Pages 16-17 23.30p Up 12% on 2015 1 Impact of the change in the Ogden discount rate is an exceptional item and therefore not recognised within operating profit. The impact to profit before tax is £475 million, with an after tax impact of £380 million. Please refer to the CFO review on pages 64-65 for further information.
2 Prior period comparatives have been restated. Refer to note 1 on page 154 for further information. 3 The estimated Solvency II cover ratio represents the shareholder view. Refer to the Glossary for further information.
£1,805m Up 20% on 2015 £3,010m Up 12% on 20152 £859m Down 22% on 20152 414p Up 6% on 20152
Our values are deliberately edgy, thought-provoking and challenging. We strive to live them every day. We want them to guide everything we do and the decisions we take
We start with the customer and prioritise delivering a great outcome for them.
We can list our priorities on one hand, picking a few things to do brilliantly. We join forces and build it once
We are dissatisfied with the status quo. We test and learn at pace. We embrace digital
We invest with courage, taking smart risks and good decisions. We take the long view
Meeting customer needs across life, general, accident & health insurance and asset management
Emphasising customer experience driven by digital – online, mobile and tablet
TWITTER, TWEET, RETWEET and the Twitter logo are trademarks of Twitter, Inc. or its affiliates.
We’re there for our 33 million customers, protecting what’s important to them and helping them save for the future.
Governance 74 Chairman’s governance letter 76 Board of Directors biographies 80 Directors’ and corporate governance report 104 Directors’ remuneration report
IFRS financial statements 128 Independent auditors’ report 134 Accounting policies 148 Consolidated financial statements 268 Financial statements of the Company
Aviva has had a good year and there is more to come. We have a clear purpose to help our customers Defy Uncertainty. We are embracing digital to deliver more effectively and our financial performance sets us well for the future.
BREXIT The European Union (EU) referendum introduced considerable volatility to UK markets however Brexit does not have a significant operational impact for Aviva. The vast majority of our businesses are locally incorporated and regulated, and we have limited reliance on passporting, which allows some companies to serve customers across the EU. We are of course developing contingency plans to cover any potential adverse consequences that might arise for our business.
The Board recognises our responsibility to our 33 million customers, to help protect what is important to them and to help save for a comfortable future. Further details can be found on pages 14-15 of the report.
BOARD cOmpOsITIOn AnD gOvERnAncE During the year Claudia Arney and Keith Williams joined the Board as Non-Executive Directors, and Scott Wheway stepped down on 31 December 2016 after nine years’ service on the Board. I would like to thank Scott for his significant contribution to the Group over this time. In March 2017 we announced a number of Board changes. Further details on this and our approach to succession planning are set out in the Chairman’s Governance letter. We remain conscious of the need to enhance Board diversity, our progress on which is also set out in the Chairman’s Governance letter.
chAllEngEs DURIng 2016 The Board and its committees of course faced some challenges during the year, including increased market uncertainty and volatility. In addition, the Governance Committee examined the customer and conduct implications following suspension of dealings in the Aviva Property Trust Funds. The Board also reviewed the steps taken following the fine issued by the Financial Conduct Authority (FCA) in October 2016 in response to the breaches of FCA client money rules. These challenges did not lead to any loss for our customers or have any material impact on our performance, as set out later in this report.
pERFORmAncE Net asset value increased 6% to 414 pence per share (2015: 390 pence per share1). Profit after tax was down 22% to £859 million (2015: £1,097 million1) which includes the adverse impact of the change in the Ogden discount rate announced by the Lord Chancellor on 27 February 2017. Excluding Ogden, profit after tax increased 13%. We have considered this change an exceptional item which is not reflected in Aviva’s operating profit and will not result in a change in dividend policy.
lOOkIng FORWARD During 2017, we will continue to focus on increasing customer advocacy, becoming a digital disruptor, capital optimisation, managing our risk environment and increasing shareholder value. Your Board remains confident in Aviva’s ability to deliver on our commitment to increase the dividend payout ratio to 50% of operating earnings per share in 2017.
profit after tax (including the impact of the change in the Ogden rate)
D O I N G T H E R I G H T T H I N G F O R O U R P E O P L E
We want our people to be able to enjoy a decent standard of living – that’s why we’re proud to be a real Living Wage Employer in the UK. And that doesn’t apply just to our people, but also to contractors and suppliers who work on our sites – people like Lynne (right), who do a great job helping to keep our offices in Norwich clean and safe. Why? Because it’s the right thing to do.
We want our values to guide everything we do and the decisions we take
I N C L U S I V E D I V E R S I T Y
Inclusive diversity is at the heart of how we do business. If people can be themselves, they’ll be happier and perform better. Our Lesbian, Gay,
Legend. Hugh is passionate about the customer and tireless in living our values every day. That’s why he is our new UK customer operations director.
MW By any standards 2016 was a year of global uncertainty – with a few political surprises. Aviva’s results however are simple and clear cut: more operating profit, more capital, more cash, more dividend. And there is more to come.
Aviva’s results reflect the considerable progress we’ve made in recent years. Operating profits are up, our balance sheet is now a key point of strength, and our results are reflected in the total dividend which increased by 12% to 23.30 pence.
We enjoy a clear strategic advantage as a composite insurer – providing customers with a wide range of insurance and savings products from car, home and health insurance to pensions and investments.
We have completed the fix phase of our transformation and we are now moving to the growth phase, redefining our business model and our relationship with our customers as we become a 320 year old digital disruptor.
We also note the surprise decision on the Ogden discount rate which we believe is not sustainable in the long term. The UK Government has announced a consultation to review the methodology behind the rate and we hope that common sense will prevail. That said, we recognised the full impact of the minus 0.75% rate as an exceptional item in our 2016 results outside of our operating profit measure. This does not affect our dividend policy. We await a fuller Government review to ascertain what the rate will be.
In addition to the cultural change we have also addressed how Aviva is structured to deliver the best of Aviva to our customers, simply and conveniently. We’re structuring ourselves so they deal with just one business. Our priorities are to
Over the past two years, we’ve recruited some of the world’s best digital talent - stars from the online gaming, technology and entertainment sectors; customer experience gurus, passionate designers and world-class app-developers. They have joined us because they want to break the mould and help us disrupt the market. Whether it’s the established digital experts we’ve attracted to Aviva or the graduates and apprentices who are choosing Aviva as the launch pad for their digital careers, this new talent is helping to drive a rapid cultural shift to a ‘Digital First’ mindset across Aviva.
Group Chief Executive Officer’s interview continue to deepen our position in our home UK market and to continue growing in our core international markets in order to diversify and strengthen Aviva.
We are rapidly increasing the number of customers on MyAviva in the UK, doubling to 4.7 million.
The insurance industry is ripe for disruption. Aviva must be the world’s oldest digital disruptor. We’re a long way from where I know we need to be. But now let’s see how far and fast we can travel.
mW As I’ve said before, I see capital allocation in Aviva as a competitive sport. And we’re going to carry on being absolutely ruthless in how we allocate it, investing where we will get the best returns and stopping things where we won’t be clear winners. Not everything in the garden is rosy and we will continue to take action to address areas which do not meet our exacting expectations.
For example, we’ve reallocated capital by selling our Irish health business and we’ve announced the sale of Antarius, our joint venture with SocGen in France. And we’ve invested for growth through our exciting new partnership with Tencent and Hillhouse, and through our deal with RBC General Insurance in Canada.
Aviva’s financial position has been transformed and an unmistakably stronger balance sheet and excess capital gives Aviva options. We will invest further to grow our businesses and we are now actively planning a capital return to our shareholders and a debt reduction in 2017.
mW We are focused on delivering consistent growth year after year.
2017 is no exception. We aim to grow profits and increase our dividend payout ratio to 50% of operating earnings per share. With our high quality franchises and strong balance sheet, we enter the year with optimism.
mW To our shareholders, I say Aviva’s strong financial position, resilience and diversity mean we are well insulated from external events. We remain confident in our ability to deliver on our key commitments of cash flow and growth.
` Aim to deliver £7 billion of cash remittances between 2016-2018
` Focus on achieving a 50% dividend pay out ratio in 2017
` Build a culture where we consider our customers in every decision
` Develop an inclusive workforce that reflects the diversity of our customers
` Extend the Aviva Community Fund to more countries and continue towards our target of helping 2.5 million beneficiaries through our projects by 2020
` Increased cash remittances‡ to Group by 20% to £1,805 million
For our customers, we have: ` Added around 30% more products to MyAviva in the UK during 2016
In Digital, we have: ` Opened digital garages in Poland and Canada, alongside our existing ones in London and Singapore
For our people, we have: ` Continued to build a culture where we consider our customers in every decision
` Created an environment which attracts and retains talented, committed, entrepreneurial people
3 The estimated Solvency II cover ratio represents the shareholder view. Refer to the Glossary for further information.
We give our people the freedom to act in line with our values to create an environment in which they can thrive through collaboration and recognition. We measure this through our annual global ‘Voice of Aviva’ survey. Since 2015, engagement has risen by four percentage points driven by increases in the UK, France, Ireland and within our Aviva Investors and Digital businesses. People who joined Aviva through the Friends Life acquisition are significantly more positive than a year ago. This is a key measure of success for our integration work.
We continue to make strong progress with our digital transformation. MyAviva remains at the heart of our digital revolution and registrations on our digital platforms have surpassed 7.5 million. Our digital platforms enable customers to deal with us whenever and however they choose.
How our performance is measured reduction since 20102015 7.5m 3.8m 2.1m
Value of New Business (VNB)‡ measures growth and is the source of future cash flows in our life businesses. VNB increased by 13%, primarily driven by growth of new business in Europe, the UK and Aviva Investors. VNB includes a foreign exchange benefit of £65 million.
We continue to maintain our strong financial position. The Solvency II shareholder cover ratio‡5 excludes the contribution from fully ring fenced with-profits funds (£2.9 billion) and staff pension schemes in surplus (£1.1 billion). The impact of the announced sale of Antarius and the changes to UK tax rules announced in the November 2016 Autumn statement have also been reflected in the Solvency II position.
R Symbol denotes key performance indicators used as a base to determine remuneration.
4 Prior period comparatives have been restated. Refer to note 1 on page 154 for further information.
5 The estimated Solvency II cover ratio represents the shareholder view. Refer to the Glossary for further information.
Customers will be much more in control, expecting to self-serve and self-solve. They will want to be able to access data and insight, and use it to guide their own decisions
Revenue generated by UK FinTech sector in 2015 £6.6bn Source: EY Publications, FinTech, February 2016
Economic loss in US dollars caused by global natural disasters in 2016 $175bn Source: Munich Re, catastrophe losses, January 2017
Developing markets will have a much larger share of the world’s savings and assets pool
A I M S : O U T C O M E - O R I E N T E D S O L U T I O N S
We help people protect what’s important to them and save for a comfortable future. We’re here to help our customers Defy Uncertainty
When our customers talk to us, it’s often because something bad has happened and they want our help. That’s what happened when Olwyn (below) called us after her home flooded. We’ve rolled out training from the British Red Cross so our people can do more to help customers with their claims at these moments of crisis. The scheme also helps our people look after their own well-being.
£34.4bn Paid out in benefits and claims to our customers in 2016.
Y O U N E V E R K N O W W H A T ’ S R O U N D T H E C O R N E R
Chris Wall (below) works at a property company and lives in Winchester in the South of England with her husband and two lovely working cocker spaniels. A
few years ago she bought an Aviva critical illness policy. Money was tight – but she saw it as a wise precaution. She’s very glad she did because in October 2015 she was diagnosed with a rare form of bowel cancer. That led to many questions – not least whether she would be able to pay the bills if she couldn’t work. Chris talked to Aviva – and within a month we had paid out on her critical illness cover. It was one less thing to worry about. She was delighted with how we handled her claim, telling us the service was “exceptional”. We’re delighted Chris has recovered and we were happy to help so she could concentrate on getting better.
We help people protect what’s important to them and save for a comfortable future
Our strategic framework focuses on the things that really matter and puts the customer at the heart of what we do: True Customer Composite
Our values are at the heart of how we do business. They are how we must operate: Care More
Lif e i ns ura nce Home, Motor, Travel, Com m ercial and Pet
Investing for external c lie nts an d In ve st in g fo r
Customers Customers benefit from a range of products to meet their needs, with easy access when and how they want it.
£34.4bn Paid out in benefits and claims to our customers in 2016
We are not interested in planting flags or being in 100 countries. We will focus on a select number of markets and business lines where we have scale and profitability or a distinct competitive advantage
With their busy lives, customers are increasingly turning to digital to make things more convenient, easier and quicker.
We can provide customers with life, general, accident and health insurance and asset management – a True Customer Composite. This is what differentiates us. We are the only composite insurer of scale in the UK.
Read more on pages 20-23 Read more on pages 26-27 Read more on pages 28-29
We are a True Customer Composite helping customers protect what’s important to them and save for a comfortable future
True Customer Composite means offering all these products individually or in tailored combinations to meet customers’ needs in a convenient, easy to understand and timely manner.
For Aviva, this means increased customer retention and engagement, and lower-cost administration.
WHY NOW? In a digital world, the advantages of being a True Customer Composite become more tangible. We have a much greater opportunity to deal directly with customers and provide them with a wide range of products to meet their needs.
HOW WE’VE PROGRESSED In the UK, our focus in 2016 was to improve the functionality and significantly increase customer registrations for MyAviva, our digital platform. This was enabled by a major programme to bring all of our UK customers onto the same database, so that they can see their products in one place.
In Singapore, customers can log in online to file and manage medical claims. It’s convenient, quick, and totally paperless – and there’s a host of other features to make life easier; whether that’s taking a photo of a letter or receipt and submitting it electronically, monitoring your claim, locating clinics, or working out what you’re entitled to. In the UK, some of our health customers can now make claims online through MyAviva. Customers claiming for back, neck, muscle and joint pain can now book an appointment online in just three easy steps, leaving them free to concentrate on the all-important business of getting better. With a range of helpful information and guidance and lots more in the pipeline in 2017, we’re working hard to help our customers quickly access the care they need, when they need it most.
We put Digital First – because that’s great for the customer. But it also means we’ve got to go the extra mile for customers who aren’t confident or comfortable with digital, tailoring what we do so it works for them. We’re making MyAviva accessible and convenient, and our retirement hub is designed with ease of use in mind. The Aviva Community
Fund has supported local projects that help people of all ages get the skills they need to do more online. We want our customers to be confident enough to be Digital First with us.
FuBaoBao. It offers a simple, easy, convenient way to build up long-term savings, especially for children. Anyone can pay in as little as 10 yuan (approximately £1). Mr. Derek Wang Tianshan from
I N T H E H O T S E A T
– and stimulate a lively debate. And in 2016, we launched a new mobile streaming app that enables colleagues to watch #Uncut live on their phones.
WHY IT’S IMPORTANT The environment in which we operate continues to see rapid change in technology and digital distribution. We have to think Digital First across all our distribution channels – it’s how customers want to connect and do business with us.
Increasingly customers want to be able to self-serve: researching, buying policies and making changes online.
This includes working to maintain and improve our IT security and data encryption, because cyber security is increasingly important to reassure our customers that they can deal with us digitally with confidence.
HOW WE’VE PROGRESSED The implementation of our Digital First strategy focuses on our larger markets: UK, France, Poland, Canada and Singapore.
We are adapting our strategies to reflect the distribution landscape in each market, whether that’s via direct, intermediaries or our partners, bringing simplicity and an effortless experience.
In all markets the objective is to grow the share of customers we acquire and interact with digitally.
We expect to continue to narrow our focus on what we can do best throughout 2017.
We focus on allocating capital to areas where we can generate strong returns. If we’re not getting the results we want, we will take action. In 2016, we disposed of our 70% shareholding in Aviva Health Insurance Ireland and in 2017, we announced the sale of Antarius, our joint venture with SocGen in France.
In 2016, we launched Aviva Financial Advisers in Singapore. The business advises on a full range of life, health, general insurance and investment products focused on meeting our customers’ needs.
OAKS, ACORNS AND APPLE TREES Our Oaks, Acorns and Apple trees categorisation shows how each of Aviva’s businesses contributes to our overall portfolio, either now or in the future.
Not Everywhere is all about focusing on creating value and then delivering it
Group capital efficiently to get the right balance of risk and return
� Create competitive advantage by actively investing in the skills, mindsets and future talent we need to win in a digital age.
Sarah Morris / Chief People Officer deVeLOPING OUR TALeNT To succeed we need to empower our people to develop the skills and experiences they need to thrive and deliver for our customers. In 2016, we: � Strengthened our executive team succession by investing in innovative programmes for future leaders and women in leadership; � Moved 22% of our high potential people into new roles which will develop and stretch them, and benefit Aviva; � Launched #disruptivedigitaltalent for 23 future leaders in our UK Digital business; � Ran the second cohort of our Finance Future Talent programme which helps transition technical finance managers to senior management; and
� Relaunched our global graduate programmes, so that Aviva builds a full pipeline of new talent.
BeCOMING A dIGITAL TALeNT deSTINATION We have taken steps to encourage digital and future talent to join Aviva. In 2016, we: � Opened a digital garage in Toronto to provide an agile environment and encourage collaboration and creativity; � Launched secondment opportunities with our Plug and Play partners, a global digital start-up accelerator, in Silicon Valley; and
Improved engagement We increased our employee engagement score to 74% – by four percentage points. Support for Aviva’s strategy is at its highest level up nine percentage points to 78%.
C ARE MORE We start with the customer and prioritise delivering a great outcome for them. We do the right thing, making sure we and those around us are acting with positive intent. We don’t shrink from the tough conversations. We’re in it together.
CREATE LEGAC Y We invest with courage, taking smart risks and making good decisions to ensure we allocate our resources where they can do most. We think like an owner, taking responsibility. We go for more than quick wins. We take the long view.
Inside Out programme for 30 women. It’s designed to develop our future female talent – by exploring purpose, authenticity, influence and confidence. It’s a great way for our talent to develop the skills they need to be successful. In 2017, we will evolve our working culture and work hard to actively embrace everyone.
Each year we look to all corners of Aviva to find the true values legends. Those people that champion our values every day. We celebrate these colleagues at our Living Legends Awards at our annual CEO Forum where we share their stories, and recognise their contribution by donating £5,000 to a charity of their choice. In 2016, we received over 80 nominations, and the winners included: CARE MORE: Joanne Cann, UK Life, for increasing morale and setting up a Women’s network in Bristol
KILL COMPLEXITY: Alison Blowers, Aviva Investors, for digitising over 30 million documents in one system
NEVER REST: Lionel Chee, Singapore, for being an individual who is driven and never satisfied
ENGAGING OUR PEOPLE More than 50,000 comments were provided and analysed in this year’s global Voice of Aviva survey. Employee engagement is up by four percentage points to 74%1, led by significant improvements within our UK Life, global functions, French, Irish and Aviva Investors businesses. Importantly former Friends Life colleagues’ engagement significantly strengthened (up 11 percentage points) highlighting how successful the integration work has been over the past 12 months.
Our people are more positive than last year on a wide range of areas, in particular strong rises in their perception of diversity and inclusion, recognition and a significant jump in support for the strategy with 78% saying they believe, understand and agree with our strategy.
INCLUSIVE DIVERSITY We will build an agile and diverse workforce to reflect the population make-up of each country we operate in and the customers we seek to serve.
We are building on the existing strengths of our networks and partnerships. Aviva Pride now has over
We are committed to ensuring we provide full and fair consideration for job applications from people with disabilities, as well as supporting any of our people who become disabled while working for Aviva. For example, we adapt the working environment where we can and offer flexible working practices to take into account their personal circumstances.
In 2017 we will continue to build on our strengths in gender, age, sexual orientation and socio-economic mobility. We will also gather better data and insight, so we will be well-placed to make progress on race and ethnicity, and disability from 2018.
� Gender: continue to unlock the potential of gender diversity - including improving our understanding of issues relating to gender identity, and strengthening the pool of future women leaders.
� Age: focusing our effort in the UK on ways we can increase the proportion of our workforce who are over 50.
� Sexual orientation: we will continue to build our Aviva Pride ‘allies’ network across the group, and find ways to achieve our aspiration that LGBT colleagues can be themselves at work.
We have a clear strategy and we will accelerate the delivery of that strategy by having the right culture, the best people, and by always putting customers first.
To make sure our customers are front-ofmind for every one of our UK people – whatever their role – we have developed Frame. It brings together genuine real-time customer feedback, in the form of videos, social media comments, telephone calls or online reviews.
It’s a great way of keeping everyone focused on what matters to our customers – and how we can serve them better.
1 Restated to reflect a new methodology used to measure employee engagement in 2016.
Prevention, not just protection, is key to helping our customers Defy Uncertainty
P L A N A N D P R O T E C T
We’re there for our customers when bad things happen. But we can also help prevent bad
Many of us will know the damage leaking pipes can cause in our homes. Through our partnership with
HomeServe we’re the first insurer to be able to offer LeakBot – a great way to help selected UK customers to detect leaks anywhere in the water mains supply to their home. It never rests in monitoring your system and sends you an alert to your phone if it finds a leak. It’s a great way of making sure small leaks don’t become big problems.
G E T T I N G F I T A N D S T AY I N G H E A L T H Y
everything from exercise programmes to advice on diet. It’s a first for the industry
AB Our strategy is to demonstrate the benefits of the composite model for our customers. The strategy puts Digital First and helps us deliver our promises to shareholders. We can meet our customers’ insurance needs, whether that’s helping our customers enjoy a secure and prosperous retirement, looking after them and their loved ones should they fall ill or die, or protecting what’s most precious to them. And by bringing our UK life, general insurance and health operations together in 2017, we can serve our customers more simply and conveniently and deepen our presence in the UK.
The UK life business is the Group’s cornerstone – and it’s a market we expect to double in the next decade. It delivers more than half the Group’s profits. That’s a major contribution to capital generation and being able to keep our promises on the dividend. It’s the base for the rest of the Group to grow, and the nucleus for delivering the composite model.
We are uniquely well-positioned in general insurance, and enjoy an unrivalled brand and offer customers a wide range of products, underpinned by strong capabilities in pricing, underwriting and indemnity management.
UK & Ireland Aviva has brought its UK insurance businesses together - life insurance, general insurance and health insurance – under Andy Briggs, who has become CEO UK Insurance1, responsible for all Aviva’s insurance businesses in the UK
Interview with Andy Briggs Chief Executive Officer, UK Insurance to help UK customers deal directly with us. We know that many people like to hold multiple products with a single provider. We want that to be with Aviva – so we can use data and analytics to assess risk and provide them with personalised products and an effortless experience.
So firstly, we want to improve the quality of our customers’ experience. For pension customers, getting their monthly valuation online is much easier and more convenient than having to ring us up. In fact, they look at their valuation around once a month.
We have a real opportunity and responsibility to help our customers look to the future with confidence
Our general insurance business is really starting to grow. HomeServe is a key example and our five year partnership with them means we can do more for customers to protect their homes. We are also founding members of Flood Re. Since its launch in April 2016, we’ve transferred around 11,000 policies to the scheme, with new customers in high flood risk areas saving an average of £500 on their premium.
I’m also delighted by our continuing work on transforming our culture. We’ve brought in new expertise and revitalised our graduate programme. And our people are also growing in confidence, with engagement scores improving. We’ve got some great people and in Colm Holmes, Chief Executive of Aviva UK General Insurance, we have someone making a big impact. He epitomises our values, in particular Never Rest.
In October, we reached a settlement with the Financial Conduct Authority (FCA) regarding historical breaches of FCA rules relating to oversight of administration for client money and assets on the UK life adviser platform and agreed to pay a fine of £8.2 million. We have taken action to address the areas of concern and customers have not suffered any loss.
AB Brexit is a challenge but we are well placed to deal with the uncertainty.
Making ends meet can be tough, especially if you’re retired. Gill Duncan, who lives near Sunderland in the North of England, was certainly finding things hard. In fact, she told us she’d started to feel trapped in her own home.
Gill has a very special companion – Spot, her cocker spaniel. Now the two of them can enjoy their daily walk with an extra spring in their step.
MyAviva, whether that’s as an app or online, is at the heart of our digital revolution. It’s where our customers can see and manage all of their policies in one place and benefit from a 20% discount on further Aviva products. In fact, we offer instant quotes with a three clicks to buy process so we don’t ask questions we already have the answers to. We’re creating an effortless experience for our customers so they can engage with us exactly when and how they want. We’ve made lots of improvements over the year to make it even better. The registration process is a whole lot easier – and we’ve also added guest registration. You can change your personal details online. We’ve overhauled the pension tracker – and we’re showing customers the benefits of the composite model through a wide range of bespoke products and offers. It’s beautifully simple.
OVERVIEW Aviva is a leading insurer in the UK and Ireland life insurance markets, with a 14.7%1 share of the UK life and pensions market. We offer a market leading range of propositions to individual and corporate customers, including long-term savings, equity release, annuities and protection. We have one of the largest back books in the UK life and pensions market.
We are one of the UK’s leading protection providers in both the individual and group protection markets, providing peace of mind to customers should they die or fall ill – including life insurance, critical illness cover and income protection. This is supported by our market leading digital Aviva Life Protection System (ALPS), a protection platform for advisers and customers in the UK.
We look after around £250 billion of assets for our customers through longterm savings and pensions, and we are the third fastest growing Platform business in the market2.
We help people save for a comfortable retirement. We are the number one provider of equity release and annuities in the UK3.
We have access to customers across the UK through our unparalleled distribution network, with a growing Digital Direct offering for sales and service, strong relationships with independent financial advisers, employee benefit consultants, banks and estate agents.
Operating expenses increased 6% to £867 million. In the UK, operating expenses increased to £827 million (2015: £788 million) due to the inclusion of the additional quarter of Friends Life in 2016. Excluding this, operating expenses are lower due to an increase in realised integration synergies partially offset by investment in digital.
Implemented Solvency II and managed market turbulence following the Brexit vote.
MARKET CONTEXT AND CHALLENGES We continue to support our customers through the wide range of choices they have as they approach and move through their retirement with market leading propositions (investment, drawdown, annuity, Equity Release), information through our Aviva Retirement Centre, online guides and tools and our newly launched in-house advice service, Aviva Financial Advice.
We look forward to further improvements to the market over the next two to three years. We would like to see a fairer pension taxation system and a simpler regulatory environment which allows us to better serve the needs of our customers. The Government has set up a working group to take forward recommendations assigned to it by the Financial Advice Market Review (FAMR) and the outcome of this could have significant implications for how we engage with our customers and their advisers.
2017 will also see a review of AutoEnrolment, where UK employers must offer and enrol their employees into a suitable pension scheme. The review will consider the success to date and explore ways to further develop the policy. We have competitive advantages through the strength of our balance sheet and being a composite with a strong brand #Aviva2016
UK Pension customers now have far more choices and decisions to take about their retirement. We want to help them make the decision that’s right for them. So we’ve set up Aviva Financial Advice. 2016 saw our team working with customers in parts of the UK, both in person or digitally. Now we’re widening the scope of our advice and covering the whole of the UK. We want customers to enjoy a secure and prosperous retirement. Aviva Financial Advice is one way to help them do that.
We grew by putting our customers at the heart of our business, launching new propositions such as Aviva Private Clients, We’ll Take Care of Business and Multi-national.
Market leading service is at the heart of our business. Customers publicly review their claims experiences with ratings over 4.5 out of 5 for both our Motor and Home policies. We have won the Insurance Times Insurer of the Year award three years running and been named Best Large Call Centre at the Top 50 Companies for Customer Service Awards.
Ireland general insurance operating profit increased to £41 million (2015: £30 million), reflecting continued rating and account improvement actions.
Cash remittances to Group were £91 million (2015: £358 million) as cash was
Customer focus We’ll continue to lead the industry on the big customer issues by simplifying products, increasing transparency and launching disruptive solutions to market.
UK and Ireland general insurance net written premiums increased 9% to £4,308 million (2015: £3,967 million). The combined operating ratio (COR) increased 11.4 percentage points to 106.3% due to the change in the Ogden rate. Excluding Ogden, COR remained stable at 94.9% (2015: 95.0%).
In February 2017, an announcement was made by the UK Government to change the Ogden discount rate, which is used by the courts to calculate awards for cases involving bodily injury. The cost of bodily injury compensation claims will increase significantly as a result of this decision. Injured claimants should be fully compensated for the injuries they receive but it is also vital that individuals are not over-compensated to a level which creates significant consequences for the cost of insurance premiums for individuals and businesses, large and small.
This is one of a number of significant changes influencing the motor insurance market at the moment.
We have supported the need for motor insurance reform through our Road to Reform campaign. We will continue to champion Road to Reform until it becomes law and Aviva has promised to pass on 100% of the savings to its customers when it does.
The floods suffered by UK customers during the 2015/16 winter once again demonstrated the importance of flood resilience. We support the Government’s flood reinsurance scheme (FloodRe) and Flood Resilience Action Plan to reduce the impacts of severe weather on communities and businesses across the UK.
In the SME and corporate markets we are prioritising efforts to protect businesses and reduce the impact of any accidents. We have equipped our risk management experts with thermographic cameras which identify early warning signs of risks and prevent interruptions to normal trading.
MT Our international markets are a major contributor to the Group, accounting for 36% of total operating profit in 2016, and providing a valuable source of diversification for the Group.
We have 14 million customers across our markets, and operate a composite model in France, Poland, Ireland and Italy.
We have strong positions in large and attractive markets such as Canada, France, Italy, Ireland and Spain; and are well placed in Poland, Turkey and India – our growing markets with relatively low insurance penetration.
We believe Canada and Europe offer us clear potential for future profitable growth.
Each of our international markets has a slightly different emphasis. But ultimately we’re there to help our customers Defy Uncertainty so everything we do is focused on delivering that objective – and delivering our promises to shareholders.
As the second2 largest general insurer in Canada, we want to be a customer champion. We listen to our customers and have responded to how they want to purchase insurance by working with our broker partners and striking new partnerships, such as a partnership with Royal Bank of Canada General Insurance (RBC GI).
MT Our focus is to build a digital ecosystem for our intermediaries and develop simpler processes, products and streamlined services for our customers.
We have strong and diversified distribution across our international markets, which are digitally immature compared to the UK. Through digital, we’ve got the potential to disrupt our markets. I’d say, we aim to fundamentally change insurance!
Maurice Tulloch / Chief Executive Officer, International Insurance 1 In 2017, we announced that Maurice Tulloch will have management responsibility for Ireland and India. However, the 2016 figures for these businesses are reported in the UK & Ireland and Asia sections respectively.
and Canada – and we already have 2.2 million registered users on digital platforms in those markets. We’ll continue to upgrade and add new functionalities to MyAviva – so it offers our customers more.
In our European businesses, we’ve seen an improved performance in the second half of the year.
Building on the success in Canada, we have launched this year Community Funds in France, Italy and Poland. We’re committed to Care More about our communities and invest in local and sustainable projects to make a difference.
The personal loss experienced in the Alberta fires was terrible – but our people did a wonderful job to help our customers. If we don’t tackle climate change we’re going to see further increases in natural catastrophes occurring. This goes to our role in society – to protect people and to be a responsible investor – and our value of Create Legacy. That’s especially important to me as the Chair of Climatewise and a member of the Insurance Development Forum.
83% of our business is intermediated, sold through a network of independent broker partners, 16% is sold through RBC General Insurance (RBC GI) agents and the remainder makes up our direct offering.
Our objective is to be the customer champion in Canadian insurance through building on our existing service to customers and distributors, building our digital capabilities, and leading product innovation in Canada.
On 1 July 2016, we acquired RBC GI and entered into a 15-year distribution agreement with RBC Insurance. Through this agreement, Aviva Canada provides underwriting, pricing and claims services. This diversifies our distribution, giving us increased access to customers. The deal combines RBC Insurance’s powerful Canadian brand and sales force with Aviva’s depth of products and guidewire (new policy and claims) system.
FINANCIAL PERFORMANCE Operating profit increased by 26% to £269 million (2015: £214 million), a 16% increase on a constant currency basis primarily driven by the RBC GI acquisition and partially offset by increased catastrophe experience, in particular the Alberta fires.
Increased our access to customers through acquiring RBC GI and entering into a 15-year distribution agreement with RBC Insurance. Integrated over 550 RBC GI colleagues into Aviva Canada.
Continue to influence the market and regulators to help drive out costs and fraud for our customers in the Ontario motor market
La Fabrique Aviva is one way in which the Aviva Community Fund in France invests in great ideas that create a wider social profit, not just a financial profit. One of the winners of the 2016 competition was a social enterprise called Myjobglasses.com, a website which matches up students with professionals in business to help them better understand the demands and prospects in different careers. It’s a great way to tackle a real problem; 45% of students say they don’t know what job they really want to do when they start out in working life and around a third of permanent contracts are broken before the end of the first year. Myjobglasses.com helps people really think about what they want to do – and it’s clearly hit the target, with over 1,000 students and 300 professionals taking part already.
Sogecap to continue managing in excess of £10 billion of assets held by Antarius.
VNB was up 13% at £224 million (2015: £198 million) however flat on a constant currency basis as higher protection and with-profit sales were offset by lower demand in unit-linked products.
EUROPE’S FINANCIAL PERFORMANCE Our European businesses have shown resilient performance during 2016, reflecting the strength and diversity of our franchise. Despite a challenging start to the year, management actions led to an improved performance in the second half of the year.
Life operating profit increased by 10% to £844 million (2015: £766 million) but decreased marginally on a constant currency basis, with growth and margin improvements more than offset by adverse market movements and the impact of a new asset levy in Poland.
VNB was up 7%1 to £480 million (2015: £400 million) largely driven by a strong performance in Italy and despite challenging conditions in other markets.
OVERVIEW We offer a full range of life, general, health insurance and asset management products to our 3.4 million customers through a well-diversified distribution model, with half of our profits generated from channels we own or control.
We enjoy a long-standing relationship with Association Française d’Epargne et de Retraite (AFER), the largest retirement and savings association in France, as well as a growing tied agency network. We also have a majority stake in Union Financière de France (UFF), a leading financial adviser network in the market with 1,200 advisers and strong direct businesses.
This transaction follows Crédit du Nord’s decision to exercise its option to purchase Aviva’s shareholding. The sale will realise a strong return for our shareholders.
OVERVIEW We offer life, general and health insurance to 2.2 million customers. We operate through strong bancassurance partnerships with three of the five top banks in Italy – Banco Popolare, UBI Banca and UniCredit – a distribution network of around 650 multi-agents and brokers, and a growing IFA network.
Leszek and Renata Kotula were longstanding life and critical illness customers with Aviva Poland and enjoyed an excellent relationship with our agent, Wanda Jadach. Sadly Leszek was diagnosed with cancer in 2015, dying shortly afterwards. With Wanda’s help we paid claims on his critical illness cover within a few days and on his life policy after his death, so Renata had one less thing to worry about. She describes Wanda as resourceful, competent, empathic and friendly. That’s the service we aim to give to all our customers in their time of need.
Launched a community fund in France, Italy and Poland to support individuals and entrepreneurs in realising innovative projects which have a positive impact on local communities and economy.
Expand and upgrade our digital solutions to enhance the seamless customer and distributor experiences in France and Poland, and develop a digital platform for our Corporate pensions customers in Turkey.
Realign our organisation and simplify our processes to deliver an outstanding customer service and offer attractive customer propositions in targeted markets.
Continue to develop market-leading positions in our growth markets – Poland and Turkey – and grow profitably our businesses in France and Italy capitalising on our True Customer Composite potential.
MARKET CONTEXT AND CHALLENGES The Italian economy continued to show signs of recovery, although financial market conditions hardened in the second half of the year. In a shrinking life insurance market and stable general insurance market, Aviva Italy has produced significant operating profit and volume growth, benefitting from the completion of its turnaround actions in the past few years.
OVERVIEW We are a leading life insurer, also providing health and general insurance products, with 1.6 million customers.
FINANCIAL PERFORMANCE Operating profit was £146 million (2015: £141 million), down 5%1 due to a new asset levy. Operating expenses increased due to the impact of the asset levy and additional expense from the acquisition of Expander in July 2015.
MARKET CONTEXT AND CHALLENGES In 2016, the insurance sector was affected by the low interest rate environment and the introduction of an asset-based levy for bank and insurance companies.
Our European businesses have shown resilient performance during 2016, reflecting the strength and diversity of our franchise
MARKET CONTEXT AND CHALLENGES The Spanish economy continues to recover, with one of the highest GDP growth in Europe, and this is starting to benefit our business. We grew our protection business, maintaining our market position, and increased our share in individual pensions, with sales outperforming the market.
OVERVIEW We are a leading pension provider with 19%3 market share, serving two million customers through our joint venture with Sabancı Group, one of Turkey’s leading conglomerates. We mainly operate through Akbank, part of the Sabancı Group, with over 900 branches.
FINANCIAL PERFORMANCE Life operating profit of £6 million (2015: £11 million) decreased due to market turbulence. VNB was down 9%1 at £25 million (2015: £27 million) as a result of market volatility and uncertainty on the pension reforms.
MARKET CONTEXT AND CHALLENGES Despite political uncertainties, Turkey offers long-term potential. It has the second largest population in Europe with a young demographic and we anticipate an increasing demand for financial products. We are well placed to seize further growth opportunities in the pensions market following the introduction of autoenrolment in early 2017.
Interview with Chris Wei Executive Chairman, Asia & FPI and Global Chairman, Aviva Digital
CW Our strategy is to change fundamentally how we engage with our customers. That will mean different things in different markets – but digital runs through much of what we’re doing.
We recorded solid growth, especially in markets with large populations and low insurance penetration, like China and Indonesia.
In Singapore we’ve done everything we said we would do – and more. We expanded our contract with the Singaporean government to include not just the armed forces, but also the Ministry of Home Affairs. One in four adult Singaporeans is now an Aviva customer. We also successfully launched Aviva Financial Advisers which disrupted the traditional agency channel, as well as a direct sales force which is already proving to be among the industry’s most productive.
But there’s much more to come from us. In particular, we’re going to work more closely with digital leaders in countries like China, which is really leaping ahead in digital innovation.
launch In August we launched Aviva Financial Advisers in Singapore to offer our customers a wide range of insurance and investment services that exactly meet their needs.
1 In 2017, we agreed to develop a joint venture in Hong Kong, with Hillhouse Capital and Tencent Holdings. 2 The 2016 figures for India are reported in Asia, however management responsibility will transfer to
CW We’re not following traditional insurance models. We’re fundamentally changing the way we engage with our customers and deliver a service that is transparent, high quality, digital – and in line with our values.
OVERVIEW We have 3.5 million customers across our markets in Asia, and operate a multi-distribution strategy which includes bancassurance, agents, financial advisers, direct and telemarketing, and direct sales force.
VNB declined to £148 million (2015: £151 million) impacted by the discontinuance of the bancassurance agreement with DBS, partly offset by growth in sales from Singapore’s core financial advisory channel. VNB in other Asian markets fell due to the adverse impact of lower sales and higher expense overruns.
We strongly believe in a needs-based financial advisory service which offers a broad range of insurance and investment choices to best meet customers’ needs. That’s why we’re disrupting the way insurance has traditionally been sold, from tied agents to financial advisers, with the launch of Aviva Financial Advisors in Singapore. In a matter of months, we have already built up a team of 400 financial advisers whose results far outperform the industry.
Further embrace the True Customer Composite model by delivering Aviva’s strengths in Life and Health, plus Aviva Investors and General Insurance, tailored to different markets.
EM We want to become a global leader in outcome-oriented investing. We’re bringing our international reach and expertise to solve our clients’ problems, most notably with the AIMS range of funds, as well as investing more in illiquid assets like infrastructure.
We’re excited by the development of the Aviva digital platform. If direct customers select Aviva Investors funds, Aviva wins twice.
EM We’re really starting to see the benefits of AIMS. I’m delighted by the inflows of funds we’re starting to see, especially from institutional investors. I’m pleased with the outcomes that our AIMS strategies are delivering, adding real value in difficult markets with very low levels of volatility.
We’re also working harder to develop alternative sources of income, such as infrastructure debt and real estate – and benefit from the scale we bring to these and other asset classes.
The asset management industry is under intense pressure to demonstrate value to customers, with the interim report from the UK Financial Conduct Authority, published in November 2016, highlighting that there is room for improvement.
Better infrastructure underpins a better society – whether that’s hospitals, schools or railways. And investing in infrastructure is also good for our customers, as it can deliver stable long-term returns. To date, we’ve invested more than £2.2 billion in hospitals and medical centres in the UK alone. That isn’t just bricks and mortar.
We’re also major investors in low carbon and renewables. In 2016 we made one of our largest investments yet – four wind farms in the UK, with the capacity to produce 60.5MW – that’s enough to power over 3,500 UK homes.
damaging fire sale of assets. The suspension on trading was lifted in mid-December but the environment for the economy remains uncertain. However, we take a global view and there are interesting opportunities out there for clients.
AIMS growth In 2016, the combined assets under management of our AIMS range increased from £3bn to £9bn.
Investment Grow and protect our asset base by investing in distribution and through True Customer Composite initiatives with the rest of the Group
Risk and compliance Continue to invest in our risk and compliance teams to protect customers, shareholders and our reputation
Digital review UK Digital was set up in 2015. It is our flagship digital business with the purpose of connecting with our customers in the UK, and significantly accelerating our digital and composite offering
OVERVIEW Customers want to be more in control, expecting to self-serve and self-solve. They want to be able to access data in clicks.
For us to disrupt in digital, we need to interpret data quickly and intuitively to develop the products and services that provide real value for customers.
MyAviva, whether that’s as an app or online, is at the heart of our digital revolution. It’s where our customers can see and manage all of their policies in one place and benefit from a 20% discount on further Aviva products, as a reward for their loyalty. In fact, we offer instant quotes with a three-clicks-to-buy process so we don’t ask questions we already have the answers to. Our long-term goal is to go from Ask it Once to Ask it Never. We’re creating a beautifully simple experience for our customers.
We also focused on delivering an effortless experience for our customers. Our new pension tracker service lets customers view their pension as well as make changes, such as switching funds.
Single customer view As part of the integration with Friends Life we now have more than 95% of our customers on a single database.
Doubled the number of customers who are registered on our UK digital platforms from 2.3 million to 4.7 million.
Consider Aviva for buying other products, compared to 63% for our competitors1 1 GfK Annual Relationship Survey, 2016. Net Promoter Score® (NPS).
New launches Leveraging new technology such as Cocoon (next generation home security) to create compelling reasons for customers to continue to choose Aviva.
Chris Wei is the Executive Chairman, Asia & FPI and Global Chairman, Aviva Digital. We asked him about his priorities for the coming year.
CW We will continue to disrupt in digital. New agile competitors will act faster to disrupt established businesses. We want to be the world’s oldest disrupter.
Quotemehappy.com was our first Digital First success story and it keeps on growing. It offers low-cost car and home insurance in the UK and is only available online. Our fully self-service insurance gives customers the flexibility to manage their policies online, such as downloading documents and making changes to their policy. And because they deal with us digitally, we are able to offer our customers lower prices.
We want to slam the brakes on the fraudsters profiting from the UK’s whiplash compensation culture. It pushes up premiums for genuine customers, puts innocent motorists at risk from crash for cash scams and wastes scarce public resources such as ambulance, police and A&E time on these entirely bogus claims. We have campaigned tirelessly for change and welcome the Government’s recent whiplash reforms. However, they will only be successful if crash for cash no longer puts innocent motorists at risk. We will pass on 100% of savings to customers. Read more in our report at www.aviva.co.uk/roadtoreform.
# S A V E S M A R T E R
A F F O R D A B L E H O M E I N S U R A N C E
Since its launch last April, we have transferred around 11,000 policies to the scheme, with new customers in high flood risk areas saving an average of £500 on their premiums.
MAKING THE RIGHT CALL Our business ethics code outlines our high ethical standards and ensures we operate responsibly and transparently. We require all our people, at every level, to read and sign-up to our code every year. We provide financial crime prevention training, in areas such as fraud and market abuse and our malpractice helpline Right Call makes it easy to report any concerns in confidence, with all reports referred to independent investigation. In 2016, 25 cases were reported through Right Call (2015: 25). 18 cases reached conclusion, and seven remain under investigation. There has been no material litigation arising from any cases reported in 2016.
Kirstine Cooper / Group General Counsel and Company Secretary 1 The equivalent Financial Services Benchmark for social responsibility is 75%.
We’re in business to help people to Defy Uncertainty. So we’re a natural partner for the British Red Cross. That takes many forms, but one of the most enjoyable was when 1,000 of our people across 13 markets took part in the Aviva Global Mapathon. They used their computers to map 75,000 buildings in some of the most vulnerable communities in the world. Their mapping will help the planning work in Malawi for a childhood Measles and Rubella immunisation initiative and in Haiti, where many rural communities were devastated by Hurricane Matthew. Every £1 invested in reducing the risk of disaster saves £4 in emergency response and reconstruction.
Aviva is one of the top-scoring companies in the 2016 Dow Jones Sustainability Index (run in partnership with RobecoSAM) and a long-standing member of the FTSE4Good Index.
46% We are carbon neutral and we’ve reduced our CO2e by 46% since 2010 (our baseline year), offsetting 1.3 million tonnes over the last ten years.
1,600 projects Our community development activity, including the Aviva Community Fund and carbon offset projects, have benefited 1,600 community projects and 939,000 people globally.
UN collaboration Following our global commitment to the Sustainable Development Goals, Mark Wilson set out to world leaders Aviva’s practical recommendations to accelerate progress towards sustainable capital markets.
Ensured that 98% of our people globally confirmed they had read, understood and accepted the business ethics code.
Red Cross Partnership Build on the successful launch of our British Red Cross partnership, sharing our skills and working together to help our customers and vulnerable communities become safer and stronger in times of uncertainty and crisis.
Continue progress towards our £2.5 billion target in low carbon infrastructure investment by 2020 and our long-term CO2e reduction target of 70% by 2030.
Our people We promote fair reward, diversity and inclusion, equal opportunities, the freedom of association and other human rights through our interactions with our people. We provide a secure, safe and healthy environment for all our people.
Due diligence We conduct human rights due diligence periodically to ensure we are not complicit in human rights abuse in the countries we operate in.
Many people know how important it is to save for a comfortable retirement. But they may not know much about the companies in which their savings for retirement are invested. While pensions are all about savings for the long term, it’s possible they’re being invested in companies that make short term profits, rather than creating a sustainable long term legacy. We’ve made a short film to explain how everyone can help to make sure more money is invested sustainably and responsibly. You can see it using the QR code below.
And if society isn’t sustainable then business is at risk. #Aviva2016
STARTING WITH OURSELVES We have a proud history of taking action to reduce the environmental impact of our business and were the first carbon neutral insurer worldwide in 2006. We continue to offset 100% of any remaining carbon emissions and our offsetting projects have helped over 970,000 people since 2012 live better lives (e.g. through provision of clean cook-stoves in Kenya). In 2016 our solar panel (solar pv) power systems began generating renewable electricity in three Aviva office sites across the UK. In light of our progress in reducing our carbon emissions against the 2020 target, we have recently revised our ambitions, setting a higher target of 50% reduction by 2020 and 70% by 2030. To date we have achieved a 46% reduction against the 2010 baseline. Under the Carbon Reduction Commitment Energy Efficiency Scheme, we reported total emissions of 55,517 tonnes of CO
2e in 2016, costing £883,623. This mandatory scheme is limited to UK businesses emissions from building energy, and includes the property portfolio of our investment funds managed by Aviva investors.
ENSURING A SUSTAINABLE FUTURE Protecting the environment today means we can all enjoy a bright and sustainable future. We have assessed our potential environmental risks, focusing our strategy on the issues that matter most to our customers, business and stakeholders (see page 70 for more details). We work hard to ensure that assets remain insurable despite environmental risks and use our expertise to advise customers on how they can help protect the people and things they love. This included partnering with the Institute for Catastrophic Loss Reduction (ICLR) in Canada to develop the Plan & Protect app to help people prepare for and minimise the impact of unforeseen weather events and natural disasters.
CLIMATE RELATED FINANCIAL DISCLOSURE Aviva was represented on the Financial Stability Board‘s Taskforce on Climaterelated Financial Disclosure this year. We have provided an initial high-level response to Taskforce recommendations in our roles as an asset owner, insurer and asset manager (Aviva Investors) – this can be found in the Annual Report and Accounts.
Prior period comparatives have been restated. Refer to Note 1 on page 154 for further information.
` Dividend per share up 12% to 23.30 pence. We aim to achieve a 50% dividend pay out ratio in 2017
` Stable Solvency II capital position with a solvency II cover ratio‡3,4 of 189%. Our target working range is 150%-180%
The Solvency II coverage ratio increased to 189%3,4 (2015: 180%). Operating capital generation‡ was £3.5 billion in 2016, comprising £4.0 billion generated by our business units, net of £0.5 billion of debt interest, head office and other costs. Operating capital generation included benefits from non-recurring items such as approved model changes as we optimised capital for Solvency II. Remittances from our business units were £1.8 billion (2015: £1.5 billion) and excess centre cash flow‡ was £0.9 billion (2015: £0.7 billion).
4 The estimated Solvency II position 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 surplus by £0.4 billion. Amortisation of TMTP since 1 January 2016 is also reflected.
Aviva Investors delivered 32% growth in fund management operating profit to £139 million (2015: £105 million). Revenue increased 12% to £506 million driven by increased external new business flow, significantly increased origination of infrastructure and other illiquid assets primarily for Aviva and completion of on-boarding of Friends Life assets. Operating expenses increased 6% to £367 million reflecting continued investment in the business. Assets under management increased 19% to £345 billion (2015: £290 billion) due to positive net flows, the inward transfer of a further £14 billion of Friends Life assets and positive market returns.
Excluding the exceptional charge associated with the change in the Ogden discount rate, operating profit1 from UK and Ireland General Insurance and Health increased by 23% to £471 million (2015: £384 million5). In UK general insurance, net written premiums1 increased 7% due to new distribution relationships with Homeserve and TSB. Excluding the exceptional Ogden discount rate impact, the combined operating ratio of the UK business remained relatively stable at 95.3% in 2016 (2015: 95.1%) with lower weather claims and the positive effect of portfolio re-balancing and cost initiatives offsetting the Flood Re levy and commission strain from new distribution partnerships. In Ireland, general insurance operating profits increased to £41 million (2015: £30 million) reflecting strong growth in net written premiums (19% in local currency) and an improvement in combined ratio to 91.2% (2015: 94.6%). Operating profit from Health increased 19% to £38 million (2015: £32 million) due to a 30% improvement in underwriting profit to £35 million.
Europe responded well to challenging market conditions by delivering resilient results in 2016. Operating profit fell 3% in local currency terms but benefitted from
foreign currency translation to reach £964 million (2015: £880 million). In France, operating profit fell 5% in constant currency terms to £499 million (2015: £466 million) due to weak investment markets, an increase in weather claims in general insurance and higher operating expenses. Italy increased operating profits by 9% in constant currency to £212 million (2015: £172 million) as a result of growing sales volumes and improved margins in life insurance. In Poland, the underlying performance remained solid, though the cost of the financial sector asset levy implemented by the Polish Government caused operating profits to decline 7% in local currency to £140 million (2015: £139 million).
In Asia, operating profit fell 8% in constant currency terms to £228 million (2015: £238 million) reflecting the discontinuation of the DBS bancassurance relationship, lower profits from Friends Provident International and investment into nascent markets such as Indonesia and Vietnam. The Singapore and Hong Kong businesses have repositioned and are pursuing innovative and disruptive distribution strategies.
CAPITAL MANAGEMENT At the end of 2016, our Solvency II coverage ratio3,4 was 189% (2015: 180%), above the top end of our 150-180% working range. The Solvency II surplus4 increased to £11.3 billion (2015: £9.7 billion) as exceptionally strong operating capital generation of £3.5 billion (of which £1.7 billion underlying) was only partially offset by negative variances from investment market fluctuations and dividend payments to shareholders. Included within 2016 operating capital generation were a number of initiatives such as Friends Life capital synergies and approved model changes that improved our position under the new Solvency II regime. In total, these accounted for approximately £1.8 billion of capital generation. While there remain opportunities for further Solvency II optimisation and capital synergies, the contribution from such actions is likely to be lower in the future than was the case in 2016.
In view of our strong Solvency II ratio, there is now capacity to deploy surplus capital. In addition to underpinning a progressive dividend, we have four priorities for capital deployment: 1. Organic growth, including capital required to support new distribution partnerships; 2. Bolt-on acquisitions that strengthen our core markets; 3. Returning capital to shareholders, via a share re-purchase program or special dividend; and 4. Paying down hybrid debt obligations.
These priorities are not mutually exclusive and we expect to pursue all of these options. Specifically, we plan to take steps to return additional capital to shareholders and reduce hybrid debt during 2017. Liquidity at the centre is £1.8 billion at the end of February 2017 (February 2016: £1.3 billion). We generally intend to maintain centre liquidity balances in excess of £1 billion.
While capital return options are now on our current agenda, we continue to invest in our businesses, with organic priorities being digital, fund management
The table below shows the movement in Net Asset Value (NAV) during 2016, which increased by 24 pence to 414 pence per share‡.
Profit after tax attributable to equity holders was £703 million (2015: £936 million1). Within this, operating profit‡, one of our key financial metrics, was £3,010 million (2015: £2,688 million1). Details of operating performance in our markets can be found on pages 38-53.
` short-term fluctuation on non-longterm business of £(518) million (2015: £(84) million)
` economic assumption changes on general insurance and health business of £(242) million (2015: £(100) million); ` integration and restructuring costs of £212 million (2015: £379 million); and
` a charge of £23 million (2015: £53 million), relating to a UK reinsurance transaction which provides significant protection again claims volatility.
We’ve finished the fix and now we’re in the transform and grow phase. It’s important for all our people to be making the right decisions, at the right time. We ‘re also continuing to improve our risk and control culture. So we’ve come up with a set of five clear principles, with our values at the core, to help guide our people in their everyday roles. It’s been rolled out to ten markets and our approach has been profiled by the Institute of Ethics.
We receive premiums which we invest in order to maximise risk-adjusted returns, so that we can fulfil our promises to customers while providing a return to our shareholders. In doing so, as set out in the next page, we have a preference for retaining those risks we believe we are capable of managing to generate a return.
Looking forward, these risks may be magnified or dampened by current and emerging external trends which may impact upon our current and longer term profitability and viability, in particular our ability to write profitable new business. This includes the risk of failing to adapt our business model to take advantage of these trends. Pages 70 to 71 describe what these trends are, their impact, future outlook and how we manage these risks.
Rigorous and consistent risk management is embedded across the Group through our Risk Management Framework, comprising our systems of governance, our risk management processes and risk preferences (see next page).
` Accident & Health insurance risk covers healthcare costs and loss of earnings arising from customers falling ill.
` Market risks result from fluctuations in asset values, including equity prices, property prices, foreign exchange, inflation and interest rates.
Asset management risk 1 Our top three risks ranked by diversified Solvency II Solvency Capital Requirement 2 At a business level we have minimal appetite for foreign exchange risk. At Group level we accept some foreign exchange risk, against predetermined limits, from the translation on consolidation of the net assets of our overseas subsidiaries from local currency into pounds sterling to the extent not offset by foreign currency borrowings and derivative hedges.
This table describes the external trends and causal factors impacting our inherent risks, their impact, future outlook and how we take action to manage these risks: KEY TRENDS AND MOVEMENT RISK MANAGEMENT OUTLOOK
` Brexit does not have a significant operational impact. We are actively engaged through the Association of British Insurers and directly with the UK Government to ensure the interests of our industry and stakeholders are appropriately taken into account. We are developing contingency plans to cover potential adverse operational outcomes for our business, in particular with regards to the loss of the ability for UK firms to passport business into the EU. Given our corporate structure, this is not a major risk. Our Financial Event Response Plan ensures that we will be able to respond swiftly and effectively to any severe adverse financial event.
` We expect greater clarity to emerge once Article 50 is invoked. However, until negotiations are concluded there will remain considerable uncertainty over their outcome, and in particular whether any transitional arrangements will be in place when the UK exits the EU, which may adversely impact financial markets and economic growth.
` There is considerable uncertainty over the extent that improvements in life expectancy experienced over the last 40 years will continue into the future. Indeed, despite continued medical advances emerging lifestyle changes may begin to slow or even reverse this trend.
` We are actively engaged in public policy debate on the risks and impacts of climate change to our business and customers. We use reinsurance to reduce the financial impact of catastrophic weather events. Our flood mapping analytics helps us identify properties most at risk and improve our risk selection. Our responsible investment strategy ensures climate change, as well as other environmental and social issues are integrated into our investment decisions. We actively seek to reduce our own direct carbon emissions (46% reduction since 2010) as well as indirect emissions through supplier agreements and as a criteria for supplier selection. For further information see pages 58-61.
Impact of new technologies – Failure to understand and react to the impact of new technology and its effect on customer behaviour and how we distribute products could potentially result in our business model becoming obsolete. While failure to keep pace with the use of data to price more accurately and to detect insurance fraud could lead to loss of competitive advantage and underwriting losses.
Changes in public policy – Any change in public policy (government or regulatory) could influence the demand for, and profitability of, our products. In some markets there are (or could be in the future) restrictions and controls on premium rates, rating factors and charges.
` In the UK pressure on public finances may result in further erosion of tax relief for pension savings, while further restrictions on pension charges are also possible, as well as increases in Insurance Premium Tax, extension in Flood Re coverage and changes to the asset management industry following the FCA’s review. Also, the Polish government is consulting on pension changes which will radically impact the pensions industry.
` In 2016 there were a number of high profile cyber security incidents for corporates in the UK and elsewhere, and we expect this to increase in 2017 as cyber criminals become ever more sophisticated and given the growing importance of digital automation in business strategy.
Changes in customer behaviour – will impact how customers wish to interact with us and the product offering they expect from us, including the exercise of options embedded in contracts already sold by us.
` We expect customers will be much more in control, expecting to self-service and self-solve. They will want to access data and insight and use it to guide their own decisions.
This Strategic Report (up to page 71) was approved by the Board of Directors on 8 March 2017 and signed on its behalf by
IN THIS SECTION 74 Chairman’s governance letter 76 Board of directors 79 Group executive 80 Directors’ and corporate governance report 104 Directors’ remuneration report
CULTURE IN THE ORGANISATION During the year I led the Board through a number of discussions on our culture and how it is manifested throughout the organisation. We engaged our management to develop a series of metrics through which the culture within Aviva could be measured. I believe that there is no single measure that can define an organisation’s culture, but that a broad dashboard can provide the Board with a holistic view of the culture in our business. As we define these cultural metrics we can better understand the actions we, as a Board, can take to develop our culture to meet our strategic objectives.
EXECUTIVE SUCCESSION The Board focused extensively on, and invested in, executive succession and contingency planning during the year, and further detail is contained in the Nomination Committee report.
One example is the launch of ‘Good Decisions’. Comprising a toolkit and principles that help our colleagues use the values to make ‘Good Decisions’ in the course of their everyday work. The cultural shift achieved is measured bi-annually via metrics including customer satisfaction, risk and control metrics, and through questions within our annual Voice of Aviva survey. The initiative ensures our values are at the heart of all decisions that the Board and our colleagues make.
dirEct crEdit of dividEnds for sharEholdErs In November 2016 we sent a newsletter to shareholders relating to the forthcoming change to our dividend payment procedures, specifically that we will cease to pay cash dividends by cheque from November 2017. Cash dividends will be paid by direct bank credit as the Board believes this directly aligns with our Digital First strategy, will increase the speed and security of payments, reduces printing and postage costs and will minimise the impact of Aviva’s activities on the environment.
The Board recognise that a strong governance framework is fundamental to the execution of our strategic objectives, underpinned by a clear purpose and well understood culture and values, and this will remain a focus during 2017.
We believe in having a diverse leadership team with regard to experience, skills, tenure, age, geographical expertise, professional background and gender. the charts below illustrate the diversity of our Board and senior management following the Board changes effective as at the date of the annual General Meeting (aGM), and are materially the same as at the date of this report.
Sir Adrian has led the Board in discussions on corporate culture and ethics and is an active advocate for these throughout the Group. He is also a champion for the Aviva Community Fund, creating legacy and supporting the communities in the markets in which Aviva operates. External Appointments: Chairman of The Manchester Airports Group plc and The Point of Care Foundation and a nonexecutive director of Cellmark AB.
Tenure: 1 year 11 months. Appointed to the Board and as Executive Director in April 2015 Qualifications: Fellow of the Institute of Actuaries Skills and Experience: Andy became CEO UK Insurance1 in 2017 and is responsible for all Aviva’s insurance businesses in the UK, further strengthening Aviva’s position in the UK market. His strategic insight and business transformation skills are supported by his extensive operational and executive experience gained over more than 25 years in the insurance industry.
Previously CEO of the Friends Life business, Andy’s knowledge and experience of the UK Life sector is invaluable to the Board.
A dynamic leader and effective communicator, Mark has enabled the successful transfer and integration of the Friends Life companies and continues to develop the Company’s strategy and embed its core values, whilst delivering strong financial performance.
Nationality: British Committee membership: Governance Committee (Chair), Nomination Committee, Remuneration Committee, Risk Committee
She has considerable experience, both executive and non-executive, across a number of sectors including financial services, publishing, digital and government.
In her executive career, Claudia was group managing director of Emap and was responsible for transforming the predominantly print trade publishing business into a digital data and information business. This experience positions her well in her role as a non-executive director of Aviva’s UK Digital business. External Appointments: Non-executive director of Derwent London plc, Halfords Group plc and the Premier League.
Nationality: Australian Committee membership: Remuneration Committee (Chair), Audit Committee, Nomination Committee
She brings strategic financial capability, and a deep knowledge of international capital markets and financial risk management to the Board.
Tenure: 5 years 1 month. Appointed to the Board in February 2012 Qualifications: Fellow of the Institute of Chartered Accountants of England and Wales; BSc Economics and Accounting (Bristol) Skills and Experience: Glyn possesses a deep understanding of accounting and regulatory issues together with in-depth transactional and financial services knowledge. He has extensive experience as a business leader and as a trusted adviser to FTSE 100 companies and their boards on a wide variety of corporate and finance issues. Glyn has extensive knowledge of the Aviva Group which gives him a balanced understanding of the issues and concerns of shareholders, allowing him to support the Chairman and the Board in instilling the appropriate culture, values and behaviours in the Boardroom.
Nationality: British Committee membership: Governance Committee, Nomination Committee, Remuneration Committee, Risk Committee
Formerly a senior partner at McKinsey & Company, where he focused on the strategies for retail and financial services companies, and having gained governmental experience at the Central Policy Review Staff (now the Number 10 Policy Unit), Michael brings a unique perspective and insight to the Board. External Appointments: Chairman of the Land Registry and senior independent director at the Care Quality Commission.
Tenure: 4 years 2 months. Appointed to the Board in January 2013 Qualifications: Certified Public Accountant, Fellow of the Society of Actuaries and a member of the American Institute of Certified Accountants and the American Academy of Actuaries Skills and Experience: Bob has a deep knowledge of accounting and actuarial practices, and the insurance and broader financial services sector.
Tenure: 7 months. Appointed to the Board in August 2016 Qualifications: Associate member of the Institute of Chartered Accountants Skills and Experience: Keith has extensive financial experience including a detailed knowledge of business planning, capital projects and project finance gained in a number of industries and over 10 years of executive experience as chief financial officer at British Airways Plc. Keith also brings to the Board his broad experience of leading transformation and implementing technology, particularly through his role as chairman of British Airways where he transformed the company into a customer focused organisation.
For a more detailed biography of each of our Group Executive please go to: www.aviva.com/ge/
Kirstine established the legal and secretarial function as a global team and is responsible for the provision of legal services to the Group, legal risk management, regulatory compliance, public policy and corporate responsibility. External appointments: Trustee of the Royal Opera House and Commissioner on the Cabinet Office’s Dormant Assets Commission.
The Board can confirm that the Company was compliant throughout the financial year under review with both the 2014 and 2016 versions of the Code. Further information on the Code can be found on the Financial Reporting Council’s (FRC’s) website www.frc.org.uk.
THE BOARD The role of the Board and its committees is set out on page 82 of this report.
A strong system of governance throughout the Group aids effective decision-making and supports the achievement of the Group’s objectives for the benefit of customers and shareholders whilst in compliance with regulations. The duties of the Board and of each of its committees are set out in their respective Terms of Reference. The committee Terms of Reference can be found on the Company’s website at www.aviva.com/committees and are also available from the Group Company Secretary. The Terms of Reference list both matters that are specifically reserved for decision by the Board and those matters that must be reported to the Board. The Board delegates clearly defined responsibilities to various committees and reports from the Audit, Governance, Nomination and Risk Committees are contained in this report. A report from the Remuneration Committee is included in the directors’ remuneration report.
As at the date of this report the Board comprises the Chairman, three Executive Directors and nine Independent NonExecutive Directors (NEDs).
Claudia Arney was appointed to the Board as a NED on 8 February 2016 and brings a wide range of skills and experience notably in building digital strategies, business transformation and customer focus. Keith Williams was appointed to the Board as a NED on 1 August 2016 and brings a strong financial background, detailed knowledge of business planning and capital projects, and experience working in the technology sector.
Board appointments The Board appoints NEDs who can apply their wider business skills, knowledge and experience to the oversight of the Group, and input and challenge in the boardroom
The Board recognises the role it plays in demonstrating effective leadership and in building Aviva’s culture. The Board requires a broad range of skills to ensure balanced and effective decision making. To support this, our skills matrix has been developed to meet the evolving needs of the Company, enabling us to map the current skills and experience of the Board and to link these to our strategy.
Executive Non-Executive * Individual Directors may fall into one or more categories
Corporate governance – 9% Reviews and approves all significant shareholder communications and monitors developments to legislation and regulation and internal governance arrangements.
Financial reporting and controls, capital structure and dividend policy – 20% Reviews and assesses the Group’s financial performance.
Group strategy and business plans ` Approved the 2017-2019 Group Plan and received presentations and reports from business units in respect of strategy execution and performance against the Group Plan
` Received regular reports from the Chairman comprising updates on Board matters for which he is responsible such as Board composition
` Critically reviewed updates from the business on the integration of the Friends Life Group following the 2015 acquisition
` Visited the leadership teams of technology companies, further details on which can be found later in this report
Oversight of risk and risk management ` Received reports from the Chief Risk Officer (CRO), and assessed the Group’s significant risks and regulatory issues; approved the Group’s risk appetite; approved the Group risk policies which provide the risk framework for managing risk across the Group; and received updates on the Group’s capital and liquidity position
` Continued focus on the governance framework for the Group’s subsidiaries and supported the roll out of the Subsidiary Governance Principles
Significant transactions and expenditure ` Approved financial matters in line with the Group Funding Plan, and also strengthening of our capital position through debt raising issues
` Reviewed reports provided by its committees on key matters of financial reporting discussed at committee meetings, providing the opportunity for the Board to input and challenge where necessary
` Reviewed the results of the 2016 Voice of Aviva survey, and discussed the organisational results in respect of culture
` Regularly discussed the current Group culture and its alignment with strategy, and initiated a project to review the culture in the Group and the metrics on which it could be measured
to progress the business. Executive director appointments are made to ensure that the appropriate business focus is represented on the Board to support effective implementation of the Board strategy. The Board regularly reviews and refreshes the skills of Board members, identifying any areas of skills, experience and knowledge that we can further strengthen. As outlined opposite, in the second half of 2016, we rolled out a refreshed version of the Board skills matrix, which will be used to further promote a sound balance of Board skills, experience and knowledge. More information on the skills matrix can be found in the Nomination Committee report, which also sets out the work carried out during the year in respect of Board and committee succession planning.
Time commitment Each NED must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively. The Chairman assesses the time commitment of the NEDs as part of the annual review of their effectiveness, and the SID reviews the time commitment of the Chairman. This assessment takes into account the number of external commitments each director has and that each director has demonstrated that they have sufficient time to devote to their present role within Aviva including under potential periods of particular stress, for example during a significant business transaction. Under the Board’s policy on this matter, executive directors may hold one external directorship and must obtain the prior consent of the Board before accepting a non-executive directorship in any other company. Executive directors may retain the fees from any external directorship. No such positions are currently held.
The Company arranges appropriate insurance cover in respect of legal actions against its directors. The Company has also entered into indemnities with its directors as described on page 102.
Collectively responsible for promoting the long-term success of the Company and for setting the Group’s strategy, against which management’s performance is monitored. It sets the Group’s risk appetite and satisfies itself that financial controls and risk management systems are robust, whilst ensuring the Group is adequately resourced. It is also responsible for setting the values and supporting the culture of the Group, and ensures appropriate dialogue with shareholders on strategy and remuneration.
Audit Responsible for monitoring the integrity of the Company’s financial statements, the adequacy and effectiveness of the systems of internal control (including whistleblowing procedures), and the effectiveness and independence of the internal and external auditors.
Governance Responsible for the consistency of, and compliance with, governance and regulatory requirements across the Group. In addition, the Committee provides oversight of conduct, customer outcomes, financial crime, corporate responsibility and the governance of UK Digital.
Risk Responsible for assisting the Board in its oversight and management of risk, and reviews the Group’s risk appetite and risk profile in relation to capital and liquidity. It works with the Remuneration Committee to ensure risk management is considered when setting remuneration policy.
from time to time, providing a forum in which they can raise matters. Sir Malcolm will not seek re-election as a NED at the 2017 AGM on 10 May 2017 and Glyn Barker will become SID on that date. Glyn will remain Chair of the Audit Committee until the half year results in August 2017, following which he will step down as Committee Chair (but remain a member).
Role profiles for the Chairman, SID, Group CEO and NEDs are on the Company’s website at www.aviva.com/roles.
INDUCTION, TRAINING AND DEVELOPMENT The Board believe strongly in the development of the directors and the Group’s employees. It is a Company requirement that each director commits to continuing their professional development.
During the year, the directors attended a number of internal training sessions on topics including Solvency II (SII) with particular focus on the reporting requirements, directors’ duties with regard to the impact of SII and SIMR, and matters affecting our IT architecture and related technical platforms. An independent IT adviser to the Board was retained to provide bespoke training and a holistic view on technological developments and the cyber security environment in the context of the Company’s strategic objectives. Training sessions have been built into the Board and committees’ plans for 2017 and are scheduled to include SII benchmarking, areas of regulatory focus and International Financial Reporting Standard 17, regarding the accounting of insurance contracts.
` An induction programme including: – Meetings with each director – Presentations from senior management – Visits to the Group’s main operating businesses – Meetings with the External Auditor and some of the Company’s advisors
Visited the BU’s and technology companies in Singapore, China and Hong Kong
BOARD PRIORITIES FOR 2017 The Board has made considerable progress during 2016 on the objectives set at the beginning of the year. This included progressing our Digital First strategy through MyAviva by focusing on our True Customer Composite model, continuing to monitor customer outcomes and conduct risk, and the Group’s adoption of SII to ensure we were well prepared to meet our new reporting obligations. These areas of focus were in addition to the Board’s routine matters, including financial reporting and strategic planning.
During 2017, IT and cyber security will remain on the Board’s agenda, as controls continue to advance in line with everevolving technological capability, so that the Company is prepared for new threats and opportunities as and when they arise.
Offsite strategy days are used to set, and reflect on progress with the Company’s strategy. In these sessions the Board also discuss the strategic priorities for the year ahead and set the three year strategic plan. In line with the 2017-2019 plan, priorities for the Board’s 2017 agenda will be further increasing value for shareholders and strengthening relationships with customers, for example by providing a single point of contact for customers no matter what product they hold.
BOARD EVALUATION The effectiveness of the Board is vital to the success of the Group. The Board has a rigorous evaluation process each year to assess how it, its committees and individual directors are performing. The normal process is to undertake an evaluation by way of internal questionnaire, supported by discussions with the Chairman, with an external evaluation being conducted every third year. However, in light of major events such as the Friends Life acquisition, the teams of technology companies enabling them to discuss business models, customer focus, culture, and the general approach to agile working. The first of these was held in Asia, visiting technology companies in Singapore, China and Hong Kong, which also aligned with a Board meeting and a visit to the Asian Business Units, and the second was held in Silicon Valley. Following this, an action plan was devised to reflect the learnings obtained and to implement these within the Group. During 2017, it is planned that the Board will visit the Group’s business in France.
CONFLICTS OF INTEREST In accordance with the Companies Act 2006, the Company’s articles of association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits or conditions as it thinks fit. The decision to authorise a conflict of interest can only be made by non-conflicted directors (those who have no interest in the matter being considered) and in making such a decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success for the benefit of its shareholders as a whole. The Board’s procedure is to review and approve actual and potential conflicts of interest as they arise. This procedure
Directors are expected to attend all meetings of the Board and the committees on which they serve and to devote sufficient time to the Company to effectively perform their duties. Directors receive relevant papers in advance of meetings and any director unable to attend can raise any issues and give comments to the Board or relevant committee chair in advance of the meeting. All meetings were attended unless stated in the footnotes below the table. Details of each committee are contained in each of the committee reports.
Governance Committee Chair, and as a member of the Nomination Committee and Risk Committee with effect from 31 December 2016. 4 Claudia Arney was appointed as a NED and as a member of the Nomination Committee on 8 February 2016, and as a member of the Remuneration Committee and Governance Committee on 1 June 2016. Claudia missed a Board meeting that was called at short notice on 15 July 2016 due to a personal commitment. 5 Keith Williams was appointed as a NED and as a member of the Audit Committee, Governance Committee and Nomination Committee on 1 August 2016. 6 Sir Malcolm Williamson missed one Audit Committee meeting on 16 December 2016 due to a personal commitment. 7 Bob Stein and Sir Malcolm Williamson will not seek re-election at the AGM on 10 May 2017.
` The responsibilities of the Board and its committees have been clarified and efforts have been made not to duplicate reporting, whilst appreciating that in some areas appropriate overlap is beneficial. Enhanced communication between committees is facilitated by detailed agenda planning, committee cross-membership and a summary of activities being presented by committee chairs at each Board meeting.
` The Company continues to engage regularly with its shareholders and the Chairman and Group CEO are particularly active in this area. The corporate brokers are invited to attend Board meetings when appropriate and provide an update on shareholder views which assists with this engagement.
Briefing Internal questionnaires developed. Comprehensive briefing by the Chairman to IBE to address themes raised in previous review.
Evaluation Internal questionnaire and supplementary questions by IBE circulated. Feedback analysed by the Chairman and Company Secretary.
Review Internal questionnaire results and final report to the Board and each Committee.
Management are responsible for the application of the RMF, for implementing and monitoring the operation of the system of internal control and for providing assurance to the Audit, Governance and Risk Committees and the Board.
This function provides independent and objective assessment on the robustness of the RMF and the appropriateness and effectiveness of internal control to the Audit, Governance and Risk Committees, business unit audit committees and the Board.
Chairman’s succession and SII readiness a decision was taken to hold an external evaluation in 2015 and conduct the 2016 review using an internal questionnaire with supplementary questions by IBE. Further details can be found on page 85.
Governance and Risk Committees which report regularly to the Board. However, the Board retains ultimate responsibility for the Group’s systems of internal control and risk management and has reviewed their effectiveness for the year.
INTERNAL CONTROLS Internal controls facilitate effective and efficient operations, the development of robust and reliable internal reporting and compliance with laws and regulations.
Group reporting manuals in relation to IFRS, Solvency II reporting requirements and a Financial Reporting Control Framework (FRCF) are in place across the Group. FRCF relates to the preparation of reliable financial reporting, covering both IFRS and Solvency II reporting activity. The FRCF process follows a risk-based approach, with management identification, assessment (documentation and testing), remediation (as required), reporting and certification over key financial reportingrelated controls. Management regularly undertakes quality assurance procedures over the application of the FRCF process and controls. Friends Life had an established framework of financial reporting controls in place at the time of acquisition in 2015 and work to align this with the Group’s FRCF methodology was completed in 2016.
The Actuarial function is accountable for Group wide actuarial methodology, reporting to the relevant governing body on the adequacy of reserves and capital requirements, as well as underwriting and reinsurance arrangements. The Compliance function supports and advises the business on the identification, measurement and management of its regulatory, financial crime and conduct risks. It is accountable for maintaining the compliance standards
and framework within which the Group operates, and monitoring and reporting on its compliance risk profile.
BOARD OVERSIGHT The Board has delegated responsibilities to various committees to assist in its oversight of risk management and the approach to internal controls are set out in the chart above. There is a good working practice between each committee and they provide regular reports to the Board on their activities and escalate significant matters where appropriate. The responsibilities and activities of each Board committee are set out in the committee reports. Further details on the management of risk operated by the Group are in note 56.
� material existing or emerging risks within the business have been identified and assessed and the business operates in a manner which conforms to the minimum requirements outlined in Group risk policies and business standards.
The chief risk officer of each business unit must certify that: � the risk function has reviewed and challenged the process supporting the business unit chief executive officer’s certification and is satisfied that it can provide reasonable assurance of the material accuracy and completeness of the business unit chief executive officer’s assessment; and
The Audit Committee, working closely with the Risk Committee, on behalf of the Board, last carried out a full review of the effectiveness of the systems of internal control and risk management in March 2017 covering all material controls, including financial, operational and compliance controls and the RMF. The review identified a number of areas for improvement and clear action plans are in place to address these, which will be regularly monitored. The committee reports refer to these areas and the mitigating actions to address them.
The risk management framework of a small number of our joint ventures and strategic equity holdings differs from Aviva’s RMF outlined in this report. We work with these entities to understand how their risks are managed and to align them, where possible, with our framework.
2017 AGM The 2017 AGM will be held on Wednesday 10 May 2017 and the Notice of AGM and related papers will, unless otherwise noted, be sent to shareholders at least 20 working days before the meeting. The AGM provides a valuable opportunity for the Board to communicate with private shareholders. All directors normally attend the Company’s AGM and all were in attendance for the 2016 AGM.
Shareholders are invited to ask questions related to the business of the meeting at the AGM and have an opportunity to meet with the directors following the conclusion of the meeting. Further details on the AGM are provided in the Shareholder Services section.
THE PRINCIPAL COMMIT TEES THAT OVERSEE R ISK MANAGEMENT ARE AS FOLLOWS
Works closely with the Risk Committee and is responsible for assisting the Board in its oversight of operational risk across the Group, particularly in respect of the risk of not delivering good customer outcomes.
Assists the Board in its oversight of risk and risk management across the Group and makes recommendations on risk appetite to the Board. Reviews the effectiveness of the RMF, and the methodology in determining the Group’s capital and liquidity requirements. Ensures that risk management is properly considered in setting remuneration policy.
I am pleased to present the Nomination Committee’s report for the year ended 31 December 2016.
The Committee continues to review the composition of the Board and succession planning for executive management. More recently the Committee has broadened its remit and now has responsibility for talent development within the wider Aviva Group.
AM The main function of the Committee is to monitor the balance of skills, knowledge, experience and diversity on the Board and lead succession planning for appointments to the Board and the senior executive team.
Q How do you ensure you have the right balance of skills on the
Board and that directors can devote sufficient time to their role?
In addition, the independence, effectiveness and time commitment of each Non-Executive Director (NED) is reviewed individually both by myself, as Group Chairman, and by the Committee. A particularly rigorous review was conducted in respect of both Scott Wheway, who had been appointed to the Board in December 2007, and Mike Hawker, who had served on the Board for just over six years. As part of this review the Committee considers closely whether directors with other external commitments have sufficient capacity to devote the necessary time to the Company. The Committee has again undertaken this review in 2017 and remains satisfied that all directors are fully able to commit to their role and accordingly all current directors, (with the exception of Sir Malcolm
We are conscious of the value of having a Board that is diverse in its make-up not only in respect of gender but diversity in its widest sense to include age, experience, ethnicity, geographical expertise and professional background. We have continued our commitment to improving the representation of women on the Board and in supporting women to advance into senior roles with 23% of the Board currently female, rising to 27% following the conclusion of the 2017 AGM. In terms of our senior management, 36% of our Group Executive is comprised of female membership.
I am confident we have the appropriate balance of skills and experience on the Board, but we will keep this under review as the business and industry evolves.
AM We use a number of measures to assess whether we have the right skills and experience on the Board, and the updated skills matrix will support this further. In addition, in 2017 I plan to hold a Nomination Committee meeting following the Board strategy meeting to ensure the skills and experience in the Boardroom and our succession plan for the Board remain aligned to the strategic direction of the Group.
Q How does the Committee ensure an efficient pipeline of talent throughout the Group?
AM In 2016, Aviva made significant investment in talent development programmes, as part of our systematic approach to creating legacy by improving diversity and strengthening the pipeline for senior roles. The Committee has had regular updates on the progress of the talent strategy. We launched our Executive and Future Leaders Programme and created detailed succession and development plans based on the assessment of potential. We plan to extend this programme in 2017. We also launched our first Global Graduate programme in September 2016. This programme will build our long-term leadership capability, creating a high performing pipeline, to meet our future needs at director level.
NED with specific attributes, such as customer focus and digital experience
Executive search consultancy firm, JCA Group, appointed to assist with the search and a shortlist of candidates identified
Q1 2016 Regulatory approval sought - appointment to the Board and the
Evaluation and annual assessment ` Considered and recommended to the Board the election/ re-election of each continuing director ahead of their election/ re-election by shareholders at the AGM
` Reviewed and made recommendations to the Board in respect of each directors’ actual, potential or perceived conflicts of interests
Succession planning and Board pipeline ` Continued to focus on succession planning arrangements at both the Board and executive level, against a specification for the role and capabilities required for the position and the composition of the Board
As Chair of the Risk Committee, I am pleased to present the Committee’s report for the year ended 31 December 2016.
The Company’s approach to risk and risk management together with the principal risks that face the Group are explained on pages 68 to 71.
Committee members are shown below and their experience, qualifications and attendance at Committee meetings during 2016 are detailed on page 84, and directors biographies on page 76. The Group Chairman, Group Chief Executive Officer, Chief Audit Officer (CAO), Chief Financial Officer, Chief Risk Officer (CRO), and additional attendees as appropriate, regularly attended Committee meetings by invitation to present reports.
MH The Committee oversees all aspects of risk management in the Group, save for compliance, conduct and reputational risk, responsibility for which lay with the Governance Committee during 2016.
Work is also undertaken with the Remuneration Committee to ensure risk management is properly considered in setting remuneration policy.
Additionally, legislative change continues within Financial Services, particularly in relation to regulatory capital and the pensions and savings markets across Europe. The strategic and operational implications associated with these changes have also been an area of focus for the Committee. The Committee has monitored the implementation and usage of the new Solvency II (SII) partial internal model and oversaw further expansion of the internal model to three of the Group’s subsidiaries. The Committee has continued to oversee developments in the Group’s internal reinsurance vehicle, given its significance in enabling the fungibility and transferability of SII capital between Group entities. The impact of IT changes on the Group in terms of cost base, customer interaction and security, including the cyber threat environment, was also looked at by the Committee.
The Group is well equipped to manage risk and retain a strong capital and liquidity position
MH Following the referendum bond yields fell to record lows and the
Committee discussed the strategic implications of the resulting financial market distortions and the appropriateness of the Group’s asset mix. Towards the end of the year, these were also discussed in the context of the business plan. Further, it considered how low interest rates have impacted our exposure to other risks, namely credit, longevity, commercial mortgages and property price risks, revisiting the Group’s risk appetites by type and counterparty credit limits.
Q Cyber security was a key focus of the Committee during the year.
MH Since 2013, Aviva has set a common risk and control performance goal for all senior colleagues affecting their remuneration to help promote the right risk culture and behaviours in the business. The Committee review and approve the goal for the coming year and receive an assessment from the Risk function of business unit performance against the goal for the previous year. This assessment considers how effectively business units have embedded the risk management framework, which includes promoting a risk aware culture, for example in rolling out the Group’s ‘Good Decisions’ initiative. The assessment of risk culture includes an analysis of risk related questions and responses from the Group-wide employee survey, Voice of Aviva.
During 2016, Glyn Barker and I were also members of the Audit Committee (Glyn as Chair), ensuring efficient and complete coverage of the effectiveness of the systems of internal control and risk management across both committees.
Attendance by Committee members to subsidiary risk committee meetings is encouraged, and during 2016 I attended an Aviva Investors audit committee meeting and a UK Life risk committee meeting, and both Glyn and I attended an Aviva Investors risk committee meeting. I also speak with the chairs of each major subsidiary risk committee and local CROs twice a year to maintain linkage to the matters considered at subsidiary level.
Group Capital and Liquidity, Financial Plan, and Stress Testing – 21% Reviews and monitors the risks to, and arising from, the Company’s strategy, business plan and major transactions and any impact on the Group’s capital, and liquidity position.
Solvency II – 13% Ensures that the Solvency II partial internal model meets required regulations, and reviews and approves Solvency II risk appetites, to which it monitors the Solvency II capital position against.
External Factors – 28% Reviews the external risk environment, the impact of this on the Company’s risk profile and assesses how risks are managed and mitigated.
Risk Appetite, Risk Management and Risk Reporting ` Reviewed reports from the CRO which included updates on significant risks facing the Group, the Group’s capital and liquidity position, the control environment, emerging risks and risk profile, and operational, regulatory and conduct risk
` Approved the Group’s risk policies for recommendation to the Board
` Assessed and monitored the IT risk in respect of the Company’s Digital First strategy
` Reviewed capital and liquidity projections including the Group’s Shareholder cover ratio and liquidity cover ratio
` Reviewed updates on credit risk, assessed scenarios to outline the Company’s exposure and reviewed mitigating actions
External Factors ` Reviewed regular updates on the performance of the Group’s investment portfolios and on the external economic environment, and assessed the implications on the Group’s asset portfolio
` Monitored the risk of Brexit ahead of, and after the European Union referendum, regularly reviewed updates regarding the potential impact on capital and liquidity, approved Brexit communications, and oversaw Brexit scenario planning including, operational and contingency planning
` Reviewed the effectiveness of the systems of internal control and risk management
` Reviewed updates on the outsourcing, cyber security and disaster recovery MCITs, and monitored and challenged progress by management
` Assessed the performance of all Group Business Units against the 2016 Group risk and control goal
` Received quarterly reports from the CAO on internal audit which included progress on improving the control environment, progress on MCITs, and the review of the Internal Audit function
Accurate and informative financial reporting, and an effective control environment are of critical importance to the Board and our shareholders. The Committee continued to review the embedding of the Solvency II (SII) regime, our control environment and the development and strengthening of the internal control framework, including overseeing the Major Control Improvement Topics (MCITs) on Cyber Security, Compliance Effectiveness, Data Governance, Disaster Recovery, Outsourcing and Fraud Management. The MCIT programme is designed to focus attention on enhancing our control environment around six key areas identified by management. The programme encourages the mobilisation of resources in a targeted way to deliver the desired control improvements. Once the MCIT closure criteria have been attained these control topics will be managed on a business as usual basis.
In August 2016, we welcomed Keith Williams to the Committee. Keith brings extensive financial expertise including a detailed knowledge of business planning and capital projects. Sir Malcolm Williamson and Bob Stein will retire from the Committee at the conclusion of the Annual General Meeting. I will become Senior Independent Director at that date, and accordingly I will step down as Committee Chair following announcement of the half year results, with Keith becoming Chair. I will remain a member of the Committee to maintain continuity of membership. I am grateful to all members of the Committee for their support in 2016. The members of the Committee are shown in the table to the left and details of their experience, qualifications and attendance at Committee meetings during the year are shown earlier in the report on pages 76 and 84.
GB The Committee’s principal function is to assist the Board in discharging its responsibilities for monitoring the integrity of the Company’s financial statements and reviewing announcements relating to the Company’s financial performance; reviewing the significant estimates and judgements of management and the methodology and assumptions used in relation to the Company’s financial statements; assessing the adequacy and effectiveness of internal controls and of the Internal Audit function; and reviewing the effectiveness, performance and objectivity of the External Auditor and of the external audit process. It is also responsible for establishing and overseeing the effectiveness of the Group’s whistleblowing procedures.
GB Committee time is divided between regular items relating to the
Company’s financial statements, accounting policies, financial risks, internal control matters and, internal and external audit issues.
The Committee is in addition responsible for assessing and recommending to the Board that the annual report and accounts, taken as a
Keith Williams 01/08/2016 <1 * Chair ** Will retire from the conclusion of the 2017
It is also responsible for reviewing and challenging the actions and judgements of management in relation to the financial statements, including the accounting policies used and their consistent application. The significant issues assessed by the Committee during the year are set out in the table above.
Q How does the Committee satisfy itself that its members meet the requirements of the Code, the Disclosure Guidance and Transparency Rules (DTR) and US requirements for financial expertise?
GB An annual exercise is undertaken to assess how the Committee’s members meet the expertise criteria of the Code, the DTR, and US requirements.
Audit function is appropriate for the business. This is carried out by reviewing reports issued by Internal Audit and the output of an annual stakeholder effectiveness survey. This formal process is supplemented by regular private discussions with both executive management and the External Auditor. The Committee concluded that for 2016 the function was performing well and it continued to deliver an objective and independent service.
For the financial period under review, the Company met the relevant provisions of the Code relating to internal controls and the Financial Reporting Council’s 2014 ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’.
Regular reports are also provided to the Committee through the Group’s malpractice reporting service and the Committee was satisfied that none of the reports received in 2016 made allegations of material financial malpractice.
Q How does the Committee satisfy itself that the External Auditor remains independent, effective and objective?
External Auditor (Auditor) in 2012 following a formal tender process. The external audit contract will be put out to tender at least every ten years.
The external audit is led by the PwC audit partner, Marcus Hine, who has held the role for the Group for two years.
The Company has an External Auditor Business Standard (Standard) in place which is aimed at safeguarding and supporting the independence and objectivity of the Auditor. This Standard is compliant with all UK and International Federation of Accountants rules and takes into account the Financial Reporting Council’s Revised Ethical Standard 2016 and the EU Audit Directive that became applicable to Aviva from 1 January 2017.
The Standard regulates the appointment of former audit employees to senior finance positions in the Group and sets out the approach to be taken by the Group when using the non-audit services of the Auditor.
In 2016 the Group paid PwC £23.9 million (2015: £19.3 million) for audit and audit-related assurance services, with the overall increase due to the fee for the audit of the Group’s SII regulatory filings now being part of audit related assurance services.
In addition, PwC were paid £9.4 million (2015: £15.2 million) for other services, including £8.1 million (2015: £13.3 million) for other assurance services, giving a total fee to PwC of £33.3 million (2015: £34.5 million). This included £7.7 million relating to the SII internal model independent validation and SII balance sheet assurance fees. SII implementation is a major project requiring substantial model validation assurance that the Company believes is most appropriately performed by the prinicpal auditor. In view of the significance and scale of this work, the Committee specifically assessed the suitability of PwC to provide this service.
GB In addition to carrying out its principal function the Committee will continue to monitor the embedding of SII as the regime becomes more mature, and will oversee the delivery of the MCITs and the development and embedding of IAI.
The Committee is responsible for supporting the Board in ensuring there is a robust system of internal control and risk management in the Group. The system of internal controls and risk management is comprised of the following: ` IAI to embed management of operational risk with First Line management
` bi-annual sign off by senior management confirming that they have tested the controls within their business responsibility and whether they have operated effectively
` MCIT programme with significant progress made during 2016 on issues identified
External Audit, auditor engagement and policy – 23% Considers and recommends to the Board the appointment, reappointment, dismissal or resignation of the External Auditor, assesses their effectiveness, independence and objectivity, agrees their remuneration, and monitors the application and appropriateness of the External Auditor Business Standard. Reviews the External
Internal Controls, including the financial reporting control framework and financial reporting developments – 11% Assesses the effectiveness of the Group’s systems of internal control and risk management.
` Approved the IFRS and SII technical provisions within the 2016 half and full year results
` Challenged and reviewed the reserve positions relating to the UK Life and GI operations
` Reviewed and challenged the treatment and recoverability of goodwill and other intangible assets
External Audit, auditor engagement and policy ` Reviewed the effectiveness of the External Auditor and was satisfied that the services it provided remained effective, objective and fit for purpose
` Reviewed the External Auditor’s compliance with the independence criteria set out in the Code
` Refreshed the External Auditor Business Standard to reflect new regulatory requirements
` Held private meetings with the External Auditor without management present to provide an appropriate forum for issues to be raised
Internal controls, including financial reporting control framework and financial reporting developments ` Reviewed quarterly updates on the effectiveness of the FRCF framework and rectification of controls
` Reviewed the Internal Audit function report to ensure adequacy of the systems of internal control and risk management
` Ensured an appropriate whilstleblowing framework to comply with the policy set out by the Financial Conduct Authority and Prudential Regulation Authority
This is my first report to shareholders as Chair of the Governance Committee and I am pleased to report that during 2016 the Committee continued to focus on the oversight of conduct risk, customer outcomes and our subsidiary governance framework.
Q The Committee has oversight for the UKD business – how does it do this?
CA Digital First is a strategic priority of the Group, and the UKD business is crucial to achieving this ambition. The Committee has continued to take an oversight role in supporting its development and in monitoring the customer and conduct risks of the new business.
The use of a Board committee in this way enables the escalation of governance matters directly to the Group and provides speed and agility in decision-making and the required oversight, in a fast developing area.
Q Since the 2015 annual report and accounts the Global Subsidiary
CA Feedback has been extremely positive with constructive comments received from directors and subsidiary boards across the Group. The Principles are aligned to UK corporate governance standards, and therefore for some jurisdictions these minimum requirements have meant raising the bar. The roll out of the Principles has enhanced the Group’s engagement with local boards and also improved the level of consistency in practice across the organisation. This is reflected in the Board evaluation process conducted by subsidiaries across the Group, the updated processes for Board appointments and the setting of executive remuneration. The Principles were refreshed at the beginning of 2017 and it is intended that they evolve over time within an established framework. More
14/05/2015 1 * Chair from 1 January 2017 ** Retired on 31 December 2016 *** Will retire from the conclusion of the 2017
Committee during 2016. The Committee receives a report from the Group Compliance Director at each meeting and particular consideration was given during the year to the rationale for the suspension of dealings in the Aviva Investors’ Property Trusts. The Committee has oversight for the Compliance Effectiveness and Data Governance Major Control Improvement Topics (MCITs) and where Business Units (BU) have failed to achieve the necessary standards this has been reflected in remuneration decisions, as outlined in the directors’ remuneration report.
CA The Committee was established in 2006 (initially focused on corporate responsibility) to support the Board’s belief that good governance and strong responsible leadership is critical to creating long-term shareholder value and business success. This continues to be the case and the Committee has played an important part in ensuring the robust oversight of governance across the Group. Aviva has a responsibility to all its stakeholders and needs to play a positive role in society, whilst addressing the rapid pace of change in technology and customer expectations. The Committee has continued to support the corporate responsibility (CR) agenda, ensuring that it is reinforced throughout the Group. Further details can be found in the Corporate Responsibility section of the Strategic Report and can be viewed at www.aviva.com/corporate-responsibility.
During 2016, the roll out of the Principles has been progressed to provide a consistent framework for subsidiary governance. Achievements have included: ` The completion of a global gap analysis against the Principles. This has helped develop consistent standards across the Group
` The roll out of a suite of board/committee templates and training to BU report writers to develop best practice in report writing across the Group
Corporate responsibility – 4% Oversees and monitors the Group’s CR strategy, external developments and the Group’s mandatory reporting requirements.
Governance – 24% Monitors compliance with corporate governance guidelines and promotes the Principles.
Regulatory and financial crime – 32% Oversees the effectiveness of the Group’s procedures and controls relating to the Group’s conduct and financial crime agenda.
Customer and conduct risk ` Constructively challenged reports on conduct risk management at each meeting to monitor compliance with regulatory standards
` Significant focus was given to the customer agenda and regular updates were received and progress monitored on customer metrics relating to sales, retention, claims experience and complaints
` Received reports from management during the year on the Aviva Community Fund and the Group’s health and safety compliance
` Reviewed and approved the Aviva Investors’ Voting Policy and Stewardship Statement
` Monitored the roll out of the Principles and reviewed the output from the subsidiary board and committee effectiveness reviews
` Monitored the Group’s compliance with the UK Corporate Governance Code and other areas of regulation and guidance
` Reviewed reports on the Group’s financial crime prevention procedures and controls and any associated actions and the effectiveness of the anti-bribery controls
UK Digital ` Received updates on UKD at each meeting and considered the conduct risk framework, the UKD licence application, its conduct and compliance strategy, data governance and security
The directors’ report required under the Companies Act 2006 comprises this directors’ and corporate governance report; the directors’ remuneration report and the following disclosures in the strategic report: � Environment and climate change for disclosure of our greenhouse gas emissions
The management report required under Disclosure and Transparency Rule 4.1.5R comprises the strategic report, shareholder information (which includes the principal risks relating to our business), and details of material acquisitions and disposals made by the Group during the year which are included in note 3. This directors’ and corporate governance report fulfils the requirements of the corporate governance statement under Disclosure Guidance and Transparency Rule 7.2.1.
� Proposed final dividend of 15.88 pence per ordinary share (2015: 14.05 pence) � Total ordinary dividend of 23.30 pence per ordinary share (2015: 20.80 pence),
� Total cost of ordinary dividends paid in 2016 was £871 million (2015: £635 million)
Further details on the Company’s dividend policy is set out on page 319 and details of any dividend waivers are disclosed in note 32.
Directors The directors as at the date of this report are shown together with their biographical details earlier in the report. During the year and up to the date of this report, the following Board appointments, resignations and retirements occurred: APPOINTMENTS
At no time during the year did any director hold a material interest in any contract of significance with the Company or any of its subsidiary undertakings other than an indemnity provision between each director and the Company and employment contracts between each executive director and a Group company. The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself and its directors and others. The Company has also executed deeds of indemnity for the benefit of each director of the Company, and each person who was a director of the Company during the year, in respect of liabilities that may attach to them in their capacity as directors of the Company or of associated companies. The Articles allow such indemnities to be granted. These indemnities were granted at different times according to the law in place at the time and where relevant are qualifying third-party indemnity provisions as defined by section 234 of the Companies Act 2006. These indemnities were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts, employment contracts and interests in the shares of the Company are set out in the directors’ remuneration report.
Longer-term viability statement It is fundamental to the Group’s longerterm strategy that the directors manage and monitor risk taking into account all key risks the Group faces, including longer term insurance risks, so that it can continue to meet its obligations to policyholders. The Group is also subject to extensive regulation and supervision including Solvency II from 1 January 2016, and as a result of being designated a Global Systemically Important Insurer by the Financial Stability Board.
Against this background, the directors have assessed the prospects of the Group in accordance with provision C.2.2 of the 2014 UK Corporate Governance Code, with reference to the Group’s current position and prospects, its strategy, risk appetite, and the potential impact of the principal risks and how these are managed (as detailed on pages 68-71 of the strategic report as well as note 56 of the IFRS financial statements).
The Group’s stress and scenario testing considers the Group’s capacity to respond to a series of relevant financial, insurance (e.g., catastrophe) or operational shocks should future circumstances or events differ from the plan assumptions. The Group addresses the impacts of contingent management actions designed to maintain or restore key capital, liquidity and solvency metrics to within the Group’s approved risk appetites over the planning period.
Fair, balanced and understandable To support the directors’ statement below that the annual report and accounts, taken as a whole, is fair, balanced and understandable, the Board considered the process followed to draft the annual report and accounts: � each section of the annual report and accounts is prepared by a member of management with appropriate knowledge, seniority and experience. Each preparer receives guidance on the requirement for content included in the annual report and accounts to be fair, balanced and understandable
� comprehensive reviews of drafts of the annual report and accounts are undertaken by members of the Group Executive and, other members of senior management, and in relation to certain parts of the report external legal advisers and the External Auditor
� an advanced draft is considered and reviewed by the Disclosure Committee
� the final draft is reviewed by the Audit Committee prior to being considered by the Board
� make reasonable and prudent judgements and accounting estimates � state whether applicable IFRSs as adopted by the EU and IFRSs issued by IASB have been followed, subject to any material departures disclosed and explained in the financial statements
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for making, and continuing to make, the Company’s annual report and accounts available on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the current directors, whose names and functions are listed on pages 76 to 79 in the directors’ and corporate governance report confirm that, to the best of their knowledge: the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and the strategic report and the directors’ and corporate governance report in this annual report and accounts include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Dear Shareholder, on behalf of the Remuneration Committee, I am pleased to present the Directors’ Remuneration Report (DRR) for the year ended 31 December 2016.
Aviva has had a good year in a volatile market environment and the Group’s performance, and the contributions of our Executive Directors (EDs), are reflected in the remuneration decisions detailed in the DRR. Our Remuneration Policy was approved by shareholders in 2015. Through consultation with shareholders and key stakeholders over the past year, we are aware of continuing support for our approach for this three year policy period. We are committed to paying for performance, and not paying excessively. We are also committed to ensuring pay outcomes are linked to the experience of our shareholders and reflect the effectiveness of risk management. Our Committee processes include steps and checkpoints to achieve these aims.
We understand the great interest that our executive pay decisions, like those of our peers, attract from key stakeholders, including our shareholders, our employees and the communities in which we operate. Our reward framework looks to align these interests through pay decisions based on a suite of financial and non-financial metrics.
ANNUAL BONUS APPROACH When we decide on annual bonuses we firstly review achievement against key financial and non-financial targets. The targets used for 2016 are detailed in our bonus scorecard on table 2 and have been chosen to align with our strategic ambitions to drive growth in shareholder value.
KEY DECISIONS IN RESPECT OF 2016 The decisions made in respect of 2016 are the annual bonuses for the EDs and the vesting of the 2014 Long Term Incentive Plan (LTIP). The impact of the Ogden rate change as a post balance sheet date exceptional item occurred almost two months after the completion of the performance year. It is considered likely there will be a further off-setting adjustment relevant to this item once the UK Government has established a new methodology for setting the rate later in 2017. In the circumstances, the Committee has determined to defer this exceptional item from the assessment of incentives for 2016 since its quantum can only be established once the new approach is decided upon. Instead, any impact would be taken against the incentive targets set for the 2017 year. This will be fully disclosed in the 2017 DRR.
2014 LTIP Given the dates of appointment of our EDs, only Mark Wilson, Group Chief Executive Officer (Group CEO) and Tom Stoddard, Chief Financial Officer (CFO) will receive shares under this award. Awards under the 2014 LTIP vested subject to Aviva’s Return on Equity (ROE) and relative Total Shareholder Return (TSR) performance over the period 1 January 2014 to 31 December 2016. 41.3% of the maximum award vested. Full details can be found in table 4.
Claudia Arney 01 Jun 2016 <1 * Chair ** Will retire from the conclusion of the 2017
Quality of earnings and risk adjustment reviews The Committee’s decisions on annual bonus and on the vesting of the 2014 LTIP were made after conducting its annual risk and quality of earnings reviews for both plans and determining they were reasonable in both cases.
discretions available to the committee With the Ogden rate change being dealt with as described earlier, no other use of discretion to adjust outcomes available under the incentive plans or the Remuneration Policy have been exercised by the Committee.
bonus 25% of the annual bonus scorecard will continue to be linked to progress on our Digital First strategy. The measure, which focused on customer registrations in 2016, will be extended in 2017 to include a target for an increase in the volume of online transactions.
2017 ltip In 2017, maximum awards under the LTIP will be in line with previous years. 300% of salary for the Group CEO and 225% of salary for the CFO and Andy Briggs, Chief Executive Officer, UK Insurance (CEO UK). The performance conditions are detailed in table 17.
disclosure of bonus scorecard and ltip targets In line with feedback we have received from stakeholders, we have made changes to how we disclose performance against the targets. The bonus targets are now being disclosed in detail at the same time as the bonus outcomes are determined, as detailed in table 3. The forward looking 2017 LTIP targets can be seen in table 17.
pay ratios The requirements for pay ratio reporting in the UK have yet to be published. We have however considered the ratio of the CEO’s pay relative to other members of the Group Executive (GE) Committee. We believe this is a meaningful comparison of interest to some shareholders given that their remuneration is similarly structured, including the mix of fixed versus ‘at risk’ pay. Based on this year’s pay decisions, the Group CEO earns approximately 2.1 times more than the GE average and 1.8 times more than the average for the other EDs.
committee changes during the year Claudia Arney joined the Aviva Board in January 2016 and became a Committee member with effect from 1 June 2016. Claudia’s background and expertise in digital and rapid growth businesses has been invaluable to the Committee in its work since she joined.
These were: � The ongoing development of a remuneration system which is fair to executives and aligned to long-term, sustainable growth in shareholder value.
Annual bonus Overview of Policy (approved in 2015) ` Maximum of 200% of salary for CEO and 150% of salary for other EDs
Phasing of payments (based on Group CEO’s maximum remuneration opportunity for 2017)
The full terms of reference for the Committee can be found on the Company’s website at www.aviva.com/ terms-of-reference and are also available from the Group General Counsel and Company Secretary.
CONSIDERATION BY THE COMMITTEE OF MATTERS RELATING TO DIRECTORS’ REMUNERATION The Committee met five times during 2016, of which four were scheduled meetings and one was an additional meeting called at short notice. Details of attendance at Committee meetings are shown on page 84.
Bonus target setting – 30% Reviews and determines annual bonus targets incorporating financial and non-financial modifiers.
Senior management objectives and pay decisions – 26% Recommends to the Board the Group’s Policy in respect of remuneration of the Board Chairman, EDs, GE and members of senior management, taking account of all legal and regulatory requirements and provisions of best practice and remuneration trends across the Group.
Reviews the general principles applying to relevant employees under SII and oversee remuneration decisions relating to these employees to ensure they are aligned to the agreed Policy.
Approves the Aviva Investors’ reward strategy, including any changes to the strategy.
` Reviewed and agreed the initial SII Remuneration Policy Statement submission, and further disclosures for Aviva Investors and UK Life subsidiaries.
` Reviewed and approved the Group bonus pools, taking into account performance against financial metrics and non-financial modifiers relating to employee engagement, customer and risk outcomes.
` Continuously reviewed quality of earnings and alignment of accounting decisions ensuring appropriate remuneration outcomes.
` Reviewed the fees for Non-Executive Directors (NEDs) on our subsidiary Boards and approved a number of amendments.
` Considered and approved amendments to the Remuneration Standard applying across the Aviva Group to simplify and provide greater clarity on the ownership on the controls.
` Ensured that remuneration outcomes were aligned with delivery against the strategic anchor, long-term sustainable growth, shareholder experience and the risk profile of the Group.
Share plan operation and performance testing ` Approved the 2016 LTIP and considered bonus targets for 2017.
SINGLE TOTAL FIGURES OF REMUNERATION FOR 2016 The table below sets out the total remuneration for 2016 and 2015 for each of our EDs.
Mark Wilson Tom Stoddard Andy Briggs Total emoluments of Executive Directors
Buyout award – CFO Award 2014 — — — 1,000 — — — 1,000
4 The value of the LTIP for 2016 relates to the 2014 award, which had a three-year performance period ending 31 December 2016. 41.3% of the award will vest in March 2017. An assumed share price of 456.27 pence has been used to determine the value of the award based on the average share price over the final quarter of the 2016 financial year. The LTIP amounts shown in last year’s report in respect of the LTIPs awarded in 2013 were also calculated with an assumed share price of 491.68 pence. The actual share price at vesting was 447.01 pence, leading to a decrease in value. Estimated value £2,562,000; actual value £2,330,000 (decrease of £232,000).
5 Pension contributions consist of employer contributions into the defined contribution section of the Aviva Staff Pension Scheme, excluding salary exchange contributions made by the employees, plus payments in lieu of pension above the lifetime or annual allowance caps. From 1 May 2015, EDs are eligible to participate in a defined contribution plan and receive pension contributions or a cash pension allowance from the Company of 28% of basic salary. The cash pension allowance is payable where the annual or lifetime limits have been reached.
ADDITIONAL DISCLOSURES IN RESPECT OF THE SINGLE TOTAL FIGURE OF REMUNERATION TABLE
2016 annual bonus outcome The Group’s financial performance, together with non-financial modifiers and personal performance have been used to determine ED bonuses paid in respect of 2016. We have provided an indication of performance against the financial and non-financial metrics for 2016 in table 2. As set out in this table, the bonuses reflect a good year in a volatile market environment for the Group.
Group progress towards strategic ambition 25% Digital First strategy progress 29.5%
Customer Performance against our Net Promoter Score (NPS) targets and our overall focus on customer outcomes.
Our 2016 relationship survey scores have improved slightly compared to 2015, with seven of our 12 markets measured being ahead of the competition, at upper quartile. Our overall global NPS improved by three points to +13 and is in line with our competitors. Our global brand strategy “Good Thinking” is underpinning how we develop new propositions for our customers, and placing the customer firmly at the heart of our business.
Risk & Controls Aviva’s reward strategy includes specific risk and control objectives for senior management and EDs. The aim is to help drive and reward effective risk management and a robust control environment across the Group.
All but one of the business units and functions within the group were assessed as on or above target against their overall goal in relation to risk, conduct and control outcomes. One business unit within the Group was identified as needing to make improvements and while corrective actions are underway, an appropriate reward adjustment was made to the annual bonus pool for the market. Other risk adjustments were limited to individual cases and managed through our performance management process. No adjustment was warranted at a Group level.
While the modified outcome against the bonus scorecard provides a pool of funding for bonuses, actual bonus decisions are made based on; individual contribution and achievements, how the person has assisted the Group achieve progress against its strategic objectives, the leadership they have exhibited and how the individual has demonstrated the Aviva values. Each ED has a target and maximum opportunity against which this is assessed.
` Delivered the Friends Life Group (FLG) integration benefits a year ahead of schedule. Secured run rate synergies of £270m – in excess of our £225m target.
` Successful financing activity including issuance of C$450m of Tier 3 into Canada to support the RBC transaction (the first Tier 3 hybrid capital issuance by any insurer) and two opportunistic euro senior debt issuances while rates were near their low point.
` Ensured resources were available to lead and oversee the development and execution of Aviva’s group-wide Major Control Improvement Topic (MCIT) programme.
Andy Briggs has continued with the integration of FLG during 2016 and his leadership of the UK Life business. Key results include: ` UK Life strategy translating into long-term support of Aviva Group’s growth goals.
` Strong financial performance, with IFRS operating profit showing underlying growth, cash remittances and capital generation significantly ahead of plan.
Bonus as a % of basic salary: 182% Bonus as a % of max opportunity: 91%
Bonus as a % of basic salary: 135% Bonus as a % of max opportunity: 90%
2015 and 2016 Annual bonus – disclosure of performance against targets This year we have moved to reporting performance against targets immediately rather than on a lagged basis. To move to this new disclosure approach, we provide details for both this year and 2015, as the yet to be disclosed prior year, below. The overall scorecard outcome percentage applies to all of the EDs. The individual bonus decisions for the EDs, explained in table 2, are determined after taking into account this scorecard assessment and their respective personal performance.
Financial metrics Weighting Minimum Target Maximum Outcome Weighting Minimum Target Maximum Outcome
Notes 1 Refer to the glossary on page 348 for a full explanation on each financial metric. 2 Modifier decisions include employee, customer and risk and control. 3 This is a key factor in determining individual bonuses for EDs along with personal performance.
2014 LTIP vesting in respect of performance period 2014-2016 As previously reported, both the ROE and TSR targets for the 2014 LTIP were adjusted to ensure that they were appropriately calibrated and were equally challenging for the enlarged Group to support the realisation of benefits from the FLG acquisition and the achievement of the Group’s strategic agenda.
Relative TSR performance 50% Median Upper quantile and above Between rank 8 and 9 0%
Mark Wilson 29 Mar 2016 LTIP 300% £2,939,997 20% 100% 31 Dec 2018 21 Mar 2021
Tom Stoddard 29 Mar 2016 LTIP 225% £1,518,748 20% 100% 31 Dec 2018 21 Mar 2021
2 Face value for the awards granted on 29 March 2016 has been calculated using the average of the middle-market closing price of an Aviva ordinary share on the three consecutive business days immediately preceding the date of the main grant, on 21 March 2016 (485.00 pence). For SAYE the option price is fixed to a three day average closing middle-market price of an ordinary share of the Company, prior to invitation date, with a discount of 20% as permitted under the SAYE plan (351.00 pence). AESOP has been calculated using the price achieved at purchase of the partnership shares (479.87 pence).
ROE targets for awards made in 2016 ROE targets determine the vesting of 50% of the LTIP award and are set annually within the context of the Company’s three-year business plan. Vesting depends upon performance over the three-year period against a target return. The 2016 targets are provided below and have been set in the context of the enlarged Group. ROE is calculated as the IFRS profit after tax and non-controlling interest, excluding the impact of investment variances, pension scheme income/charge and economic assumption changes, over average IFRS equity (excluding pension scheme net surplus/deficit) attributable to the ordinary shareholders of the Company.
Between 24.5% and 30% Pro rata between 10% and 50% on a straight line basis 30% and above 50%
TSR targets for awards made in 2016 Relative TSR determines the vesting of the other 50% of the LTIP award. Performance for the 2016 grant will be assessed against the following companies: Aegon, Allianz, Assicurazioni Generali, AXA, CNP Assurances, Direct Line Group, Legal & General, MetLife, NN Group, Old Mutual, Prudential, RSA Insurance Group, Standard Life and Zurich Financial. The performance period for the TSR performance condition will be three years beginning 1 January 2016. For the purposes of measuring the TSR performance condition, the Company’s TSR and that of the comparator group will be based on the 90-day average TSR for the period immediately preceding the start and end of the performance period. The vesting schedule is set out in table 7 below.
PAYMENTS TO PAST DIRECTORS (AUDITED INFORMATION) Russell Walls retired from the Board with effect from 8 May 2013. � Russell was appointed as a NED of Aviva Italia Holdings S.p.A on 4 December 2014 and on 30 April 2015 was appointed as Chairman. � On 13 April 2015 Russell was also appointed as Chairman of Aviva Annuity UK Limited, Aviva Life Holdings UK Limited, Aviva Life Services UK Limited and Aviva Life & Pensions UK Limited each of which are subsidiary companies of Aviva plc.
SINGLE TOTAL FIGURE OF REMUNERATION FOR 2016 The table below sets out the total remuneration earned by each NED who served during 2016.
8 TOTAL 2016 REMUNER ATION – NON -EXECUTIVE DIREC TORS (AUDITED INFORMATION)
Notes 1 Benefits include the gross taxable value of expenses relating to accommodation, travel and other expenses incurred on Company business in accordance with our expense policy and may vary year-on-year dependent on the time required to be spent in the UK.
HISTORICAL TSR PERFORMANCE AND GROUP CEO REMUNERATION OUTCOMES Table 10 compares the TSR performance of the Company over the past eight years against the TSR of the FTSE 100 Return Index. This index has been chosen because it is a recognised equity market index of which Aviva is a member. In addition, median TSR performance for the LTIP comparator group has been shown. The companies which comprise the current LTIP comparator group for TSR purposes are listed in the ‘TSR Targets’ section on page 113.
10 AVIVA PLC E IGHT-YEAR TSR PERFORMANCE AGAINST THE F TSE 100 INDEX AND THE MEDIAN OF THE COMPAR ATOR GROUP
Notes 1 Mark joined the Board as an ED with effect from 1 December 2012, and became Group CEO on 1 January 2013. He received no emoluments in respect of 2012. 2 Andrew resigned from the Board with effect from 8 May 2012 and left the Company on 31 May 2012.
Neither Tom nor Andy received any fees or other compensation for these appointments.
STATEMENT OF DIRECTORS’ SHAREHOLDINGS AND SHARE INTERESTS EDs share ownership requirements The Company requires the Group CEO to build a shareholding in the Company equivalent to 300% of basic salary and each ED to build a shareholding in the Company equivalent to 150% of basic salary. � The EDs are required to retain 50% of the net shares released from ABP and LTIP awards until the shareholding requirement is met. � Shareholding requirement needs to be built up over a five-year period.
� Unvested share awards, including shares held in connection with bonus deferrals, are not taken into account in applying this test.
Notes 1 Directors’ beneficial holdings in the ordinary shares of the Company. This information includes holdings of any connected persons. For Andy Briggs it also includes partnership shares purchased under the AESOP, under which participants can currently contribute up to £150 every month. Shares are purchased on a monthly basis, and have to be held in the AESOP trust for three years.
Notes 1 This information includes holdings of any connected persons. 2 Scott Wheway stepped down from the Board effective 31 December 2016.
There were no changes to the NEDs interests in Aviva shares during the period 1 January 2017 to 7 March 2017.
Share awards and share options Details of the EDs who were in office for any part of the 2016 financial year and hold or held outstanding share awards or options over ordinary shares of the Company pursuant to the Company’s share based incentive plans are set out in table 15. EDs are eligible to participate in two HMRC tax-advantaged all employee share plans (SAYE and AESOP) on the same basis as other eligible employees. Details of awards and options granted to EDs under these plans are also included in tables 1, 5 and 13 (and SAYE options are included in table 15). More information around these HMRC tax-advantaged plans can also be found in note 31 and the shareholder information section on page 316 (share capital).
2 The information given in this column is at 31 December 2016. 3 The actual price used to calculate the ABP and LTIP awards is based on a three-day average closing middle-market price of an ordinary share of the Company, prior to grant date. These were in 2013: 299.00 pence, 2014: 489.00 pence, 2015: 564.00 pence and 2016: 485.00 pence. The actual price used to calculate the CFO Award is based on a three-day average closing middle-market price of an ordinary share of the Company, prior to employment start date, which was 509.00 pence.
The Company monitors the number of shares issued under the Aviva employee share plans and their impact on dilution limits. The Company’s usage of shares compared to the relevant dilution limits set by the Investment Association in respect of all share plans (10% in any rolling ten-year period) and executive share plans (5% in any rolling ten-year period) was 2.54% and 1.50% respectively on 31 December 2016.
Solvency II remuneration Remuneration Requirements (PRA PS22/16 & SS10/16) apply to the Aviva Group. Our remuneration structures have been designed in a way so that they are compliant with these requirements for all senior managers across the Group, not just those identified as being specifically covered by the requirements of the regulation. Such employees at Aviva are termed ‘Covered Employees’. As part of the implementation of SII we are required to complete a Remuneration Policy Statement, which outlines how we have complied with each of the requirements, this document was approved by the Group Remuneration Committee and submitted to the Prudential Regulatory Authority (PRA). The SII reporting requirements necessitate firms to produce two key reports containing remuneration information. One of these reports, the Solvency and Financial Condition Report (SFCR) is publicly available, while the other, the Regulatory Supervisory Report (RSR) is submitted to the PRA.
STATEMENT OF VOTING AT AGM The result of the shareholder vote at the Company’s 2016 AGM in respect of the 2015 DRR is set out in the table below.
IMPLEMENTATION OF REMUNERATION POLICY IN 2017 The implementation of the Policy will be consistent with that outlined in the Policy Report, with no significant changes from how the Policy was implemented during 2016, and detailed in full within table 19.
Remuneration Committee to provide assurance that bonus payouts appropriately reflect the shareholder experience.
` Performance against a number of other non-financial measures will be considered when determining bonus payouts (employee engagement, customer and risk).
Between 28.8% and 35.2% 10-50% (straight line) Between median and upper quantile
Pro rata between 10% and 50% on a straight line basis 35.2% and above 50% Upper quantile and above 50%
Approach to NED fees for 2017 NED fees are reviewed annually. No changes were made to the current fee levels, as set out in the table below: 18 NON -EXECUTIVE DIREC TORS’ FEES
Chairman of the Company1 £550,000 £550,000 Board membership fee £70,000 £70,000 Additional fees are paid as follows: Senior Independent Director £35,000 £35,000 Committee Chairman (inclusive of committee membership fee): Committee membership: 1 Inclusive of Board membership fee and any committee membership fees.
Annual review, with changes normally taking effect from 1 April each year. The review is informed by: ` Relevant pay data including market practice among relevant FTSE listed companies of comparable size to Aviva in terms of market capitalisation, large European and global insurers; and UK financial services companies
` A significant increase in the size, value or complexity of the Group
Awards are based on performance in the year. Targets are set annually and pay-out levels are determined by the Committee based on performance against those targets.
Cash and deferred awards are subject to malus and clawback. Details of when these may be applied are set out in the notes below.
Maximum bonus opportunity for the Group CEO is 200% of basic salary with 100% of basic salary payable for performance in line with target.
Maximum bonus opportunity for other EDs is 150% of basic salary with 100% of basic salary payable for performance in line with target.
This section sets out Aviva’s Remuneration Policy for directors, in accordance with the requirements of the Companies Act 2006 (as amended) and the Large & Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended).
This Policy was approved by shareholders at Aviva’s 2015 AGM, held on 29 April 2015. We have included the Policy below, but have updated the scenario charts and details of our Directors’ dates of appointment in table 22. The full Policy, as approved by shareholders, can be found on the Aviva plc website.
Table 19 below provides an overview of our Remuneration Policy for EDs. For an overview of the Remuneration Policy for NEDs see table 21.
The plan rules allow for awards to be made up to a maximum of 350% of basic salary.
Currently, performance targets over three years are: ` 50% vest based on targets for absolute Return on Equity (ROE) performance
EDs employed under UK contracts are eligible to participate in any HMRC approved all employee share plans operated by the Company on the same basis as other eligible employees.
Employees who are relocated or reassigned from one location to another receive relevant benefits to assist them and their dependants in moving home and settling in to the new location.
LTIP performance measures are chosen to provide an indication of both absolute and relative return generated for shareholders. In terms of target setting, a number of reference points are taken into account each year including, but not limited to, the Group’s business plan and external market expectations of the Company. Maximum payouts require exceptional performance that significantly exceeds performance targets or expected performance, under both the annual bonus and LTIP.
Malus and Clawback The circumstances when malus and clawback may apply include (but are not limited to) where the Committee considers that the employee concerned has been involved in or partially or wholly responsible for: � A materially adverse misstatement of the Company’s financial statements, or a misleading representation of performance; or � A significant failure of risk management and/or controls; or � A scenario or event which causes material reputational damage to the Company; or � Misconduct which, in the opinion of the Committee, ought to result in the complete or partial lapse of an award.
The Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above where the terms of the payment were agreed (i) before the Policy came into effect or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted.
The maximum level of variable pay which could be awarded to a new ED, excluding any buyouts, would be in line with the Policy set out above and would therefore be no more than 550% of basic salary for the Group CEO (200% of basic salary annual bonus opportunity and 350% of basic salary as the face value of a LTIP grant) and 500% of basic salary for other EDs (150% of basic salary
position, the Committee may continue to honour these for a period of time. Where an ED is appointed from within the organisation, the normal policy of the Company is that any legacy arrangements would be honoured in line with the original terms and conditions. Similarly, if an ED is appointed following Aviva’s acquisition of, or merger with, another company, legacy terms and conditions may be honoured.
ILLUSTRATION OF THE POLICY The charts below illustrate how much EDs could earn under different performance scenarios in one financial year: � Minimum – basic salary, pension or cash in lieu of pension and benefits, no bonus and no vesting of the LTIP � Target – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 100% and an LTIP of 300% of basic salary (with notional LTIP vesting at 50% of maximum) for the Group CEO; – A bonus of 100% and an LTIP of 225% of basic salary (with notional LTIP vesting at 50% of maximum) for the CFO; and – A bonus of 100% and an LTIP of 225% of basic salary (with notional LTIP vesting at 50% of maximum) for the CEO UK.
� Maximum – basic salary, pension or cash in lieu of pension, benefits, and: – A bonus of 200% and an LTIP of 300% of basic salary (with notional LTIP vesting at maximum) for the Group CEO; – A bonus of 150% and an LTIP of 225% of basic salary (with notional LTIP vesting at maximum) for the CFO; and – A bonus of 150% and an LTIP of 225% of basic salary (with notional LTIP vesting at maximum) for the CEO UK.
Contract dates Director: Date current contract commenced: Mark Wilson 1 January 2013 Tom Stoddard 28 April 2014 Andy Briggs 13 April 2015
POLICY ON PAYMENT FOR LOSS OF OFFICE There are no pre-determined ED special provisions for compensation for loss of office. The Committee has the ability to exercise its discretion on the final amount actually paid. Any compensation would be based on basic salary, pension entitlement and other contractual benefits during the notice period, or a payment made in lieu of notice, depending on whether the notice is worked.
The treatment of leavers under our ABP and LTIP is determined by the rules of the relevant plans. Good leaver status under these plans would be granted in the event of, for example, the death of an ED, or their departure on ill health grounds. Good leaver status for other leaving reasons is at the discretion of the Committee, taking into account the circumstances of the individual’s departure, but would typically include planned retirement. In circumstances where good leaver status has been granted, awards may still be subject to malus and clawback in the event that inappropriate conduct of the ED is subsequently discovered post departure. If good leaver status is not granted, all outstanding awards will lapse.
NON-EXECUTIVE DIRECTORS The table below, sets out details of our Remuneration Policy for NEDs.
NEDs are reimbursed for reasonable expenses, and any tax arising on those expenses is settled directly by Aviva. To the extent that these are deemed taxable benefits, they will be included in the annual remuneration report, as required.
time commitment Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively.
Director Committee appointments Appointment date1 Appointment end date in accordance with letter of appointment
approval by the Board This Directors’ Remuneration Report was reviewed and approved by the Board on 8 March 2017.
CONSOLIDATED FINANCIAL STATEMENTS 148 Consolidated income statement 149 Consolidated statement of comprehensive income 150 Reconciliation of Group operating profit to profit for the year 151 Consolidated statement of changes in equity 152 Consolidated statement of financial position 153 Consolidated statement of cash flows
FINANCIAL STATEMENTS OF THE COMPANY 268 Income statement 268 Statement of comprehensive income 269 Statement of changes in equity 270 Statement of financial position 271 Statement of cash flows 272 Notes to the Company’s financial statements
What we have audited The financial statements included within the Annual Report and Accounts (the “Annual Report”) comprise: • the Consolidated and Company statements of financial position as at 31 December 2016; • the Consolidated and Company income statements and statements of comprehensive income for the year then ended; • the Reconciliation of Group operating profit to profit for the year then ended; • the Consolidated and Company statements of changes in equity and statements of cash flows for the year then ended; • the principal accounting policies adopted in the preparation of the financial statements; and • the notes to the financial statements which include other explanatory information.
Overview • Overall group materiality: £140 million which represents 5% of operating profit before tax attributable to shareholders’ profits after the deduction of integration and restructuring costs. • Based on the outputs of a risk assessment, along with our understanding of the Aviva structure, we performed full scope audits over the following markets; UK Life (including Friends Life), UK General Insurance, Canada, Italy and France Life. • We identified a further four markets where account balances are considered to be significant in size in relation to the Group, and scoped our audit to include detailed testing of those account balances. • Further audit procedures were performed by the Group engagement team, including over the head office operations and the consolidation process, to ensure that sufficient coverage was obtained. • Our risk assessment analysis identified the following as areas of focus : – Valuation of life insurance contract liabilities. – Valuation of non-life insurance contract liabilities. – Valuation of hard to value investments. – Valuation of finite lived intangible assets relating to the Friends Life Group Limited acquisition.
• The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as “areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.
Valuation of life insurance contract liabilities Refer to page 95 (Audit Committee Report), page 136 (Accounting policies) and page 207 (notes) For UK Life (including Friends Life) insurance contract liabilities, the Directors’ valuation of the provisions for the settlement of future claims involves complex and subjective judgements about future events, both internal and external to the business, for which small changes in assumptions can result in material impacts to the valuation of these liabilities.
As part of our consideration of the entire set of assumptions we focused particularly on the following three within the UK Life market (including Friends Life) given their significance to the Group’s result and the level of judgement involved.
Based on the work performed, we consider the allowance for credit default risk to be appropriate.
Union; and • have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
Our audit continued to focus on the valuation of insurance contract liabilities and the valuation of hard to value investments as well as the valuation of certain intangible assets established through the acquisition of the Friends Life Group in the prior year.
Overview • Overall group materiality: £140 million which represents 5% of operating profit before tax attributable to shareholders’ profits after the deduction of integration and restructuring costs. • Based on the outputs of a risk assessment, along with our understanding of the Aviva structure, we performed full scope audits over the following markets; UK Life (including Friends Life), UK General Insurance, Canada, Italy and France Life. • We identified a further four markets where account balances are considered to be significant in size in relation to the Group, and scoped our audit to include detailed testing of those account balances. • Further audit procedures were performed by the Group engagement team, including over the head office operations and the consolidation process, to ensure that sufficient coverage was obtained. • Our risk assessment analysis identified the following as areas of focus : – - Valuation of life insurance contract liabilities. – - Valuation of non-life insurance contract liabilities. – - Valuation of hard to value investments. – - Valuation of finite lived intangible assets relating to the Friends Life Group Limited acquisition.
Based on the work performed and the evidence obtained, we consider the assumptions used for annuitant mortality to be reasonable.
Credit default risk assumptions for corporate bonds and commercial and equity release mortgage assets UK Life (including Friends Life for corporate bonds only) has substantial holdings in asset classes with significant credit risk, notably, corporate bonds and commercial and equity release mortgages.
• We validated significant assumptions used by management against market observable data (to the extent available and relevant) and our experience of market practices.
The estimation of non-life insurance contract liabilities involves a significant degree of judgement. The liabilities are based on the best-estimate ultimate cost of all claims incurred but not settled at a given date, whether reported or not, together with the related claims handling costs. 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 patterns of claims. This includes assumptions relating to the settlement of personal injury lump sum compensation amounts. Regulators across the globe continue to focus on reserving adequacy for non-life insurers, particularly in the current market. Given their size in relation to the consolidated Group and the complexity of the judgements involved our work focused on the liabilities in the UK General Insurance and Canada markets.
In the UK General Insurance and Canada markets, we assessed the Directors’ calculation of the non-life insurance liabilities by performing the following procedures: • We tested on a sample basis the underlying data to source documentation. • Using our actuarial specialist team members, we applied our industry knowledge and experience and we compared the methodology, models and assumptions used against recognised actuarial practices.
• Understood and tested the governance process in place to determine the insurance contract liabilities, including testing the associated financial reporting control framework.
Valuation of hard to value investments Refer to page 95 (Audit Committee Report), page 136 (Accounting policies) and page 184 (notes) Given the ongoing market volatility and macroeconomic uncertainty, investment valuation continues to be an area of inherent risk. The risk is not uniform for all investment types and is greatest for the following, where the investments are hard to value because quoted prices are not readily available: • Commercial mortgage loans (UK Life). • Equity release and UK securitised mortgage loans (UK
• We compared the assumptions used against appropriate benchmarks and investigated significant differences.
How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the group, the accounting processes and controls, and the industry in which the group operates. Using the outputs of a risk assessment, along with our understanding of the Aviva structure, we scoped our audit based on the significance of the results and financial position of individual markets relative to the Group result and financial position. In doing so, we also considered qualitative factors and checked that we obtained sufficient coverage across all financial statement line items in the consolidated financial statements. This scope provided us with audit coverage in excess of 78% for Operating profit before tax and, after the deduction of integration and restructuring costs, 80% for Gross Written Premiums and 84% for Total Assets. The Group’s primary reporting format is along market reporting lines with supplementary information being given by business activity. The operating segments of the Group are ‘United Kingdom & Ireland’ (Life and General Insurance), France, Poland, ‘Italy, Spain and Other’, Canada, Asia, Aviva Investors and ‘Other Group Activities’. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at each of the markets by us, as the Group audit team, or auditors of the markets within PwC UK or from other PwC network firms operating under our instructions. Work was performed by local engagement teams in the following markets; UK Life (including Friends Life), UK General Insurance, Canada, France Life, Aviva Investors UK, Spain, Italy, Poland and Asia (Friends Provident International Limited). Where the work was performed by auditors of the markets, we determined the level of involvement we needed as the Group audit team to have in the audit work at those markets to be able to conclude whether sufficient and appropriate audit evidence had been obtained as a basis for our opinion on the financial statements as a whole. The Group audit team kept in regular communication with reporting market audit teams including visits to teams based in Aviva operating locations at Bristol, York and Norwich in the United Kingdom, France, Canada, Italy, Spain, Poland and Hong Kong, regular phone calls, discussions and written instructions, where appropriate.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality £140 million (2015: £114 million). How we determined it 5% of operating profit before tax attributable to shareholders’
• We examined the new amortisation and impairment methodology to check it is in accordance with IFRS requirements.
• We tested management’s application of the methodology by reperforming the amortisation and impairment calculations as appropriate.
Based on the work performed, we consider the valuation of the finite lived intangibles to be appropriate.
In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the Directors’ and corporate governance report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and the Directors’ and corporate governance report have been prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding of the group, the company and their environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ and corporate governance report. We have nothing to report in this respect.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. We have nothing material to add or to draw attention to.
Under the Listing Rules we are required to review the directors’ statement that they have carried out a robust assessment of the principal risks facing the group and the directors’ statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or • the company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. With respect to the Strategic Report and Directors’ and corporate governance report, we consider whether those reports include the disclosures required by applicable legal requirements.
In accordance with IFRS 4 Insurance Contracts, the Group has applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards. Further details are given in accounting policy G.
(i) Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation
(iv) Amendments to IAS 1 – Disclosure Initiative These amendments form part of the IASB’s Disclosure
(v) Annual Improvements to IFRSs 2012-2014 These improvements consist of amendments to five IFRSs including IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 7 Financial Instruments: Disclosures and IAS 19 Employee Benefits. The amendments clarify existing guidance and there is no impact on the Group’s consolidated financial statements.
(iv) Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions
(v) IFRS 9, Financial Instruments (including amendments to IFRS 4, Insurance Contracts)
In September 2016, the IASB published amendments to IFRS 4 Insurance Contracts that address the accounting consequences of the application of IFRS 9 to insurers prior to the publication of the forthcoming accounting standard for insurance contracts. The amendments introduce two options for insurers: the deferral approach and the overlay approach. The deferral approach provides an entity, if eligible, with a temporary exemption from applying IFRS 9 until the earlier of the effective date of a new insurance contract standard or 2021.The overlay approach allows an entity to remove from profit or loss the effects of some of the accounting mismatches that may occur before the new insurance contracts standard is applied.
In December 2016, the IASB published amendments to IAS 40 Investment Property to clarify that transfers of property to, or from, investment property should only be made when there is evidence of a change in use of the property. The adoption of these amendments is not expected to have a significant impact on the Group’s consolidated financial statements. The amendments are effective from 1 January 2018 and have not yet been endorsed by the EU.
These narrow scope amendments clarify the application of the requirements for investment entities to measure subsidiaries at fair value instead of consolidating them. There are no implications for the Group’s consolidated financial statements as the Group does not meet the definition of an investment entity.
The revisions to IAS 12 Income Taxes clarify the accounting for deferred tax assets on unrealised losses and state that deferred tax assets should be recognised when an asset is measured at fair value and that fair value is below the asset’s tax base. It also provides further clarification on the estimation of probable future taxable profits that may support the recognition of deferred tax assets. The adoption of this amendment is not expected to have an impact on the consolidated financial statements as the clarifications are consistent with our existing interpretation. The amendment is effective from 1 January 2017 and has not yet been endorsed by EU.
In December 2016, the IASB published IFRIC 22 Foreign Currency Transactions and Advance Consideration to clarify the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. For the purpose of determining the exchange rate, the date of the transaction is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. The adoption of this standard is not expected to have a significant impact on the Group’s consolidated financial statements. The standard is effective for annual reporting beginning on or after 1 January 2018 and has not yet been endorsed by the EU.
AVIF is recognised, amortised and tested for impairment by reference to the present value of estimated future profits. Other intangible assets are recognised and tested for impairment using an income approach method. Significant estimates include forecast cash flows and discount rates
Fair value of financial investments, derivative financial instruments and investment property
Where quoted market prices are not available, valuation techniques are used to value financial investments, derivatives and investment property. These include broker quotes and models using both observable and unobservable market inputs.
Operating profit also excludes impairment of goodwill, associates and joint ventures; amortisation and impairment of other intangibles; 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. 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. Details of these items are provided in the relevant notes.
The Audit Committee reviews the reasonableness of judgements and assumptions applied and the appropriateness of significant accounting policies. The significant issues considered by the Committee in the year are included within the Audit Committee Report on page 95.
Management use estimation techniques to determine the amortisation profile and impairment test by reference to the present value of estimated future profits
Investment vehicles In several countries, the Group has invested in a number of specialised investment vehicles such as Open-ended Investment Companies (OEICs) and unit trusts. These invest mainly in equities, bonds, cash and cash equivalents, and properties, and distribute most of their income. The Group’s percentage ownership in these vehicles can fluctuate from day to day according to the Group’s and third-party participation in them. When assessing control over investment vehicles, along with the factors determining control outlined above, the Group considers the scope of its decision-making authority including its ability to direct the relevant activities of the fund and exposure to variability of returns from the perspective of an investor in the fund and of the asset manager. In addition, the Group assesses rights held by other parties including substantive removal rights that may affect the Group’s ability to direct the relevant activities and indicate that the Group does not have power. Where the Group is deemed to control such vehicles, they are consolidated, with the interests of parties other than Aviva being classified as liabilities. These appear as ‘Net asset value attributable to unitholders’ in the consolidated statement of financial position.
(H) Premiums earned Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are recognised at the date when payments are due. Premiums are shown before deduction of commission and before any salesbased taxes or duties. Where policies lapse due to non-receipt
(L) Insurance and participating investment contract liabilities Claims Long-term business claims reflect the cost of all claims arising during the year, including claims handling costs, as well as policyholder bonuses accrued in anticipation of bonus declarations.
The long-term business provisions are calculated separately for each life operation, based either on local regulatory requirements or existing local GAAP (at the later of the date of transition to IFRS or the date of the acquisition of the entity); and actuarial principles consistent with those applied in each local market. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 40(b). For the UK with-profit funds, FRS 27 required liabilities to be calculated on the realistic basis adjusted to remove the shareholders’ share of future bonuses. FRS 27 was grandfathered from UK regulatory requirements prior to the adoption of Solvency II. For UK non-profit insurance contracts, the liabilities are calculated using the gross premium valuation method. This method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions are set on a prudent basis and can vary by contract type and reflect current and expected future experience. The liabilities are based on the UK regulatory requirements prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business.
The Company’s investments In the Company’s statement of financial position, subsidiaries, associates and joint ventures are stated at their fair values, estimated using applicable valuation models underpinned by the Company’s market capitalisation. These investments are classified as available for sale (AFS) financial assets, with changes in their fair value being recognised in other comprehensive income and recorded in a separate investment valuation reserve within equity.
The fair value of a non-financial asset is determined based on its highest and best use from a market participant’s perspective. When using this approach, the Group takes into account the asset’s use that is physically possible, legally permissible and financially feasible.
The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. In certain circumstances, the fair value at initial recognition may differ from the transaction price. If the fair value is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging), or is based on a valuation technique whose variables include only data from observable markets, then the difference between the fair value at initial recognition and the transaction price is recognised as a gain or loss in the income statement. When unobservable market data has a significant impact on the valuation of financial instruments, the difference between the fair value at initial recognition and the transaction price is not recognised immediately in the income statement, but deferred and recognised in the income statement on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out or otherwise matured.
(I) Other investment contract fee revenue Investment contract policyholders are charged fees for policy administration, investment management, surrenders or other contract services. The fees may be for fixed amounts or vary with the amounts being managed, and will generally be charged as an adjustment to the policyholder’s balance. The fees are recognised as revenue in the period in which they are collected unless they relate to services to be provided in future periods, in which case they are deferred and recognised as the service is provided.
Long-term business provisions Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices, with the exception of liabilities remeasured to reflect current market interest rates to be consistent with the value of the backing assets, and those relating to UK with-profit and non-profit contracts.
Unallocated divisible surplus In certain participating long-term insurance and investment business, the nature of the policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain. Amounts whose allocation to either policyholders or shareholders has not been determined by the end of the financial year are held within liabilities as an unallocated divisible surplus.
Other assessments and levies The Group is subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included in insurance liabilities but are included under ‘Provisions’ in the statement of financial position.
Accounting policies continued related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies.
General insurance and health provisions Outstanding claims provisions General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the statement of financial position date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the statement of financial position date. As such, booked claim provisions for general insurance and health insurance are based on the best estimate of the cost of future claim payments plus an explicit allowance for risk and uncertainty. Any estimate represents a determination within a range of possible outcomes. Further details of estimation techniques are given in note 40(c).
Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and statement of financial position as appropriate.
Acquired value of in-force business (AVIF) The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary, is recognised as an asset.
Borrowing costs directly attributable to the acquisition and construction of property and equipment are capitalised. All repair and maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and the renovation replaces an identifiable part of the asset. Major renovations are depreciated over the remaining useful life of the related asset.
AFS equity securities: An AFS equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, such evidence includes a significant or prolonged decline in fair value below cost. Unless there is evidence to the contrary, an equity security is considered impaired if the decline in fair value relative to cost has been either at least 20% for a continuous six-month period or more than 40% at the end of the reporting period, or been in an unrealised loss position for a continuous period of more than 12 months at the end of the reporting period. We also review our largest equity holdings for evidence of impairment, as well as individual equity holdings in industry sectors known to be in difficulty. Where there is objective evidence that impairment exists, the security is written down regardless of the size of the unrealised loss.
Accounting policies continued known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are those with less than three months’ maturity from the date of acquisition, or which are redeemable on demand with only an insignificant change in their fair values.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement. The gain or loss on the hedged item that is attributable to the hedged risk is recognised in the income statement. This applies even if the hedged item is an available for sale financial asset or is measured at amortised cost. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment made to the carrying amount of the hedged item is amortised to the income statement, based on a recalculated effective interest rate over the residual period to maturity. In cases where the hedged item has been derecognised, the cumulative adjustment is released to the income statement immediately.
(V) Loans Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. Certain loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method.