PVNBP is equal to the present value of new regular premiums, plus total single premiums from new business written at the point of sale. It includes any changes to existing contracts, which were not anticipated at the outset of the contract that generates additional shareholder risk and associated premium income of the nature of a new policy. An example of a change to existing contracts that is considered to be generating value of new business is an internal transfer of annuities from with-profits to our non-profit fund. We adjust annual premiums to reflect the expected stream of business coming from this new business over future years. In the view of management, this performance measure better recognises the relative economic value of regular premium contracts compared with single premium contracts. PVNBP is a European insurance industry standard measure of new business.
Acquisitions and disposals Over the last three years we have completed and announced a number of transactions, some of which have had a material impact on our results. These transactions reflect our strategic objectives of narrowing our focus to businesses where we seek to produce attractive returns and exit businesses which we do not consider central to our future growth.
During 2016, the Group also increased its associate holding in India to 49% and sold its stake in its Irish private medical insurance business and a closed book of offshore bonds business.
UK with-profits business With-profits products are mainly written in our UK & Ireland operating segment, with small funds in France and Singapore. With-profits products are designed to pay policyholders smoother investment returns through a combination of regular bonuses and final bonuses. These funds enable policyholders to participate in a large pool of diverse investments, therefore reducing their exposure to individual securities or asset classes. The investment pool is managed by us with returns to withprofits policyholders paid through bonuses which are added to the value of their policy. Shareholders also have a participating interest in the with-profits funds and any declared bonuses. Shareholders’ profit emerges from this business in direct proportion to policyholder bonuses as shareholders receive up to one-ninth of the value of each year’s bonus declaration to policyholders. Accordingly, the smoothing inherent in the bonus declarations provides for relatively stable annual shareholders’ profit from this business. The most significant factors that influence the determination of bonus rates are the return on the investments of the with-profits funds and expectations about future investment returns. Actual and expected investment returns are affected by, among other factors, the mix of investments supporting the with-profits fund, which in turn is influenced by the extent of the inherited estate within the withprofits fund. While bonuses can never be negative, a predicted sustained fall in equity markets could lead to a reduction in regular and final bonus rates, thereby reducing both policyholder returns and shareholders’ profit under IFRS.
The annual excess of premiums and investment return over operating expenses, benefit provisions and claims payments within our with-profits funds that are not distributed as bonuses and related shareholders’ profit is transferred from the income statement to the unallocated divisible surplus. Conversely, if a shortfall arises one year, for example because of insufficient investment return, a transfer out of the unallocated divisible surplus finances bonus declarations and related shareholders’ profit.
The unallocated divisible surplus consists of future (as yet undetermined) policyholder benefits, associated shareholders’ profit and the inherited estate. The inherited estate serves as working capital for our with-profits funds. It affords the withprofits funds a degree of freedom to invest a substantial portion of the funds’ assets in investments yielding higher returns than might otherwise be obtainable while continuing to demonstrate solvency.
Other long-term insurance and savings business Non-profit business falls into two categories: investment type business and risk cover and annuity business.
Financial and operating performance continued on assets supporting insurance liabilities and shareholder capital, exceed claims and benefit costs, costs of acquiring new business and administration costs.
Long-term insurance and savings new business sales Sales of the long-term insurance and savings business consist of: • Insurance and participating investment business – This includes traditional life insurance, long-term health, annuity business and with-profits business. – There is an element of insurance risk borne by the Group therefore, under IFRS, these are reported within net written premiums.
• Non-participating investment business – This includes unit-linked business and pensions business. – The amounts received for this business are treated as deposits under IFRS and an investment management fee is earned on the funds deposited.
Present value of new business premiums1 34,967 29,765 24,728 Investment sales 7,292 6,437 4,977 General insurance and health net written premiums 9,134 8,090 8,300 Less: long-term health and collectives business2 (4,944) (3,660) (3,146)
2 Long-term health and collectives business are included as part of PVNBP following the extension of MCEV covered business.
Sales Year ended 31 December 2016 Total sales increased to £46,449 million (2015: £40,632 million) for the reasons set out in the market performance sections below.
Operating profit We report to our chief operating decision makers in the businesses the results of our operating segments using a nonGAAP financial performance measure we refer to as ‘operating profit’. Operating profit is defined as profit before income taxes and non-controlling interests in earnings, excluding the following items: investment return variances and economic assumption changes on long-term and non-long-term business, impairment of goodwill, associates, and joint ventures and other amounts expensed, amortisation and impairment acquired value of in-force business, amortisation and impairment of other intangibles, profit or loss on the disposal and remeasurement of subsidiaries, joint ventures and associates and integration and restructuring costs and other items.
Operating profit for non-long-term insurance business is based on expected investment returns on financial investments backing shareholder funds over the period. Expected investment returns are calculated for equities and properties by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of return. This rate of return is the same as that applied for the long-term business expected returns. The longer-term return for other investments is the actual income receivable for the period. Changes due to market value movement and interest rate changes, which give rise to variances between actual and expected investment returns, are disclosed as non-operating items. The impact of changes in the discount rate applied to claims provisions is also treated outside operating profit.
Profit before tax attributable to shareholders’ profits – continuing operations 1,193 1,413 2,306
Profit before tax attributable to shareholders’ profits – discontinued operations — — 58
Operating profit before tax (from continuing operations) Year ended 31 December 2016 Operating profit before tax was £3,010 million (2015: £2,688 million1). Refer to the market performance section below.
• IFRS gross written premiums from existing long-term business The non-GAAP measure of long-term and savings sales focuses on new business written in the year under review while the IFRS income statement includes premiums received from all business, both new and existing.
Consolidated results of operations The table below presents our consolidated sales for the three years ended 31 December 2016, 2015 and 2014.
United Kingdom & Ireland Life1 18,801 16,797 12,444 United Kingdom & Ireland GI2 4,357 4,051 4,028 France 6,717 5,835 5,739 Poland 516 514 630 Italy, Spain and Other 5,415 3,559 4,639 Canada 2,453 1,992 2,104 Asia 2,413 2,879 2,162 Aviva Investors 5,776 5,005 3,106 Other group activities 1 — 7 1 Includes £257 million relating to the internal transfer of annuities from a with-profit fund to a non-profit fund during the second half of 2016 in the UK.
2 2016 excludes a reinsurance premium ceded of£107 million (2015: £712 million) relating to an outwards reinsurance contract completed by the UK General Insurance business.
While these excluded items are significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of operating profit enhances the understanding and comparability of the underlying performance of our segments by highlighting net income attributable to ongoing segment operations.
Adjusted for the following: Investment return variances and economic assumption changes on long-term business 379 14 72 Short-term fluctuation in return on investments on non-long-term business (518) (84) 261 Economic assumption changes on general insurance and health business (242) (100) (145) Impairment of goodwill, associates and joint ventures and other amounts expensed — (22) (24) Amortisation and impairment of intangibles (175) (155) (90) Amortisation and impairment of acquired value of in-force business (540) (498) (40) (Loss)/profit on the disposal and remeasurement of subsidiaries, joint ventures and associates (11) 2 174
Profit before tax attributable to shareholders’ profits 1,193 1,413 2,364 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This led to an increase in operating profit and profit before tax of £23 million for 2015 and £25 million for 2014. See IFRS financial statements – note 1 for further details.
Year ended 31 December 2015 Integration and restructuring costs were £379 million (2014: £140 million), principally driven by transaction and integration activities in relation to the acquisition of Friends Life. It also included expenses associated with the Solvency II programme of £82 million (2014: £94 million). Life investment variances were £14 million positive (2014: £72 million positive) mainly driven by realised bond gains and equity outperformance in France and positive variances in Asia, partially offset by widening credit spreads in Italy. The investment variance in the UK was broadly neutral.
Other items, a charge of £53 million, represents a day one loss upon the completion of an outwards reinsurance contract, completed in 2015 by UK General Insurance business, which provides significant protection against claims volatility from mesothelioma, industrial deafness and other long tail risks.
Net earned premiums 22,868 18,924 20,057 Fee and commission income 1,962 1,797 1,230 Net investment income 30,257 2,825 21,889 Share of profit of joint ventures and associates 216 180 147 (Loss)/profit on the disposal and remeasurement of subsidiaries and associates (11) 2 174
Long-term insurance and savings premiums increased by £2,393 million, or 21% to £14,051 million (2015: £11,658 million), driven by an additional quarter of Friends Life, strong performance in Italy and benefitted from the weakening of sterling against the euro.
Year ended 31 December 2015 (continuing operations) Other income, which consists of fee and commission income, share of profit after tax of joint ventures and associates, and profit on disposal and remeasurement of subsidiaries, joint ventures and associates, increased by £428 million, or 28%, to £1,979 million in 2015 (2014: £1,551 million). Fee and commission income increased by £567 million, or 46% to £1,797 million (2014: £1,230 million), mainly due to the contribution from the acquired Friends Life businesses. Profit on disposal and remeasurement of subsidiaries, joint ventures and associates was £2 million (2014: £174 million profit) and the share of profits from joint ventures and associates was £180 million (2014: £147 million).
Fee and commission expense, other expenses and finance costs increased by £1,638 million, or 24% to £8,364 million (2015: £6,726 million1) due to foreign exchange movements on external borrowings.
Fee and commission expense1, other expenses and finance costs increased by £843 million, or 14% to £6,726 million1 (2014: £5,883 million1) mainly as a result of increased amortisation of acquired value of in-force business following the acquisition of Friends Life, and higher integration and restructuring costs principally driven by transaction and integration activities in relation to the Friends Life acquisition. See ‘IFRS Financial Statements – note 6 – Details of expenses’ for further details. 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This led to an increase in operating profit and profit before tax of £23 million for 2015 and £25 million for 2014. See IFRS financial statements – note 1 for further details.
Adjusting items Year ended 31 December 2016 Integration and restructuring costs decreased to £212 million (2015: £379 million), as a result of lower integration spend relating to the Friends Life acquisition and lower Solvency II project costs of £17 million (2015: £82 million). This was partly offset by costs related to the RBC acquisition. Life investment variances were £379 million positive (2015: £14 million positive) mainly driven by lower interest rates and narrowing credit spreads in the UK, partially offset by adverse variances in France and widening credit spreads in Italy.
Net written premiums were £23,078 million (2015: £19,035 million) which includes a reinsurance premium ceded of £107 million relating to an outwards reinsurance contract completed by the UK General Insurance business (2015: £712 million). Excluding this, net written premiums increased by £3,438 million, or 17%, to £23,185 million (2015: £19,747 million).
Net investment income Year ended 31 December 2016 Net investment income was £30,257 million (2015: £2,825 million). Compared to 2015, unrealised gains were significantly higher in 2016 reflecting market movements, including higher fixed income security market values arising from lower risk-free interest rates, narrowing corporate bond spreads and favourable equity index movements. Foreign exchange gains also increased following depreciation of sterling.
Expenses Year ended 31 December 2016 Claims and benefits paid net of reinsurance in 2016 increased by £1,797 million, or 8% to £23,782 million (2015: £21,985 million). This was mainly due to higher claims payments in UK Life, due to the inclusion of an additional quarter of Friends Life, and higher claims in Europe due in part to the weakening of sterling against the euro in 2016.
The change in investment contract provisions was a charge of £14,039 million (2015: £1,487 million charge) as a result of investment market conditions (primarily driven by favourable equity returns in the UK) causing an increase in contract liabilities.
The change in unallocated divisible surplus (‘UDS’) was a debit of £381 million (2015: £984 million credit) mainly driven by foreign exchange rate movements with the remaining debit reflecting lower interest rates and corporate bond yields in France.
The change in investment contract provisions was a charge of £1,487 million (2014: £6,518 million charge) as a result of investment market conditions causing an increase in contract liabilities.
Amortisation and impairment of intangibles was a charge of £155 million (2014: £90 million charge) and amortisation and impairment of acquired value of in-force business (AVIF) was a charge of £498 million (2014: £40 million). The higher charges during 2015 were driven by amortisation of the AVIF and intangibles arising on the acquisition of Friends Life.
Income Gross written premiums 25,442 21,925 21,670 Premiums ceded to reinsurers (2,364) (2,890) (1,614)
Profit before tax attributable to shareholders’ profits 1,193 1,413 2,306 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This led to an increase in operating profit and profit before tax of £23 million for 2015 and £25 million for 2014. See IFRS financial statements – note 1 for further details.
Year ended 31 December 2015 Claims and benefits paid net of reinsurance in 2015 increased by £2,511 million, or 13% to £21,985 million (2014: £19,474 million). This was mainly due to higher claims payments in UK Life following the acquisition of Friends Life, partly offset by lower claims in our European life businesses due in part to the weakening of the euro during 2015. General insurance and health claims decreased by £437 million, or 8% to £5,176 million (2014: £5,613 million) mainly due to lower claims in UK & Ireland GI.
Change in insurance liabilities in 2015 was a credit of £6,681 million (2014: £5,570 million charge), resulting mainly from changes in economic and non-economic assumptions on long-term business.
Operating profit before tax United Kingdom 1,523 1,431 1,050 Ireland 32 24 24
2 Includes £257 million relating to the internal transfer of annuities from a with-profits fund to a non-profit fund during the second half of 2016 in the UK.
Year end 31 December 2015 UK & Ireland general insurance and health NWP decreased to £3,339 million (2014: £4,028 million), which included a reinsurance premium ceded of £712 million relating to an outwards reinsurance contract completed in the year by the UK business. Excluding this, net written premiums increased by £23 million, or 1%, to £4,051 million (2014: £4,028 million). Within this, in the UK, general insurance and health NWP increased 18% to £3,685 million (2014: £3,663 million) primarily driven by growth in personal motor, partly offset by selected exits in personal property lines. Ireland general insurance and health NWP was stable at £367 million (2014: £365 million).
Profit before tax decreased to £140 million (2014: £406 million). This included operating profits of £414 million (2014: £492 million), which decreased for the reasons set out above.
The remaining decrease in profit before tax attributable to shareholders’ profits was due to higher integration and restructuring costs of £26 million (2014: £11 million) adverse short term investment variances of £84 million (2014: £82 million positive), lower adverse economic assumption changes of £98 million (2014: £145 million adverse) and the day one loss arising from the completion of the outwards reinsurance contract of £53 million.
Profit before tax attributable to shareholders’ profits Year ended 31 December 2016 Profit before tax attributable to shareholders was £1,193 million (2015: £1,413 million1) mainly due to the reasons set out in the sections ‘net written premiums’, ‘net investment income’, ‘other income’ and ‘expenses’ above. It also includes a debit of £640 million (2015: £218 million credit) in relation to tax attributable to policyholders’ returns. See ‘IFRS Financial Statements – note 13 – Tax’ for further details.
UK & Ireland general insurance and health The table below presents sales, net written premiums, operating profit and profit before tax attributable to shareholders’ profits from our UK and Ireland general insurance and health businesses for the three years ended 31 December 2016, 2015 and 2014.
Operating profit before tax United Kingdom 392 368 455 Ireland 48 41 33
(Loss)/profit before tax attributable to shareholders’ profits (247) 140 406 1 2016 excludes a reinsurance premium ceded of £107 million (2015: £712 million) relating to an outwards reinsurance contract.
Within this, UK operating profit was £392 million (2015: £368 million). This excludes the adverse impact of the change in the Ogden discount rate of £475 million as this is an exceptional item within other non-operating items. Longer term investment return in the UK reduced by £53 million to £162 million (2015: £215 million) mainly due to the reduction in the internal loan (which is neutral at an overall Group level). The UK underwriting result increased to £232 million (2015: £154 million), attributable to lower weather claims and improvements in underlying performance. In Ireland, general insurance and health operating profit increased to £48 million (2015: £41 million) mainly driven by strong rate increases and ongoing improved underlying performance, partly offset by continued investment in the business.
Profit before tax has decreased to a loss of £247 million (2015: £140 million profit), mainly due to the impact of the change in the Ogden discount rate of £475 million (2015: £nil).
Operating profit before tax from general insurance and health business was down 16% to £409 million (2014: £488 million). In the UK, operating profit was £368 million (2014: £455 million). Within this, longer term investment return reduced by £45 million to £215 million (2014: £260 million) mainly as a result of the lower intercompany loan balance (which is neutral at an overall Group level). The underwriting result was £154 million (2014: £199 million) with the adverse weather experience due to the December floods in the UK being partly offset by the benefit of expense savings and more favourable prior year claims development.
Year ended 31 December 2016 The weakening of the sterling against the euro affected all metrics from a Group perspective.
On a PVNBP basis, long-term insurance and savings business sales in France increased to £5,525 million (2015: £4,821 million), but remained stable on a constant currency basis, with higher sales in protection and with-profit products offset by lower sales of unit-linked products reflecting customer demand. General insurance and health sales increased by 4% on a constant currency basis to £1,192 million (2015: £1,014 million), reflecting rating actions and growth in SME and
On a PVNBP basis, long-term insurance and savings business sales in France increased by £188 million, to £4,821 million (2014: £4,633 million), with higher sales of unit-linked, withprofit and protection products. General insurance and health sales decreased by £92 million to £1,014 million (2014: £1,106 million) but increased by 2% on a constant currency basis, with increases across both personal and commercial lines of business. IFRS net written premiums remained stable at £5,702 million (2014: £5,684 million), but were up 12% on a constant currency basis.
Poland The table below presents sales, net written premiums, operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in Poland for the three years ended 31 December 2016, 2015 and 2014.
Operating profit increased by 3% to £146 million (2015: £141 million) but decreased by 5% on a constant currency basis. Within this, life operating profit was down 6% on a constant currency basis mainly as a result of a new asset levy and general insurance operating profit was down 28% on a constant currency basis due to commercial large loss experience and increased motor claims frequency. Profit before tax attributable to shareholders’ profits was £141 million (2015: £139 million).
Italy, Spain and Other The table below presents sales, net written premiums, operating profit and profit before tax attributable to shareholders’ profits under IFRS from our operations in Italy, Spain and Other for the three years ended 31 December 2016, 2015 and 2014.
Total long-term insurance and savings sales were £5,020 million (2015: £3,229 million) mainly due to strong sales in both Italy and Spain.
In Italy, life sales increased by £1,487 million, or 69%, to £3,634 million (2015: £2,147 million) or 50% on a constant currency basis, reflecting growth in all product lines.
Other life sales, which relates to sales in our Turkey Life joint venture, decreased by £12 million, or 4% on a constant currency basis, to £448 million (2015: £460 million), driven by lower pension sales arising from market volatility and uncertainty on pension reforms.
General insurance sales in Italy increased by £65 million, or 20%, to £395 million (2015: £330 million), with growth in most lines.
General insurance and health operating profit increased to £42 million (2015: £33 million) with lower longer-term investment return more than offset by growth in underwriting result.
In Italy (excluding Eurovita), life sales decreased by £326 million, or 13%, to £2,147 million (2014: £2,473 million) or 3% on a constant currency basis, reflecting lower unit-linked and with-profit sales.
General insurance and health operating profit increased to £33 million (2014: £26 million) mainly driven by the disposal of the loss-making Turkey GI business in December 2014.
Canada The table below presents sales, net written premiums, operating profit and profit before tax attributable to shareholders for the three years ended 31 December 2016, 2015 and 2014.
Operating profit before tax General insurance 269 214 189 Other operations 1 — 2
Financial and operating performance continued commercial lines. IFRS net written premiums increased by 1% on a constant currency basis to £6,538 million (2015: £5,702 million).
Operating profit before tax was 4% lower at £449 million (2014: £470 million) but improved by 6% on a constant currency basis. Within this, life operating profit decreased by 4% to £395 million (2014: £412 million) but improved by 7% on a constant currency basis, mainly from portfolio growth and a change in mix towards unit-linked products and protection products, together with strong results from UFF, our majority owned broker business. General insurance and health operating profit was lower at £71 million (2014: £78 million), up 2% on a constant currency basis due to better weather experience compared to the prior year, partly offset by higher large losses and lower investment returns.
Sales Long-term insurance and savings business 430 448 573 General insurance and health net written
Year ended 31 December 2016 The weakening of sterling against the zloty affected all metrics from a Group perspective. Life and pensions sales on a PVNBP basis were down 4% to £430 million (2015: £448 million), and down 12% on a constant currency basis. This was due to regulatory changes and reduced market appetite. General insurance net written premiums were £86 million (2015: £66 million) driven by rating actions in motor. Total net written premiums increased 2% to £487 million (2015: £477 million) but decreased c.5% on a constant currency basis.
Sales Long-term insurance and savings business Italy – excluding Eurovita 3,634 2,147 2,473 Spain – excluding Aseval & CxG 938 622 1,054 Other 448 460 495 Eurovita, Aseval & CxG — — 224 Total long-term insurance and savings
Year ended 31 December 2016 The weakening of sterling affected all metrics from a Group perspective.
IFRS net written premiums increased £1,923 million, or 52% in constant currency, to £4,610 million (2015: £2,687 million) for the reasons described above.
Total long-term insurance and savings sales were £3,229 million (2014: £4,246 million) mainly due to lower sales in Italy and Spain.
Profit before tax attributable to shareholders’ profits decreased by £298 million to £191 million (2014: £489 million). This includes lower operating profit as described above and adverse investment variances of £45 million (2014: £88 million positive). The prior year also included profit on disposal of subsidiaries, including CxG and Eurovita, of £125 million.
Year ended 31 December 2016 The weakening of sterling has affected all metrics from a Group perspective.
Operating profit was £270 million (2015: £214 million), a 26% increase compared to the prior year. On a constant currency basis, operating profit increased by 16%, including higher underwriting profits of £168 million (2015: £120 million), mainly due to the RBC acquisition and higher favourable prior year development, partially offset by increased catastrophe experience. Longer term investment return increased 7% to £105 million (2015: £98 million) but decreased 1% on a constant currency basis.
Profit before tax attributable to shareholders’ profits was £142 million (2014: £253 million) including higher operating profits more than offset by short-term investment variances of £47 million (2014: £65 million positive) reflecting lower investment values.
Profit before tax attributable to shareholders’ profits was £70 million (2014: £38 million). As described above, this included operating profits partly offset by a higher AVIF amortisation charge. In addition, there were favourable life
Operating profit before tax Fund management operating profit1 139 105 79 Long-term insurance and savings business –
Profit before tax attributable to shareholders’ profits was £164 million (2015: £142 million) including higher operating profits for the reasons described above partly offset by higher amortisation of intangibles of £29 million (2015: £10 million), and higher integration and restructuring costs of £18 million (2015: £7 million) following the acquisition of RBC.
Year ended 31 December 2016 Long -term insurance and savings sales in Asia decreased by 18% to £2,209 million (2015: £2,694 million) mainly reflecting the discontinuance of the bancassurance agreement with DBS Bank Ltd. General insurance and health net written premiums, excluding long-term health, were £67 million (2015: £56 million) due to strong renewals in Group schemes.
Total net written premiums were stable at £783 million (2014: £781 million).
Operating profits were £223 million (2014: £78 million) including a £151 million contribution from FPI (£15 million operating profit net of amortisation of acquired value of in-force business). Excluding FPI, operating profit was £72 million (2014: £78 million). Within this, higher life operating profits were more than offset by lower non-life profits.
Pooled Pensions operating profit1 2 1 2 Other operations 19 — (18)
Year ended 31 December 2016 Total sales increased by 15% to £5,776 million (2015: £5,005 million). Long-term insurance and savings business increased to £2,845 million reflecting growth of the Aviva Investors MultiStrategy (AIMS) fund.
Profit before tax attributable to shareholders’ profits was broadly flat at £81 million (2014: £83 million). This included higher fund management operating profits and higher integration and restructuring costs of £11 million (2014: £4 million). The 2014 result included a profit on disposal of River Road of £35 million and the provision for the FCA fine of £17.6 million as described below.
Other Group activities The table below presents net written premiums, operating losses and loss before tax attributable to shareholders’ profits from other Group activities for the three years ended 31 December 2016, 2015 and 2014.
Loss before tax attributable to shareholders’ profits was £1,248 million (2015: £510 million loss). The higher loss in 2016 is due to foreign exchange movements on external borrowings.
Year ended 31 December 2015 Net written premiums from our reinsurance business were £13 million (2014: £18 million).
In July 2012, the Group’s shareholding in Delta Lloyd N.V., which had been deconsolidated during 2011 and subsequently accounted for as an associate, fell below 20%. From July 2012 Delta Lloyd was treated as a financial investment within continuing operations at fair value through profit and loss. The Group sold its remaining shareholding in Delta Lloyd in January 2013.
Expenses Claims and benefits paid, net of recoveries from reinsurers (23,782) (21,985) (19,474) (22,093) (23,601) Change in insurance liabilities, net of reinsurance (6,893) 6,681 (5,570) 2,493 (430) Change in investment contract provisions (14,039) (1,487) (6,518) (7,050) (4,450) Change in unallocated divisible surplus (381) 984 (3,364) 280 (6,316) Fee and commission expense (3,885) (3,324) (3,364) (3,975) (4,457) Other expenses (3,853) (2,784) (1,979) (2,220) (2,843) Finance costs (626) (618) (540) (609) (653)
Profit/(loss) per share attributable to equity shareholders: Basic (pence per share) 15.3p 23.1p 50.4 65.3p (109.1)p Diluted (pence per share) 15.1p 22.8p 49.6 64.5p (109.1)p
This data is derived from our consolidated financial statements which have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU).
2 Weighted average number of shares in issue for the year is calculated after deducting treasury shares.
Total assets 440,419 387,831 285,653 281,627 317,120 Gross insurance liabilities 151,183 140,556 113,445 110,555 113,091 Gross liabilities for investment contracts 197,095 181,082 117,154 116,058 110,494 Unallocated divisible surplus 9,349 8,811 9,467 6,713 6,931 Core structural borrowings 8,577 6,912 5,310 5,125 5,139 Other liabilities 54,664 32,200 27,981 32,159 70,105 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 to the Consolidated Financial Statements for further details.
Meeting all customer needs across life, general, accident and health insurance and asset management.
• Digital First Emphasising customer experience driven by digital – online mobile, and tablet
Our business Overview Our business operates across four main market sectors – life insurance, general insurance, accident and health insurance and asset management, providing services to over 33 million customers worldwide. We operate in 16 different countries and have approximately 29,500 employees. The Group’s operating segments are determined along market reporting lines and internal management reporting.
Life insurance business Long-term insurance business accounted for approximately 80% of our total worldwide sales for the year ended 31 December 2016. We reported total long-term insurance, savings and health new business sales of £37.3 billion1.
Market position In the UK, we have a market share of 14.5%2 based on annual premium equivalent (APE) as at 30 September 2016. We also have life insurance businesses in Ireland, France, Italy, Spain, Poland, Turkey and Asia. Further details of our position in each market are set out in the market sections below.
• Pensions – a means of providing income in retirement for an individual and possibly his or her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.
Asset management Aviva Investors, our asset management business, provides asset management services to Aviva’s long-term insurance and savings, and general insurance operations as well as to thirdparty investors. The fund management operations are in the UK, Europe, North America and Asia. All sales of retail fund management products are included in our long-term insurance and savings business sales.
3 Verdict Financial Intelligence 2015 4 Market Security Analysis & Research Inc, 2015 online database 5 Willis Towers Watson World 500 largest asset manager’s study 2015
6 Milliman Consolidated Sales APE Market Analysis 2016. 7 UK Insurance and Long Term Key Facts 2015.
On 1 July 2016, Aviva Canada Inc. acquired 100% of the issued and outstanding shares of RBC. Further details can be found in ‘IFRS Financial Statements – Note 3 – Subsidiaries’.
Business overview Our plan Our strategic framework increases the focus on the things that really matter and puts the customer clearly at the heart of all we do. It provides clear direction across all our markets for how we run our business. Our overarching purpose is to defy uncertainty. And we have a clear strategy to deliver our investment thesis of cash flow growth by always putting our customers first. Our Strategic Anchor is the “what we do, how we do it and where we do it” of our strategy as set out below: • True Customer Composite
• Protection – an insurance contract that protects the policyholder or his or her dependants against financial loss on death or ill-health. Our product ranges include term assurance, mortgage life insurance, flexible whole of life and critical illness cover and group schemes.
Some of our insurance and investment contracts contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as “participating” contracts.
Information on the Company continued general and health insurance net written premiums of £9.1 billion1.
• Direct sales force – In some of our European and Asian markets we operate direct sales forces that only sell Aviva’s products and the sales forces receive commission on the products they sell.
In Ireland, we continue to deliver on our strategy of growing annuity and investment business, as we progress towards being the provider of choice for pre and post retirement solutions.
Products In the UK, we provide a comprehensive product range focused on both the consumer and corporate markets. The pensions and retirement products we offer include personal pensions, equity release, annuities and income drawdown. Our annuity offerings include immediate life, enhanced, fixed-term annuities and with-profits pension annuities. We provide a number of traditional life insurance products, including level-term, decreasing-term (with or without critical illness), guaranteed whole of life insurance, over 50s life cover and income protection. Our savings and investment products include ISAs, investment bonds, funds, base rate trackers, investments with guarantees and with-profits products. In Ireland, our long-term insurance and business offers a wide range of products with our focus being on protection, annuities, investment and a discrete set of accumulation products. Our protection products include life insurance, mortgage protection and specified illness. The pensions and savings range covers pre and post retirement products and investment products and are delivered by collaborating with Aviva Investors to ensure we offer products which align to their fund offering.
In Ireland our products include property, motor, travel, agricultural and business insurance and our health insurance business products for both the personal and commercial sector were offered until the sale of our health business to Irish Life in the third quarter of 2016.
We have a longstanding relationship with the Association Française d’Epargne et de Retraite (AFER) which is the largest retirement savings association in France with 720,000 members as at December 2015, to manufacture and distribute the AFER savings product.
Distribution We have developed a multi-distribution model combining retail, direct and bancassurance networks through owned distribution channels, independent networks and partnerships. Our retail network sells through over 920 tied agents, a direct sales force made up of approximately 1,200 Union Financière de France (UFF) consultants and direct advisors (Aviva France also holds a majority stake in UFF), and through brokers in the life, health and construction markets. Direct distribution is managed through the Eurofil brand for personal general insurance, the Aviva Direct brand for protection and Epargne Actuelle for the AFER product. We operate in the bancassurance market through our arrangement with Crédit du Nord, a subsidiary of Société Générale, selling life, savings and protection products. This will cease upon completion of the sale of Aviva’s 50% share as our partner exercised its call option.
• Increasing regulatory focus from governmental agencies, such as the Financial Supervisory Authority (KNF) and the Office of Competition and Consumer Protection (UOKiK) on unit-linked products.
Products Our life business in Poland provides a broad range of protection, savings and pension products as well as health insurance and mutual funds. For institutions we offer group life insurance and employee pension programmes, which are both mostly unit-linked products. We offer a standard product as part of our privately managed pension business. We offer general insurance products to both commercial entities and individuals. For individuals, our offer consists of home, accident and travel insurance, which are primarily sold by tied agents, as well as motor insurance, which is sold primarily through our direct operation. For institutions, we offer selected commercial lines risks.
• Boost the IFA distribution channel especially in hybrid (unitlinked and with-profit) products.
• Implement our Digital strategy, with new digital services provided to customers and distributors through MyAviva and Telematics.
We implemented these changes in 2014, ahead of the regulatory requirement.
The Ogden discount rate is used by courts in the UK to calculate awards for cases involving bodily injury. On 27 February 2017, the Lord Chancellor announced a reduction to the Ogden discount rate, which will see the cost of bodily injury compensation claims increase significantly. In Ireland, there is continued market-wide pressure on profitability. However, material rate increases have resulted in 7.8% market growth in 201510.
Our UK personal products include motor, home, travel, home emergency, pet and Mobile Device Interface insurance. Our UK commercial products include motor, property and liability insurance for small and medium size enterprises (SMEs) and larger UK corporate customers as well as products in the specialty risks market.
Information on the Company continued in profitable general insurance segments while developing our digital capabilities.
Poland Business overview and strategy Aviva is the second largest insurer in the Life market in terms of gross written premiums with a market share of 8%14. Our general insurance business is the 12th largest with a market share of 2% on the same basis. Our focus in Poland is to grow the value of life new business and in general insurance we aim 12 European Insurance – Key Facts, August 2016 13 Les assurances de personnes – Donnees cles 2015 14 Polish FSA (‘KNF’) report as at 30 June 2016, excluding joint ventures with Bank Zachodni WB
• Accelerate general insurance organic growth of our Agents network with specific focus on non-motor.
15 Bank Zachodni WBK 30 June 2016 results 16 Association of Polish intermediaries 17 Infobila, ANIA database. Classification “Gruppo per Unico soggetto”.
The focus of our general insurance business remains on balancing the weight of motor with non-motor business, widening our offer e.g. in health products (Salute Advance in Bancassurance channel and Salute Smart in agents network).
Customers in Spain are accustomed to receiving advice through banking channels, and we continue to use our relationship with our partners to capitalise on this while developing our retail agents and broker distribution network.
Distribution Through bancassurance partnerships we have established subsidiaries to distribute our products with each of the banks as set out below: • Unicorp Vida – in conjunction with Unicaja since 2001. • Caja España Vida – in conjunction with Caja España (now part of Unicaja Group) since 2001 • Caja Granada Vida – in conjunction with Caja Granada (now part of Banco Mare Nostrum (BMN)) since 2002 • Cajamurcia Vida – in conjunction with Cajamurcia (now part of Banco Mare Nostrum (BMN)) since 2007
Canada Business overview and strategy We are Canada’s second largest general insurer21. Through our distribution partners we provide a range of personal and commercial lines general insurance products to 2.9 million policyholders. We have a 10.6%21 market share and a top five position in all major provinces20. We employ over 4,000 people and operate from a head office in Toronto, with other offices located throughout Canada.
On 1 July 2016, Aviva Group acquired RBC General Insurance Company and entered into an exclusive 15 year strategic agreement with RBC Insurance.
Distribution Independent brokers are our largest distribution channel, with approximately 1,300 independent group and retail brokers distributing our core personal and commercial line products. We also built our own direct distribution capability and, with the acquisition of RBC, we now have exposure to customers who choose to deal directly with their insurer.
In China, through our 50% joint venture with COFCO Capital Investment Co., Ltd, we are ranked number 9 among 27 foreign life insurers in terms of APE as at 30 September 201623. We have presence in 13 provinces with over 80 branches. We operate a multi-distribution platform including agency, bancassurance, direct marketing, and brokerage channels offering a wide range of protection and savings products.
In Indonesia, through our 50% joint venture with PT Astra International Tbk, we distribute our products primarily through our bancassurance arrangement with Permata Bank. We are also focused on strengthening our partnership with Astra International.
In India, with a distribution network of 109 branches, we operate in partnership with the Dabur Group through an interest in Aviva Life Insurance Company India Ltd, which increased by 26% to 49% during 2016. As at 31 October 2016, we ranked 19th among the private life insurance companies in India based on total APE (including Group Business)24.
Market and competition The Asian markets are strategically important to Aviva, owing to large populations in fast-growing economies, coupled with relatively low insurance penetration rates and social insurance coverage. Life insurance penetration (as measured by insurance premium as a proportion of GDP) in most Asian countries is typically less than 6% (1.9% in China, 1.3% in Indonesia, 0.8% in Vietnam, and 5.5% in Singapore) 22. The Asian markets are expected to deliver GDP growth of 5.7% in 2017, ranging from 2.2% in Singapore to 6.3% in China25.
Distribution Across Asia, we operate a multi-distribution strategy. In Singapore, we operate across multiple proprietary, affinity and financial advisory channels, owning Aviva Financial Advisers Pte., Ltd and a majority interest in Professional Investment Advisory Services Pte Ltd, Singapore’s financial advisory arms. In China, our products are sold mainly through agents, brokers, telemarketing, and bancassurance channels. In Indonesia, individual business is primarily sold through our bancassurance channel and group business is sold through our direct sales force. In Taiwan, bancassurance is our main distribution channel and our products are also sold through direct marketing. In Vietnam, our products are sold through bancassurance and agents. We are also investing in other channels such as direct marketing and digital to differentiate ourselves from competitors. In Hong Kong, we have operated primarily through IFA networks. In 2017, we will also operate in the digital space through the joint venture with Hillhouse and Tenent. On 31 December 2015, our 15 year regional bancassurance agreement with DBS Bank Ltd was discontinued. Aviva retains the existing book of business, associated profits, and customer rights and relationships which were purchased in the original transaction with DBS in 2001. FPI’s products are targeted towards affluent expatriate individuals and are sold via distribution hubs in Hong Kong, Singapore and the United Arab Emirates.
Products Our life business offers a wide range of products covering protection, savings and pensions, with a continued focus on less capital intensive products, to optimise the product mix and further improve our hybrid product offering for our networks.
Market and competition We have seen the Spanish insurance market continue to recover with improved lending conditions, and expect this to benefit our credit linked insurance product sales.
Products We offer a wide range of bonds, savings, and protection products. Investment products include both unit-linked and traditional plans, where profit sharing is regularly used to increase the policy return. Our traditional plans include savings schemes and income products. Pension savings products have 18 ANIA monthly reporting on Life. “Newsletter-Vita_settembre-2016” 19 ANIA quarterly reporting on general Insurance. “Newsletter_DANNI secondo trimestre 2016” 20 Investigación Co-operativa entre Entidades Asegurados y Fordos de Pensionies (‘ICEA’).
Aviva Vida y Pensiones distributes our products through professional intermediaries (agents and brokers), supported by a branch office network and call centres, and through Pelayo´s network.
We believe that we are well placed for continued growth and that our success is underpinned by our focus on the insurance fundamentals of pricing, risk selection, distribution, claims indemnity and expense management. We are broadening our distribution reach and strengthening our business mix, as well as taking a ‘Digital First’ approach to our business.
Steady consolidation has resulted in the top five companies representing 49% of the market and the top two companies, Intact Financial and Aviva, separately responsible for 27% of the market21.
Asia Business overview and strategy In Asia, we are focused on growth. Increasing the value of our new business remains our first priority in Asia. We are achieving this through scale benefits, strengthening our distribution platforms and by focusing our product mix on higher margin products.
In Singapore, we are a top tier insurer in the market, providing employee benefit, individual life and health insurance through a multi-distribution model. We are the pioneer in online general insurance, with our own investment platform, Navigator Investment Services, Ltd.
24 Insurance Regulatory and Development Authority of India (31 October 2016). 25 Asian Development Bank, Asian Development Outlook 2016 update.
We provide external clients with bespoke segregated solutions or offer access to a variety of fund ranges. Our principal target clients for the larger segregated solutions tend to be large pension funds and financial institutions such as insurance companies and banks. Our strategy is to offer a range of investment propositions to deliver the specific outcomes that our clients value most.
26 Boston Consulting Group – Global Asset Management 2016. “Doubling down on data”.
The UK with-profits business is comprised largely of long-term contracts with some guaranteed payments. We are therefore able to invest a significant proportion of the funds supporting this business in equities and real estate. This is because the longterm nature of these contracts allows us to take advantage of the long-term growth potential within these classes of assets, while the level of guaranteed payments is managed to mitigate the level of risk that we bear in relation to the volatility of these classes of assets.
Investment strategy Our investment portfolio supports a range of businesses operating in a number of geographical locations. Our aim is to match the investments held to support a line of business to the nature of the underlying liabilities, while at the same time considering local regulatory requirements, the level of risk inherent within different investments, and the desire to generate superior investment returns, where compatible with this stated strategy and risk appetite.
Analysis of investments The Group’s exposure to investment return varies according to the characteristics of the liability the assets are held to support. We distinguish between policyholder, participating fund and shareholder investments, which are terms used to reflect the differing exposure to investment gains and losses. Policyholder assets are connected to our unit-linked business, where the policyholder bears the investment risk on the assets in the unit-linked funds. Our exposure to loss on policyholder assets is limited to the extent that income arising from asset management charges is based on the value of assets in the funds. Participating fund assets relate to some of our insurance and investment contracts which contain a discretionary participation feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. Our exposure to investment losses on participating funds is generally limited to our participation in the fund. Shareholder assets are other assets held within our businesses that are not backing unit-linked liabilities or participating funds.
Investments held at 31 December 2016 and 31 December 2015 are listed below: Policyholder assets £m
For more information about financial investments analysed according to their accounting classification and valuation approach, as well as the cost, unrealised gains and losses, impairments, fair value and other information concerning financial investments, see ‘IFRS Financial statements − Note 26 − Financial investments’.
Corporate Public utilities 3 156 1,481 3,170 253 83 5,146 Convertibles and bonds with warrants — — — 180 — — 180 Other corporate bonds 6,554 4,882 10,883 13,691 3,197 2,579 41,786
Debt securities Participating fund asset and shareholder debt securities analysed by credit rating and sector Participating fund asset and shareholder debt securities analysed by credit rating and product type as at 31 December 2016 are set out in the tables below. Government and corporate debt securities are further analysed by type of issuer.
Government UK Government — 11,644 — — — 8 11,652 Non-UK Government 5,466 16,786 2,828 9,917 517 352 35,866
At 31 December 2016, the proportion of our shareholder debt securities that are investment grade increased to 93.5% (2015: 92.9%). The remaining 6.5% of shareholder debt securities that do not have an external rating of BBB or higher can be split as follows: • 1.1% are debt securities that are rated as below investment grade; and • 5.4% are not rated by the major rating agencies.
Unit trusts and other investment vehicles 44,642 4,164 1,384 50,190 Derivative financial instruments 95 4,102 1,922 6,119 Deposits and credit institutions 294 28 3 325 Minority holdings in property management undertakings 172 825 189 1,186 Other 427 — 8 435
Property Our global headquarters are located in St. Helen’s, 1 Undershaft, London, England, EC3P 3DQ. In addition, we have major offices in the following locations: • UK: UK Life, York and Bristol; UK General Insurance, Norwich; Aviva Investors, London; • Asia: Singapore; • North America: Scarborough, Ontario, Canada. • Europe: Paris, France; Dublin, Ireland; Madrid, Spain; Warsaw, Poland; and Milan, Italy.
Contractual obligations Contractual obligations with specified payment dates at 31 December 2016 included the following: Less than one year £m
2. All linked contracts and almost all non-linked investment contracts may be surrendered or transferred on demand. For such contracts the earliest contractual maturity is therefore at the current statement of financial position date, for a surrender amount approximately equal to the current statement of financial position liability. Although we expect surrenders, transfers and maturities to occur over many years, the total liability for linked and non-linked investment contracts is shown in the less than one year column above.
Total Greece, Ireland, Portugal, Italy and Spain 7.2 5.9 0.9 0.8 8.1 6.7
Total Greece, Ireland, Portugal, Italy and Spain 9.7 7.9 1.3 1.2 11.0 9.1
Public utilities 3,448 874 6 4,328 Banks, trusts and insurance companies 11,523 3,664 206 15,393 Industrial, miscellaneous and all other 37,509 11,225 252 48,986 Non-redeemable preferred shares 91 8 206 305
As of 31 December 2016, we owned and occupied land and buildings for our own use with a total book value of £321 million (2015: £337 million). We believe that these facilities are adequate for our present needs in all material respects. We also hold other properties, both directly and indirectly, for investment purposes, valued at £9,169 million at 31 December 2016 (2015: £9,372 million).
Insurance and investment contracts Long-term business – Insurance contracts – non-linked1 9,583 17,680 13,997 100,506 141,766 – Investment contracts – non-linked2 68,203 — — — 68,203 – Linked business2 153,774 — — — 153,774 General Insurance3 6,764 4,393 2,190 3,628 16,975 238,324 22,073 16,187 104,134 380,718 Other contractual obligations4 Borrowings 1,173 1,315 1,816 16,269 20,573 Operating lease obligations 103 179 157 423 862 Capital commitments 98 55 20 112 285 Payables and other financial liabilities5 12,030 1,178 965 4,155 18,328 Net assets attributable to unit holders 15,638 — — — 15,638
4. The Group has no material finance leases for property and equipment. 5. Includes obligations for repayment of collateral received under stock lending arrangements and derivative transactions amounting to £7,433 million. 6. When subordinated debt is undated or loan notes perpetual, the interest payments have not been included beyond 15 years. Annual interest payments for these borrowings are £82 million. Contractual undiscounted interest payments are calculated using fixed interest rates or prevailing market floating rates as applicable. 7. The unallocated divisible surplus represents the excess of assets over liabilities, including policyholder ‘asset share’ liabilities in the UK, which reflect the amount payable under the realistic Peak 2 reporting regime of the Prudential
Aviva’s risk management framework has been designed and implemented to support these objectives. The key elements of our risk management framework comprise our risk appetite; risk governance, including risk policies and business standards, risk oversight committees and roles and responsibilities; and the processes we use to identify, measure, manage, monitor and report (IMMMR) risks, including the use of our risk models and stress and scenario testing. These elements are expanded in the IFRS Financial statements – Note 56.
In November 2016 the Group’s designation as a Global Systemically Important Insurer (G-SII) was re-confirmed. Among other policy requirements, this may result in new loss absorbency capital requirements, which are still under development, to be applied from January 2019, if the Group remains a G-SII.
The Group continues to manage its risk profile to reflect Aviva’s objective of maintaining financial strength and reducing capital volatility. Steps to amend the Group’s risk profile include successfully completing a number of management actions. These include: continuing to reduce the sensitivity of the balance sheet to interest rates, including reducing sales of products with guarantees (in particular in Italy and France) and shifting our sales towards protection and unit-linked product; starting to use longevity reinsurance for bulk purchase annuities and guaranteed annuity options, while continuing to evaluate emerging reinsurance market solutions; and reducing our operational risk exposures through continued investment in our Security Transformation programme in response to the increasing cyber security risk and on-going investment in simplifying our technology estate to improve resilience and reliability of our systems. Restrictions on non-domestic investment in sovereign and corporate debt from Greece, Italy, Portugal and Spain remain in place. As described in note 56 to the IFRS Financial statements, a number of foreign exchange, credit and equity hedges are also in place. These are used to mitigate the Group’s foreign exchange, credit and equity risk exposure, and enable the Group to accept other credit risks offering better risk adjusted returns while remaining within appetite. In addition, we renewed our catastrophe reinsurance programme to reduce the Group’s potential loss to an extreme insurance loss event.
• Declare dividends with reference to factors including growth in cash flow and earnings.
Risk environment The outcome of the UK referendum resulted in sterling falling to a 31 year low against the US dollar, widening credit spreads and a reduction in yields on eurozone and UK government treasuries to all time lows. However, the new Trump US administration announced intention to favour fiscal stimulus over accommodative monetary policy to support economic growth, raises the prospect of rising inflation, commodity prices and bond yields next year, continuing the rebound from record lows earlier in the year, as well as further strengthening of the US dollar, as the US Federal raises interest rates and the European Central Bank (ECB) and Bank of England maintain their loose monetary policy stances.
Looking forward to 2017 there are a number of events which have the potential to disrupt the economy and financial markets. These include uncertainty over the outcome of the UK’s future relationship with the EU as negotiations commence after Article 50 is exercised, elections in Netherlands, France and Germany, US trade policy and further divergence between US, eurozone and UK monetary policy exacerbating macroeconomic imbalances in the global economy.
During 2016, the Group significantly increased the amount of business ceded to Aviva International Limited, its primary onshore internal reinsurance mixing vehicle, with the objective of promoting greater capital efficiency and realising the benefits of group diversification of risk through lower solo capital requirements in the ceding entities.
Capital management Capital management objectives Group capital is represented by Solvency II Own Funds1. At 31 December 2016, the estimated Solvency II Own Funds (shareholder view) amounts to £24.1 billion (1 January 2016: £21.8 billion). This excludes the estimated marginal contribution to Group Own Funds of fully ring fenced with-profits funds of £2.9 billion (1 January 2016: £2.7 billion) and staff pension schemes in surplus of £1.1 billion (1 January 2016: £0.7 billion), such that the impact on the Solvency II surplus is nil. The most material fully ring fenced with-profit funds and staff pension schemes are self-supporting on a Solvency II capital basis with any surplus capital above Solvency Capital Requirement (SCR) not recognised in the Group position. The Solvency II Own Funds figure also includes the estimated adverse impact of £0.4 billion from a notional reset of transitional measure on technical provision (TMTP) to reflect interest rates at 31 December 2016. The shareholder view is considered by Management to be more representative of the shareholders’ risk exposure and the Group’s ability to cover the SCR with eligible own funds. The Group manages its capital position assuming a dynamic TMTP in respect of interest rate movements on the risk margin, to avoid step changes to the Solvency II position that arise only when a formal TMTP reset is triggered (as specified by the PRA). Own Funds is financed by a combination of shareholders’ funds, preference share capital, direct capital instrument, tier 1 notes, subordinated debt, and deferred tax assets measured on a Solvency II basis. Previously, the Group used a risk based capital model to assess economic capital requirements for a number of years. This risk based capital model formed the foundation of the Group’s Solvency II partial internal model application and supported the transition to the new capital regime. The Solvency II partial internal model application was approved in December 2015. Management also consider a capital employed metric prepared on an IFRS basis in managing capital and measure business unit performance. The total capital employed comprises of similar items to Own Funds but measured in accordance with IFRS and includes senior debt. In particular, analysis of return on equity calculated based on the capital employed has been used as one of the inputs to Management’s decision making process for capital allocation purposes.
2 Subordinated debt excludes amounts held by Group companies of £9 million (2015: £42 million). 3 Goodwill, AVIF and other intangibles are maintained within the capital base. Goodwill includes goodwill in subsidiaries of £2,045 million (2015: £1,955 million), goodwill in joint ventures of £20 million (2015: £19 million) and goodwill in associates of £47 million (2015: £26 million). AVIF and other intangibles comprise £5,468 million (2015: £5,731 million) of intangibles in subsidiaries, £72 million (2015: £71 million) of intangibles in joint ventures and £18 million (2015: Nil) of intangibles in associates, net of deferred tax liabilities of £(783) million (2015: £(814) million) and the non-controlling interest share of intangibles of £(226) million (2015: £(195) million).
1 The estimated Solvency II position represents the shareholder view. This excludes the contribution to Group Solvency Capital Requirement (SCR) and Group Own Funds of fully ring fenced with-profits funds £2.9 billion (2015: £2.7 billion) and staff pension schemes in surplus £1.1 billion (2015: £0.7 billion) – these exclusions have no impact on Solvency II surplus.
Reconciliation of IFRS total equity to Solvency II Own Funds The reconciliation from total Group equity on an IFRS basis to Solvency II Own Funds is presented below. The valuation differences reflect moving from IFRS valuations to a Solvency II regulatory basis. The Solvency II Own Funds represents a shareholder view, excluding the impact of ring-fenced WithProfit funds, and staff pension schemes in surplus.
Total Group equity on an IFRS basis 19.6 18.3 Elimination of goodwill and other intangible assets2 (10.0) (9.9) Liability valuation differences (net of transitional deductions)3 22.1 20.4 Inclusion of risk margin (net of transitional deductions)3 (4.4) (4.0) Net deferred tax (1.5) (1.3) Revaluation of subordinated liabilities (0.9) (0.7)
Difference between Solvency II Net Assets and Own Funds4 (0.8) (1.0)
Solvency II Own Funds5 24.1 21.8 1 Following a correction to accounting and modelling for annual management charge rebates in UK Life, prior year comparatives have been restated. This has led to an increase in operating profit and profit before tax of £23 million for 2015 and an increase in opening retained earnings for 2015 of £20 million with an increase in equity at 31 December 2015 of £38 million. See note 1 for further details 2 Includes £2.0 billion (2015: £1.9 billion) of goodwill and £8.0 billion (2015: £8 billion) of other intangible assets comprising acquired value of in-force business of £3.9 billion (2015: £4.4 billion), deferred acquisition costs (net of deferred income) of £2.5 billion (2015: £2.3 billion) and other intangibles of £1.6 billion (2015: £1.3 billion).
3 Includes an estimated adverse impact of a notional reset of the transitional measure on technical provisions (‘TMTP’) to reflect interest rates at 31 December 2016. Removing this notional reset of TMTP would increase the estimated Solvency II Own Funds by £0.4 billion 4 Regulatory adjustments to bridge from Solvency II Net Assets to Own Funds include recognition of subordinated debt capital and non-controlling interests.
5 The estimated Solvency II position represents the shareholder view. It excludes the contribution to Group SCR and Group Own Funds of fully ring-fenced with-profits funds £2.9 billion (2015: £2.7 billion) and staff pension schemes in surplus £1.1 billion (2015: £0.7 billion) – these exclusions have no impact on Solvency II surplus.
Financial flexibility The Group’s borrowings are comprised primarily of long dated hybrid instruments with maturities spread over many years, minimising refinancing risk. In addition to central liquid asset holdings of £1.5 billion, the majority of which was held within Aviva Group Holdings Limited at the 2016 year end, the Group also has access to unutilised committed credit facilities of £1.7 billion provided by a range of leading international banks.
To support value adding growth by efficient capital allocation, the Group continued to reallocate capital from businesses where the capital returns were low; for example the Group withdrew capital from Ireland through the sale of the private health insurance operations and separately invested in Canada through the acquisition of RBC General Insurance Company.
N/A Y 100,000 tCO2e annually 1 This includes new investment in wind, solar, biomass and energy efficiency. 2 This KPI relates to tCO2e savings from our Infrastructure Income Fund only.
% of employees who feel Aviva is a place where people from diverse backgrounds can succeed1 76% 76% 87% Improve from previous year 11pp Y Maintain performance
% of employees who believe Aviva is a good corporate citizen
New KPI 80% 84% Improve from previous year 4pp Y Improve from previous year 1 The question ‘Aviva is a place where people from diverse backgrounds can succeed’ has improved across all demographic classes. 2 We refined the methodology for calculating employee engagement in 2016. We have therefore restated 2014 and 2015 data using this new methodology. In 2016 we saw strong uplifts in engagement in UK, France, Ireland and within our Aviva Investors and Digital businesses. Before restatement the figure for 2014 and 2015 was 76%.
from previous year % of managed supply that has been engaged on
2016 data has been subject to independent assurance by PwC. See pages 311 to 312. For details on the methodology followed to report on these KPIs, please refer to our Reporting Criteria document (
Our assurance does not extend to information in respect of earlier periods or to any other information included in the Annual Report and Accounts 2016.
% of business that are in or above the upper quartile relative to the local market average (NPS score®)2 8pp Y Improve past performance 1 All employees are required to read, understand and sign their acceptance of the Code annually, except in France where the Code is included as part of their employment contracts. 2 Net Promoter Score ® (NPS) is the difference between the percentage of customers who are our promoters (i.e. advocates who would recommend Aviva to friends and colleagues) and those who are our detractors (i.e. customers who would not recommend Aviva or would even speak out against Aviva). The percentage figures are based on those markets within which Aviva has continued to operate from 2012, which are: UK, Ireland, Canada, France, Italy, Spain, Poland, Lithuania, Singapore, China, and India.
Environment % of CO2e emissions offset annually 100% 100% 100% Offset 100% CO2e emissions = Y Offset 100% CO2e emissions % reduction of CO2e emissions relative to our 2010 by 2020 and 70% reduction by 2030 7pp N/A 50% reduction by 2020 and 70% reduction by 2030
Suppliers % of managed supply that has agreed to the supplier Code of Behaviour 43% 43% 57% Increase scope/ %
Selected Information The scope of our work was limited to assurance over the information marked with the symbol in Aviva’s Annual Report and Accounts for the year ended 31 December 2016 (the “Selected Information” as found on page 310).
Our work was carried out by an independent team with experience in sustainability reporting and assurance.
Understanding reporting and measurement methodologies The Selected Information needs to be read and understood together with the Reporting Criteria, which Aviva is solely responsible for selecting and applying. The absence of a significant body of established practice on which to draw to evaluate and measure non-financial information allows for different, but acceptable, measurement techniques and can affect comparability between entities and over time. The Reporting Criteria used for the reporting of the Selected Information are as at 31 December 2016.
management and group CR reporting; • evaluated the design of the key structures, systems, processes and controls for managing, recording and reporting the Selected
PricewaterhouseCoopers LLP, Chartered Accountants, London 8 March 2017 1 The maintenance and integrity of Aviva’s website is the responsibility of the Directors; the work carried out by us does not involve consideration of these matters and, accordingly, we accept no responsibility for any changes that may have occurred to the reported Selected Information or Reporting Criteria when presented on Aviva’s website.
We believe that unmitigated climate change presents a real threat to financial stability over the coming decades both at a governmental and corporate level to the point of permanent impairment to total assets. We have been reporting on climate change in our Annual Report & Accounts since 2004 and we recognise the financial implications of climate change and the associated risks for Aviva.
We recognise that the increased severity and frequency of weather related losses has the potential to turn earnings events into capital events. Consequently, large catastrophic losses are explicitly considered in economic capital modelling to ensure Aviva and its subsidiaries are resilient to such scenarios.
Climate change is part of our asset management House View, which outlines our view of the economic outlook and is updated on a quarterly basis to provide key climate-related physical or policy trends and developments. We have held a number of briefing sessions with fund managers and analysts to discuss the implications of climate change across asset classes. We have explicitly incorporated corporate responsibility disclosure and performance into Aviva’s voting policy since 2001 and we were one of the first asset managers to do so globally.
This report, including our conclusions, has been prepared solely for the Board of Directors of Aviva in accordance with the agreement between us, to assist the Directors in reporting Aviva’s corporate responsibility performance and activities. We permit this report to be disclosed in the Annual Report and Accounts for the year ended 31 December 2016, to assist the Directors in responding to their governance responsibilities by obtaining an independent assurance report in connection with the Selected Information. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Board of Directors and Aviva for our work or this report except where terms are expressly agreed between us in writing.
We strongly welcome the Financial Stability Board’s interest in the implications of climate change, and we were pleased to be represented and involved in the Taskforce’s work to help businesses disclose climate-related financial risks and opportunities within their existing disclosure requirements, both as a responder, and as users of such disclosures.
This response, along with an expanded version1 constitutes Aviva plc’s initial response to the TFCD framework in our multiple roles as an asset owner, insurer, investor and asset manager. We note this framework is subject to change.
Risk Management – identification, assessment and management The ways in which the insurance sector could be impacted by climate change are diverse, complex and uncertain. However, for the purposes of our response we have focused on the three risk factors that the Prudential Regulation Authority identified in its 2015 report – Physical, Transition, and Liability.
Liability Risk Aviva has negligible exposure to litigation risks on the insurance side through liability contracts such as professional indemnity for Directors’ and Officers’ and Pension Trustee Liability insurances. However, in certain jurisdictions we are aware of regulatory and legal challenges with respect to corporate climate related impacts and disclosures, which may impact us given our equity and corporate debt exposures. Direct impact from legal challenges and any associated fines are likely to be limited to specific companies.
We targeted a £500 million annual investment in low-carbon infrastructure from 2015-2020, and an associated carbon saving target of 100,000 CO2 tonnes annually. In 2016 we signed £450 million of new investment into wind, solar, biomass and energy efficiency, and our Infrastructure Income Fund will deliver over 150,000 tonnes of CO2e savings annually when the projects are operational. Aviva holds over £247 million in green bonds.
In July 2015, we identified an initial set of 40 companies with more than 30% of their business (by revenue) associated with thermal coal mining or coal power generation. We undertook focused engagement with these companies setting out our expectations on their governance, business strategy, operational efficiency, responsible climate and energy policy advocacy and crucially whether any of those companies have any plans for new investment in coal generating capacity. Since then we have had meaningful engagement, often with multiple meetings or calls with 80% of the companies concerned.
Insurance We build the possibility of extreme weather events into our planning to help us understand the impact and ensure our pricing is adequate. Whist there may be incremental changes in the level of risk during the planning period these are not considered to be material.
We continue to invest in analytical solutions such as flood mapping, predictive analytics and risk mitigation techniques that help us better understand risk being transferred to us from our customers and to respond more rapidly when our customers need us.
Additional information For the purposes of Listing Rule (LR) 9.8.4C R, the information required to be disclosed by LR 9.8.4 R can be found in the following locations: Section in LR 9.8.4C R Topic Location in the annual report and accounts 1 Interest capitalised N/A 2 Publication of unaudited financial information N/A 3 Requirement deleted from the listing rules 4 Details of long-term incentive schemes DRR and IFRS Financial Statements – note 31 5 Waiver of emoluments by a director N/A 6 Waiver of future emoluments by a director N/A 7 Non-pre-emptive issues of equity for cash N/A 8 Item (7) in relation to major subsidiary undertakings N/A 9 Parent participation in a placing by a listed subsidiary N/A 10 Contracts of significance N/A 11 Provision of services by a controlling shareholder N/A 12 Shareholder waivers of dividends IFRS Financial Statements – note 32 13 Shareholder waivers of future dividends IFRS Financial Statements – note 32 14 Agreements with controlling shareholders N/A
History of share capital The following table sets out information about the history of the Company’s ordinary shares over the last three full calendar years.
At 31 December 2015 4,048,465,173 Shares issued under the Group’s Employee and Executive Share Option Schemes1 13,074,033 1. For more information on our various option schemes, see note 31 in the financial statements.
Share options and awards The Company maintains a number of active stock option and share award schemes. Details of any outstanding awards under these schemes are set out in ‘IFRS Financial statements – note 31 – Group’s share plans’. Details of employee share schemes are set out in Note 31 and/or the directors’ remuneration report. In addition to the share schemes mentioned in note 31 and the DRR, we operate the following share schemes: The global matching share plan Aviva has launched a global variation of the Aviva all employee share ownership plan (the global plan) during 2016. Eligible employees can invest up to £40 per month out of their net salary in the Company’s shares. There is a matching element through which the Company matches every purchased share with two matching shares. Matching shares are subject to forfeiture if purchased shares are withdrawn from the Global Plan within three years of the end of the year of purchase, as long as the employee remains employed by the Company. Participants are also eligible to receive dividend shares through the global plan. The operation of the Aviva matching share plan in the UK is described in the DRR.
Transactions with joint ventures in the UK relate to the property management undertakings, the most material of which are listed in note 18(a)(iii). Our interest in these joint ventures comprises a mix of equity and loans, together with the provision of administration services and financial management to many of them. Our UK life insurance companies earn interest on loans advanced to these entities, movements in which may be found in note 18(a)(i).
The Company pays cash dividends in pounds sterling, although the articles of association permit payment of dividends on ordinary shares in other currencies and in forms other than cash, such as ordinary shares. If dividends on ordinary shares held by the American Depositary Shares (ADS) depositary are paid in pounds sterling, the ADS depositary will convert the pounds sterling that it receives on behalf of the ADS holders into US dollars according to the prevailing market rate on the date that the ADS depositary actually receives the dividends.
Apart from the disclosed transactions discussed above and in the ‘Governance’ section of this report, no director had an interest in shares, transactions or arrangements that requires disclosure under applicable rules and regulations.
Historically, the Company has declared an interim and a final dividend for each year (with the final dividend being paid in the year following the year to which it relates). Subject to the restrictions set out above, the payment of interim dividends on ordinary shares is made at the discretion of our Board, while payment of any final dividend requires the approval of the Company’s shareholders at a general meeting. Preference shares are irredeemable and dividends on preference shares are made at the discretion of our Board.
From the 2009 interim dividend to the 2012 interim dividend, shareholders on record were provided the opportunity to elect to receive dividends in the form of newly issued ordinary shares through the Aviva Scrip Dividend Scheme. For the 2012 final and subsequent dividends, the Aviva Scrip Dividend Scheme has been withdrawn. An interim dividend is generally paid in November of each year. A final dividend is typically proposed by the Company’s Board after the end of the relevant year and generally paid in May. The following table shows certain information regarding the dividends that we paid on ordinary shares for the periods indicated in pounds sterling and converted into US dollars at the noon buying rate in effect on each payment date.
Limited liability partnerships classified as joint ventures As part of their investment strategy, the UK and certain European long-term business policyholder funds have invested in a number of property limited partnerships (PLP), either directly or indirectly via property unit trusts (PUT), through a mix of capital and loan instruments. The PLPs are managed by general partners (GP), in which the long-term business shareholder companies hold equity stakes and which themselves hold nominal stakes in the PLPs. The PUTs are managed by a Group subsidiary.
Liquidity and capital resources Treasury function The treasury function of our business is managed by our centralised treasury team, headed by the Group treasurer. The Group treasurer acts as owner of the Group business standard for liquidity risk management within the Group risk governance and oversight framework. Changes in policy require the agreement of the Chief Risk Officer. This policy is independently implemented and monitored by each of our businesses. Our central treasury team is split into distinct functions: a Group team, which develops our overall treasury strategy and our treasury team at Aviva Investors, which manages and monitors our treasury and cash flow positions for our holding companies. Each business unit is responsible for monitoring its own cash and liquidity positions, as well as its ongoing funding requirements. It is our policy to make the majority of our financing arrangements for our business units at the parent company level, primarily through external borrowings and equity offerings. This enables us to achieve the efficiencies afforded by our collective size. A small number of our business units also raise debt on their own behalf.
Extraordinary market conditions While management believes that we have liquidity and capital resources to meet business requirements under current and stressed market conditions, a return to adverse financial market conditions such as those seen in late 2008 could significantly affect our ability to meet liquidity needs and obtain capital.
Information on operating lease commitments can be found in Note 53(b) to the IFRS Financial Statements.
Note 18 to the IFRS Financial Statements provides a list of the principal PLPs accounted for as joint ventures, as well as summarised information on the income, expenses, assets and liabilities of the Group’s interests in its joint ventures in aggregate. In respect of these PLPs, there are no significant contingent liabilities to which we are exposed, nor do we have any significant contingent liabilities in relation to our interests in them. External debt raised by the PLPs is secured on their respective property portfolios, and the lenders are only entitled to obtain payment of both interest and principal to the extent there are sufficient resources in the respective PLPs. The lenders have no recourse whatsoever to the policyholder and shareholders’ funds of any companies in the Aviva Group. At 31 December 2016, we had £6 million capital commitments to these PLP joint ventures.
In managing our capital, we seek to: • match the profile of our assets and liabilities, taking into account the risks inherent in each business; • maintain financial strength to support new business growth while still satisfying the requirements of policyholders, regulators and rating agencies; • retain financial flexibility by maintaining strong liquidity, access to a range of capital markets and significant unutilised committed credit lines; • allocate capital efficiently to support growth and repatriate excess capital where appropriate; and
At 31 December 2016, the Group had £28.1 billion (31 December 2015: £25.2 billion) of total capital employed on an IFRS basis in our trading operations which is financed by a combination of equity shareholders’ funds, preference share capital, a direct capital instrument, subordinated debt and internal and external borrowings.
Management of debt Aviva plc is the principal financing vehicle in our centralised funding strategy. We aim to maintain a balance of fixed and floating rate debt, and manage the maturity of our borrowings and our undrawn committed facilities to avoid bunching of maturities. We aim to maintain access to a range of funding sources, including the banking market, the commercial paper market and the long-term debt capital markets. We issue debt in a variety of currencies, predominantly sterling and euro, based on investor demand at the time of issuance and management of the Group’s foreign exchange translation exposures in the statement of financial position.
Further information on the maturity, currency and interest rate structure of our borrowings is presented in ‘IFRS Financial statements – note 34 – Direct capital instrument and tier 1 notes and note 49 – Borrowings’. Commercial paper is issued for terms up to 12 months and is generally reissued at maturity. Other than commercial paper, the earliest available repayment date for a debt instrument is the first call date of 3 November 2017 for the 8.25% $650 million fixed rate tier one notes. At this time Aviva will have the option of repaying the debt or deferring repayment until future coupon dates. Further information on this particular issuance is presented in ‘IFRS Financial statements – note 34 – Direct capital instrument and tier 1 notes’.
The value of the secured assets and the corresponding nonrecourse funding was £1,110 million (2015: £1,308 million). We continue to receive fees from these special purpose entities in respect of loan administration services.
Dividends received1 1,635 1,378 Internal interest received 170 129 Cash remitted to Group 1,805 1,507 External interest paid (540) (554) Internal interest paid (85) (138) Central spend (227) (252) Other operating cash flows1 (24) 136
Excess centre cash flow2 929 699 1 Other operating cash flows include central investment income and group tax relief payments and other financial cash flows previously reported under central spend.
Capital injections We make capital injections into our businesses where necessary to ensure that they meet their local solvency requirements and also to support development of their operations. Capital is provided either by equity or, where a local holding company is in place, may be via loans with the holding company subsequently injecting equity capital in the regulated operating company. Each capital injection is subject to central review and approval by the Board of the relevant holding company and needs to meet our required internal rates of return. To the extent that capital injections are provided or funded by regulated entities, then we have to consider the impact on regulatory capital of the capital injection.
Otherwise our ability to make capital injections into our businesses is not materially limited by applicable legal and regulatory restrictions. Total capital injections into the business units were £509 million and £469 million in 2016 and 2015 respectively. Payments during the year include initial capitalisation of the Group’s internal reinsurance vehicle and other restructuring activity.
Net cash from investing activities Net cash from investing activities was a £407 million outflow (2015: £7,641 million inflow). The decrease of £8,048 million is mainly due to the reduced level of acquisitions in 2016 following the acquisition of Friends Life in 2015. Cash flows in respect of acquisitions in 2016 mainly related to RBC General Insurance Company in Canada.
In the UK, we have raised non-recourse funding secured against books of mortgages. This funding has been raised through the use of special-purpose entities. The beneficial interest in the books of mortgages has been passed to these special-purpose entities. These entities, which are owned by independent trustees, have funded this transfer through the issue of loan notes.
2 Other includes Group Reinsurance. 3 Cash remittances are eliminated on consolidation and are hence not directly reconcilable to the Group’s IFRS
Shareholder information continued maintain sufficient capital to meet minimum solvency requirements and any additional target capital expected by local regulators. These minimum solvency requirements, are discussed later in this section under the heading ‘Regulatory capital position’. We do not believe that the legal and regulatory restrictions constitute a material limitation on the ability of our businesses to meet their obligations or to pay dividends to the parent company, Aviva plc.
Aviva plc maintains two £2 billion commercial paper programmes, one of which is guaranteed by Aviva Insurance Limited, which allow debt to be issued in a range of currencies. At 31 December 2016, outstanding debt issued under the unguaranteed programme was £642 million (2015: £485 million). No commercial paper has been issued under the guaranteed programme in 2015 or 2016. More details of movements in debt can be found in the ‘Management of debt section’.
Aviva plc has also issued longer term debt under a Euro Note Programme. Debt issued under this programme may be senior debt or regulatory qualifying debt and may have a fixed or floating interest rate. At 31 December 2016, the outstanding debt (including equity accounted tier 1 notes) issued under this programme was £5,542 million (2015: £3,838 million).
In 2016, total cash paid by the Company as ordinary and preference dividends and coupon payments on the direct capital instrument and tier 1 notes amounted to £973 million, compared with £724 million in 2015.
For the purposes of the cash flow statement, cash and cash equivalents also include bank overdrafts, which are included in payables and other financial liabilities on the balance sheet.
Net cash and cash equivalents At 31 December 2016, total consolidated net cash and cash equivalents, net of bank overdrafts, amounted to £38,405 million, an increase of £5,235 million over £33,170 million in 2015.
Net cash from investing activities Net cash from investing activities (continuing operations) was £7,641 million inflow (2014: £228 million outflow). The increase of £7,869 million was mainly due to cash balances brought into the Group following the acquisition of Friends Life.
Net cash outflow on financing activities Net cash used in financing activities (continuing operations) decreased by £590 million to an outflow of £1,365 million (2014: £1,955 million outflow). The decrease was mainly due to the redemption of a direct capital instrument in 2014.
Contractual obligations for future repairs and maintenance on investment properties are £nil (2015: £nil, 2014: £nil). We have capital commitments to joint ventures and associates of £9 million (2015: £62 million, 2014: £91 million). These commitments are expected to be funded through operational cash flow without recourse to core structural borrowings.
Regulatory capital position Solvency II, the new European-wide prudential regulatory framework, came into force on 1 January 2016. The Solvency II regime puts in place a consistent solvency framework for insurers across Europe. The Aviva Group is regulated on a Solvency II basis and the Group Solvency II position reflects a consolidation of all legal entities on a Solvency II basis. The Solvency II regime is underpinned by market-consistent principles. For assets this typically means the market value is used, whereas liabilities are valued on a best estimate basis using market-implied assumptions. In addition, a risk margin is required to be held, designed to represent the additional amount an insurer would be expected to pay to transfer its obligations to another insurer. The combination of the valuation of liabilities and the risk margin is known as ‘technical provisions’. Subject to regulatory approval, firms may utilise a transitional measure which spreads the increase in technical provisions that resulted from the move to the Solvency II regime, over a period of 16 years. Available capital resources is referred to as ‘own funds’ under Solvency II. This includes the excess of assets over technical provisions in the Solvency II balance sheet, subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds approved by the regulator. The Solvency II regime requires firms to hold own funds in excess of the solvency capital requirement (SCR). The SCR is calculated using a risk-based capital model, calibrated to reflect the cost of mitigating the risk of insolvency to a 99.5% confidence level over a one year time horizon (equivalent to events occurring in 1 out of 200 years) against financial and non-financial shocks. The Aviva Group had used a risk-based capital model to assess economic capital requirements for a number of years which helped to prepare for the Solvency II regime. Aviva’s Group Solvency II internal model was approved in December 2015 by the Prudential Regulation Authority (PRA) for use in calculating the Group SCR. An extension of the scope of the internal model to include the non-profit funds of Friends Life Limited and Friends Life and Pensions Limited, was effective 31 December 2016. While the majority of Aviva’s Group SCR is calculated using the Group’s internal model, the SCR for some business units is valued using the standard formula, and hence the Aviva Group SCR is calculated using a partial internal model.
The estimated Solvency II surplus at 31 December 2016 is £11.5 billion, with a shareholder cover ratio of 191%. This is an increase of £1.8 billion compared to the 31 December 2015 surplus. The beneficial impacts of operating capital generation, foreign exchange variances and hybrid debt issuance have been partially offset by the impact of the Aviva plc dividend, acquisitions and the adverse non-operating capital generation, driven by adverse market movements, notably falls in interest rates over the year. The operating capital generation includes the beneficial impact of increasing the scope of the Group’s internal model to include the non-profits funds of Friends Life Limited and Friends Life and Pensions Limited. The nonoperating capital generation includes a notional reset of the transitional measure on technical provisions (‘TMTP’) to reflect interest rates at 31 December 2016.
Capital commitments Contractual commitments for acquisitions or capital expenditures of investment property, property and equipment and intangible assets, which have not been recognised in our consolidated financial statements, are as follows: Investment property 46 71 97 Property and equipment 37 61 8 Other investment vehicles 202 202 —
Solvency II The Solvency II Directive which governs insurance industry regulation and prudential capital requirements within the European Union, including associated Implementing Technical Standards and guidelines became effective from 1 January 2016. Solvency II is a European prudential framework that reflects risk management practices to define required capital and manage risk. The framework has three main pillars: • Pillar 1 consists of the quantitative requirements (for example the amount of capital an insurer should hold); • Pillar 2 sets out requirements for the governance and risk management of insurers, as well as their supervision; and • Pillar 3 focuses on disclosure and transparency requirements.
Systemic Risk In July 2013, the Financial Stability Board (FSB) designated nine insurance groups, including Aviva as Global Systemically Important Insurers G-SIIs. The designation is reviewed on an annual basis, with the FSB re-affirming Aviva as a G-SII in November 2016. The International Association of Insurance Supervisors (IAIS) has published policy measures that apply to GSIIs. The policy measures include enhanced supervision, recovery and resolution planning, the preparation of systemic risk management and liquidity risk management plans. The policy measures also include higher loss absorbency requirements (HLA). In the absence of a global capital framework for insurers, the IAIS has developed a Basic Capital Requirement (BCR) to provide a comparable foundation for the application of HLA to G-SIIs. The IAIS intend that the BCR will be superseded by the ICS once finalised as a foundation for HLA. The IAIS plans that its approach to HLA will be applicable to G-SIIs from 2019.
Insurance Capital Standard (ICS) The Financial Stability Board (FSB) has stated that a sound capital and supervisory framework for the insurance sector is essential for supporting financial stability. In this respect the IAIS will develop a work plan to develop a comprehensive, groupwide supervisory and regulatory framework for Internationally Active Insurance Groups (IAIGs), including a quantitative capital standard. The ICS will be incorporated into the global framework for the supervision of internationally active insurance groups (ComFrame) that the IAIS is developing. The IAIS plans to develop the ICS for adoption by the IAIS in 2019 along with the rest of ComFrame.
The FCA is a company limited by guarantee, accountable to the UK Treasury, and through the Treasury, to the UK Parliament. It is operationally independent of government and entirely funded by the firms it regulates. The FCA’s strategic objective as set out in the Financial Services Act 2012 is to ensure that markets “function well” and it is responsible for the conduct regulation of all financial services firms (including those prudentially regulated by the PRA, such as insurers). In addition, the FCA prudentially regulates those financial services firms not supervised by the PRA, including most asset managers. The FCA has three operational objectives: • securing an appropriate degree of protection for consumers; • protecting and enhancing the integrity of the UK financial system; and • promoting effective competition in the interests of consumers in the markets for financial services.
Authorised Firms must at all times meet specified threshold conditions, including possession of adequate resources for the carrying on of their business, and being fit and proper to conduct that business, having regard to all the circumstances. Authorised Firms must also operate in accordance with the FCA’s Principles for Business if solo regulated and the PRA’s Fundamental Rules and FCA’s Principles for Business if dual regulated. The FCA has 11 high level principles for conducting financial services business in the UK, including maintenance of adequate systems and controls, treating customers fairly, and communicating with customers in a manner that is clear, fair and not misleading. The PRA has 9 Fundamental Rules including organising and controlling its affairs responsibly and effectively and acting in a prudent manner.
Conduct of business rules The FCA’s Conduct of Business (COBS) and Insurance: Conduct of Business (ICOBS) Rules apply to every Authorised Firm carrying on relevant regulated activities, and regulate the dayto -day conduct of business standards to be observed by all Authorised Persons in carrying out regulated activities.
The PRA’s COBS rule book is limited to with-profits business and linked long-term insurance business as these classes of business are regulated by both the PRA and FCA. For withprofits business the FCA is concerned with ensuring fairness between policyholders and shareholders while the PRA has ultimate responsibility in respect of decisions which have material consequences for both affordability and fairness. For linked long-term business, the FCA is concerned with ensuring benefits are determined by reference to an approved index, while the PRA is concerned with linked assets being capable of being realised in time to meet obligations to policyholders and the matching of linked assets with linked liabilities.
All open actions are progressed in accordance with timescales agreed with the PRA and FCA.
Outside of the UK, each Aviva business is regulated by its own national regulator(s). However, overseas operations are also within the remit of the PRA to the extent that they have an interest in the systems and controls by which the Group manages its overseas businesses to mitigate the risk of financial shocks arising overseas flowing through to the UK.
Approved persons and controllers From 1 January 2016, the Approved Person regime (APER) was replaced with Senior Insurance Managers Regime (SIMR) for the UK Solvency II firms. Although in substance similar to APER, SIMR will result in a greater transparency with a narrower focus on individuals running Solvency II companies.
Both the PRA and FCA place great emphasis on the principle of senior management responsibility. The directors of, and senior managers carrying out controlled function roles (as defined in the PRA and FCA handbooks) in, any of the Group’s regulated entities are individually registered with either the PRA or FCA under the ‘Senior Insurance Managers Regime’ or the ‘Approved Person’ regime, and can be held directly accountable to the relevant regulator for control failings in those entities. For solo regulated entities, individuals applying for approval in a controlled function make their application to the FCA and if successful, are registered with the FCA. For dual regulated entities, responsibility for applying the approved persons regime to controlled functions is split between the PRA and FCA, with the PRA having responsibility for all of the Governing Functions. However, the PRA cannot approve an application without the consent of the FCA. Each regulator can apply its Statements of Principles and Code of Practice for Approved Persons to the conduct expected of approved persons, and each can discipline an approved person who has breached a statement of principle, regardless of which regulator gave approval.
The PRA and FCA regulate from a legal entity perspective, even though Aviva tends to operate by business unit. However, both regulators expect that Aviva’s regulated subsidiaries will operate within an overall framework of Group governance and controls. PRA and FCA rules expressly provide that any systems and controls which operate on a Group basis will be taken into account in determining the adequacy of a regulated subsidiary’s systems and controls. The robustness of these Group controls is therefore subject to scrutiny and challenge by both regulators.
Distribution of profits and with-profits business For UK authorised life insurers carrying on with-profits business, such as Aviva Life and Pensions UK Ltd (‘AVLAP’), the FCA’s rules require that where a firm decides to make a distribution of surplus from the with-profits fund it must distribute at least the required percentage (as defined in the FCA Handbook) of the total amount distributed to policyholders, with the balance of the total amount to be distributed being payable to the shareholders.
Old with-profits sub-fund (‘Old WPSF’) inherited estate. Such a distribution will ordinarily be required if the level of the inherited estate of the Old WPSF exceeds the Required Distribution Threshold as described in the Reattribution Scheme of Transfer effective from 1 October 2009 (‘The Scheme’) on any such annual investigation from the third such investigation after 1 October 2009. No distributions were made during 2016 in relation to the Old WPSF.
An Annual investigation may also be carried out to determine if a Release to shareholders can be made from the RIEESA. Releases can only be made: • if the Reattributed Inherited Estate exceeds the Permitted
Reporting requirements The Solvency II Pillar 3 reporting requirements require two key reports. The Solvency and Financial Condition Report (SFCR) that contains qualitative and quantitative information is reported publically on an annual basis. The Regulatory Supervision Report (RSR) is a private report to the PRA including qualitative and quantitative information that must be submitted in full at least every three years and in summary every year. This report is not publically disclosed. In addition data templates are completed and submitted to the PRA on a quarterly and annual basis.
During 2016, there were wholly owned businesses in Singapore and Hong Kong. Aviva also operated businesses in China, India, Taiwan, Indonesia and Vietnam which, depending on the nature and extent of the control exerted by Aviva, were accounted for as joint ventures or associates. In 2015, following the acquisition of the Friends Life Group, one of its subsidiaries, Friends Provident International Limited (which is domiciled in the Isle of Man) also operates in Asia through branches in Singapore, Hong Kong and United Arab Emirates.
In addition, at least once a year the AVLAP Board must consider whether a distribution is required to be made from the
• following the sixth annual investigation after 1 October 2009 or later investigation and provided that investigation and investigations made in the previous two years determined that the Reattributed Inherited Estate exceeded the Permitted Release Threshold.
No release to shareholders from the RIEESA was made during 2016.
The AVLAP Board set aside £150 million as at 31December 2016 to enhance the with-profits benefits for customers as they leave the AVLAP With-Profits Sub Fund (‘AVLAP WPSF’).
Canada We write property and casualty business in Canada via a number of wholly owned companies.
Intellectual property Our primary brands (the Aviva name and logo) are registered trademarks in the UK and are registered or pending in all other countries where Aviva has operations.
Shareholder information continued include, for example, political, social or economic instability in countries in which we operate, discriminatory regulation, credit risks of our counterparties, lack of local business experience in certain markets, risks associated with exposure to insurance industry insolvencies through policyholder guarantee funds or similar mechanisms set up in markets in which we are present and, in certain cases, risks associated with the potential incompatibility with foreign partners, especially in countries in which we are conducting business through entities which we do not control. Some of our international insurance operations are, and are likely to continue to be, in emerging markets where these risks are heightened. Our overall success as a global business and our results of operations depend, in part, upon our ability to succeed in different economic, social and political conditions.
Credit spread volatility may adversely affect the net unrealised value of our investment portfolio and our results of operations. Our exposure to credit spreads primarily relates to market price variability associated with changes in credit spreads in our investment portfolio. These are largely held to maturity, so although our financial statements reflect the market value of assets, our priority remains the management of assets and liabilities over the longer term. Credit spread moves may be caused by changes in the perception of the creditworthiness of a company, or from market factors such as the market’s risk appetite and liquidity. A widening of credit spreads will generally reduce the value of fixed income securities we hold. Conversely, credit spread tightening will generally increase the value of fixed income securities we hold. It can be difficult to value certain of our securities if trading becomes less liquid. Accordingly, valuations of investments may include assumptions or estimates that may have significant period to period changes that could have a material adverse effect on our consolidated results of operations or financial condition. Downturns in the net unrealised value of our investment portfolio may also have a material adverse effect on our regulatory capital surplus based.
We have a significant exposure to third parties that owe us money, securities or other assets, and which may not perform under their payment obligations. These parties include private sector and government (or government-backed) issuers whose debt securities we hold in our investment portfolios (including mortgage-backed, asset-backed, government bonds and other types of securities), borrowers under residential and commercial mortgages and other loans, re-insurers to which we have ceded insurance risks, customers, trading counterparties, and counterparties under swap and other derivative contracts. We also execute transactions with other counterparties in the financial services industry, including brokers and dealers, commercial and investment banks, hedge funds and other investment funds, insurance groups and institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty.
We are also susceptible to an adverse financial outcome from a change in third-party credit standing. As well as having a potential impact on asset values and, as a result, our financial condition and results of operations, credit rating movements can also impact our solvency position where regulatory capital requirements are linked to the credit rating of the investments held. Such movements in the credit standing of third parties could impact on the Group’s solvency, profitability and shareholders’ equity.
Fluctuations in currency exchange rates may adversely affect our results of operations and financial condition. We operate internationally and are exposed to foreign currency exchange risk arising from fluctuations in exchange rates of various currencies. For the year ended 31 December 2016, approximately 63% of our premium income from continuing operations arose in currencies other than sterling, and our net assets were denominated in a variety of currencies, of which the largest are the euro, sterling and Canadian dollar. In managing our foreign currency exposures, we do not hedge revenues as these are substantially retained locally to support the growth of the business and meet local regulatory and market requirements. Nevertheless, the effect of exchange rate fluctuations on local operating results could lead to significant fluctuations in our consolidated financial statements upon translation of the results into sterling. Although we take certain actions to address this risk, foreign currency exchange rate fluctuation could materially adversely affect our reported results due to unhedged positions or the failure of hedges to effectively offset the impact of the foreign currency exchange rate fluctuation. Any adverse foreign currency exchange fluctuation may also have a material adverse effect on our regulatory capital surplus based on the EU Solvency II Insurance Directive.
We are also subject to the risk that the cost of hedging these guaranteed minimum benefit increases, resulting in a reduction to net income. In addition, we are subject to the risk that unanticipated policyholder behaviour or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. These, individually or collectively, may have a material adverse effect on our results of operations, financial condition or liquidity.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability of assets and liabilities associated with changes in interest rates.
As a holding company, Aviva plc is dependent over the medium to long term on its operating subsidiaries to cover operating expenses and dividend payments. As a holding company, Aviva plc has no substantial operations of its own. Its principal sources of funding are dividends from subsidiaries, shareholder-backed funds and any amounts that may be raised through the issuance of debt and commercial paper. Our insurance and fund management operations are generally conducted through direct and indirect subsidiaries. Certain subsidiaries have regulatory restrictions that may limit the payment of dividends and could prompt a decision to inject capital, which in some more adverse circumstances and over the longer term could limit our ability to pay dividends to shareholders. In the future, following completion of the UK’s negotiations to withdraw from the EU, such restrictions imposed by local EU supervisors on dividend payments to Group, by which time would be a non-EU parent, might increase. This could have a material adverse impact on our business.
Furthermore, outstanding claims provisions for the general insurance business are based on the best-estimate ultimate cost
Shareholder information continued of all claims incurred but not settled at a given date, whether reported or not, together with related claims handling costs. Any provisions for re-opened claims are also included. A range of methods, including stochastic projections, may be used to determine these provisions. Underlying these methods are a number of explicit or implicit assumptions relating to the expected settlement amount and settlement pattern of claims.
AVIF reflects the estimated present value of future profit that will emerge over the remaining life of certain in-force contracts in a life insurance company, acquired either directly or through the purchase of a subsidiary, associate or joint venture, and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and investment contracts in-force at the acquisition date. AVIF is based on actuarially determined projections. Actual experience may vary from the projections. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in impairment and a charge to net income. Such adjustments could have an adverse effect on our results of operations or financial condition.
We hold certain investments that may lack liquidity such as commercial mortgages, real estate, privately placed fixedmaturity securities, and unlisted equities. The valuations of such assets are based on inputs which are not directly observable in the market. The inputs used reflect the assumptions that we consider market participants would normally use based on a combination of independent third party evidence and internally developed models, intended to be calibrated to market observable data where possible. These are known as Level 3 asset classes in our fair value hierarchy and represented 15.8% of total financial assets and investment properties held at fair value as of 31 December 2016. Even some higher-quality assets may become more illiquid as has been experienced in challenging market conditions in the past.
The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above and, at times, our higher-quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no certainty that we would be able to sell them for the prices at which we have recorded them and we may be forced to sell them at significantly lower prices.
As such, we may be forced to reduce our dividends, defer interest payments or redemptions, delay raising capital, issue shorter-term securities than we prefer, or bear an unattractive cost of capital which could decrease profitability and reduce financial flexibility. Our results of operations, financial condition and cash flows could be materially adversely affected.
Any restrictions on the transferability and fungibility of capital between subsidiaries and Aviva plc may result in restrictions to Group Solvency II Own Funds recognised to the extent these funds cannot be made available to Aviva plc within nine months and thus adversely impact the Group’s solvency position.
We have a significant exposure to annuity business and a significant life insurance risk is associated with longevity. Longevity statistics are monitored in detail, compared with emerging industry trends, and the results are used to inform both the reserving and pricing of annuities. It is likely that uncertainty will remain in the development of future longevity that cannot be mitigated.
Operational risks relating to Aviva’s business All of our businesses are subject to operational risks, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from malicious acts by third parties or external events. Our business is dependent on processing a large number of complex transactions across numerous and diverse products.
Furthermore, the long-term nature of the majority of our business means that accurate records have to be maintained for significant periods.
We operate in several markets through arrangements with third parties, and this may expose us to additional risks. Our ability to exercise management control or influence over our partnership operations, our joint ventures and our investment in them depends on the terms of the legal agreements. In particular, the relationships depend on the allocation of control among, and continued co-operation between, the participants.
We may also face financial or other exposure in the event that any of our partners fail to meet their obligations under their partnership agreements or encounter financial difficulty. Partnership agreements may also be terminated on certain dates or subject to certain conditions and could be subject to renewal
Our fund management operation depends on a number of key vendors, for various fund administration, accounting, valuations, custody and transfer agent roles and other operational needs. The failure or inability to diversify sources for key services or the failure of any key vendors to fulfil their obligations could lead to operational issues for us and in certain products, which could result in financial losses for our clients and impact our results of operations.
Our systems and processes on which we are dependent to serve our customers are designed to identify appropriately and address the operational risks associated with our activities. However, they may nonetheless fail due to IT malfunctions, human error, intentional disruption through the hacking of our IT systems, phishing attacks, or planting of malware by third parties or by other means, business interruptions, nonperformance by third parties or other external events and failure of disaster recovery arrangements. This could disrupt business operations resulting in material reputational damage and the loss of customers, and have a consequent material adverse effect on our results of operations and financial condition. Although we have taken steps to upgrade systems and processes to reduce these operational risks, we cannot anticipate the details or timing of all possible operational and systems failures which may adversely impact our business. The increasing sophistication of cyber criminals and the importance of digital interaction with our customers to our strategy means the inherent risk of failure of our operations due to the malicious acts of third parties is expected to increase.
Our businesses are exposed to risk from potential noncompliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of “rogue traders” or other employees. It is not always possible to completely deter employee misconduct, and the precautions we take to prevent and detect this activity may not always be effective.
We employ a range of risk mitigation strategies including the use of equity, interest rate and credit derivatives and reinsurance arrangements to reduce market, credit and insurance risk. A range of different modelling approaches are used to derive and evaluate the strategies adopted. The breakdown of the assumptions used in these modelling approaches, which may occur during market dislocations, could cause these risk mitigation strategies to be less effective than anticipated and thereby adversely affect our financial condition and results of operations.
Shareholder information continued on less favourable terms. In addition, a significant proportion of our product distribution, such as bancassurance, is carried out through arrangements with third parties not controlled by us and is dependent upon the continuation of these relationships. A temporary or permanent disruption to these distribution arrangements could affect our financial condition. Some of these arrangements require our third-party partners to participate in and provide capital to our joint venture, associate and subsidiary undertakings. Our partners may change their strategic priorities or encounter financial difficulties preventing them from providing the necessary capital to promote future growth.
The failure to attract or retain the necessary personnel, or to keep existing personnel’s skills up to date and in line with our strategy, could have a material adverse effect on our results of operations and/or our businesses. As an international financial services organisation with a decentralised management structure, we rely to a considerable extent on the quality of local management in the countries in which we operate. The success of our operations is dependent, among other things, on our ability to attract and retain highly qualified professional employees. Competition for such key employees is intense. Our ability to attract and retain key employees is dependent on a number of factors, including prevailing market conditions, working environment and compensation packages offered by companies competing for the same talent. This may be affected by any change to the freedom of movement of UK and other EU citizens between the UK and other EU countries.
Shareholder information continued 2016, 15.8% of total financial investments, loans and investment properties at fair value were classified as Level 3, amounting to £54.0 million. Where estimates were used for inputs to Level 3 fair values, these were based on a combination of independent third-party evidence and internally developed models, intended to be calibrated to market observable data where possible.
An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to our valuation.
Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill and intangible assets with indefinite useful lives at least annually for impairment or when circumstances or events indicate there may be uncertainty over this value. We test intangibles with finite lives when circumstances or events indicate there may be uncertainty over this value. For impairment testing, goodwill and intangibles have been allocated to cash-generating unit by geographical reporting unit and business segment.
The proceeds received from disposals may not reflect the values that management believes are achievable and/or may cause substantial accounting losses (particularly if the disposals are done in difficult market conditions), each of which may result in our failure to realise the anticipated benefits and gains from any such disposal. In addition, disposals of businesses, which may be cash generative and profitable, may adversely affect our short term cash flows until the medium to long term strategic benefits of such disposals are realised, as well as gives rise to a corresponding potential impact on capital requirements and liquidity. Preparation of businesses for disposal, and the disposal process more generally, may divert management time and attention away from the operation of the business in the ordinary course and may be disruptive to the business. We retain a residual exposure in respect of disposed business as a result of any representations, warranties or indemnities provided.
Risk relating to the execution of our strategy, and corporate disposals and acquisitions Our acquisitions and other corporate transactions may not realise expected benefits and may divert management attention and other resources and involve risks of undisclosed liabilities and integration issues. In past years, we have completed a number of acquisitions. In 2015 the Group acquired Friends Life Group together with its subsidiary undertakings and in 2016 the Group acquired RBC General Insurance Company and the Group may undertake further acquisitions in the future. Growth by acquisition involves risks that could adversely affect our operating results, including the substantial amount of management time and other resources that may be diverted from operations to pursue and complete acquisitions, or risks of undisclosed liabilities or integration or separation issues. The integration of any future acquisition may not be successful or in line with our expectations and any acquired businesses may fail to achieve, in the near or long term, the financial results projected or the strategic objectives of the relevant acquisition (such as cost savings or synergies) and, once acquired, may continue to divert further management attention and resources or necessitate changes in group strategy. The inability to realise expected benefits from such transactions may adversely affect our results of operations.
Our businesses are conducted in highly competitive environments. There are many factors which affect our ability to sell our products, including fiscal incentives, price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, service levels to customers, fund management performance and historical bonus levels. In some of our markets, we face competitors that are comparable in size, scope and brand recognition. In some markets, competitors have greater financial resources or greater market share, offer a broader range of products, benefit from more advantageous tax treatments, or have higher bonus rates or claims paying ratios. Further, heightened competition for talented and skilled employees with local experience, particularly in the emerging, high growth markets, may limit our ability to grow businesses as quickly as planned. In certain non-UK markets, we face intense competition from local and international financial institutions, which may be more established in these markets and may have other competitive advantages, such as greater size and breadth, which may limit our ability to be successful in these markets. In addition, local laws and regulations may be tailored to domestic providers, which may pose additional challenges to our business.
The fair value of the reporting unit is impacted by the performance of the business. Goodwill, negative unallocated divisible surplus and indefinite life intangibles are written down for impairment where the recoverable amount is insufficient to support our carrying value. Such write downs could have a material adverse effect on our results of operations or financial condition.
Shareholder information continued account legal, regulatory, operational, capital and other requirements. The implementation of any strategy, changes in strategy, adoption of any new strategy and/or entry into new markets could entail significant changes in our business which may entail higher levels of risk or could adversely affect the results of operations, the financial condition and/or the credit and financial strength ratings of the Group.
We may not be able to protect our intellectual property and may be subject to infringement claims by a third party. Our primary brand in the UK (‘Aviva’) is a registered trade mark in the UK and elsewhere. We own and trade under other registered or pending trade marks in the UK and elsewhere
Regulatory and legislative risks relating to our businesses Our regulated business is subject to extensive regulatory supervision both in the UK and internationally. We are subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental agencies, including the PRA, the FCA and other regulators. These authorities may seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manage our capital, and may require us to satisfy increased capital requirements.
There has been an increased focus in the EU on the fair treatment of customers, in particular on the way in which the insurance industry or fund management industry sells and administers insurance policies or other products. The European Commission is currently in the process of preparing delegated regulations under the Insurance Distribution Directive (‘IDD’) and has also been working on an initiative in relation to Packaged Retail and Insurance based Investment Products (‘PRIIPs’) with the aim of harmonising pre contractual disclosures and selling practices for such products. There is a risk that any new rules required in due course to implement the IDD and any new rules relating to PRIIPs will lead to restrictions on our ability to distribute our products within the EU and additional distribution and compliance costs, which could have a material adverse effect on our results, operations, and/or costs or otherwise negatively impact on our distribution arrangements.
On 1 October 2015 the FCA published a consultation paper setting out proposed changes to FCA rules and guidance in relation to the UK government’s pension reforms which came into effect in April 2015. The purpose of the paper is to consult on the FCA’s expectations about how existing rules and guidance will operate in the new environment as well as bring forward proposals for further changes to the FCA’s rules. Following receipt of feedback, the FCA has yet to publish its rules. The consequences of the FCA’s work in this area remains uncertain but could include requirements to pay redress to customers who could have obtained a more favourable annuity rate by exercising their open market option to buy an annuity or purchasing an enhanced annuity and/or the imposition of greater obligations on annuity providers to treat customers fairly and provide increased levels of information on alternative options available to customers at retirement. Regulatory action of this type could have consequences for the Group and have a material adverse effect on our business, results of operations and/or financial condition.
Following a market study by the Office of Fair Trading (‘OFT’) and the Department of Work and Pensions (‘DWP’), since April 2015, a 0.75% charge cap has come into effect on autoenrolment schemes. The cap covers member-borne deductions which include all charges on member savings other than transaction costs. In November 2016, the FCA published its rules on introducing a 1% cap to early exit charges for personal and stakeholder pension schemes. Other measures arising out of the recommendations from the OFT and DWP’s market study will be implemented in coming years, but how these will be implemented remains uncertain. The extent of the measures, including the impact of any further charge caps on pension providers remain uncertain and the industry response to these measures could have a range of possible impacts on the Group’s trading and financial performance.
We are involved in various legal proceedings, regulatory investigations and examinations and may be involved in more in the future. We have been named as defendants in lawsuits, including class actions and individual lawsuits. We have been subject to regulatory investigations or examinations in the various jurisdictions in which we operate. These actions arise in various contexts, including in connection with our activities as an
Furthermore, various jurisdictions in which we operate, including the UK, have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of another market participant. As a major participant in the majority of our chosen markets, circumstances could arise where we, along with other companies, may be required to make such contributions. We (like all other groups in which an entity is PRA and/or FCA regulated) contribute to the Financial Services Compensation Scheme and the levels of contribution to the Financial Services Compensation Scheme may change over time.
The IAIS is also developing a common framework for the supervision of internationally active insurance groups (‘ComFrame’). The framework is designed to develop common principles for supervision. In addition, it is not clear how ComFrame will interact with existing regimes of group-wide supervision. The intention is that an insurance capital standard (‘ICS’), currently being developed and applicable to globally active insurers, will ultimately form part of ComFrame. The final ICS is planned to be adopted by the IAIS in 2019. Subsequently implementation at a national level may require incorporation into EU or UK law and/or regulation.
Shareholder information continued insurer, securities issuer, employer, investment adviser, investment manager, investor and taxpayer.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. Examples of emerging claims and coverage issues include adverse changes in loss trends, judicial expansion of policy coverage and the impact of new theories of liability; growth of claims culture; legislative or judicial action that affects policy coverage or interpretation, claim quantification, or pricing; a growing trend of plaintiffs targeting property and casualty insurers in purported class action litigation relating to claims handling and other practices; new causes of liability or mass claims; claims in respect of directors’ and officers’ coverage, professional indemnity and other liability covers; and climate change related litigation.
The design of life insurance products by our life insurance companies takes into account a number of factors, including risks and taxation and is based on the tax legislation in force at that time. Changes in tax legislation or in the interpretation of tax legislation may therefore, when applied to such products, have a material adverse effect on the financial condition of the relevant long-term business fund of the Company in which the business was written.
A number of other jurisdictions, in which we operate, have introduced or announced that they intend to introduce similar measures requiring financial institutions in their territory to report account information. The OECD Common Reporting Standard (‘CRS’), which was endorsed by the G20 in July 2014, calls on jurisdictions to obtain information from their financial institutions regarding non-resident account holders and automatically exchange that information with other participating jurisdictions on an annual basis. To date, over 101 jurisdictions have committed to participating in automatic exchange by reference to CRS requirements, 56 of those jurisdictions committing to implement legislation to implement CRS and require first reporting by financial institutions in 2017
Changes to IFRS generally or specifically for insurance companies may materially adversely affect the reporting of our financial results Changes to IFRS for insurance companies have been proposed in recent years and further changes may be proposed in the future. While the UK remains a member of the EU, any changes to IFRS will be applicable to the extent they are endorsed by the EU, and subsequent to the UK’s withdrawal from the EU the applicability of changes to IFRS will be subject to the outcome of the UK government’s negotiations with the EU and those arrangements that are put in place. The International Accounting Standards Board has published proposals that would introduce significant changes to the statutory reporting of insurance entities that prepare financial statements according to IFRS. The accounting proposals, which are not expected to be finalised until May 2017 with a likely effective date of 1 January 2021, will change the presentation and measurement of insurance contracts, including the effect of technical reserves and reinsurance on the value of insurance contracts. It is uncertain how the proposals may affect the Group should they become definitive standards and their full impact. Current proposals may have an adverse effect on the manner in which we report insurance provisions and, therefore, identify and report revenues, costs and distributable reserves. The changes could, therefore, have an adverse effect on our financial performance and condition (including through changes affecting the calculation of taxation). These and any other changes to IFRS, to the extent applicable, that may be proposed in the future, whether or not specifically targeted at insurance companies, could materially adversely affect our reported results of operations and financial position.
There are also specific rules governing the taxation of policyholders. We are unable to predict accurately the impact of future changes in tax law on the taxation of life insurance and pension policies in the hands of policyholders. Amendments to existing legislation, particularly if there is the withdrawal of any tax relief, or an increase in tax rates, or the introduction of new rules, may affect the future long-term business and the decisions of policyholders. The impact of such changes upon us might depend on the mix of business in-force at the time of such change.
The ADSs may be illiquid. The Company currently intends to maintain its ADR facility with Citibank, N.A. as a Level I programme. This means that the Company’s ADS could continue be traded on the over-thecounter market. Accordingly, the Company has not arranged for the listing of its ADSs or ordinary shares on a national securities exchange or for the quotation of its ADSs or ordinary shares in a quotation medium in the United States. The Company’s ordinary shares will remain listed on the London Stock Exchange, which will continue to be the primary trading market for such ordinary shares. The lack of an active and liquid trading market in the ADSs could therefore make it more difficult to sell such ADSs in such form, as compared to the underlying ordinary shares.
The holders of our ADRs in the US may not be able to participate in offerings of rights, warrants or similar securities to holders of our ordinary shares on the same terms and conditions as holders of our ordinary shares. In the event that we offer rights, warrants or similar securities to the holders of our ordinary shares or distribute dividends
Shareholder rights under English law differ from the US. Individual shareholders of an English company (including US persons) have the right under English law to bring lawsuit on behalf of the Company in which they are a shareholder, and on their own behalf against the Company, in certain limited circumstances. English law does not permit class action lawsuit by shareholders, except in limited circumstances.
Product definitions Annuity A type of policy that pays out regular amounts, either immediately and for the remainder of a person’s lifetime, or deferred to commence from a future date. Immediate annuities may be purchased for an individual and his or her dependants or on a bulk purchase basis for groups of people. Deferred annuities are accumulation contracts, which may be used to provide benefits in retirement and may be funded by a policyholder by payment of a series of contributions or by a capital sum. Annuities may be guaranteed, unit-linked or indexlinked.
General insurance Also known as non-life or property and casualty insurance. Property insurance covers loss or damage through fire, theft, flood, storms and other specified risks. Casualty insurance primarily covers losses arising from accidents that cause injury to other people or damage to the property of others.
Single premium A single lump sum is paid by the policyholder at the start of the contract.
Acquired value of in force (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of, or investment in, a business.
Health insurance Provides cover against loss from illness or bodily injury. It can pay for medicine, visits to the doctor, hospital stays, other medical expenses and loss of earnings, depending on the conditions covered and the benefits and choices of treatment available on the policy.
Individual savings account (ISAs) Tax-efficient plans within the UK for investing in stocks and shares, cash deposits or life insurance investment funds, subject to certain limits.
Annual premium equivalent (APE) Used as a measure of life sales. It is calculated as the sum of new regular premiums plus 10% of new single premiums written in the period.
Assets under management‡ Assets under management represents all assets managed or administered by or on behalf of the Group, including those assets managed by third parties. Assets under management include managed assets that are included within the Group’s statement of financial position and those assets belonging to external clients outside the Aviva Group which are therefore not included in the Group’s statement of financial position.
Cost of non-hedgeable risks (CNHR) This is the cost of undertaking those risks for which a deep and liquid market in which to hedge that risk does not exist. This can include both financial risks and non-financial risks such as mortality, persistency and expense. The cost of non-hedgeable risks reduces the MCEV value of new business.
Frictional costs The additional taxation and investment costs incurred by shareholders through investing required capital in the Company rather than directly. Frictional costs reduce the MCEV value of new business.
Latent claims General insurance claims that are often not made until many years after the period of cover provided, due to the impact of perils or causes not becoming evident for a number of years. Sources of latent claims include asbestos-related diseases, environmental pollution and industrial deafness.
MCEV VNB can be reconciled to adjusted Solvency II VNB and to Solvency II Own Funds impact of new business; however there is no equivalent IFRS metric.
Operating earnings per share (EPS)‡ Operating EPS is calculated based on the operating profit attributable to ordinary shareholders net of tax, non-controlling interests, preference dividends, the direct capital instrument (DCI) and tier one notes divided by the weighted average number of ordinary shares in issue, after deducting treasury shares.
The components used to calculate the operating EPS are detailed in note 14 – Earnings per share.
Own Funds Under Solvency II, capital available to cover the SCR and MCR is referred to as own funds. This includes the excess of assets over liabilities in the Solvency II balance sheet (calculated on best estimate, market consistent assumptions and net of transitional measures on technical provisions), subordinated liabilities that qualify as capital under Solvency II, and off-balance sheet own funds approved by the regulator. Own funds eligible to cover the SCR and MCR also reflect any tiering restrictions.
Present value of new business premiums (PVNBP) Present value of new regular premiums plus 100% of single premiums from new business written at the point of sale and any changes to existing contracts, which were not anticipated at the outset of the contract that generates additional shareholder risk and associated premium income of the nature of a new policy. An example of a change to existing contracts that is considered to be generating PVNBP is an internal transfer of annuities from with-profits funds to a non-profit fund. PVNBP is calculated using assumptions consistent with those used to determine the MCEV value of new business.
Solvency II cover ratio is detailed in the Capital Management, Regulatory Capital overview section within the Annual Report and Accounts.
Market consistent embedded value (MCEV) A measure of the value of a life business to its shareholders. It is the sum of shareholders net assets and today’s value of the future profits that are expected to emerge from business already written, where the assumptions used to calculate future profits are consistent with current market prices for traded assets.
The components used to calculate the operating expense ratio are detailed in note 1 – Operating profit, note 3 – Expenses and note A3 – Group debt costs and other interest within the Aviva plc 2016 Preliminary Results Announcement.
Operating profit‡ This is a non-GAAP financial performance measure. It is based on expected investment returns and stated before tax and before non-operating items including impairment of goodwill and amortisation and impairment of acquired value of in-force business, the profit or loss on disposal and remeasurement of subsidiaries, joint ventures and associates, integration and restructuring costs and other items. Other items are those items that, in the Directors’ view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group’s financial performance.
Risk Margin The amount an insurance company would require, in excess of best estimate liabilities, in order to take over and meet the whole portfolio of insurance and reinsurance obligations. It reflects the cost of providing capital equal to the Solvency II capital requirement for non-hedgable risks necessary to support the insurance obligations over their lifetime. Risk Margin represents the value of deviation risk of the actual outcome compared with the best estimate, expressed in terms of a defined risk measure.
Solvency II These are insurance regulations designed to harmonise EU insurance regulation. Primarily this concerns the amount of capital that European insurance companies must hold under a measure of capital and risk. Solvency II became effective from 1 January 2016.
Solvency II cover ratio‡ Own funds divided by the Solvency Capital Requirement, as calculated on a shareholder view. The shareholder view excludes the contribution to Group Solvency Capital Requirement (SCR) and Group own funds of fully ring fenced with-profits funds and staff pension schemes in surplus – these exclusions have no impact on Solvency II surplus.
From November 2017, we are simplifying the way we pay dividends to shareholders by only paying cash dividends directly into a nominated bank account. This provides shareholders with the following benefits:  A faster, more secure, environmentally friendly way of paying dividends – we currently send out over 200,000 cheques for each dividend
Computershare Investor Services PLC (Computershare). This enables shareholders living outside of the Single European Payment Area (SEPA) to elect to receive their dividends or interest payments in a choice of over 60 international currencies
 The Dividend Reinvestment Plan enables eligible shareholders to reinvest their cash dividend in additional Aviva ordinary shares
During November and December 2016, Aviva shareholders completed 1,500 online dividend mandate instructions, meaning a donation of £1,500 to the British Red Cross to help people become safer and stronger in times of uncertainty and crisis.
You can help achieve even more – for every online dividend mandate and every voting instruction received online for the 2017 Annual General Meeting, Aviva will donate £1 to the British Red Cross.
Last date to complete a mandate instruction to receive the dividend payable in November 2017
www.investorcentre.co.uk/eproxy: For access to electronic voting for our Annual General Meeting.
SHAREHOLDER UPDATES In 2017, we want to keep you informed with quarterly online shareholder updates. This will provide a summary on how Aviva is doing as well as information for shareholders. Sign up for email communications at www.aviva.com/online to receive a notification when the latest update is available.
Total shareholder return (TSR) A measure of company performance based on the overall value to shareholders of their investment in a stock over a given period of time. TSR includes movement in the share price and dividends paid and reinvested, expressed as a percentage of the initial value of the investment or share price at the beginning of the period. There is no equivalent GAAP measure.
Transitional Measures on Technical Provisions (TMTP) TMTP is an adjustment to Solvency II technical provisions to bring them into line with the pre-Solvency II equivalent as at 1 January 2016 when the regulatory basis changed, to smooth the introduction of the new regime. This will decrease linearly over the 16 years following Solvency II implementation but may be recalculated to allow for material changes to the risk profile of the relevant business, subject to agreement with the regulator. TMTP may also be recalculated every 24 months at the request of either the firm or the regulator.
PARTNERING WITH THE BRITISH RED CROSS We are a year into our three year strategic partnership with the British Red Cross and already we have achieved a huge amount together to help communities in the UK and globally, be safer and stronger in times of uncertainty and crisis.
This includes training our people to spot the signs of stress in our customers during times of crisis, and continuing our support of the British Red Cross emergency app. Together, we are helping to make people better informed, prepared and therefore more resilient if disaster should strike.
Spring 2019 An annual dividend confirmation will be sent to shareholders who have had dividends withheld during the previous year * Any dates marked with an asterisk are provisional and may be subject to change
MANAGE YOUR SHAREHOLDING ONLINE www.aviva.com/online: You can access Computershare online services directly using the above address where you can log in using your Computershare details to:  Change your address  Change payment options  Switch to electronic communications  View your shareholding  View any outstanding payments  Access useful information and view your Aviva policies www.aviva.co.uk/myaviva: If you’ve already registered for MyAviva you’ll be able to view useful shareholder information. You can also check the details of Aviva policies you may have. Our online portal brings all this information together into one safe and secure place at a time that suits you. Just login as normal using your email address via www.aviva.co.uk/myaviva.
www.aviva.com/reports: To access our latest reports, such as our annual report and accounts.
Individual 578,993 98.22 248,881,261 6.13 Banks and nominee companies 7,906 1.34 3,758,032,990 92.53 Pension fund managers and insurance companies 221 0.04 1,040,014 0.03 Other corporate bodies 2,368 0.40 53,584,941 1.32
Ordinary 2016 final dividend ex-dividend date* 6 April 2017 2016 final dividend record date (Ordinary and ADR) 7 April 2017 Last day for Dividend Reinvestment Plan and currency election for 2016 final dividend 25 April 2017 Annual General Meeting 11am on 10 May 2017 2016 final dividend payment date* 17 May 2017
In Writing: Citibank Shareholder Services, PO Box 43077, Providence, Rhode Island, 02940-3077 USA
This document should be read in conjunction with the documents distributed by Aviva plc (the ‘Company’ or ‘Aviva’) through The Regulatory News Service (RNS). This announcement contains, and we may make other verbal or written ‘forward-looking statements’ with respect to certain of Aviva’s plans and current goals and expectations relating to future financial condition, performance, results, strategic initiatives and objectives. Statements containing the words ‘believes’, ‘intends’, ‘expects’, ‘projects’, ‘plans’, ‘will’, ‘seeks’, ‘aims’, ‘may’, ‘could’, ‘outlook’, ‘likely’, ‘target’, ‘goal’, ‘guidance’, ‘trends’, ‘future’, ‘estimates’, ‘potential’ and ‘anticipates’, and words of similar meaning, are forwardlooking. By their nature, all forward-looking statements involve risk and uncertainty. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. Aviva believes factors that could cause actual results to differ materially from those indicated in forward-looking statements in the announcement include, but are not limited to: the impact of ongoing difficult conditions in the global financial markets and the economy generally; the impact of simplifying our operating structure and activities; the impact of various local and international political, regulatory and economic conditions; market developments and government actions (including those arising from the referendum on UK membership of the European Union); the effect of credit spread volatility on the net unrealised value of the investment portfolio; the effect of losses due to defaults by counterparties, including potential sovereign debt defaults or restructurings, on the value of our investments; changes in interest rates that may cause policyholders to surrender their contracts, reduce the value of our portfolio and impact our asset and liability matching; the impact of changes in short or long-term inflation; the impact of changes in equity or property prices on our investment portfolio; fluctuations in currency exchange rates; the effect of market fluctuations on the value of options and guarantees embedded in some of our life insurance products and the value of the assets backing their reserves; the amount of allowances and impairments taken on our investments; the effect of adverse capital and credit market conditions on our ability to meet liquidity needs and our access to capital; changes in, or restrictions on, our ability to initiate capital management initiatives; changes in or inaccuracy of assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, lapse rates and policy renewal rates), longevity and endowments; a cyclical downturn of the insurance industry; the impact of natural and man-made catastrophic events on our business activities and results of operations; our reliance on information and technology and third-party service providers for our operations and systems; the inability of reinsurers to meet obligations or unavailability of reinsurance coverage; increased competition in the UK and in other countries where we have significant operations; regulatory approval of extension of use of the Group’s internal model for calculation of regulatory capital under the European Union’s Solvency II rules; the impact of actual experience differing from estimates used in valuing and amortising deferred acquisition costs (‘DAC’) and acquired value of in-force business (‘AVIF’); the impact of recognising an impairment of our goodwill or intangibles with indefinite lives; changes in valuation methodologies, estimates and assumptions used in the valuation of investment securities; the effect of legal proceedings and regulatory investigations; the impact of operational risks, including inadequate or failed internal and external processes, systems and human error or from external events (including cyber attack); risks associated with arrangements with third parties, including joint ventures; our reliance on third-party distribution channels to deliver our products; funding risks associated with our participation in defined benefit staff pension schemes; the failure to attract or retain the necessary key personnel; the effect of systems errors or regulatory changes on the calculation of unit prices or deduction of charges for our unit-linked products that may require retrospective compensation to our customers; the effect of fluctuations in share price as a result of general market conditions or otherwise; the effect of simplifying our operating structure and activities; the effect of a decline in any of our ratings by rating agencies on our standing among customers, broker-dealers, agents, wholesalers and other distributors of our products and services; changes to our brand and reputation; changes in government regulations or tax laws in jurisdictions where we conduct business, including decreased demand for annuities in the UK due to changes in UK law; the inability to protect our intellectual property; the effect of undisclosed liabilities, integration issues and other risks associated with our acquisitions; and the timing/regulatory approval impact, integration risk and other uncertainties, such as non-realisation of expected benefits or diversion of management attention and other resources, relating to announced acquisitions and pending disposals and relating to future acquisitions, combinations or disposals within relevant industries, the policies, decisions and actions of government or regulatory authorities in the UK, the EU, the US or elsewhere, including the implementation of key legislation and regulation. For a more detailed description of these risks, uncertainties and other factors, please see ‘Other information – Shareholder Information – Risks relating to our business’ above. Aviva undertakes no obligation to update the forward looking statements in this announcement or any other forwardlooking statements we may make. Forward-looking statements in this report are current only as of the date on which such statements are made. This Annual Report and Accounts has been prepared for, and only for, the members of the Company, as a body, and no other persons. The Company, its directors, employees, agents or advisers do not accept or assume responsibility to any other person to who this document is shown or into whose hands it may come, and any such responsibility or liability is expressly disclaimed.
By category of shareholder Number of shareholders %* Number of shares %*
ANNUAL GENERAL MEETING (AGM) The 2017 AGM will be held at The Queen Elizabeth II Centre, Broad Sanctuary, Westminster, London SW1P 3EE, on Wednesday, 10 May 2017, at 11am.
AVIVA PLC STRATEGIC REPORT The strategic report sets out a review of Aviva’s business, addressing key issues such as its business model, strategy and principal risks and uncertainties facing the business. The strategic report forms part of the annual report and accounts. However, shareholders can also elect to receive Aviva’s standalone strategic report as an alternative to the full annual report and accounts by contacting Computershare.
View our online summary and download the full report at www.aviva.com/AR16 www.aviva.com www.aviva.com/AR16