over the preparation of the liabilities, including manually calculated components. We focused on the consistency in treatment and methodology period-on-period and with reference to recognised actuarial practice; • We tested key controls which support the calculation of the liabilities; • We used the results of an independent PwC annual benchmarking survey of assumptions to further challenge the assumption setting process by comparing certain assumptions used relative to the Group’s industry peers; and
Annuitant mortality assumptions (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 44 Insurance liabilities methodology and assumptions (a) Long-term business.
Management have adopted the most recent CMI 2018 model and dataset in setting this assumption with specific parameters for the long term rate of improvement and tapering at older ages and adjustments to reflect the profile of their portfolio. This reflects their views on the rate of mortality improvement.
Management use an active approach to setting the associated credit default assumptions on these illiquid assets. A long term deduction for credit default is made from the current market yields and a supplementary allowance is also held to cover the risk of higher short term default rates along with a margin for prudence.
In respect of the credit default assumptions, we performed the following: • We tested the methodology and credit risk pricing models used by management for commercial and equity release mortgages to derive the assumptions with reference to relevant rules and actuarial guidance, including the adoption of an appropriate prudence margin and by applying our industry knowledge and experience; and
Expense assumptions (Group) Refer to the Audit Committee report, Accounting policy (L) Insurance and participating investment contract liabilities – Long-term business provisions and note 44 Insurance liabilities methodology and assumptions (a) Long-term business.
In respect of the expense assumptions, we performed the following: • We tested the methodology used by management to derive the assumptions with reference to relevant rules and actuarial guidance and by applying our industry knowledge and experience. This included testing the split of expenses between acquisition and maintenance by agreeing a sample to supporting evidence; • We validated significant assumptions used by management, including the margin for prudence and the rate of inflation against past experience, market observable data (to the extent available and relevant) and our experience of market practices; and
In the UK General Insurance and Canada components, we assessed the calculation of the non-life insurance liabilities by performing the following procedures: • We understood and tested the governance process in place to determine the insurance contract liabilities, including testing the associated financial reporting control framework; • We tested the underlying data to source documentation on a sample basis; • Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices; • Using our actuarial specialist team members, we independently estimated the reserves on selected classes of business, particularly focusing on the largest and most uncertain reserves. For these classes we compared our estimated reserves to those booked by management, and sought to understand any significant differences; • For the remaining classes we evaluated the methodology and assumptions applied, or performed a diagnostic check to identify and investigate any anomalies; and
Valuation for hard to value investments (Group) Refer to Audit Committee report, Accounting policies (F) and (T) and note 24 Fair Value methodology, note 26 Securitised mortgages and related assets and note 28 Financial Investments.
We assessed the Directors’ approach to valuation for these hard to value investments by performing the following procedures: • We agreed data inputs used in the valuation models to underlying documentation on a sample basis; • We evaluated the methodology and assumptions used by management, including yield curves, discounted cash flows, property growth rates, longevity and liquidity premiums as relevant to each asset class; • We tested the operation of data integrity and change management controls for the valuation models, which we baseline every three years; • Using our valuation experts, we performed independent valuations for a sample of collateralised loans, non-recourse loans and structured bonds; and
Valuation of specific UK Life provisions (Group) Refer to Audit Committee report, Accounting policies (AA) and note 51 Pension deficits and other provisions (b) Movements on restructuring and other provisions.
The first provision relates to advised sales by Friends Provident. The valuation of this provision involves a high degree of judgement due to the time elapsed since the advice was given. The estimate of the provision could change substantially over time as specific case investigations continue and new information is obtained.
We determined that there were no key audit matters applicable to the Company to communicate in our report.
Using the outputs of our risk assessment, along with our understanding of Aviva, we scoped our audit based on the significance of the results and financial position of individual components relative to the Group result and financial position. In doing so, we also considered qualitative factors and ensured we obtained sufficient coverage across all financial statement line items in the consolidated financial statements. Our scoping provided us with audit coverage of 86% for IFRS profit before tax (2018: 94%) and 79% of Group adjusted operating profit before tax attributable to shareholders’ profits (2018: 80%). We also obtained audit coverage of 83% for Gross Written Premiums (2018: 83%) and 83% for Total Assets (2018: 82%).
The Group’s primary reporting format aggregates individual operating segments into market reporting lines with supplementary information being given by business activity. The IFRS 8 operating segments or ‘markets’ of the Group are United Kingdom (Life and General Insurance), France, Poland, ‘Italy, Ireland, Spain and Other’, Canada, Asia, Aviva Investors and ‘Other group activities’. Individual components that are used in our risk assessment are a more granular subset of the Group’s operating segments. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at each of the components by us, as the Group audit team, or auditors of the components within PwC UK or from other PwC network firms operating under our instruction.
As the Group audit team, we determined the level of involvement required at those components to be able to conclude whether sufficient and appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole. In our role as Group auditors, we exercised oversight of the work performed by auditors of the components including performing the following procedures: • Maintained an active dialogue with reporting component audit teams throughout the year, including holding a workshop for those teams in London during the planning phase of the audit; • Visited all in-scope components and undertook a detailed review of audit working papers; • Attended meetings with local management; and • Attended Audit Committee meetings for certain in-scope components.
How we determined it 5% of Group adjusted operating profit before tax attributable to shareholders’ profits.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £20 million and £145 million. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £7 million (Group audit) (2018: £7 million) and £2.4 million (Company audit) (2018: £5.2 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
We are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Group’s and the Company’s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ and Corporate Governance Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Strategic report and Directors’ and corporate governance report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ and Corporate Governance Report for the year ended 31 December 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: • The directors’ confirmation on page 65 of the Annual Report that they have carried out a robust assessment of the principal risks facing the
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the ‘Code’); and considering whether the statements are consistent with the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions We have nothing to report in respect of our responsibility to report when: • The statement given by the directors, on page 82, that they consider the Annual report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and the Company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and the Company obtained in the course of performing our audit; • The section of the Annual report on page 73 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; and
Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
New standards, interpretations and amendments to published standards that have been adopted by the Group and/or the Company The Group and/or the Company has adopted the following amendments to standards which became effective for the annual reporting period beginning on 1 January 2019: (i) IFRS 16, Leases In January 2016, the IASB published IFRS 16 Leases. This standard replaces IAS 17 Leases and applies to annual reporting periods beginning on or after 1 January 2019. The standard has been endorsed by the EU.
The Group has chosen to adopt the modified retrospective approach on transition permitted by IFRS 16. This approach does not require prior period comparatives to be restated, and the impact of adoption of the standard on retained earnings is shown as an adjustment to opening retained earnings. On transition, and where applicable, the Group has applied the following practical expedients: • Applied a single discount rate to a portfolio of leases with reasonably similar characteristics; • Relied on existing assessments on whether leases are onerous as an alternative to performing an impairment review. Where such leases existed, the onerous lease provision held at 31 December 2018 was offset against the initial right-of-use asset at the date of initial application as permitted by IFRS 16; • Excluded initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
Application of the modified retrospective approach on transition has resulted in a reduction of retained earnings of £110 million at 1 January 2019. This reflects the fact that the right-of-use assets and lease liabilities amortise to nil at different rates over the lease term. A higher initial amortisation of the right-of-use asset compared to the lease liability results in the asset value being lower than the lease liability during the lease term, with the difference between the two generally converging to nil as the lease term ends. There have been corresponding increases in the value of assets (£434 million) and liabilities (£544 million), representing the right-of-use assets and liabilities, net of any tax impacts, not previously recognised on the balance sheet in accordance with IAS 17. There has been no material impact on profit before tax.
Future contractual aggregate minimum lease payments under non-cancellable operating leases, as disclosed in note 56 of the Group’s 2018 annual report and accounts, were £728 million at 31 December 2018. Lease liabilities in respect of operating leases brought on to the balance sheet at 1 January 2019 following the adoption of IFRS 16 were £544 million. The balance shown at 1 January 2019 represents a present value of lease payments, whereas the figure disclosed at 31 December 2018 is the aggregated undiscounted payments. Other differences between the commitments disclosed and the opening IFRS 16 lease liabilities recognised relate primarily to amounts paid under service contracts that were included as a commitment in prior periods, but do not meet the definition of a lease under IFRS 16.
Leased property classified as investment property is held at fair value and measured in accordance with IAS 40 Investment Property. This is consistent with the approach adopted under IAS 17.
The introduction of IFRS 16 has had no impact on the Company’s financial statements.
(iii) Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement In February 2018, the IASB published Plan Amendment, Curtailment or Settlement (Amendments to IAS 19). The amendments are effective for annual reporting beginning on or after 1 January 2019.
(iv) Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures In October 2017, the IASB published Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28). The amendments are effective for annual reporting beginning on or after 1 January 2019.
Standards, interpretations and amendments to published standards that are not yet effective and have not been adopted early by the Group The following new standards and amendments to existing standards have been issued, are not yet effective for the Group and have not been adopted early by the Group: (i) IFRS 17, Insurance Contracts In May 2017, the IASB published IFRS 17 Insurance Contracts, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 that was issued in 2005. IFRS 17 applies to all types of insurance contracts as well as to certain financial instruments with discretionary participation features. In contrast to the requirements in IFRS 4, which are largely based on grandfathering of previous local accounting policies, IFRS 17 provides a comprehensive and consistent approach to insurance contracts. The core of IFRS 17 is the general model, supplemented by a specific adaption for contracts with direct participation features (the variable fee approach) and a simplified approach (the premium allocation approach) mainly for short-duration contracts.
The main features of the new accounting model for insurance contracts are, as follows: the measurement of the present value of future cash flows incorporating an explicit risk adjustment and remeasured at each reporting period (the fulfilment cash flows); a contractual service margin that is equal and opposite to any day one gain in the fulfilment cash flows of a group of contracts, representing the unearned profit of the insurance contracts to be recognised in profit or loss over the service period (coverage period); the presentation of insurance revenue and insurance service expenses in the statement of comprehensive income based on the concept of insurance services provided during the period; and extensive disclosures to provide information on the recognised amounts from insurance contracts and the nature and extent of risks arising from these contracts.
The impact of the adoption of IFRS 17 significantly impacts the measurement and presentation of the contracts in scope of the standard. Following the publication of an Exposure Draft of proposed amendments to IFRS 17 in June 2019, it is expected that the standard will apply to annual reporting periods beginning on or after 1 January 2022 at the earliest. The final standard is due to be published mid-2020 and remains subject to endorsement by the EU and the UK. We note the UK’s endorsement procedure, following departure from the EU, remains under development through the transition period to the end of December 2020.
IFRS 9 incorporates new classification and measurement requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39, and new hedge accounting requirements. Under IFRS 9, all financial assets will be measured at either amortised cost or fair value. The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. The standard retains most of IAS 39’s requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the fair value changes attributable to own credit is to be recognised in other comprehensive income instead of the income statement. The hedge accounting requirements are more closely aligned with
(iv) Amendment to IFRS 3 Business Combinations Published by the IASB in October 2018. The amendments are effective for annual reporting beginning on or after 1 January 2020 and have not yet been endorsed by the EU.
(vi) Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7 Published by the IASB in October 2019. The amendments are effective for annual reporting beginning on or after 1 January 2020 and were endorsed by the EU on 15 January 2020.
Group adjusted operating profit excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of intangibles acquired in business combinations; amortisation and impairment of acquired value of in-force business; and the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates. These items principally relate to mergers and acquisition activity which we view as strategic in nature, hence they are excluded from the operating profit APM as this is principally used to manage the performance of our operating segments when reporting to the Group’s chief operating decision maker. For 2019, the Group adjusted operating profit APM has been amended and now excludes only the amortisation and impairment of intangible assets acquired in business combinations. Group adjusted operating profit now includes amortisation and impairment of internally generated intangible assets to provide more relevant information by better reflecting their operational nature. These assets include advisor platforms, digital distribution channels and claims and policy administration systems which are used to support operational activities. The 2018 comparative figures have been restated (see note 1(b)).
The following accounting policies are those that have the most significant impact on the amounts recognised in the financial statements, with those judgements involving estimation summarised thereafter.
The table below sets out those items considered particularly susceptible to changes in estimates and assumptions, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, and the relevant accounting policy and note disclosures.
Where quoted market prices are not available, valuation techniques are used to value financial instruments and investment property. These
UK Life hold provisions relating to two historical product governance issues. The amount of the provision is determined based on the Group’s estimation of the expenditure required to settle the obligation at the statement of financial position date. The valuation of the provisions involves a high degree of judgement and estimation uncertainty due to either the time that has elapsed since the customer contracts were incepted or due to the dependence on decisions made by customers.
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: the purpose and design of an investee, relevant activities, substantive and protective rights, and voting rights and potential voting rights.
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. In determining whether the Group controls such vehicles, primary considerations include whether the Group is acting as a principal or an agent (including an assessment of the substantive removal rights of third parties) and the variability in the returns associated with the Group’s aggregate economic interest in the fund (direct interest and expected management fees) relative to the total variability of returns.
Additionally, the Group’s percentage ownership in these vehicles can fluctuate on a daily basis according to the level of participation of the Group and third-parties. To avoid transitory or minor changes in fund holdings (which do not reflect the wider facts and circumstances of the Group’s involvement) resulting in binary changes in the consolidation conclusions, the Group takes into account the trend of
Where the Group is deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position.
Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures. Losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred between entities.
The Company’s investments In the Company’s statement of financial position, subsidiaries, associates and joint ventures are stated at cost less impairment. Investments are reviewed annually to test whether any indicators of impairment exist. Where there is objective evidence of such an asset being impaired the investment is impaired to its recoverable value and any unrealised loss is recorded in the income statement.
Strategic report Governance IFRS financial statements Other information policies lapse due to non-receipt of premiums, then all the related premium income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
(I) Other investment contract fee revenue Investment contract policyholders are charged fees for policy administration, investment management, surrenders or other contract services. The fees may be for fixed amounts or vary with the amounts being managed, and will generally be charged as an adjustment to the policyholder’s balance. Fees related to investment management services are recognised as revenue over time, as performance obligations are satisfied. In most cases this revenue is recognised in the same period in which the fees are charged to the policyholder. Fees that are related to services to be provided in future periods are deferred and recognised when the performance obligation is fulfilled. Variable consideration, such as performance fees and commission subject to clawback arrangements, is not recognised as revenue until it is reasonably certain that no significant reversal of amounts recognised would occur.
Initiation and other ‘front-end’ fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised cost, these fees are deferred and recognised over the expected term of the policy by an adjustment to the effective yield. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided. Origination fees are recognised immediately where the sale of fund interests represent a separate performance obligation.
(K) Net investment income Investment income consists of dividends, interest and rents receivable for the year, movements in amortised cost on debt securities, realised gains and losses, and unrealised gains and losses on FVTPL investments (as defined in accounting policy T). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis, and is recognised on a straight line basis unless there is compelling evidence that benefits do not accrue evenly over the period of the lease.
The majority of the Group’s contracts classified as non-participating investment contracts are unit-linked contracts and are measured at fair value. Certain liabilities for non-linked non-participating contracts are measured at amortised cost.
(P) Property and equipment Owner-occupied properties are carried at their revalued amounts, and movements are recognised in other comprehensive income and taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. These properties are depreciated down to their estimated residual values over their useful lives.
All other items classed as property and equipment within the statement of financial position are carried at historical cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis to write down the cost of other assets to their residual values over their estimated useful lives as follows: • Properties under construction No depreciation • Owner-occupied properties, and related mechanical and electrical equipment
The assets’ residual values, useful lives and method of depreciation are reviewed regularly, and at least at each financial year end, and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount.
(Q) Investment property Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, as assessed by qualified external valuers or by qualified staff of the Group. Changes in fair values are recorded in the income statement in net investment income.
AFS debt securities An AFS debt security is impaired if there is objective evidence that a loss event has occurred which has impaired the expected cash flows, i.e. where all amounts due according to the contractual terms of the security are not considered collectible. An impairment charge, measured as the difference between the security’s fair value and amortised cost, is recognised when the issuer is known to be either in default or in financial difficulty. Determining when an issuer is in financial difficulty requires the use of judgement, and we consider a number of factors including industry risk factors, financial condition, liquidity position and near-term prospects of the issuer, credit rating declines and a breach of contract. A decline in fair value below
Strategic report Governance IFRS financial statements Other information highly effective in offsetting the risk in the hedged item, both at inception and on an ongoing basis.
Changes in the fair value of hedging instruments that are designated and qualify as a hedge of a net investment in a foreign operation (net investment hedges) or a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a firm commitment (cash flow hedges), and that prove to be highly effective in relation to the hedged risk, are recognised in other comprehensive income and a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment or occurrence of the cash flow as appropriate.
The Group does not currently apply the specific hedge accounting rules to its derivative transactions which are treated as derivatives held for trading. The fair value gains and losses on these derivatives are recognised immediately in net investment income.
(W) Collateral The Group receives and pledges collateral in the form of cash or noncash assets in respect of stock lending transactions, certain derivative contracts and loans, in order to reduce the credit risk of these transactions. Collateral is also pledged as security for bank letters of credit. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.
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 (see note 61). 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.
Where the Group is the lessor, leases are classified as finance leases if the risks and rewards of ownership are substantially transferred to the lessee and operating leases if they are not substantially transferred. Lease income from operating leases is recognised in the income statement on a straight-line basis over the lease term. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable. The Group has not entered into any material finance lease arrangements as lessor.
Where assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable. The Group has not entered into any material finance lease arrangements either as lessor or lessee.
Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. Contingent liabilities are disclosed if there is a possible future obligation as a result of a past event, or if there is a present obligation as a result of a past event but either a payment is not probable or the amount cannot be reasonably estimated.
The defined benefit obligation is calculated by independent actuaries using the projected unit credit method. The pension obligation is measured as the present value of the estimated future cash outflows, using a discount rate based on market yields for high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. The resultant net surplus or deficit recognised as an asset or liability on the statement of financial position is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets.
Plan assets exclude unpaid contributions due from Group entities to the schemes, and any non-transferrable financial instruments issued by a Group entity and held by the schemes. If the fair value of plan
Past service costs are recognised at the earlier of the date the plan amendment or curtailment occurs or when related restructuring costs are recognised.
Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill, or from the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither accounting profit nor taxable profit or loss at the time of the transaction.
In the pro forma reconciliations, the Group adjusted operating profit has been calculated after charging policyholder tax.
Income 6 Gross written premiums 31,243 28,659 Premiums ceded to reinsurers (3,563) (2,326)
Premiums written net of reinsurance 27,680 26,333 Net change in provision for unearned premiums (209) (81)
Attributable to: Equity holders of Aviva plc 2,548 1,568 Non-controlling interests 41 115 119
Fair value gains 39 39 57 Fair value gains transferred to profit on disposals 39 (19) (78)
Group adjusted operating profit before tax attributable to shareholders’ profits 3,184 3,004
Adjusted for the following: Life business: Investment variances and economic assumption changes 9 654 (197) Non-life business: Short-term fluctuation in return on investments 10(a) 167 (476) General insurance and health business: Economic assumption changes 10(a) (54) 1 Impairment of goodwill, joint ventures, associates and other amounts expensed 17(a), 20 (15) (13) Amortisation and impairment of intangibles acquired in business combinations 18 (87) (97) Amortisation and impairment of acquired value of in-force business 18 (406) (426) (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates 4(a) (22) 102 Other2 (47) 231
Profit before tax attributable to shareholders’ profits 3,374 2,129 Tax on group adjusted operating profit 15(a)(i) (668) (625) Tax on other activities 15(a)(i) (43) 183 (711) (442)
Reconciliation of Group adjusted operating profit to profit for the year continued Group adjusted operating profit can be further analysed into the following segments (details of segments can be found in note 5): For the year ended 31 December 2019
United Kingdom 1,820 285 — — 2,105 Canada — 191 — — 191 France 425 94 — (46) 473 Poland 171 20 — 3 194 Italy, Ireland and Other 258 69 — (13) 314 Asia 299 (8) (4) (12) 275 Aviva Investors — — 96 — 96 Other Group activities 27 (7) — (46) (26) 3,000 644 92 (114) 3,622 Corporate Centre (183) Group debt costs and other interest (255) Total 3,184
Total 3,004 1 Other Group activities within Other includes net expenses of £15 million (2018 restated: £180 million) in relation to the Group’s UK digital business. 2 During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note 1(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax attributable to shareholders’ profit.
Balance at 1 January 975 200 10,232 (15) 1,122 (279) 4,523 731 17,489 966 18,455 Adjustment at 1 January for adoption of IFRS 162 — — — — — — (110) — (110) — (110) Balance at 1 January restated2 975 200 10,232 (15) 1,122 (279) 4,413 731 17,379 966 18,345 Profit for the year — — — — — — 2,548 — 2,548 115 2,663 Other comprehensive income — — — — (308) 178 (763) — (893) (39) (932) Total comprehensive income for the year — — — — (308) 178 1,785 — 1,655 76 1,731 Dividends and appropriations — — — — — — (1,244) — (1,244) — (1,244) Non-controlling interests share of dividends declared in the year — — — — — — — — — (63) (63) Reclassification of tier 1 notes to financial liabilities3 — — — — — — 21 (231) (210) — (210) Reserves credit for equity compensation plans — — — — — 62 — — 62 — 62 Shares issued under equity compensation plans 5 — 25 (5) — (62) 55 — 18 — 18 Treasury shares held by subsidiary companies — — — 13 — — — — 13 — 13 Forfeited dividend income — — — — — — 4 — 4 — 4 Changes in non-controlling interests in subsidiaries — — — — — — — — — (2) (2) Change in equity accounted option — — — — — — 22 — 22 — 22 Shares purchased in buy-back — — — — — — — — — — — Transfer to profit on disposal of subsidiaries, joint ventures and associates — — — — — — — — — — — Capital contributions from non-controlling interests — — — — — — — — — — — Aggregate tax effect – shareholder tax — — — — — — 9 — 9 — 9 Balance at 31 December 980 200 10,257 (7) 814 (101) 5,065 500 17,708 977 18,685 1 Capital reserves consist of share premium of £1,239 million, a capital redemption reserve of £44 million and a merger reserve of £8,974 million. 2 The Group adopted IFRS 16 Leases from 1 January 2019. In line with the transition options available, prior period comparatives have not been restated and the impact of the adoption has been shown as an adjustment to opening retained earnings. See accounting policy A for further information. 3 On 17 October 2019, notification was given that the Group would redeem the 6.875% £210 million tier 1 notes. At that date, the instrument was reclassified as a financial liability of £210 million, representing its fair value at that date. On 21 November 2019, the instrument was redeemed in full at a cost of £210 million. The difference between its carrying amount of £231 million and fair value of £210 million has been charged to retained earnings. See note 37 for further details.
Assets Goodwill O & 17 1,855 1,872 1,876 Acquired value of in-force business and intangible assets O & 18 2,800 3,201 3,455 Interests in, and loans to, joint ventures D & 19 1,227 1,214 1,221 Interests in, and loans to, associates D & 20 304 304 421 Property and equipment P & 21 889 548 509 Investment property Q & 22 11,203 11,482 10,797 Loans V & 25 38,579 36,184 37,227 Financial investments S, T, U & 28 343,418 319,825 331,690 Reinsurance assets N & 47 12,356 11,755 13,492 Deferred tax assets AC & 50 151 185 144 Current tax assets 132 76 94 Receivables 29 8,995 8,639 8,151 Deferred acquisition costs X & 30 3,156 2,965 2,906 Pension surpluses and other assets X & 31 2,799 3,341 3,468 Prepayments and accrued income X & 31(b) 3,143 3,149 3,117 Cash and cash equivalents Y & 59(d) 19,524 15,926 13,377 Assets of operations classified as held for sale AH & 4(b) 9,512 8,855 10,871
Total equity and liabilities 460,043 429,521 442,816 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Cash flows from operating activities2 Cash generated from operating activities 59(a) 6,517 5,848 Tax paid (549) (447)
Cash flows from financing activities Proceeds from issue of ordinary shares 27 8 Shares purchased in buy-back 33 — (600) Treasury shares purchased for employee trusts (9) (4) New borrowings drawn down, net of expenses 580 3,148 Repayment of borrowings3 (927) (4,181) Net repayment of borrowings 53(e) (347) (1,033) Interest paid on borrowings (553) (551) Preference dividends paid 16 (17) (17) Ordinary dividends paid 16 (1,184) (1,128) Forfeited dividend income 4 4 Coupon payments on direct capital instrument and tier 1 notes 16 (43) (44) Capital contributions from non-controlling interests of subsidiaries 41 — 3 Dividends paid to non-controlling interests of subsidiaries 41 (63) (90) Other4 (5) (13) Total net cash used in financing activities (2,190) (3,465)
Fee and commission income 2,180 (2) 2,178 Net investment expense (10,847) (65) (10,912) Fee and commission expense (3,393) 67 (3,326)
Assets Loans 28,785 7,399 36,184 27,857 9,370 37,227 Financial investments 297,585 22,240 319,825 311,082 20,608 331,690 Receivables 8,879 (240) 8,639 8,285 (134) 8,151 Prepayments and accrued income 2,947 202 3,149 2,860 257 3,117 Cash and cash equivalents 46,484 (30,558) 15,926 43,347 (29,970) 13,377 Other 45,798 — 45,798 49,254 — 49,254 Total assets 430,478 (957) 429,521 442,685 131 442,816 Liabilities Net asset value attributable to unit holders 18,125 (1,787) 16,338 18,327 (151) 18,176 Payables and other financial liabilities 16,882 799 17,681 16,459 217 16,676 Other liabilities 3,043 31 3,074 2,791 65 2,856 Other 373,973 — 373,973 385,973 — 385,973
Strategic report Governance IFRS financial statements Other information 1 – Changes to comparative amounts continued (a) Presentation of consolidated investment funds continued The impact of the changes above on the following captions in the statement of cash flows for the prior period presented is shown below: As reported £m
Total net cash from operating activities 5,958 (557) 5,401 Total net increase in cash and cash equivalents 2,930 (557) 2,373 Cash and cash equivalents at 1 January1 43,587 (29,970) 13,617 Effect of exchange rate changes on cash and cash equivalents 92 (31) 61 Cash and cash equivalents at 31 December1 46,609 (30,558) 16,051 1 Cash and cash equivalents shown in the statement of cash flows above include cash and cash equivalents of operations classified as held for sale and bank overdrafts.
The above items have also resulted in a number of corresponding reclassifications in the Group’s fair value hierarchy level disclosures included in note 24. The primary changes reflect: • The inclusion of fixed maturity securities in level 2 and loans in amortised cost (the assets were previously classified as cash and cash equivalents and therefore not included in the fair value hierarchy); and • A reduction in financial investments reflecting the de-consolidation of two investment funds where the Group was incorrectly deemed to have been the controlling entity.
Strategic report Governance IFRS financial statements Other information 2 – Exchange rates The Group’s principal overseas operations during the year were located within the eurozone, Canada and Poland. The results and cash flows of these operations have been translated into sterling at the average rates for the year, and the assets and liabilities have been translated at the year end rates as follows: Eurozone Average rate (€1 equals) £0.88 £0.88 Year end rate (€1 equals) £0.85 £0.90 Canada Average rate ($CAD1 equals) £0.59 £0.58 Year end rate ($CAD1 equals) £0.58 £0.57 Poland Average rate (PLN1 equals) £0.20 £0.21 Year end rate (PLN1 equals) £0.20 £0.21 3 – Subsidiaries, joint ventures and associates – acquisitions The Group completed minor acquisitions in Canada, the UK and France in 2019. The aggregate consideration paid in these transactions was £20 million. With the exception of the acquisition of an associate in Canada, the acquired entities are all consolidated subsidiaries. During 2019, an adjustment of £2 million was made to the acquisition balance sheet of Friends Life Assurance Company DAC (Friends First), which became a wholly owned subsidiary on 1 June 2018. This resulted in a corresponding decrease in the negative goodwill previously recognised.
4 – Subsidiaries, joint ventures and associates – disposals and held for sale This note provides details of the disposals of subsidiaries, joint ventures and associates that the Group has made during the year, together with details of businesses held for sale at the year end.
Disposals 6 113 Held for sale remeasurements (28) (13) Remeasurements due to change in control status — 2
The loss on the disposal and remeasurement of subsidiaries, joint ventures and associates during the year of £22 million (2018: £102 million gain) consists of £6 million of gains relating to small disposals and a £28 million remeasurement loss relating to Friends Provident International Limited (FPI), see note 4(b) for further details. In 2018, the profit on disposal of £113 million primarily related to the disposals of Avipop Assicurazioni S.p.A. (Italy Avipop) and three businesses in Spain and the remeasurement loss of £13 million was related to FPI.
Liabilities Gross insurance liabilities 687 121 Gross liabilities for investment contracts 8,324 8,341 External borrowings 28 — Other liabilities 87 59
Assets and liabilities of operations classified as held for sale as at 31 December 2019 relate primarily to the expected disposal of the international operations of FPI and also include Group’s operations in Hong Kong. See below for further details. Assets and liabilities of operations classified as held for sale during 2018 relate entirely to FPI.
The transaction remains subject to regulatory approvals. The delays to receiving these approvals have been beyond the control of the Group and both the Group and RL360 have continued to cooperate with the regulatory approval process throughout. The Group remains committed to completing the transaction and now expects it to complete in 2020. As such, the subsidiary continues to be classified as held for sale and has been remeasured at fair value less costs to sell of £334 million, based on the agreed price. This resulted in a total loss on remeasurement of £28 million in 2019 (2018: £13 million) (see note 18). The business remains a consolidated subsidiary of Aviva at the balance sheet date.
(ii) Hong Kong joint venture On 20 November 2019, Aviva announced the sale of its entire 40% shareholding in its Hong Kong joint venture (Blue) to Hillhouse AV Holdings Limited for 450 million HKD (approximately £44 million). In addition to the investment in the joint venture, Aviva retained control of certain activities under the previous sale agreement reached in 2018, which remain fully consolidated at the balance sheet date, and which form part of the sale agreement to Hillhouse AV Holding Limited. No remeasurement loss has been recognised on reclassification to held for sale.
Strategic report Governance IFRS financial statements Other information 5 – Segmental information The Group’s results can be segmented either by activity or by geography. Our primary reporting format is along market reporting lines, with supplementary information being given by business activity. This note provides segmental information on the consolidated income statement. In November 2019 the Group announced the creation of new divisions. From 2020 UK Life will focus on three product lines – annuities and equity release, protection and health and heritage. The Investments, Savings and Retirement division, will bring together Aviva Investors and the modern UK Savings and Retirement business that is currently reported in UK Life. The global General Insurance division will report the results of the UK, Canada and our European and Asian general insurance businesses. Europe Life and Asia Life will no longer include the results of the European and Asian general insurance businesses. The following segments represent how the business has been managed in 2019 and are consistent with the segments presented in 2018.
(a) Operating segments United Kingdom The United Kingdom comprises two operating segments – Life and General Insurance. The principal activities of our UK Life operations are life insurance, long-term health and accident insurance, savings, pensions and annuity business. UK General Insurance provides insurance cover to individuals and businesses, for risks associated mainly with motor vehicles, property and liability (such as employers’ liability and professional indemnity liability) and medical expenses.
Asia Our activities in Asia principally comprise our long-term business operations in China, India, Singapore, Hong Kong (see note 4(b)), Vietnam, Indonesia, and FPI (see note 4(b)). This segment also includes general insurance and health operations in Singapore and health operations in Indonesia.
profits 2,253 288 211 410 198 352 87 91 (516) 3,374 Adjusting items: Reclassification of corporate costs and unallocated interest — (8) 33 46 — — — 5 (76) — Life business: Investment variances and economic assumption changes (695) — — 84 (4) (42) 10 — (7) (654) Non-life business: Short-term fluctuation in return on investments — (102) (64) (95) (5) (33) — — 132 (167) General insurance and health business: Economic assumption changes — 27 2 24 — — — — 1 54 Impairment of goodwill, joint ventures, associates and other amounts expensed — — 2 — — — 13 — — 15 Amortisation and impairment of intangibles acquired in business combinations 54 — 13 2 5 2 11 — — 87 Amortisation and impairment of AVIF 243 — — 2 — 33 126 — 2 406 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates — — (6) — — — 28 — — 22 Other3 — 45 — — — 2 — — — 47 Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 1,855 250 191 473 194 314 275 96 (464) 3,184 1 Total reported income, excluding inter-segment revenue, includes £39,041 million from the United Kingdom (Aviva plc’s country of domicile). Income is attributed on the basis of geographical origin which does not differ materially from revenue by geographical destination, as most risks are located in the countries where the contracts were written. 2 Other Group activities include internal reinsurance and net expenses of £15 million in relation to the UK digital business. The reduction of £165 million from 2018 reflects the alignment of the UK digital business with the UK Life and UK GI businesses during the year. 3 Other includes a charge of £45 million in relation to a change in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (see note 44(b)) and a charge of £2 million relating to the negative goodwill that arose on acquisition of Friends First (see note 3).
Gross written premiums 7,302 4,504 3,047 5,584 616 6,504 1,102 — — 28,659 Premiums ceded to reinsurers (1,666) (317) (119) (77) (12) (113) (20) — (2) (2,326) Internal reinsurance revenue — 6 — — — (2) (7) — 3 — Premiums written net of reinsurance 5,636 4,193 2,928 5,507 604 6,389 1,075 — 1 26,333 Net change in provision for unearned premiums 14 (87) 27 (38) 7 9 (13) — — (81)
Net earned premiums 5,650 4,106 2,955 5,469 611 6,398 1,062 — 1 26,252 Fee and commission income 939 122 24 313 94 113 202 368 3 2,178 6,589 4,228 2,979 5,782 705 6,511 1,264 368 4 28,430 Net investment (expense)/income (6,771) 16 51 (2,302) (73) (1,111) (286) 37 (473) (10,912) Inter-segment revenue — — — — — — — 259 — 259 Share of profit of joint ventures and associates 144 — 1 9 — 10 14 — (66) 112 Profit/(loss) on the disposal and remeasurement of subsidiaries,
Claims and benefits paid, net of recoveries from reinsurers (10,184) (2,731) (1,989) (4,659) (356) (2,595) (570) — (58) (23,142) Change in insurance liabilities, net of reinsurance 6,184 351 (133) 557 148 (872) (40) — 51 6,246 Change in investment contract provisions 7,540 — — 27 — (2,249) 42 (39) — 5,321 Change in unallocated divisible surplus 270 — — 1,754 12 1,063 138 — — 3,237 Fee and commission expense (738) (1,225) (791) (484) (146) (343) (199) (33) 633 (3,326) Other expenses (1,663) (220) (182) (256) (106) (188) (272) (449) (507) (3,843) Inter-segment expenses (232) (5) (6) (1) (6) (7) — — (2) (259) Finance costs (172) (1) (5) (1) — (5) (3) — (386) (573)
Adjusting items: Reclassification of corporate costs and unallocated interest — (16) 31 48 — (1) — 5 (67) — Life business: Investment variances and economic assumption changes 115 — — (6) 10 57 21 — — 197 Non-life business: Short-term fluctuation in return on investments — 172 45 44 2 57 — — 156 476 General insurance and health business: Economic assumption changes — 4 — (5) — — — — — (1) Impairment of goodwill, joint ventures, associates and other amounts expensed — — — — 2 — 3 — 8 13 Amortisation and impairment of intangibles acquired in business combinations 50 — 26 1 6 2 12 — — 97 Amortisation and impairment of AVIF 285 — — 2 — 6 130 — 3 426 (Profit)/loss on the disposal and remeasurement of subsidiaries, joint ventures and associates — — — — — (89) 5 (27) 9 (102) Other6 — (190) — — — (36) — — (5) (231) Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 1,886 383 27 510 198 300 261 148 (709) 3,004 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
3 Total reported income, excluding inter-segment revenue, includes £4,412 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.
USA in 2013, a gain of £36 million relating to negative goodwill on the acquisition of Friends First, a charge of £63 million relating to the UK defined benefit pension scheme as a result of the requirement to equalise members’ benefits for the effects of Guaranteed Minimum Pension and a charge of £10 million relating to the goodwill payments to preference shareholders, which was announced on 30 April 2018, and associated administration costs.
Other ‘Other’ includes service companies, head office expenses, such as Group treasury and finance functions, and certain financing costs and taxes not allocated to business segments and elimination entries for certain inter-segment transactions and group consolidation adjustments.
Gross written premiums1 20,335 10,908 — — 31,243 Premiums ceded to reinsurers (2,879) (684) — — (3,563) Premiums written net of reinsurance 17,456 10,224 — — 27,680 Net change in provision for unearned premiums — (209) — — (209) Net earned premiums 17,456 10,015 — — 27,471 Fee and commission income 1,490 126 319 206 2,141 18,946 10,141 319 206 29,612 Net investment income/(expense) 38,722 622 (1) 1,234 40,577 Inter-segment revenue — — 250 — 250 Share of profit of joint ventures and associates 113 — — (28) 85 (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates (28) 6 — — (22) Segmental income 57,753 10,769 568 1,412 70,502 Claims and benefits paid, net of recoveries from reinsurers (16,612) (6,484) — — (23,096) Change in insurance liabilities, net of reinsurance (5,566) (136) — — (5,702) Change in investment contract provisions (24,095) — — — (24,095) Change in unallocated divisible surplus (3,985) — — — (3,985) Fee and commission expense (1,546) (2,672) (27) (1,291) (5,536) Other expenses (1,850) (649) (453) (377) (3,329) Inter-segment expenses (237) (13) — — (250) Finance costs (170) (10) — (396) (576) Segmental expenses (54,061) (9,964) (480) (2,064) (66,569) Profit/(loss) before tax 3,692 805 88 (652) 3,933 Tax attributable to policyholders’ returns (559) — — — (559) Profit/(loss) before tax attributable to shareholders’ profits 3,133 805 88 (652) 3,374 Adjusting items (133) (161) 4 100 (190) Group adjusted operating profit/(loss) before tax attributable to shareholders’ profits 3,000 644 92 (552) 3,184 1 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £62 million, which all relates to property and liability insurance. 2 General insurance and health business segment includes gross written premiums of £944 million relating to health business. The remaining business relates to property and liability insurance. 3 Other includes net expenses of £15 million in relation to the UK digital business. The reduction of £165 million from 2018 reflects the alignment of the UK digital business with the UK long-term and general insurance businesses during the year.
Claims and benefits paid, net of recoveries from reinsurers (16,540) (6,602) — — (23,142) Change in insurance liabilities, net of reinsurance 6,044 202 — — 6,246 Change in investment contract provisions 5,321 — — — 5,321 Change in unallocated divisible surplus 3,237 — — — 3,237 Fee and commission expense (1,245) (2,592) (31) 542 (3,326) Other expenses (2,128) (596) (461) (658) (3,843) Inter-segment expenses (249) (12) — (2) (263) Finance costs (179) (6) — (388) (573)
3 Gross written premiums include inward reinsurance premiums assumed from other companies amounting to £56 million which all relates to property and liability insurance. 4 General insurance and health business segment includes gross written premiums of £879 million relating to health business. The remaining business relates to property and liability insurance. 5 Other includes net expenses of £180 million (restated) in relation to the UK digital business.
Strategic report Governance IFRS financial statements Other information 6 – Details of income This note gives further detail on the items appearing in the income section of the income statement.
Gains/(losses) arising in the year 27,050 (20,757) Losses recognised now realised (9,130) (8,044)
Gains recognised in prior periods as unrealised in equity 19 78
Share of profit after tax of joint ventures (note 19(a)(i)) 18 91 Share of profit after tax of associates (note 20(a)(i)) 67 21 Share of profit after tax of joint ventures and associates 85 112 (Loss)/profit on disposal and remeasurement of subsidiaries, joint ventures and associates (note 4(a)) (22) 102
Change in insurance liabilities Change in insurance liabilities (note 42(b)) 6,824 (6,415) Change in reinsurance asset for insurance provisions (note 42(b)) (1,122) 169
Change in investment contract provisions Investment expense/(income) allocated to investment contracts 14,972 (6,128) Other changes in provisions
Commission expenses for insurance and participating investment contracts 2,829 2,678 Change in deferred acquisition costs for insurance and participating investment contracts (163) (183) Deferrable costs for non-participating investment contracts 39 32 Other acquisition costs 1,048 996 Change in deferred acquisition costs for non-participating investment contracts (83) 84
Investment expense/(income) attributable to unitholders 1,355 (771) Reinsurance commissions and other fee and commission expense 511 490
Staff costs (note 11(b)) 1,161 1,172 Central costs and sharesave schemes 183 216 Depreciation 98 40 Impairment of goodwill on subsidiaries (note 17(a)) 6 13 Amortisation of acquired value of in-force business on insurance/investment contracts (note 18) 406 426 Amortisation of intangible assets (note 18) 212 209 Impairment of intangible assets (note 18) 13 — Other expenses (see below) 1,345 1,729
Total expenses 66,319 16,080 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Change in insurance liabilities includes a charge of £45 million (2018: gain of £190 million) relating to the movement in the discount rate used for estimating lump sum payments in settlement of bodily injury claims (see note 44(b)).
Strategic report Governance IFRS financial statements Other information 8 – Finance costs This note analyses the interest costs on our borrowings (which are described in note 53) and similar charges. Finance costs comprise: £m
Interest expense on operational borrowings Amounts owed to financial institutions 21 20 Securitised mortgage loan notes at fair value 77 95
Strategic report Governance IFRS financial statements Other information 9 – Life business investment variances and economic assumption changes continued (d) Investment variances and economic assumption changes The investment variances and economic assumption changes excluded from the life adjusted operating profit are as follows: Life business 2019 £m
Investment variances and economic assumption changes were £654 million (2018: £197 million negative). This is primarily due to the UK where there was a positive variance as a result of a reduction in yields, a narrowing of fixed income spreads and a consequent impact from economic assumption changes, including an alignment of methodology across the UK, partially offset by the impact of increases in equities. The impact of yields and equities reflects the fact that we hedge on an economic rather than on an IFRS basis.
The short-term fluctuations in investment return and economic assumption changes attributable to the non-life business result and reported outside Group adjusted operating profit were as follows: Non-life business 2019 £m
Analysis of investment income: Net investment income/(expenses) 511 (88) Foreign exchange gains/(losses) and other charges 55 (8)
Analysed between: Long-term investment return, reported within Group adjusted operating profit 399 380 Short-term fluctuation in investment return, reported outside Group adjusted operating profit General insurance and health 296 (315) Other operations1 (129) (161) 167 (476)
The short-term fluctuations during 2019 of £167 million favourable is primarily due to strong market conditions across all our major markets. This resulted in significant gains on equities plus gains on fixed income securities driven by interest rates falling and a narrowing of credit spreads. These gains are partly offset by losses on hedges held by the Group, including the Group centre hedging programme, and other adverse movements on centre holdings. The adverse short-term fluctuations during 2018 were mainly due to adverse market conditions across most of our major markets. This resulted in losses on fixed interest income securities driven by interest rate increases and widening credit spreads plus significant falls in equities and other adverse market movements on Group centre holdings.
Total employee numbers 31,181 31,703 31,791 31,232 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.
Profit sharing and incentive plans 193 221 Equity compensation plans (note 34(d)) 62 64 Termination benefits 35 10
Acquisition costs 611 565 Claims handling expenses 197 161 Central costs and sharesave schemes 67 76 Other operating expenses (note 7) 1,161 1,172
Total staff costs 2,036 1,974 12 – Directors Information concerning individual directors’ emoluments, interests and transactions is given in the Directors’ Remuneration Report in the ‘Corporate governance’ section of this report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the directors in respect of 2019 was £7 million (2018: £10 million). Employer contributions to pensions for executive directors for qualifying periods were £18,813 (2018: £165,373). The aggregate net value of share awards granted to the directors in the period was £8.0 million (2018: £11.1 million). The net value has been calculated by reference to the closing middle market price of an ordinary share at the date of grant. During the year, no share options were exercised by directors (2018: no share options).
Strategic report Governance IFRS financial statements Other information 13 – Auditors’ remuneration This note shows the total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, to our auditors.
Total audit fees 16.3 15.7 Audit related assurance 4.9 4.7 Other assurance services 0.7 0.9
Tax compliance services — — Tax advisory services — — Services relating to corporate finance transactions — — Other non-audit services not covered above 0.1 1.0 Fees payable to PwC LLP and its associates for services to Group companies 22.0 22.3
Fees payable to BDO LLP and its associates for the statutory audit of Group subsidiaries in Poland 0.4 0.2
Strategic report Governance IFRS financial statements Other information 14 – Tax This note analyses the tax charge for the year and explains the factors that affect it.
Current tax For the period 1,062 559 Prior period adjustments (179) (49) Total current tax 883 510
(iii) The tax charge/(credit) above, comprising current and deferred tax, can be analysed as follows: £m
(v) Deferred tax charged/(credited) to the income statement represents movements on the following items: £m
Long-term business technical provisions and other insurance items (1,185) 907 Deferred acquisition costs 4 3 Unrealised gains/(losses) on investments 1,554 (1,453) Pensions and other post-retirement obligations 21 2 Unused losses and tax credits 4 7 Subsidiaries, associates and joint ventures 4 (7) Intangibles and additional value of in-force long-term business (63) (64) Provisions and other temporary differences 48 60
Current tax In respect of pensions and other post-retirement obligations (49) (59) In respect of foreign exchange movements (10) (1)
(ii) There is no tax charge/(credit) attributable to policyholders’ return included above in either 2019 or 2018.
Strategic report Governance IFRS financial statements Other information 14 – Tax continued (c) 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 £9 million (2018: £8 million).
Tax calculated at standard UK corporation tax rate of 19.00% (2018: 19.00%) 641 106 747 405 (91) 314 Reconciling items
Different basis of tax – policyholders — 454 454 — (385) (385) Adjustment to tax charge in respect of prior periods 5 — 5 (16) — (16) Non-assessable income and items not taxed at the full statutory rate (51) — (51) (4) — (4) Non-taxable profit on sale of subsidiaries and associates (1) — (1) (59) — (59) Disallowable expenses 41 — 41 50 — 50 Different local basis of tax on overseas profits 98 (1) 97 71 (1) 70 Change in future local statutory tax rates (6) — (6) — — — Movement in deferred tax not recognised (4) — (4) (3) — (3) Tax effect of profit from joint ventures and associates (8) — (8) (6) — (6) Other (4) — (4) 4 — 4
Finance Act 2016 introduced legislation reducing the UK corporation tax rate from 1 April 2020 to 17%. In addition, in France the rate of corporation tax was reduced from 34.43% to 32.02% from 1 January 2019, to 27.37% from 1 January 2021 and 25.83% from 1 January 2022. These reduced rates were used in the calculation of the Group’s deferred tax assets and liabilities as at 31 December 2018.
During 2019, the UK Government indicated that it would reverse the reduction in corporation tax rate to 17% due from 1 April 2020. As of the 31 December 2019, this measure had not been substantively enacted and therefore no impact is reflected in the calculation of the UK’s deferred tax assets and liabilities as at 31 December 2019. Were this measure to be introduced, it would increase the Group’s deferred tax liability by approximately £73 million.
(a) Basic earnings per share (i) The profit attributable to ordinary shareholders is: £m
(net of tax) (34) — (34) (36) — (36) Profit attributable to ordinary shareholders 2,367 130 2,497 2,226 (711) 1,515 1 During 2019 the Group adjusted operating profit APM has been revised and now includes the amortisation and impairment of internally generated intangible assets to better reflect the operational nature of these assets (see note 1(b)). Group adjusted operating profit continues to exclude amortisation and impairment of intangible assets acquired in business combinations. Comparative amounts have been restated resulting in a reduction in the prior period Group adjusted operating profit of £112 million. There is no impact on profit before tax attributable to shareholders’ profit.
(iii) The calculation of basic earnings per share uses a weighted average of 3,911 million (2018: 3,963 million) ordinary shares in issue, after deducting treasury shares. The actual number of shares in issue at 31 December 2019 was 3,921 million (2018: 3,902 million) and 3,919 million (2018: 3,899 million) excluding treasury shares.
Strategic report Governance IFRS financial statements Other information 15 – Earnings per share continued (b) Diluted earnings per share (i) Diluted earnings per share is calculated as follows: £m
Profit attributable to ordinary shareholders 2,497 3,911 63.8 1,515 3,963 38.2 Dilutive effect of share awards and options — 45 (0.7) — 47 (0.4)
(ii) Diluted earnings per share on Group adjusted operating profit attributable to ordinary shareholders is calculated as follows: £m
Group adjusted operating profit attributable to ordinary shareholders 2,367 3,911 60.5 2,226 3,963 56.2 Dilutive effect of share awards and options — 45 (0.7) — 47 (0.7)
Ordinary dividends declared and charged to equity in the period Final 2018 – 20.75 pence per share, paid on 30 May 2019 812 — Final 2017 – 19.00 pence per share, paid on 17 May 2018 — 764 Interim 2019 – 9.50 pence per share, paid on 26 September 2019 372 — Interim 2018 – 9.25 pence per share, paid on 24 September 2018 — 364 1,184 1,128 Preference dividends declared and charged to equity in the period 17 17 Coupon payments on DCI and tier 1 notes 43 44
Subsequent to 31 December 2019, the directors proposed a final dividend for 2019 of 21.40 pence per ordinary share (2018: 20.75 pence), amounting to £839 million (2018: £812 million) in total. Subject to approval by shareholders at the AGM, the dividend will be paid on 2 June 2020 and will be accounted for as an appropriation of retained earnings in the year ending 31 December 2020.
Gross amount At 1 January 1,991 2,080 Acquisitions and additions 4 8 Disposals (5) (99) Foreign exchange rate movements (22) 2 At 31 December 1,968 1,991
Accumulated impairment At 1 January (119) (168) Impairment charges (6) (13) Disposals — 63 Foreign exchange rate movements 12 (1) At 31 December (113) (119)
Carrying amount at 31 December 1,855 1,872 1 The balance on 1 January 2018 includes goodwill of £36 million which was part of operations classified as held for sale.
(b) Goodwill allocation and impairment testing A summary of the goodwill and intangibles with indefinite useful lives allocated to groups of cash generating units (CGUs) is presented below.
United Kingdom – long-term business 663 663 — — 663 663 United Kingdom – general insurance and health 927 924 1 — 928 924 Canada 77 82 — — 77 82 France – long-term business — — 52 56 52 56 Poland 25 27 7 7 32 34 Italy – general insurance and health 24 26 — — 24 26 Ireland – general insurance and health 94 99 — — 94 99 Asia 45 51 1 — 46 51
Strategic report Governance IFRS financial statements Other information 17 – Goodwill continued The present value of expected profits arising from future new business may be included within the shareholder value and is calculated on an adjusted Solvency II basis, using profit projections based on the most recent three-year business plans approved by management. These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, mortality, morbidity and persistency.
Expected profits from future new business are discounted using a risk adjusted discount rate. The discount rate is a combination of a riskfree 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 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 the European Insurance and Occupational Pensions Authority (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%.
General insurance, health, fund management and other businesses Value in use is calculated as the discounted value of expected future profits of each business. The calculation uses cash flow projections based on business plans approved by management covering a three-year period. These plans reflect management’s best estimate of future profits based on both historical experience and expected growth rates for the relevant cash generating unit. The underlying assumptions of these projections include market share, customer numbers, premium rate and fee income changes, claims inflation and commission rates.
Gross amount At 1 January 2018 2,620 2,697 1,966 380 7,663 Additions and transfers 67 30 153 (57) 193 Disposals — — (488) (189) (677) Foreign exchange rate movements 5 (1) (8) — (4)
At 31 December 2018 (27) (147) (38) (71) (283) Impairment charges4 — (28) (13) — (41) Disposals — — 6 — 6 Foreign exchange rate movements — — 1 4 5 At 31 December 2019 (27) (175) (44) (67) (313) Carrying amount At 1 January 2018 1,533 1,725 1,376 252 4,886 At 31 December 2018 1,418 1,498 882 63 3,861
At 31 December 2019 1,235 1,244 786 61 3,326 Less: Assets classified as held for sale (29) (496) (1) — (526) 1,206 748 785 61 2,800 1 On insurance and participating investment contracts. 2 On non-participating investment contracts. 3 Amortisation of other intangible assets with finite useful lives includes £87 million (2018: £97 million) of amortisation in respect of intangible assets acquired in business combinations. 4 Impairment charges comprise £28 million (2018: £13 million) of AVIF impairment in respect of FPI recognised within profit/(loss) on the disposal and remeasurement of subsidiaries, joint ventures and associates due to FPI’s classification as held for sale (see note 4).
(a) Acquired value of in-force business AVIF on insurance and investment contracts is generally recoverable in more than one year. Of the total of £2,479 million, £2,380 million (2018: £2,904 million) is expected to be recoverable more than one year after the statement of financial position date.
Strategic report Governance IFRS financial statements Other information 18 – Acquired value of in-force business (AVIF) and intangible assets continued (b) Other intangible assets with finite useful lives Other intangible assets with finite useful lives consist mainly of the value of bancassurance and other distribution agreements and capitalised software. Additions of intangible assets with finite lives in 2019 and 2018 relate to capitalisation of software costs in relation to the Group’s digital initiatives.
(c) Intangible assets with indefinite useful lives Intangible assets with indefinite useful lives primarily comprise the value of distribution channel Union Financière de France Banque in France where the existing life of the asset supports this classification. Impairment testing of these intangible assets is covered in note 17(b). No impairment has been recognised in 2019 (2018: £nil).
Less: Joint venture classified as held for sale — (8) (8) — — —
At 31 December 38 1,189 1,227 46 1,168 1,214 1 Comprises other intangibles of £5 million (2018: £5 million).
On 20 November 2019, Aviva announced the sale of its entire 40% shareholding in its Hong Kong joint venture (Blue) to Hillhouse AV Holdings Limited for 450 million HKD (approximately £44 million). In addition to the investment in the joint venture, Aviva retained control of certain activities under the previous sale agreement reached in 2018, which remain fully consolidated at the balance sheet date, and which form part of the sale agreement to Hillhouse AV Holding Limited. No remeasurement loss has been recognised on reclassification to held for sale, as detailed in note 4(b).
The Group’s share of total comprehensive income related to joint venture entities is £40 million (2018: £81 million).
The long-term business undertakings perform life insurance activities. All investments in such undertakings are unlisted with the exception of AvivaSA Emeklilik 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 Company Ltd., which are held by Aviva plc. The Group’s share of net assets of that company is £320 million (2018: £294 million) and it has a carrying value at cost of £123 million (2018: £123 million).
(iii) No joint ventures are considered to be material from a Group perspective (2018: none). The Group’s principal joint ventures are as follows: Proportion of ownership interest
At 1 January 304 421 Share of results before tax 80 22 Share of tax (4) (1)
The Group’s share of total comprehensive income related to associates is £67 million (2018: £21 million).
(iii) The associates have no contingent liabilities to which the Group has significant exposure. The Group has commitments to provide funding to property management associates of £6 million (2018: £5 million).
An impairment charge of £9 million (2018: £nil) was recognised within the income statement as a component of share of profit after tax of joint ventures and associates following management’s annual impairment review of the Group’s associate in India, Aviva Life Insurance Company India Limited (Aviva India).
Cost or valuation At 1 January 2018 1 340 3 155 265 764 Additions 1 21 1 24 40 87 Disposals (2) (8) — (7) (6) (23) Fair value gains — 3 — — — 3 Foreign exchange rate movements — 3 — 3 7 13
At 31 December 2019 — 709 1 40 147 897 Less: Assets classified as held for sale — (7) — — (1) (8) At 31 December 2019 — 702 1 40 146 889 1 The Group has adopted IFRS 16 Leases from 1 January 2019. In line with the transition options available, prior period comparatives have not been restated and the impact of the adoption has been shown as an adjustment to opening property and equipment.
Owner-occupied properties, excluding £385 million held under lease arrangements, are stated at their revalued amounts, as assessed by qualified external valuers. These values are assessed in accordance with the relevant parts of the current Royal Institute of Chartered Surveyors Appraisal and Valuation Standards in the UK, and with current local valuation practices in other countries. This assessment is in accordance with UK Valuations Standards ‘Red book’, and is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing wherein the parties had acted knowledgeably and without compulsion, on the basis of the highest and best use of asset that is physically possible, legally permissible and financially feasible. The valuation assessment adopts market-based evidence and is in line with guidance from the International Valuation Standards Committee and the requirements of IAS 16 Property, Plant and Equipment.
Owner-occupied properties held under lease arrangements are stated at amortised cost and are amortised on a straight-line basis over the lease term. For further information on the Group’s lease arrangements see note 23.
If owner-occupied properties were stated on a historical cost basis, the carrying amount would be £431 million (2018: £364 million).
Total cash outflows recognized in the period in relation to leases were £70 million. Expenses recognised in the Group consolidated income statement in relation to short-term and low-value leases were £nil. Variable lease payments not included in the measurement of lease liabilities were £nil.
Strategic report Governance IFRS financial statements Other information 23 – Lease assets and liabilities continued (iii) Lease liabilities included within note 54 total £572 million. Future contractual aggregate minimum lease payments are as follows: £m
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Financial assets Loans (note 25(a)) 38,559 38,579 36,130 36,184 Financial investments (note 28(a)) 343,418 343,418 319,825 319,825
Fixed maturity securities2 198,832 198,832 191,675 191,675 Equity securities 99,570 99,570 88,227 88,227 Other investments (including derivatives)2 45,016 45,016 39,923 39,923
Fixed maturity securities — 199,481 273 191,799 Equity securities — 99,826 — 88,437 Loans 9,580 28,980 9,859 26,271 Receivables 5,799 3,265 5,609 3,041 Cash and cash equivalents 15,344 4,960 11,249 5,365 Accrued income and Interest 272 1,924 193 2,505 Other financial assets 5 51,930 10 46,557
Recurring fair value measurements Investment property (note 22) — — 11,203 11,203 — 11,203 Loans (note 25(a)) — — 28,319 28,319 10,260 38,579 Financial investments measured at fair value (note 28(a))
Financial assets classified as held for sale 5,788 50 1,986 7,824 1 7,825 Total 204,741 120,527 65,496 390,764 10,261 401,025 Financial liabilities measured at fair value
Financial liabilities classified as held for sale 5,259 20 3,045 8,324 28 8,352 Total 151,498 5,506 5,045 162,049 7,834 169,883 1 In addition to the balances in this table, included within reinsurance assets in the statement of financial position and note 47 are £4,006 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair value through profit and loss and are classified as Level 1 assets.
Non-recurring fair value measurement Properties occupied by Group companies — — 320 320 Total — — 320 320
IFRS 13, Fair Value Measurement, permits assets and liabilities to be measured at fair value on either a recurring or non-recurring basis. Recurring fair value measurements are those that other IFRSs require or permit in the statement of financial position at the end of each reporting period, whereas non-recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit in the statement of financial position in particular circumstances. The value of owner-occupied properties measured on a non-recurring basis at 31 December 2019 was £320 million (2018: £352 million), stated at their revalued amounts in line with the requirements of IAS 16 Property, Plant and Equipment.
Fixed maturity securities2 65,996 109,176 16,503 191,675 — 191,675 Equity securities 87,813 — 414 88,227 — 88,227 Other investments (including derivatives)2 29,971 4,770 5,182 39,923 — 39,923
Financial assets classified as held for sale 5,240 19 1,992 7,251 — 7,251
Financial liabilities measured at fair value Non-participating investment contracts3 (note 45(a)) 111,966 47 — 112,013 — 112,013 Net asset value attributable to unit holders 16,313 — 25 16,338 — 16,338 Borrowings (note 53(a)) — — 1,225 1,225 8,195 9,420 Derivative liabilities (note 61(b)) 466 5,478 534 6,478 — 6,478
2 Following a review of the classification of financial assets, comparative amounts have been restated from those previously reported. The effect of this change is to reclassify £2,201 million of assets from fixed maturity securities to other investments and £3,734 million of assets from fair value hierarchy level 2 to level 1.
Non-recurring fair value measurement Properties occupied by Group companies — — 352 352
Transfers between Level 1 and Level 2 There were no significant transfers between Level 1 and 2 during the year.
Transfers to/from Level 3 £1.5 billion of assets transferred into Level 3 and £1.2 billion of assets transferred out of Level 3 relate principally to debt securities held by our businesses in the UK and France. These are transferred between Levels 2 and 3 depending on the availability of observable inputs and whether the counterparty and broker quotes are corroborated using valuation models with observable inputs.
(g) Further information on Level 3 assets and liabilities The table below shows movement in the Level 3 assets and liabilities measured at fair value.
Institution of Chartered Surveyors and using estimates during the intervening period. Outside the UK, valuations are produced by external qualified professional appraisers in the countries concerned. Investment properties are valued on an income approach that is based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break options taking into consideration lease incentives and assuming no further growth in the estimated rental value of the property. The uplift and discount rates are derived from rates implied by recent market transactions on similar properties. These inputs are deemed unobservable.
• The mortgages have a no negative equity guarantee (‘NNEG’) such that the cost of any potential shortfall between the value of the loan and the realised value of the property, at the end of the term, is recognised by a deduction to the value of the loan. Property valuations at the reporting date are obtained by taking the most recent valuation for the property and indexing using market observable regional house price indices. NNEG is calculated using base property growth rates reduced for the cost of potential dilapidations, using a stochastic model. In addition, a cost of capital charge is applied to reflect the variability in these cashflows. The base property growth rate assumption is RPI +0.75% which equates to a long-term average growth rate of 4.0% pa at 31 December 2019 (2018: 4.3%). After applying the cost of capital charge, dilapidations and the stochastic distribution, the effective net long-term growth rate equates to 0.5% pa (2018: 0.6%).
• Non-standard debt products and privately placed bonds held by our businesses in the UK do not trade in an active market. These debt securities are valued using discounted cash flow models, designed to appropriately reflect the credit and illiquidity risk of the instrument. These bonds have been classified as Level 3 because the valuation approach includes significant unobservable inputs and an element of subjectivity in determining appropriate credit and illiquidity spreads.
• Debt securities held by our French and Asian businesses which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued (iv) Equity securities • Equity securities which primarily comprise private equity holdings 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.
(vi) Financial assets of operations classified as held for sale • Financial assets of operations classified as held for sale are held by our Asia business and consist primarily of discretionary managed funds of £1,404 million (2018: £1,398 million) and debt securities which are not traded in an active market and have been valued using third party or counterparty valuations of £401 million (2018: £360 million). These assets are included within the relevant asset category within the sensitivity table below.
The tables below show the sensitivity of the fair value of Level 3 assets and liabilities to changes in unobservable inputs to a reasonable alternative: Sensitivities 2019 Fair value £bn Most significant unobservable input Reasonable alternative
Investment property 11.2 Equivalent rental yields +/- 5-10% 0.9 (0.9) Loans Commercial mortgage loans and Primary Healthcare loans 12.9 Illiquidity premium +/- 20 bps 0.2 (0.2) Equity release mortgage loans 11.0 Base property growth rate +/- 10% 0.3 (0.4) Current property market values +/- 10% 0.2 (0.2) Infrastructure and Private Finance Initiative (PFI) loans 4.0 Illiquidity premium +/- 25 bps1 0.2 (0.2) Other 0.4 Illiquidity premium +/- 25 bps1 — — Fixed maturity securities Structured bond-type and non-standard debt products 6.4 Market spread (credit, liquidity and other) +/- 25 bps 0.1 (0.1) Privately placed notes 1.7 Credit spreads +/- 25 bps1 0.1 (0.1) Other debt securities 9.9 Credit and liquidity spreads +/- 20-25 bps 0.5 (0.5) Equity securities 0.8 Market spread (credit, liquidity and other) +/- 25 bps — (0.1) Other investments Property Funds 0.8 Market multiples applied to net asset values +/- 15-20% 0.1 (0.1) Other investments (including derivatives) 6.4 Market multiples applied to net asset values +/- 10-40%2 0.8 (0.6) Liabilities Non-participating investment contract liabilities (3.0) Fair value of the underlying unit funds +/- 20-25% 0.4 (0.4) Borrowings (1.2) Illiquidity premium +/- 50 bps — — Other liabilities (including derivatives) (0.8) Independent valuation vs counterparty N/A — — Total Level 3 investments 60.5 3.8 (3.8) 1 On discount spreads. 2 Dependent on investment category.
Strategic report Governance IFRS financial statements Other information 24 – Fair value methodology continued Sensitivities 2018 Fair value £bn Most significant unobservable input Reasonable alternative
Equity securities 0.3 Market spread (credit, liquidity and other) +/- 25 bps — —
Liabilities Non-participating investment contract liabilities (3.1) Fair value of the underlying unit funds +/- 20-25% 0.4 (0.4) Borrowings (1.2) Illiquidity premium +/- 50 bps — — Other liabilities (including derivatives) (0.6) Independent valuation vs counterparty N/A — —
Total Level 3 investments 55.7 3.6 (3.5) 1 On discount spreads. 2 Dependent on investment category. 3 Following a review of the sensitivities of equity release mortgage loans to base property growth rates, the 2018 comparative amounts have been restated from those previously reported. 4 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Strategic report Governance IFRS financial statements Other information 25 – Loans This note analyses the loans our Group companies have made, the majority of which are mortgage loans.
Policy loans 1 684 685 1 769 770 Loans to banks 302 8,528 8,830 303 9,019 9,322 Healthcare, infrastructure and PFI other loans 6,467 — 6,467 5,358 — 5,358 UK securitised mortgage loans (see note 26) 2,432 — 2,432 2,437 — 2,437 Non-securitised mortgage loans 19,117 — 19,117 17,427 — 17,427 Other loans — 1,049 1,049 — 870 870
Of the above total loans, £28,938 million (2018: £26,696 million) are due to be recovered in more than one year after the statement of financial position date.
Non-securitised mortgage loans include £8,558 million (2018: £7,315 million) of residential equity release mortgages, £7,681 million (2018: £7,283 million) of commercial mortgages and £2,878 million (2018: £2,829 million) relating to UK primary healthcare and PFI businesses. The healthcare and PFI mortgage loans 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.
The movements in the impairment provisions on these loans for the years ended 31 December 2019 and 2018 were as follows: £m
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.
(b) Carrying values The following table summarises the securitisation arrangements: Securitised assets £m
Total loan notes issued, as above 1,457 1,464 Less: Loan notes held by Group companies (224) (239)
Strategic report Governance IFRS financial statements Other information 27 – 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.
All of the investment vehicles in the investment portfolio are managed by portfolio managers who are compensated by the respective investment vehicles for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee, and is reflected in the valuation of the investment vehicles.
(b) Interests in unconsolidated structured entities As part of its investment activities, the Group invests in unconsolidated structured entities. As at 31 December 2019, the Group’s total interest in unconsolidated structured entities was £58,519 million (2018 restated: £53,617 million) on the Group’s statement of financial position. The Group’s total interest in unconsolidated structured entities is classified as ‘Interests in and loans to joint ventures and associates’ and ‘financial investments held at fair value through profit or loss’. The Group does not sponsor any of the unconsolidated structured entities.
2 Primarily reported within ‘other debt securities’ in note 28(a). 3 Loans include Healthcare, infrastructure & PFI other loans along with certain non-securitised mortgage loans.
The majority of debt securities above are investment grade securities held by the UK business. In some cases, the Group may be required to absorb losses from an unconsolidated structured entity before other parties when and if Aviva’s interest is more subordinated with respect to other owners of the same security.
Strategic report Governance IFRS financial statements Other information 27 – Interests in structured entities continued In relation to risk management, disclosures on debt securities and investment vehicles are given in note 60(b)(ii) ‘Risk management’. In relation to other guarantees and commitments that the Group provides in the course of its business, please see note 56(f) ‘Contingent liabilities and other risk factors’.
Aviva’s interest in unconsolidated structured entities that it also manages at 31 December 2019 is £1,919 million (2018: £2,146 million) and the total funds under management relating to these investments at 31 December 2019 is £15,454 million (2018: £16,794 million).
Strategic report Governance IFRS financial statements Other information 28 – 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.
Fixed maturity securities2 Debt securities UK government — 27,044 — 27,044 — 29,203 — 29,203 UK local authorities — 202 — 202 — 191 — 191 Non-UK government (note 28(d)) — 60,569 1,133 61,702 — 55,168 1,287 56,455 Corporate bonds
Convertibles and bonds with warrants attached — 35 6 41 — 270 — 270 Other — 7,378 — 7,378 — 6,710 — 6,710 — 183,479 1,461 184,940 — 176,225 1,595 177,820 Certificates of deposit — 14,541 — 14,541 — 14,167 85 14,252
Equity securities Ordinary shares Public utilities — 2,883 — 2,883 — 2,369 — 2,369 Banks, trusts and insurance companies — 20,635 1 20,636 — 19,742 1 19,743 Industrial miscellaneous and all other — 76,082 14 76,096 — 66,129 — 66,129 — 99,600 15 99,615 — 88,240 1 88,241 Non-redeemable preference shares — 211 — 211 — 196 — 196
Total financial investments 7,097 342,667 1,478 351,242 5,357 320,037 1,682 327,076 Less: Assets classified as held for sale
Fixed maturity securities — (649) — (649) — (397) — (397) Equity securities — (256) — (256) — (210) — (210) Other investments — (6,919) — (6,919) — (6,644) — (6,644)
2 Following a review of the classification of financial assets, comparative amounts have been amended from those previously reported. The effect of this change is to reclassify £2,201 million of assets from fixed maturity securities to other investments.
Fixed maturity securities2 186,753 20,040 (7,312) 199,481 184,934 15,733 (8,595) 192,072 Equity securities 87,436 16,835 (4,445) 99,826 87,007 9,339 (7,909) 88,437 Other investments2
These are further analysed as follows: At fair value through profit or loss 313,893 49,264 (13,393) 349,764 307,392 40,406 (22,404) 325,394 Available for sale 1,381 98 (1) 1,478 1,602 85 (5) 1,682 315,274 49,362 (13,394) 351,242 308,994 40,491 (22,409) 327,076 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as fixed maturity securities and equity securities in the table above. The restatement has had no impact on the profit for the year or equity. See note 1(a) for further information.
Unrealised gains and losses on financial investments classified as at fair value through profit or loss, recognised in the income statement in the year, were a net gain of £18,398 million (2018 restated: £29,885 million net loss). Of this net gain, £17,920 million net gain (2018 restated: £28,801 million net loss) related to investments designated as other than trading and £478 million net gain (2018 restated: £1,084 million net loss) related to financial investments designated as trading.
The movement in the unrealised gain/loss position reported in the statement of financial position during the year, shown in the table above, includes foreign exchange movements on the translation of unrealised gains and losses on financial investments held by foreign subsidiaries, which are recognised in other comprehensive income, as well as transfers due to the realisation of gains and losses on disposal and the recognition of impairment losses.
The Group receives collateral in order to reduce the credit risk of these arrangements, either in the form of securities or cash. See note 62 for further discussion regarding collateral positions held by the Group.
(ii) Other arrangements In carrying on its bulk purchase annuity business, the Group’s UK Life operation is required to place certain investments in trust on behalf of the policyholders. Amounts become payable from the trust funds to the trustees if the Group were to be in breach of its payment obligations in respect of policyholder benefits. At 31 December 2019, £2,472 million (2018: £2,313 million) of financial investments were restricted in this way.
Singapore 12 5 784 658 374 342 1,170 1,005 Other 2,932 2,072 3,862 3,331 671 829 7,465 6,232 Asia Pacific and other 2,944 2,077 4,646 3,989 1,045 1,171 8,635 7,237
Less: Assets classified as held for sale (23) (9) — — (93) (1) (116) (10)
Total 9,288 5,704 39,408 38,626 12,890 12,115 61,586 56,445 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The review identified amounts presented within cash and cash equivalents and other investments that are now presented as Non-UK Government debt securities in the table above. The restatement has had no impact on the profit for the year or equity. See note 1(a) for further information.
Our direct shareholder asset exposure to government (non-UK) debt securities amounts to £12,983 million (2018 restated: £12,116 million). The primary exposures, relative to total shareholder (non-UK) government debt exposure, are to Canadian (24%), French (14%), US (8%), Polish (4%), German (4%) and Irish (3%) government debt securities.
Deferred acquisition costs in respect of: Insurance contracts – Long-term business 993 931 Insurance contracts – General insurance and health business 1,141 1,088 Participating investment contracts – Long-term business 116 101 Non-participating investment contracts – Long-term business 1,108 1,036
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, £1,751 million (2018: £1,879 million) is expected to be recovered in 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.
(b) Deferred acquisition costs – movements in the year The movements in deferred acquisition costs during the year were: Long-term business
Carrying amount at 1 January 858 33 1,071 1,110 2 3,074 Acquisition costs deferred during the year 265 13 87 2,279 — 2,644 Amortisation (141) (9) (140) (2,282) (2) (2,574) Impact of assumption changes 14 1 16 — — 31 Effect of portfolio transfers, acquisitions and disposals (5) — — (10) — (15) Foreign exchange rate movements 2 1 2 (9) — (4) Other movements1 (62) 62 — — — — Carrying amount at 31 December 931 101 1,036 1,088 — 3,156
1 Following the adoption of IFRS 15, the categorisation of DAC balances was analysed resulting in a transfer of £62 million from insurance contracts to participating investment contracts.
DAC for long-term business increased over 2019 mainly due to new business sales across the UK and European markets. DAC for general insurance and health business increased over 2019 mainly due to business growth in the UK and Canada.
Where amortisation of the DAC balance depends on projected profits, changes to economic conditions may lead to a movement in the DAC balance and a corresponding impact on profit. It is estimated that the movement in the DAC balance would reduce profit by £29 million (2018: £40 million) if market yields on fixed income investments were to increase by 1% and increase profit by £36 million (2018: £39 million) if yields were to reduce by 1%.
At both 31 December 2019 and 31 December 2018 the DAC balance has been restricted by the value of projected future profits.
Surpluses in the staff pension schemes and £1 million (2018: £1 million) of other assets are recoverable more than one year after the statement of financial position date.
Loans 2,111 2,008 Fixed maturity securities2 42,350 37,181 Equity securities 83,035 73,229 Reinsurance assets 4,003 4,099 Cash and cash equivalents 8,353 7,571 Units trusts and other investment vehicles2 37,822 32,392 Other 8,508 8,378
Strategic report Governance IFRS financial statements Other information 33 – Ordinary share capital This note gives details of Aviva plc’s ordinary share capital and shows the movements during the year.
At 1 January 3,902,352,211 975 44 1,214 4,012,682,691 1,003 14 1,207 Shares issued under the Group’s Employee and
Strategic report Governance IFRS financial statements Other information 34 – Group’s share plans This note describes various equity compensation plans operated by the Group, and shows how the Group values the options and awards of shares in 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.
(vi) Aviva Investors long-term incentive plan awards These awards have been made under the Aviva Investors Long-Term Incentive Plan 2015 (AI LTIP)
(b) Outstanding options The following table summarises information about options outstanding at 31 December 2019: Range of exercise prices
The comparative figures as at 31 December 2018 were: Range of exercise prices
Strategic report Governance IFRS financial statements Other information 34 – Group’s share plans continued (c) Movements in the year A summary of the status of the option and share plans as at 31 December 2018 and 2019, and changes during the years ended on those dates, is shown below.
Share price 405p 500p Expected volatility1 23% 25% Expected volatility of comparator companies’ share price1 23% 25% Correlation between Aviva and comparator competitors’ share price1 53% 64% Expected life1 2.77 years 2.64 years Expected dividend yield 0.00% 0.00% Risk-free interest rate1 0.63% 0.80% 1 For awards with market-based performance conditions only.
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the expected life of the share award prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life of the share awards.
Shares held by employee trusts 1,714,288 7 455,986 2 Shares held by subsidiary companies — — 2,435,983 13 1,714,288 7 2,891,969 15
(b) Shares held by subsidiary companies At 31 December 2019, the balance of shares held by subsidiary companies of nil (2018: 2,435,983 shares) had an aggregate nominal value of £nil (2018: £608,996) and a market value of £nil (2018: £9,148,336).
At the end of 2019, the fair value of Aviva plc’s preference share capital was £299 million (2018: £264 million).
Strategic report Governance IFRS financial statements Other information 37 – Direct capital instrument and tier 1 notes
Notional amount 2019 £m 5.9021% £500 million direct capital instrument – Issued November 2004 500 500 6.875% £210 million STICS – Issued November 2003 — 231
The Step-up Tier one Insurance Capital Securities (‘STICS’) were issued on 21 November 2003 by Friends Life Holdings plc, substituted as issuer by Aviva plc on 1 October 2015. These had no fixed redemption date, however, on 17 October 2019 notification was given that the Group would redeem the tier one notes at the first call date on 21 November 2019. On the notification date the instruments were reclassified as a financial liability of £210 million, representing the fair value and redemption cost at that date. The resulting difference of £21 million between the carrying amount of £231 million and fair value of £210 million has been charged to retained earnings. The instruments were cancelled on 25 November 2019.
No interest will accrue on any deferred coupon on the DCI. Deferred coupons on the DCI will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital. These instruments have been treated as equity. Please refer to accounting policy AE.
At the end of 2019 the fair value of the DCI was £514 million (2018 DCI: £506 million, STICS: £216 million).
Strategic report Governance IFRS financial statements Other information 38 – Merger reserve Prior to 1 January 2004, certain significant business combinations were accounted for using the ‘pooling of interests method’ (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations gave rise to a merger reserve in the consolidated statement of financial position, being the difference between the nominal value of new shares issued by the Parent Company for the acquisition of the shares of the subsidiary and the subsidiary’s own share capital and share premium account.
39 – Currency translation and other reserves This note gives details of the currency translation and other reserves forming part of the Group’s consolidated equity and shows the movements during the year net of non-controlling interests: Other reserves
Strategic report Governance IFRS financial statements Other information 40 – Retained earnings This note analyses the movements in the consolidated retained earnings during the year.
Balance at 31 December 5,065 4,523 1 Net remeasurements of pension schemes recorded in the consolidated statement of comprehensive income of £867 million loss (2018: £279 million loss) includes £867 million of remeasurement losses (2018: £280 million losses)
Balance at 1 January 966 1,235 Profit for the year attributable to non-controlling interests 115 119 Foreign exchange rate movements (39) 5 Total comprehensive income attributable to non-controlling interests 76 124 Capital contributions from non-controlling interests — 3 Non-controlling interests’ share of dividends declared in the year (63) (90) Changes in non-controlling interests in subsidiaries1 (2) (306)
Balance at 31 December 977 966 1 Changes in non-controlling interests in 2018 primarily relate to the sale of the Group’s shareholdings in Avipop (Italy), the sale of the life insurance and pension joint ventures Caja Murcia Vida and Caja Granada Vida (Spain) and the change in control status of Hong Kong.
42 – Contract liabilities and associated reinsurance The Group’s liabilities for insurance and investment contracts it has sold, and the associated reinsurance, is covered in the following notes: • Note 43 covers insurance liabilities; • Note 44 covers the methodology and assumptions used in calculating the insurance liabilities; • Note 45 covers liabilities for investment contracts; • Note 46 details the financial guarantees and options on certain contracts; • Note 47 details the associated reinsurance assets on these liabilities; and • Note 48 shows the effects of changes in the assumptions on the liabilities.
Strategic report Governance IFRS financial statements Other information 42 – Contract liabilities and associated reinsurance continued (a) Carrying amount The following is a summary of the contract liabilities and related reinsurance assets as at 31 December.
General insurance and health Outstanding claims provisions (8,831) 683 (8,148) (9,046) 789 (8,257) Provisions for claims incurred but not reported (2,672) 1,004 (1,668) (2,360) 822 (1,538) (11,503) 1,687 (9,816) (11,406) 1,611 (9,795) Provision for unearned premiums (5,138) 275 (4,863) (4,946) 254 (4,692) Provision arising from liability adequacy tests1 (15) — (15) (16) — (16)
(371,465) 12,356 (359,109) (346,545) 11,755 (334,790) 1 Provision arising from liability adequacy tests relates to general insurance business only. Liability adequacy test provisions for life operations, where applicable, are included in other line items. At 31 December 2019 this provision is £nil (2018: £nil) for the life operations.
(b) Change in contract liabilities, net of reinsurance, 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 (note 7), to the change in insurance liabilities recognised as an expense in the relevant movement tables in the following notes. 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, 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.
General insurance and health Change in insurance liabilities (note 43(c)(iv) and 47(c)(ii))1 (313) 111 (202) Less: Unwind of discount (8) 8 —
Total change in insurance liabilities (note 7) (6,415) 169 (6,246) 1 Includes £(190) million in the UK General Insurance and Health business relating to a change in the discount rate used for estimating lump sum payments of bodily injury claims from -0.75% to 0.00%.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities This note analyses the Group’s gross insurance contract liabilities for the long-term and general insurance and health business, describes how the Group calculates these liabilities and presents the movement in these liabilities during the year.
Long-term business Participating insurance liabilities1 47,344 46,768 Unit-linked non-participating insurance liabilities 14,707 14,480 Other non-participating insurance liabilities1 69,131 64,581 131,182 125,829 Outstanding claims provisions 2,187 2,001
General insurance and health Outstanding claims provisions 8,831 9,046 Provision for claims incurred but not reported 2,672 2,360 11,503 11,406 Provision for unearned premiums 5,138 4,946 Provision arising from liability adequacy tests2 15 16
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities continued (iii) Movements in long-term business liabilities The following movements have occurred in the gross long-term business liabilities during the year: £m
For many types of long-term business, including unit-linked and participating insurance liabilities, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The gross long-term business liabilities increased by £5.4 billion during 2019 (2018: £5.1 billion decrease) mainly driven by: • Variance between actual and expected experience of £3.2 billion, which was mainly due to higher than expected equity returns in the UK
(c) General insurance and health liabilities (i) Business description The Group underwrites general insurance and health business in a number of countries as follows: • In the UK, providing individual and corporate customers with a wide range of insurance products; • In Canada, providing a range of personal and commercial lines products; and • In Europe and Asia, providing a range of general insurance and health products.
(iii) Provisions for Outstanding Claims The table below shows the total general insurance and health liabilities split by outstanding claim provisions and provision for claims incurred but not reported (IBNR provisions), gross of reinsurance, by major line of business.
Motor 4,836 1,115 5,951 5,019 963 5,982 Property 1,823 155 1,978 1,833 104 1,937 Liability 1,864 1,277 3,141 1,856 1,164 3,020 Creditor 5 6 11 4 7 11 Other 303 119 422 334 122 456
Carrying amount at 1 January 11,406 11,801 Impact of changes in assumptions 126 (22) Claim losses and expenses incurred in the current year 7,045 7,158 Decrease in estimated claim losses and expenses incurred in prior periods (186) (544) Incurred claims losses and expenses 6,985 6,592 Less: Payments made on claims incurred in the current year (3,834) (3,927) Payments made on claims incurred in prior periods (3,327) (3,343) Recoveries on claim payments 396 357
Carrying amount at 31 December 11,503 11,406 1 The movement during 2018 relates to the disposal of Avipop in Italy.
Strategic report Governance IFRS financial statements Other information 43 – Insurance liabilities continued (vi) Analysis of general insurance and health claims development The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the accident years 2010 to 2019. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year, while the lower section of the tables shows the original estimated ultimate cost of claims and how these original estimates have increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.
• £83 million release from Europe mainly due to favourable claims development in France.
2,341 121 127 184 217 350 587 1,036 1,368 1,936 3,362 11,629 Effect of discounting (280) (18) (1) — 1 — — — — — — (298) Present value 2,061 103 126 184 218 350 587 1,036 1,368 1,936 3,362 11,331 Cumulative effect of foreign exchange movements — (3) (2) 1 4 19 71 (16) (23) (19) — 32 Effect of acquisitions 8 1 7 9 12 23 42 38 — — — 140 Present value recognised in the
Valuation discount rates for business in the non-profit funds are as follows: Valuation discount rates (Gross of investment expenses) 2019 2018
Assurances Life conventional non-profit 0.5% to 2.1% 0.9% to 2.6% Pensions conventional non-profit 0.6% to 1.6% 1.1% to 2.1%
Income Protection Active lives 0.6% to 2.1% 1.1% to 2.6% Claims in payment (level and index linked) 1.1% 1.3% to 1.6%
The valuation discount rates are after a reduction for risk, but before allowance for investment expenses. For conventional immediate annuity business, the allowance for risk comprises long-term assumptions on a prudent basis for defaults or, in the case of equity release assets, expected losses arising from the No-Negative-Equity Guarantee. These allowances vary by asset category and for some asset classes by rating.
Expenses Maintenance expense assumptions for non-profit business are generally expressed as a per policy charge set with regards to an allocation of current year expense levels by broad category of business and using the policy counts for in-force business. The assumptions also include an allowance for prudence and increase by future expense inflation over the lifetime of each contract. Expense inflation is assumed to be in line with RPI, and in line with external agreements for business administered externally. An additional liability is held if projected per-policy expenses in future years are expected to exceed current assumptions. Further, explicit project expense liabilities are held for non-discretionary project costs that typically relate to mandatory requirements. Expense-related liabilities are only held where expenses are not covered by anticipated future profits in the liability methodology, notably for unit-linked contracts. Investment expense assumptions are generally expressed as a proportion of the assets backing the liabilities.
For the largest portfolio of pensions annuity business, the underlying mortality assumptions for males are 105.4% of PMA08 HAMWP adjusted (2018: 105.8% of PMA08 HAMWP adjusted) with base year 2008; for females the underlying mortality assumptions are 99.5% of PFA08 HAMWP adjusted (2018: 99.0% of PFA08 HAMWP adjusted) with base year 2008.
Improvements are based on ‘CMI_2018 (S=7.25) Advanced with adjustments’ (2018: ‘CMI_2017 (S=7.5) Advanced with adjustments’) with a long-term improvement rate of 1.75% (2018: 1.75%) for males and 1.5% (2018: 1.5%) for females, both with an additional improvement for prudence of 0.5% (2018: 0.5%) to all future annual improvement adjustments. The CMI_2018 tables have been adjusted by adding 0.25% (2018: 0.25%) and 0.35% (2018: 0.35%) to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the annuitant population relative to the general population on which CMI_2018 is based), and uses the advanced parameters to taper the long-term improvement rates to zero between ages 90 and 115 (the ‘core’ parameters taper the long-term improvement rates to zero between ages 85 and 110). The tapering approach is unchanged from that used at 2018. In addition, on a significant proportion of individual annuity business, 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.
Mortality Mortality assumptions for with-profits business are set with regard to recent Company experience and general industry trends. The mortality tables used in the valuation are summarised below: Mortality table used 2019 2018
As at 31 December 2018 maintenance expense assumptions for with-profits business were generally expressed as a fixed per policy charge in line with agreements between UKLS and AVLAP. The assumptions increased by a future inflation charge over the lifetime of each contract, which was 50% RPI, 100% RPI or 100% RPI + 1% depending on product type. Any excess of expenses charged by UKLS to AVLAP over the charges specified by the agreements was borne by the non-profit business.
Strategic report Governance IFRS financial statements Other information 44 – Insurance liabilities methodology and assumptions continued Discounting Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held: Discount rate Mean term of liabilities
The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
The discount rate that has been applied to latent claims reserves, structured settlements and reinsured London Market business is based on the swap curve in the relevant currency at the reporting date, having regard to the duration of the expected settlement dates of the claims. The range of discount rates used depends on the duration of the claims and is given in the table above. The duration of the claims span over 35 years, with the average duration being between 9 and 12 years depending on the geographical region.
At 31 December 2019, it is estimated that a 1% fall in the discount rates used would increase net claim reserves by approximately £120 million (2018: £100 million), excluding the offsetting effect on asset values as assets are not hypothecated across classes of business.
The best estimate of the liabilities reflects the latest available market information and studies. Many different scenarios can be derived by flexing these key assumptions and applying different combinations of these assumptions. An upper and lower scenario can be derived by making reasonably likely changes to these assumptions, resulting in an estimate of £25 million (2018: £20 million) greater than the best estimate, or £35 million (2018: £30 million) lower than the best estimate. These scenarios do not, however, constitute an upper or lower bound on these liabilities.
Strategic report Governance IFRS financial statements Other information 45 – Liabilities for investment contracts This note analyses our gross liabilities for investment contracts by type of product and describes the calculation of these liabilities.
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated divisible surplus, except for the with-profits sub-fund supported by the RIEESA. Guarantees on long-term investment products are discussed in note 46.
Of the non-participating investment contracts measured at fair value, £137,040 million at 31 December 2019 (2018: £119,402 million) are unit-linked in structure and the fair value liability is equal to the current unit fund value, including any unfunded units, plus if required, additional non-unit reserves based on a discounted cash flow analysis. These contracts are generally classified as Level 1 in the fair value hierarchy, as the unit reserve is calculated as the publicly quoted unit price multiplied by the number of units in issue, and any non-unit reserve is insignificant.
For unit-linked business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 30 and the deferred income liability is shown in note 55.
Strategic report Governance IFRS financial statements Other information 45 – Liabilities 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.
France from non-participating investment contracts to participating investment contracts (£(151) million) and to a reclassification from non-participating investment contracts to participating investment contracts in the UK (£(853) million).
For unit-linked investment contracts, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. The variance between actual and expected experience in 2019 of £16.3 billion is primarily the result of the impact of strong global equity performance.
(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 £178 million at 31 December 2019 (2018: £153 million).
Strategic report Governance IFRS financial statements Other information 46 – Financial guarantees and options continued (c) Overseas life businesses In addition to guarantees written in the Group’s UK 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 guaranteed minimum bonuses and options Aviva France has written a number of contracts with a guaranteed surrender value and guaranteed minimum bonuses. 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 2019 (2018: no PAF was established).
The most significant of these contracts is the AFER Eurofund which has total liabilities of £37 billion at 31 December 2019 (2018: £39 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 1.85% for 2019 (2018: 2.25%) compared with an accounting income from the fund of 2.34% (2018: 2.74%).
(ii) Italy Guaranteed investment returns and guaranteed surrender values The Group has written contracts containing guaranteed investment returns and guaranteed surrender values in Italy. 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 and IFRS 4.
Long-term business Insurance contracts 6,369 5,836 Participating investment contracts 1 1 Non-participating investment contracts1 4,006 4,009
General insurance and health Outstanding claims provisions 683 789 Provisions for claims incurred but not reported 1,004 822 1,687 1,611 Provisions for unearned premiums 275 254 12,431 11,800 Less: Assets classified as held for sale (75) (45)
Carrying amount at 1 January 9,846 11,565 Assets in respect of new business 954 1,766 Expected change in existing business assets (185) (22) Variance between actual and expected experience 274 431 Impact of non-economic assumption changes (175) (460) Impact of economic assumption changes 193 21 Other movements recognised as an expense1 (37) (3,877) Change in assets2 1,024 (2,141) Effect of portfolio transfers, acquisitions and disposals3 — 399 Foreign exchange rate movements (73) 23 Other movements4 (421) —
Carrying amount at 31 December 10,376 9,846 1 Other movements recognised as an expense during 2019 primarily relate to the ceding of reinsurance for annuity business offset by basis methodology changes in Ireland, the reclassification of health reinsurance assets in
Singapore and collective investments in unit-linked funds in the UK following a restructure of a reinsurance treaty. The latter part is a continuation of activity undertaken in 2018. 2 Change in assets does not reconcile with values in note 42(b) due to the inclusion of reinsurance assets classified as non-participating investment contracts where, for such contracts, deposit accounting is applied on the income statement. 3 The movement during 2018 primarily relates to the acquisition of Friends First in Ireland. 4 Following a review of the presentation of negative reinsurance assets in the UK, £(427) million of negative reinsurance assets have been reclassified from insurance liabilities to reinsurance assets.
The impact of assumption changes in the above analysis shows the resulting movement in the carrying value of reinsurance assets, 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 impact profit, these are included in the effect of changes in assumptions and estimates during the year (see note 48), together with the impact of movements in related liabilities and other non-financial assets.
Incurred in current year 195 176 Incurred in prior years 96 40
Reinsurance recoveries received in the year (280) (313) Unwind of discounting 10 8
Change in reinsurance asset recognised as income (note 42(b)) 94 (111) Effect of portfolio transfers, acquisitions and disposals1 — (9) Foreign exchange rate movements (15) 2 Other movements (3) —
Carrying amount at 31 December 275 254 1 The movement during 2018 relates to the proportion of Avipop sold by Italy in 2018 that was ceded to reinsurers.
Strategic report Governance IFRS financial statements Other information 48 – Effect of changes in assumptions and estimates during the year This note analyses the impact of changes in estimates and assumptions from 2018 to 2019, on liabilities for insurance and investment contracts, and related assets and liabilities, such as unallocated divisible surplus, reinsurance, deferred acquisition costs and acquired value of in-force business and does not allow for offsetting movements in the value of backing financial assets.
Assumptions Long-term insurance business Interest rates (2,978) 1,061 Expenses (47) 9 Persistency rates (124) 23 Mortality and morbidity for assurance contracts (38) 24 Mortality for annuity contracts 830 780 Tax and other assumptions 9 18 Long-term investment business Expenses — (1) General insurance and health business Change in discount rate assumptions (54) 1
The impact of interest rates on long-term business relates primarily to annuities in the UK (including any change in credit default and reinvestment risk provisions), where a reduction in the discount rate, in response to decreasing interest rates and narrowing credit spreads, has increased liabilities.
The impact of expenses on long-term business relates primarily to the UK and Ireland, where reserves have increased by £55 million following a review of recent experience including the margin for prudence. This has been offset slightly by £8 million due to favourable expense experience in Singapore.
In Ireland there was a slight reduction in the reserves of £31 million following a review of recent experience.
In the general insurance and health business, a negative impact of £(54) million (2018: £1 million positive) has arisen primarily as a result of a decrease in the interest rates used to discount claim reserve for both periodic payment orders and latent claims.
Strategic report Governance IFRS financial statements Other information 49 – Unallocated divisible surplus An unallocated divisible surplus (UDS) is established where the nature of policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain at the reporting date. Therefore, the expected duration for settlement of the UDS is undefined.
The amount of UDS at 31 December 2019 has increased to £9.6 billion (2018: £5.9 billion). The increase is mainly due to market movements in Europe as a result of decreasing interest rates, narrowing credit spreads and increasing equity returns.
Where the aggregate amount of participating assets is less than the participating liabilities within a fund then the shortfall may be held as negative UDS, subject to recoverability testing as part of the liability adequacy requirements of IFRS 4. There are no material negative UDS balances at the participating fund-level within each life entity in the current period (2018: £355 million negative UDS within five funds in Italy).
(a) Current tax Current tax assets recoverable and liabilities payable in more than one year are £104 million and £9 million (2018: £24 million and £9 million), respectively.
The Group is party to the CFC & Dividend Group Litigation Order, which challenged the tax treatment of dividends received from non-UK entities before 2009. The Group is attempting to recover claims from HMRC covered by this judgement. The uncertainty in respect of the claims resulted in no recoverable amounts being recognised at 31 December 2018. As a result of recent progress made with the claims a recoverable balance of £99 million is included within current tax assets at 31 December 2019.
Deferred tax assets 162 185 Deferred tax liabilities (2,155) (1,885) Net deferred tax liability (1,993) (1,700)
Amounts classified as held for sale include £11 million of deferred tax assets. (2018: £nil).
Net liability at 1 January (1,700) (2,416) Adjustment at 1 January for adoption of IFRS 16 24 — Net liability at 1 January restated (1,676) (2,416) Acquisition and disposal of subsidiaries1 — 184 Amounts (charged)/credited to income statement (note 14(a)) (387) 545 Amounts credited/(charged) to other comprehensive income (note 14(b)) 50 (9) Foreign exchange rate movements 23 (10) Other movements (3) 6
In addition, the Group has unrecognised gross capital losses of £612 million (restated 2018: £604 million). These have no expiry date.
Total IAS 19 obligations to staff pension schemes 836 758 Restructuring provisions 29 64 Other provisions 700 577
At 1 January 64 577 641 92 515 607 Additional provisions 2 302 304 1 269 270 Provisions released during the period — (57) (57) — (128) (128)
Of the total restructuring and other provisions, £569 million (2018: £402 million) is expected to be settled more than one year after the statement of financial position date.
Other provisions have increased during the year mainly due to the recognition of a new product governance provision in our UK Life business of £175 million. This provision relates to past communications to a specific sub-set of pension policyholders, that may not have adequately informed them of switching options into with-profit funds that were available to them. This issue is restricted to a product originally sold between 1985 and 1989 and acquired by Aviva through the purchase of Friends Life. It does not affect any other part of our business. We are completing a review to identify and contact affected customers to ensure they are not disadvantaged. The most significant assumption in relation to the calculation of the provision is the estimated rates of customer switching. Each 10% reduction/increase in the rates of switching would reduce/increase the estimate of the provision by £40 million. The valuation of the provision involves a high degree of judgement and estimation uncertainty due to the dependence on decisions made by customers, and therefore the possible range of outcomes is significant.
The remainder of the increase in other provisions of £127 million largely relates to a number of relatively small new provisions including provisions relating to product governance rectification, warranty claims and litigation. This increase is offset by utilisation in the year of £118 million.
Strategic report Governance IFRS financial statements Other information 52 – Pension obligations (a) Introduction The Group operates a number of defined benefit and defined contribution pension schemes. The material defined benefit schemes are in the UK, Ireland and Canada. The assets and liabilities of these defined benefit schemes as at 31 December 2019 are shown below.
Total fair value of scheme assets (see b(ii) below) 17,671 833 264 18,768 17,059 775 249 18,083 Present value of defined benefit obligation (15,416) (1,035) (341) (16,792) (14,246) (950) (324) (15,520)
(i) UK schemes In the UK, the Group operates three main pension schemes, the Aviva Staff Pension Scheme (ASPS), the 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 sections of the UK schemes are 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.
Net IAS 19 surplus in the schemes at 1 January 18,083 (15,520) 2,563 Administrative expenses1 — (19) (19) Total pension cost charged to net operating expenses — (19) (19) Net interest credited/(charged) to investment income/(finance costs)2 479 (406) 73 Total recognised in income 479 (425) 54
Employer contributions 215 — 215 Plan participant contributions 4 (4) — Benefits paid (612) 612 — Administrative expenses paid from scheme assets1 (19) 19 — Foreign exchange rate movements (44) 55 11 Net IAS 19 surplus in the schemes at 31 December 18,768 (16,792) 1,976 1 Administrative expenses are expensed as incurred. 2 Net interest income of £96 million has been credited to investment income and net interest expense of £23 million has been charged to finance costs (see note 8).
Net IAS 19 surplus in the schemes at 1 January 18,678 (16,043) 2,635 Past service costs – amendments1 — (63) (63) Administrative expenses2 — (19) (19)
Remeasurements: Actual return on these assets (182) — (182) Less: Interest income on scheme assets (442) — (442)
Return on scheme assets excluding amounts in interest income (624) — (624) Gains from change in financial assumptions — 622 622 Losses from change in demographic assumptions — (185) (185) Experience losses — (93) (93) Total recognised in other comprehensive income (624) 344 (280)
Net IAS 19 surplus in the schemes at 31 December 18,083 (15,520) 2,563 1 Past service costs include a charge of £63 million relating to the estimated additional liability arising in the UK defined benefit schemes as a result of the requirement to equalise members’ benefits for the effects of Guaranteed
Strategic report Governance IFRS financial statements Other information 52 – Pension obligations continued (ii) Scheme assets Scheme assets are stated at their fair values at 31 December 2019.
Property 392 — — 392 353 — — 353 Pooled investment vehicles 4,497 283 122 4,902 4,738 555 100 5,393 Derivatives 60 4 — 64 (65) 4 — (61) Insurance Policies 1,977 — — 1,977 776 — — 776 Cash and other1 (5,952) (177) 1 (6,128) (4,653) (570) 1 (5,222)
Total fair value of scheme assets 18,317 833 264 19,414 17,679 775 249 18,703 Less: consolidation elimination for non-transferable Group
(iii) Assumptions on scheme liabilities The valuations used for accounting under IAS 19 have been based on the most recent funding actuarial valuations, updated to take account of the standard’s requirements in order to assess the liabilities of the material schemes at 31 December 2019.
The projected unit credit method The inherent uncertainties affecting the measurement of scheme liabilities require these to be measured on an actuarial basis. This involves discounting the best estimate of future cash flows to be paid out by the scheme using the projected unit credit method. This is an accrued benefits valuation method which calculates the past service liability to members and makes allowance for their projected future earnings. It is based on a number of actuarial assumptions, which vary according to the economic conditions of the countries in which the relevant businesses are situated, and changes in these assumptions can materially affect the measurement of the pension obligations.
Inflation rate1 3.0%/2.2% 3.3%/2.2% 1.5% 1.6% 2.0% 2.0% General salary increases2 4.8% 5.1% 3.0% 3.1% 2.5% 2.5% Pension increases3 3.0%/2.2% 3.3%/2.2% 0.35% 0.4% 1.25% 1.25% Deferred pension increases3 3.0%/2.2% 3.3%/2.2% 1.5% 1.6% — — Discount rate4, 5 1.9% (non-insured members)
2 In the UK, the only remaining linkage between pension benefits and general salary increases is in respect of a small amount of Guaranteed Minimum Pension benefits, in line with National Average Earnings. 3 For the UK schemes, assumptions are provided for RPI/CPI. In the UK, relevant RPI/CPI swap curves are used, which are equivalent to the single rates shown. The assumptions are also adjusted to reflect the relevant caps/floors and the inflation volatility. 4 To calculate scheme liabilities in the UK, a single discount rate is used in the RAC scheme, whereas for ASPS and FPPS, separate discount rates are used for the defined benefit obligation for members included / not included in annuity policies held by the scheme. 5 For the Irish schemes, a discount rate of 1.1% and 1.2% is used for AISPF and FFPS respectively, reflecting the differences in the duration of the liabilities between the two schemes.
The mortality tables, average life expectancy and pension duration used at 31 December 2019 for scheme members are as follows: Life expectancy/(pension duration) at NRA of a male Life expectancy/(pension duration) at NRA of a female
(28.2) (30.0) (29.6) (31.9) – RAC SAPS, including allowances for future improvement 65 86.9 88.9 89.5 91.4 (21.9) (23.9) (24.5) (26.4) – FPPS SAPS, including allowances for future improvement 60 87.6 90.0 90.1 92.2 (27.6) (30.0) (30.1) (32.2)
Ireland – AISPF 73%/81% PNA00 with allowance for future improvements 61 89.7 92.7 91.4 94.3 (28.7) (31.7) (30.4) (33.3)
Canada Canadian Pensioners’ Mortality 2014 Private Table, including allowance for future improvements 65 87.0 88.5 89.5 90.9
The assumptions above are based on commonly used mortality tables. The tables make allowance for observed variations in such factors as age, gender, pension amount, salary and postcode-based lifestyle group, and have been adjusted to reflect recent research into mortality experience. However, the extent of future improvements in longevity is subject to considerable uncertainty and judgement is required in setting this assumption. For the ASPS, which is the most material scheme to the Group, the allowance for mortality improvement is per the actuarial profession’s ‘CMI_2018 (S=7.25) Advanced with adjustments’ model (2018: ‘CMI_2017 (S=7.5) Advanced with adjustments’), with a long-term improvement rate of 1.75% per annum (2018: 1.75% per annum) for males and 1.5% per annum (2018: 1.5% per annum) for females. The CMI_2018 tables have been adjusted by adding 0.25% per annum (2018: 0.25% per annum) and 0.35% per annum (2018: 0.35% per annum) to the initial rate of mortality improvements for males and females respectively (to allow for greater mortality improvements in the pension scheme membership relative to the general population on which CMI_2018 is based), and uses the advanced parameters to taper the longterm improvement rates to zero between ages 90 and 115 (2018: long-term improvement rates taper to zero between ages 90 and 115) (the ‘core’ parameters taper the long-term improvement rates to zero between ages 85 and 110).
Strategic report Governance IFRS financial statements Other information 52 – Pension obligations continued Sensitivity analysis Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality. The sensitivity analysis below has been determined by changing the respective assumptions while 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
Impact on present value of defined benefit obligation at 31 December 2019 (2,786) 3,713 2,627 (2,037) 613 Impact on present value of defined benefit obligation at 31 December 2018 (2,502) 3,317 2,275 (1,788) 536 1 The effect of assuming all members in the schemes were one year younger.
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 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, as well as the longevity sensitivity impact due to the insurance policy and longevity swap assets held by the UK schemes.
(iv) Risk management and asset allocation strategy As noted above, the 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 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.
Other schemes The other schemes are considerably less material but their risks are managed in a similar way to those in the main UK scheme. In 2015, the RAC pension scheme entered into a longevity swap covering approximately £0.6 billion of pensioner in payment scheme liabilities.
Strategic report Governance IFRS financial statements Other information 52 – Pension obligations continued (v) Funding Formal actuarial valuations normally take place every three years and where there is a deficit, the Group and the trustees would agree a deficit recovery plan. The assumptions adopted for triennial actuarial valuations are determined by the trustees and agreed with the Group and are normally more prudent than the assumptions adopted for IAS19 purposes, which are best estimate.
Continuing operations UK defined benefit schemes 21 22 Overseas defined benefit schemes 1 1
Total defined benefit schemes (note 11(b)) 22 23 UK defined contribution schemes 143 143 Overseas defined contribution schemes 21 20
Strategic report Governance IFRS financial statements Other information 53 – Borrowings Our borrowings are classified as either core structural borrowings, which are included within the Group’s capital employed, or operational borrowings drawn by operating subsidiaries. This note shows the carrying values and contractual maturity amounts of each type, and explains their main features and movements during the year.
Core structural borrowings, at amortised cost 7,496 7,699 Operational borrowings, at amortised cost 338 496 Operational borrowings, at fair value 1,233 1,225 1,571 1,721 9,067 9,420 Less: Liabilities classified as held for sale (28) —
Securitised mortgage loan notes UK lifetime mortgage business (note 26(b)) 1,233 1,225
Within one year 294 46 340 257 49 306 1 to 5 years 392 173 565 535 185 720 5 to 10 years 559 148 707 555 163 718 10 to 15 years 59 116 175 180 142 322 Over 15 years 212 109 321 136 154 290
Company from In the event the Company does not call the notes, the coupon will reset at each applicable reset date to £700 million 14 Nov 2001 14 Nov 2036 16 Nov 2026 5 year Benchmark Gilt + 2.85% £800 million 29 Sep 2003 Undated 29 Sep 2022 5 year Benchmark Gilt + 2.40% £600 million 20 May 2008 20 May 2058 20 May 2038 3 month LIBOR + 3.26% £162 million 21 May 2009 21 May 2021 N/A N/A £500 million 21 April 2011 21 April 2022 N/A N/A £450 million 26 May 2011 3 June 2041 3 June 2021 6 Month LIBOR + 4.136% €650 million 5 July 2013 5 July 2043 5 July 2023 5 year EUR mid-swaps + 5.13% €700 million 3 July 2014 3 July 2044 3 July 2024 5 year EUR mid-swaps + 3.48% £400 million 4 June 2015 4 June 2050 4 December 2030 3 month LIBOR + 4.022% €900 million 4 June 2015 4 December 2045 4 December 2025 3 month Euribor + 3.55% C$450 million 9 May 2016 10 May 2021 N/A N/A £400 million 12 September 2016 12 September 2049 12 September 2029 3 month LIBOR + 4.721%
Subordinated notes issued by the Company rank below its senior obligations and ahead of its preference shares and ordinary share capital. The dated subordinated notes rank ahead of the undated subordinated notes. The fair value of notes at 31 December 2019 was £7,211 million (2018: £6,610 million), calculated with reference to quoted prices.
At 31 December 2019 the obligations to repay third parties arising out of financial reinsurance operations were nil (2018: £177 million).
Other loans of £222 million (2018: £206 million) include external debt raised by overseas long-term businesses to fund operations.
(v) Securitised mortgage loan notes Loan notes have been issued by special purpose securitisation companies in the UK. Details are given in note 26.
New borrowings drawn down, excluding commercial paper, net of expenses — 75 75 649 126 775 Repayment of borrowings, excluding commercial paper1 (210) (231) (441) (1,178) (211) (1,389) Movement in commercial paper2 19 — 19 (419) — (419) Net cash outflow (191) (156) (347) (948) (85) (1,033) Foreign exchange rate movements (204) (28) (232) 42 6 48 Borrowings reclassified/(loans repaid) for non-cash consideration1 210 (4) 206 — 65 65 Fair value movements — 38 38 — 89 89 Amortisation of discounts and other non-cash items (23) — (23) (35) — (35) Movements in debt held by Group companies3 5 — 5 — — —
2 Gross issuances of commercial paper were £505 million in 2019 (2018: £2,372 million), offset by repayments of £486 million (2018: £2,791 million). 3 Certain subsidiary companies have purchased subordinated notes and securitised loan notes issued by Group companies 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.
Payables arising out of direct insurance 1,503 1,374 Payables arising out of reinsurance operations 348 464 Deposits and advances received from reinsurers 78 129 Bank overdrafts (see below) 870 563 Derivative liabilities (note 61) 6,517 6,478 Amounts due to brokers for investment purchases 314 240 Obligations for repayment of cash collateral received 6,329 6,714 Lease liabilities (note 23(iii)) 572 — Other financial liabilities 1,634 1,745
Bank overdrafts amount to £536 million (2018: £153 million) in life business operations and £334 million (2018: £410 million) in general insurance business and other operations.
Deferred income 135 138 Reinsurers’ share of deferred acquisition costs 23 19 Accruals 1,197 1,265 Other liabilities 1,799 1,685
Expected to be settled within one year 2,399 2,482 Expected to be settled in more than one year 755 625 3,154 3,107 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
56 – Contingent liabilities and other risk factors This note sets out the main areas of uncertainty over the calculation of our liabilities.
(d) Regulatory compliance The Group’s insurance and investment business is subject to local regulation in each of the countries in which it operates. A number of the Group’s UK subsidiaries are dual regulated (directly authorised by both the PRA (for prudential regulation) and the FCA (for conduct regulation)) while others are solo regulated (regulated solely by the FCA for both prudential and conduct regulation). Between them, the PRA and FCA have broad powers including the authority to grant, vary the terms of, or cancel a regulated firm’s authorisation; to investigate marketing and sales practices; and to require the maintenance of adequate financial resources. The Group’s regulators outside the UK typically have similar powers, but in some cases they also operate a system of ‘prior product approval’.
Infrastructure loan advances 853 898 Investment property 115 42 Property and equipment 62 77 Other investment vehicles1 241 266 1,271 1,283 1 Represents commitments for further investment in certain private equity vehicles. Such commitments do not expose the Group to the risk of future losses in excess of its investment.
At our Capital Markets Day in November 2019, we announced robust financial targets focussed on economic value. However, Group capital continues to be represented by Solvency II own funds. The Solvency II position disclosed is based on a ‘shareholder view’. The shareholder view is considered by management to be more representative of the shareholders’ risk exposure and the Group’s ability to cover the solvency capital requirement (SCR) with eligible own funds and aligns with management’s approach to dynamically manage its capital position.
Strategic report Governance IFRS financial statements Other information 58 – Group capital management continued In arriving at the shareholder position, the following adjustments are typically made to the regulatory Solvency II own funds: • The contribution to the Group’s SCR and own funds of the most material fully ring fenced with-profits funds of £2,501 million at 31 December 2019 (2018: £2,634 million) and staff pension schemes in surplus of £1,181 million at 31 December 2019 (2018: £1,142 million) are excluded. These exclusions have no impact on Solvency II surplus as these funds are self-supporting on a Solvency II capital basis with any surplus capital above SCR not recognised.
• A notional reset of the transitional measure on technical provisions (TMTP), calculated using the same method as used for formal TMTP resets. This presentation avoids step changes to the Solvency II position that arise only when the formal TMTP reset points are triggered. The 31 December 2019 position is based on a formal reset of the TMTP, in line with the requirement to reset the TMTP at least every two years and hence no adjustment is required. The 31 December 2018 Solvency II position includes a notional reset (£127 million reduction in own funds). The TMTP is amortised on a straight-line basis over 16 years from 1 January 2016 in line with the Solvency II rules.
• The 31 December 2019 Solvency II position includes three pro forma adjustments. These relate to the disposal of FPI (£111 million reduction in own funds), the disposal of Hong Kong (£6 million reduction in own funds) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£nil impact on own funds). The 31 December 2018 Solvency II position includes the pro forma impact of the disposals of FPI (£113 million reduction in own funds) and the potential impact of an expected change to Solvency II regulations on the treatment of equity release mortgages (£nil impact on own funds).
Solvency II surplus at the Group level represents the excess of eligible Solvency II own funds over the Group’s solvency capital requirements calculated in accordance with Solvency II requirements. The Group maintained capital in excess of the SCR at all times during 2019. All regulated subsidiaries complied with their capital requirements throughout the year.
Strategic report Governance IFRS financial statements Other information 59 – Statement of cash flows This note gives further detail behind the figures in the statement of cash flows.
Profit before tax 3,933 1,652 Adjustments for: Share of profits of joint ventures and associates (85) (112) Dividends received from joint ventures and associates 81 43 (Profit)/loss on sale of: Investment property (58) (69) Property and equipment 2 1 Subsidiaries, joint ventures and associates 22 (102) Investments (10,537) (7,319)
(10,571) (7,489) Fair value (gains)/losses on: (18,483) 29,574 Depreciation of property and equipment 98 40 Equity compensation plans, equity settled expense 62 64 Impairment and expensing of: Goodwill on subsidiaries 6 13 Financial investments, loans and other assets 14 10 Acquired value of in-force business and intangibles 13 — Non-financial assets 22 —
Cash consideration for subsidiaries, joint ventures and associates acquired and additions (20) (165) Less: Cash and cash equivalents acquired with subsidiaries 1 357 Total cash flow on acquisitions and additions (19) 192
Cash proceeds from disposal of subsidiaries, joint ventures and associates 12 441 Less: Net cash and cash equivalents divested with subsidiaries — (60)
Cash at bank and in hand 6,722 5,620 Cash equivalents 13,582 10,994 20,304 16,614 Bank overdrafts (870) (563)
19,524 15,926 1 Following a review of the Group’s presentation of consolidated investment funds, comparative amounts have been restated from those previously reported. The restatement has had no impact on the profit for the year or equity.
Board oversight of risk and risk management across the Group is maintained on a regular basis through its Risk Committee and Customer, Conduct and Reputation Committee. The Board has overall responsibility for determining risk appetite, which is an expression of the risk the business is willing to take. Risk appetites are set relative to capital and liquidity at Group and in the business units.
Fixed maturity securities 10.7% 34.1% 19.7% 23.0% 8.0% 4.5% 199,481 (649) 198,832 Reinsurance assets 3.3% 75.8% 9.2% 7.8% — 3.9% 12,431 (75) 12,356 Other investments 0.2% — 0.3% 0.1% — 99.4% 51,935 (6,919) 45,016 Loans 18.3% 3.8% 0.1% — — 77.8% 38,580 (1) 38,579 Total 302,427 (7,644) 294,783
Less: Assets classified as held for sale £m Carrying value £m